2017 Investment Climate Statements: Indonesia

Policies Towards Foreign Direct Investment

With GDP growth registering over 5 percent in 2016, Indonesia’s young population, growing middle class, strong domestic demand, stable political situation, and conservative macroeconomic policy make it an attractive destination for foreign direct investment (FDI). Indonesia is also the largest economy in ASEAN. Indonesian government officials welcome increased FDI, aiming to create jobs and spur economic growth, and court foreign investors, notably focusing on infrastructure development and export-oriented manufacturing. However, vague and conflicting regulations, poor existing infrastructure, rigid labor laws, sanctity of contract issues, and corruption remain significant concerns for foreign investors. U.S. firms have expressed hope that better coordination under Indonesia’s current administration will help to improve the investment climate.

The Investment Coordination Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia. As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sectors. Through its One-Stop Shop Center, BKPM facilitates licensing and permitting processes of 21 ministries and agencies. Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately USD $8 million or employing 1000 local workers.

Limits on Foreign Control and Right to Private Ownership and Establishment

Restrictions on FDI are, for the most part, outlined in presidential decree 44/2016, commonly referred to as the Negative Investment List or the “DNI”. The Negative Investment List aims to consolidate FDI restrictions from numerous decrees and regulations, in order to create greater certainty for foreign and domestic investors. The 2016 revision to the list eased restrictions in a number of previously closed or restricted fields. Previously closed sectors, including the film industry (including filming, editing, captioning, production, showing, and distribution of films), on-line marketplaces with a value in excess of IDR 100 billion (USD $7.4 million), restaurants, cold chain storage, informal education, hospital management services, and manufacturing of raw materials for medicine, are now open for 100 percent foreign ownership. The 2016 list also raises the foreign investment cap in the following sectors, though not fully to 100 percent: online marketplaces under IDR 100 billion (USD $7.4 million), tourism sectors, distribution and warehouse facilities, logistics, and manufacturing and distribution of medical devices. In certain sectors, restrictions are looser for foreign investors from other ASEAN countries. Though the energy sector saw a little change in the 2016 revision, foreign investment in construction of geothermal power plants up to 10 MW is permitted with an ownership cap of 67 percent while the operation and maintenance of such plants is capped at 49% foreign ownership. For investment in certain sectors, such as mining and higher education, the 2016 Negative Investment List is useful only as a starting point, as additional licenses and permits are required by individual ministries. A number of sectors remain closed to foreign investment or are otherwise restricted. Notably, the 2016 revision added construction services up to IDR 50 billion (USD $3.4 million) and construction consulting services with a value up to IDR 10 billion (USD $) to the list of enterprises reserved for micro, small and medium enterprises (MSMEs). The salvage of undersea artifacts from shipwrecks was added to the list of fields closed to both domestic and foreign investment. In November 2016, Bank Indonesia (BI) introduced a regulation imposing a foreign ownership limit of 20 percent for companies that offer electronic payment services. Foreigners may purchase equity in state-owned firms through initial public offerings. Capital investments in publicly listed companies through the stock exchange are not subject to Indonesia’s Negative Investment List unless an investor is buying a controlling interest.

Other Investment Policy Reviews

The latest World Trade Organization (WTO) Investment Policy Review of Indonesia was conducted in April 2013 and can be found on the TWO website: http://www.wto.org/english/tratop_e/tpr_e/tp378_e.htm 

The most recent OECD Investment Policy Review of Indonesia, conducted in 2010, can be found on the OECD website:

http://www.oecd.org/daf/inv/investmentfordevelopment/indonesia-investmentpolicyreview-oecd.htm 

UNCTADs report on ASEAN Investment can be found here: http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1604 

Business Facilitation

Business Registration

The Investment Coordination Board, or BKPM, serves as an investment promotion agency, a regulatory body, and the agency in charge of approving planned investments in Indonesia. As such, it is the first point of contact for foreign investors, particularly in manufacturing, industrial, and non-financial services sector. Some industries (e.g., financial services, oil and gas, and mining) require specific licenses from other relevant ministries or regulatory authorities.

In order to conduct business in Indonesia, foreign investors must be incorporated as a foreign-owned limited liability company in Indonesia (PMA). To apply for a principle license, investors must provide: a company deed legalized by a notary; clearance for the Indonesian company’s name from the Ministry of Law and Human Rights; the company’s certificate of domicile; a tax identification number; and proof of registration with either the Ministry of Industry or Ministry of Trade. Investors are also required to participate in the Workers Social Security Program or BPJS. Once an investor has obtained a principle license he may apply for a business license. At this stage, investors must: document their legal claim to the proposed project land/location; provide an environmental impact statement (AMDAL); show proof of submission of an “investment realization report”; and provide a recommendation from relevant ministries as necessary. Previously the business registration process averaged 260 days. Following the January 2015 establishment of a one stop service center by the BKPM, which includes representatives of 21 ministries/agencies, the process has been reduced to 24.9 days according to the 2017 World Bank’s Ease of Doing Business report, placing Indonesia 91^st out of the 190 countries in the report. Special expedited licensing services are available for investors meeting certain criteria, such as making investments in excess of approximately USD $8 million or employing 1000 local workers, among others. After obtaining a principle investment license, investors in some designated industrial estates can directly start construction on projects. Other licenses such as construction environment permits can be applied for in parallel with construction, though they must still be obtained before commercial production commences.

Foreign investors are generally prohibited from investing in MSMEs in Indonesia, although the 2016 Negative Investment List opened some opportunities for partnerships in farming, catalog and online retail. In accordance with the Indonesian SMEs Law No. 20/2008, MSMEs are defined as enterprises with net assets less than IDR10 billion (about USD $7 million) or with a total annual sales under IDR 50 billion (USD $35 million). However, the Indonesian Central Bureau of Statistics defines MSMEs as enterprises with fewer than 99 employees. The GOI provides assistance to SMEs, including expanded access to business credit for SMEs in farming, fishery, manufacturing, creative business, trading and services sectors, a tax exemption for MSMEs with annual sales under IDR 200 million (USD $14,815 million)., and assistance with international promotion.

The Ministry of Law and Human Rights’ implementation of an electronic business registration filing and notification system has dramatically reduced the number of days needed to register a company. Foreign firms are not required to disclose proprietary information to the government before investing.

Screening of FDI

BKPM is responsible for issuing investment licenses to foreign entities and has taken steps to simplify the application process through better coordination between various government institutions. BKPM has launched an online portal for its National Single Window for Investment which allows foreign investors to apply for and track the status of licenses and other services online. In an effort to streamline the investment licensing and permitting process, BKPM launched a national one-stop-service center to coordinate many of the permits issued by more than a dozen ministries and agencies required for investment approval. While the BKPM one-stop- service center’s goal is to help ease investment approvals, investments in the mining, oil and gas, plantation, and most other sectors still require multiple licenses from related ministries and authorities. Likewise, certain tax and land permits, among others, typically must be obtained from local government authorities. Though Indonesian companies only require one approval at the local level, businesses report that foreign companies often must obtain both administrative and de facto legislative approval in order to establish a business. In January, 2016, BKPM also launched a three-hour shop for investments in excess of IDR 100 billion (approximately USD $8 million) or employing at least 1,000 local workers and which meet certain other requirements.

The Coordinating Ministry of Home Affairs, the Ministry of Administrative Reform and Bureaucracy Reform, and BKPM issued a circulating letter on September 15, 2010, to clarify investment that crosses provincial and regional boundaries. Investment in a regency (a sub-provincial level of government) is managed by the regency government; investment that lies in two or more regencies is managed by the provincial government; and investment that lies in two or more provinces is managed by central government, or central BKPM. BKPM has plans to roll out its one-stop-shop structure to the provincial and regency level to streamline local permitting processes at more than 500 sites around the country.

Outward Investment

BKPM, as the investment promotion agency, facilitates outward investment and has designated a division to provide information about investment opportunities in and policies of other countries. The division provides consultation services to interested outward investors. The government does not restrict outward investment but also does not provide incentives for outward investment.

Indonesia has signed investment agreements with 64 countries, including: Algeria, Argentina, Australia, Bangladesh, Belgium, Bulgaria, Cambodia, Chile, China, Croatia, Cuba, Czech Republic, Denmark, Egypt, Finland, France, Germany, Guyana, Hungary, India, Iran, Italy, Jamaica, Jordan, Kyrgyzstan, Laos, Libya, Malaysia, Mauritius, Mongolia, Morocco, Mozambique, Netherland, Norway, Pakistan, Peru, Philippines, Poland, Qatar, Romania, Saudi Arabia, Singapore, Serbia, Slovak Republic, South Korea, Spain, Sri Lanka, Sudan, Suriname, Syria, Sweden, Switzerland, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, United Kingdom, Uzbekistan, Venezuela, Vietnam, Yemen, and Zimbabwe. Indonesia does not have a bilateral investment treaty (BIT) with the U. S.

In 2014 Indonesia began to abrogate its existing BITs by allowing the agreements to expire. In 2016 21 BITs expired, including those with Argentina, Bulgaria, Cambodia, China, Egypt, France, Hungary, India, Italy, Laos, Malaysia, Netherlands, Norway, Pakistan, Romania, Singapore, Spain, Slovakia, Switzerland, Turkey, and Vietnam. A new model BIT is currently being developed and should be concluded in 2017.

Under the ASEAN Free Trade Agreement, duties on imports from ASEAN countries generally range from 0 percent to 5 percent, except for products specified on exclusion lists. Indonesia also provides preferential market access to Australia, China, Japan, Korea, India, Pakistan, and New Zealand under regional ASEAN agreements and to Japan under a bilateral agreement. In accordance with the ASEAN-China FTA, in August 2012 Indonesia increased the number of goods from China receiving duty-free access to 10,012 tariff lines. Indonesia is currently negotiating bilateral agreements with Iran, India, Australia, New Zealand, South Korea, and European Free Trade Association, studying potential FTAs with Chile, Turkey, Tunisia, Mexico, South Africa, and Egypt. The ASEAN Economic Community (AEC) arrangement came into effect on January 1, 2016, and is expected to reduce barriers for goods, services and some skilled employees across ASEAN. Indonesia is also participating in negotiations for the Regional Comprehensive Economic Partnership (RCEP), which includes the 10 ASEAN Member States and 6 additional countries (Australia, China, India, Japan, Korea and New Zealand). In March 2017, RCEP entered the 17^th round of negotiations, which included discussion on trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, SMEs and other issues.

The U.S. and Indonesia signed the Convention between the Government of the Republic of Indonesia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of the Fiscal Evasion with Respect to Taxes on Income in Jakarta on July 11, 1988. This was amended with a Protocol, signed on July 24, 1996. There is no double taxation of personal income.

Transparency of the Regulatory System

Indonesia continues to bring its legal, regulatory, and accounting systems into compliance with international norms, but progress is slow. Notable successes include passage of a comprehensive anti-money laundering law in late 2010 and a land acquisition law in January 2012, with revised implementing regulations issued in 2015. Although Indonesia continues to move forward with regulatory system reforms, these efforts have not yet created a level playing field for foreign investors, nor does the current regulatory system establish clear and transparent rules for all actors. Certain laws and policies, including the Negative List, establish sectors that are either fully off-limits to foreign investors or are subject to substantive conditions.

Decentralization has introduced another layer of bureaucracy for firms to navigate, resulting in costly red tape. Ineffective management, resistance from vested interests, and corruption are among the challenges faced by the GOI in launching bureaucratic reform. U.S. businesses cite regulatory uncertainty and a lack of transparency as two ongoing factors hindering operations. Government ministries and agencies, including the Indonesian Parliament, continue to publish many proposed laws and regulations in draft form for public comment; however, not all draft laws and regulations are made available in public fora. Laws and regulations are often vague and require substantial interpretation by the implementers, leading to business uncertainty and rent-seeking opportunities.

Regulatory consultation in Indonesia is inconsistent, at best, despite the existence of Law 10/2004 on the Formulation of Regulations, article 53 of which states that the community is entitled to provide oral or written input into draft laws and regulations, and Law 12/2010 which further expands this right.

International Regulatory Considerations

Ministries and agencies are required to provide draft regulations to the National Standards Body of Indonesia (BSN) to be included in the National Program for Technical Regulation. BSN has primary responsibility to notify draft regulations to the WTO; however, in practice, notification is inconsistent.

Legal System and Judicial Independence

Indonesia’s legal system is based on civil law. The court system consists of District Courts (primary courts of original jurisdiction), High Courts (courts of appeal), and the Supreme Court (the court of last resort). Indonesia also has a Constitutional Court. The Constitutional Court has the same legal standing as the Supreme Court, and its role is to review the constitutionality of legislation. Both the Supreme and Constitutional Courts have authority to conduct judicial reviews.

The court system often does not provide effective recourse for resolving property and contractual disputes. Cases that would be adjudicated in civil courts in other jurisdictions sometimes result in criminal charges in Indonesia. Judges are not bound by precedent and many laws are open to various interpretations.

A lack of clear land titles has plagued Indonesia for decades, although the land acquisition law enacted in December 2011 included legal mechanisms designed to resolve some past land ownership issues. Indonesia also has a poor track record on the legal enforcement of contracts and civil disputes are sometimes criminalized. Government Regulation 79 of 2010 opened the door for the GOI to remove recoverable costs from production sharing contracts. The GOI is also requiring mining companies to renegotiate their contracts of work to require higher royalties, more divestment, more local content, and domestic processing of mineral ore.

Indonesia’s commercial code, grounded in colonial Dutch law, has been updated to include provisions on bankruptcy, intellectual property rights, incorporation and dissolution of businesses, banking, and capital markets. Application of the commercial code, including the bankruptcy provisions, remains uneven, in large part due to corruption and training deficits for judges, prosecutors, and defense lawyers.

Laws and Regulations on Foreign Direct Investment

FDI in Indonesia is regulated by Law 25/2007 (the Investment Law). Under the law, any form of FDI in Indonesia must be in the form of a limited liability company, with the foreign investor holding shares in the company. In addition, the government outlines restrictions on FDI in presidential decree 44/2016, issued in May 2016, commonly referred to as the 2016 Negative Investment List. It aims to consolidate FDI restrictions in certain sectors from numerous decrees and regulations to create greater certainty for foreign and domestic investors. The 2016 Negative Investment List enables greater foreign investments in some sectors like film, tourism, logistics, health care, and e-commerce. A number of sectors remain closed to investment or are otherwise restricted. The 2016 Negative List contains a clause that clarifies that existing investments will not be affected by the 2016 revisions. The website of the Investment Coordination Board (BKPM) provides information on investment requirements and procedures: http://www2.bkpm.go.id/ .

Competition and Anti-Trust Laws

The Indonesian Competition Authority (KPPU) implements and enforces the 1999 Indonesia Competition Law. The KPPU reviews agreements, business practices and mergers that may be deemed anti-competitive, advises the government on policies that may affect competition, and issues guidelines relating to the Competition Law.

Expropriation and Compensation

The GOI generally recognizes and upholds the property rights of foreign and domestic investors, and the 2007 Investment Law opened major sectors of the economy to foreign investment, while assuring investors’ protection from nationalization, except where corporate crime is involved. However, Indonesia’s economic nationalism continues to manifest itself through negotiations, policies, regulations, and laws that erode investor value. These include local content requirements, requirements to divest equity shares to Indonesia stakeholders, and requirements to establish manufacturing or processing facilities in Indonesia.

In 2012, the GOI issued a regulation requiring foreign-owned mining operations to divest majority equity to Indonesian shareholders within 10 years of operational startup using cost of investment incurred, rather than market value, for purposes of divestment valuation. In October 2014, with Regulation 77/2014, the government eased the foreign ownership restrictions to 60 percent for companies that smelt domestically (40 percent divestment) and 70 percent for companies that operate underground mines (30 percent divestment). However, regulations enacted in January 2017 again require foreign-owned miners to gradually divest over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. Implementation of the new regulations has just begun, but the government has indicated it intends the majority-share divestment requirement to supersede Regulation 77/2014 and apply to all foreign investors in the sector. Based on the 2009 Mining Law, the GOI required that mining contracts of work be renegotiated to alter terms in favor of the GOI, including royalty and tax rates, local content levels, domestic processing of minerals, and reduced mine areas. Some mining companies had to reduce the size of their original mining work area without compensation.

In general, Indonesia’s rising resource nationalism supports the idea that domestic interests should not have to pay prevailing market prices for domestic resources. In the oil and gas sector, the GOI is increasingly explicit in its policy that expiring production sharing contracts operated by foreign companies be transferred to domestic interests rather than extended. While there is no obligation of compensation under the production sharing contract, this policy has begun to affect the Indonesian business interests of foreign companies.

The Law on Land Acquisition Procedures for Public Interest Development passed in December 2011 sought to streamline GOI acquisition of land for much-needed infrastructure projects. The law seeks to clarify roles, reduce the time frame for each phase of the land acquisition process, deter land speculation, and curtail obstructionist litigation, while still ensuring safeguards for land-right holders. The implementing regulations, first approved in 2012, went into effect on January 1, 2015; further revisions in 2015 expanded the scope of the new provisions. Some reports indicate that the law has reduced land acquisition timelines; with no accusations of illegal GOI expropriation of land.

Dispute Settlement

ICSID Convention and New York Convention

Indonesia is a member of the International Center for Settlement of Investment Disputes (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Thus, foreign arbitral awards are legally recognized and enforceable in the Indonesian courts, but, in practice, are not always enforced.

Investor-State Dispute Settlement

Since 2004, Indonesia has faced seven Investor-State Dispute Settlement (ISDS) arbitration cases including those that have been settled and ongoing cases. In December 2016, an International Centre for Settlement of Investment Disputes (ICSID) tribunal ruled in favor of Indonesia in the 2012 arbitration case of British firm Churchill Mining vs Indonesia. Currently, there are two on-going arbitration cases involving Indonesia, with Indian firm Indian Metals & Ferro Alloys, and Singaporean firm Oleovest.

Indonesia recognizes binding international arbitration of investment disputes in its bilateral investment treaty agreements (BITs). However, in response to a perceived increase in the number of arbitration cases submitted to ICSID, in February 2014 Indonesia began to allow its existing BITs, numbering more than 60, to expire as soon as the agreement allowed. BKPM formed an expert team to review the current generation of BITs and formulate a new modern model BIT that would more effectively protect national interests. The Indonesian model BIT is currently under legal review for finalization.

International Commercial Arbitration and Foreign Courts

Judicial handling of investment disputes remains mixed. Indonesia’s legal code recognizes the right of parties to apply agreed upon rules of arbitration. Some arbitration but not all is handled by Indonesia’s domestic arbitration agency, the Indonesian National Arbitration Body.

Companies have resorted to ad hoc arbitrations in Indonesia using the UN Commission on International Trade Laws (UNCITRAL model law) arbitration rules. Though doing business in Indonesia remains challenging, there is not a clear pattern or significant record of investment disputes involving U.S. or other foreign investors. The court system in Indonesia works slowly. International arbitration awards, when enforced, may take years from original judgment to payment.

Bankruptcy Regulations

Indonesian Law No. 37/2004 on Bankruptcy and Suspension of Obligation for Payment of Debts is decidedly pro-creditor and the law makes no distinction between domestic and foreign creditors. As a result, foreign creditors have the same rights as all potential creditors in a bankruptcy case, as long as foreign claims are submitted in compliance with underlying regulations and procedures. Monetary judgments in Indonesia are made in local currency.

Investment Incentives

The GOI offers a tax holiday scheme that exempts certain businesses from paying corporate income taxes for up to ten years under Ministry of Finance Decree No. 130/PMK.011/2011. Businesses must have operated as a legal entity in Indonesia for at least 12 months prior to the issuance of the tax holiday regulation, among other requirements. Priority is given to investment in resource extraction, resource refinement, industrial machinery, renewable resources, telecommunications equipment, or pioneer sectors. Government Regulation No. 62 of 2008 provides a tax incentive program for projects conducted in national high-priority sectors, which encompass 128 different fields. Businesses may only apply for one tax incentive: either the tax holiday or the tax incentive program. On August 27, 2015, the GOI released an updated tax holiday incentive under Ministry of Finance Decree No. 159/PMK.010/2015 in order to increase investment, especially in pioneer industries. The GOI still retains the majority of the existing tax holiday policy, with changes aimed at relaxing and simplifying the provision of facilities. The coverage of pioneer sectors was expanded to include the following industries:

• upstream metal;
• petroleum refining;
• organic basic chemicals derived from petroleum and natural gas;
• industrial machinery production;
• marine transportation;
• the processing industry when it is the major industry in a Special Economic Zone (SEZ);
• telecommunications information and communication; and
• processing based on agricultural, forestry, and fisheries products.

The updated regulation also extended the time frame for the tax holiday facility to 5 to 15 years, or up to 20 years at the discretion of the Minister of Finance. In addition, the GOI issued Government Regulation No. 9/2016 expanding regional tax incentives for certain business categories in May 2016. Apparel, leather goods, footwear industries in all regions are now eligible for the tax incentives. In this regulation, existing tax facilities are maintained, including:

• Deduction of 30 percent from taxable income over a 6 year period
• Accelerated depreciation and amortization
• 10 percent of withholding tax on dividend paid by foreign taxpayer or a lower rate according to the avoidance of double taxation agreement
• Compensation losses extended from 5 to10 years with certain condition for companies that are:

1. Located in industrial or bonded zone
2. Developing infrastructure
3. Using at least 70 percent domestic raw material
4. Absorbing 500 to 1000 laborers
5. Doing research and development (R&D)
6. Reinvesting capital
7. Exporting at least 30 percent of their product

In October 2016, the GOI offered a new incentive to entrepreneurs in Indonesia’s footwear and textiles sectors that employ at least 2,000 workers and export 50 percent of their total sales. The authorities also give a 50 percent discount on income tax from 5 percent to 2.5 percent to those workers who earn a maximum of IDR 50 million (USD $3,850) per year, who participate in Indonesia’s national healthcare and social security (BPJS) program.

Research and Development

At present, Indonesia does not have formal regulations granting national treatment to U.S. and other foreign firms participating in Government-financed or subsidized research and development programs. The State Ministry for Research and Technology, and Higher Education handles applications on a case-by-case basis.

Natural Resources

Indonesia’s vast natural resource wealth has attracted significant foreign investment over the last century and continues to offer significant prospects. But a variety of government regulations have made doing business in the resources sector increasingly difficult, and Indonesia now ranks near the bottom, 88^th of 96 jurisdictions in the Fraser Institute’s Mining Policy Perception Index. In 2012, the GOI banned the export of raw minerals, dramatically increased the divestment requirements for foreign mining companies, and required major mining companies to renegotiate their contracts of work with the government. The ban on the export of raw minerals went into effect in January 2014. In July 2014, the government issued regulations that allowed, until January 2017, the export of copper and several other mineral concentrates with export duties and other conditions imposed. When the full ban came back into effect in January 2017, the GOI issued new regulations that again allowed exports of copper concentrate and other specified minerals but imposing even more onerous requirements. Of note for foreign investors, provisions of the regulations require that to be able to export non-smelted mineral ores, companies with contracts of work must convert to mining business licenses—and thus be subject to prevailing regulations—and must commit to build smelters within the next five years. Also, foreign-owned mining companies must gradually divest over ten years 51 percent of shares to Indonesian interests, with the price of divested shares determined based on fair market value and not taking into account existing reserves. The 2009 mining law devolved the authority to issue mining licenses to local governments, who have responded by issuing more than 10,000 licenses, many of which overlap or are unclearly mapped. In the oil and gas sector, Indonesia’s Constitutional Court disbanded the upstream regulator in 2012, injecting confusion and more uncertainty into the natural resources sector. Until a new oil and gas law is enacted, upstream activities are supervised by the Special Working Unit on Upstream Oil and Gas (SKK Migas).

Infrastructure

Since taking office in October 2014, President Jokowi and his administration have made infrastructure development a top priority. The government announced plans to add 35,000 megawatts of electricity capacity and create a maritime nexus, to include the development and/or expansion of 24 ports and other transportation infrastructure. The current institutional arrangement for infrastructure development still suffers from overlap of functions, lack of capacity for public-private partnership (PPP) projects in regional governments, lack of solid value-for-money methodologies, crowding out of the private sector from state-owned enterprises (SOE), legal uncertainty, lack of a solid land-acquisition framework, long-term operational risks for the private sector, unwillingness from stakeholders to be the first ones to step in the new and fragile system, and especially, lack of an institutional champion. Currently infrastructure development is largely taking place through SOEs, with PPPs having only a marginal share of infrastructure projects.

Foreign Trade Zones/Free Trade/ Trade Facilitation

The GOI offers incentives to over 1,500 foreign and domestic industrial companies that operate in bonded, or special trade, zones throughout Indonesia. The largest bonded zone is the free trade zone (FTZ) island of Batam, located just south of Singapore. Neighboring Bintan Island and Karimun Island also enjoy FTZ status. Investors in FTZs are not required to apply for additional implementation licenses (location, construction, and nuisance act permits and land titles), and foreign companies are allowed 100 percent ownership. These companies are also exempt from import duty, income tax, VAT, and sales tax on imported capital goods, equipment, and raw materials until the portion of production destined for the domestic market is “exported” to Indonesia, in which case fees are owed only on that portion. Companies operating in FTZ may lend machinery and equipment to subcontractors located outside of the zone for a maximum two-year period.

Ministry of Finance Regulation No. 147/2011 stipulates that the delivery of products outside of bonded zones into the domestic market is set at a maximum of 25 percent (down from 50 percent) of export realization value of the previous year. If a bonded zone company exceeds the 25 percent limitation, its domestic quota for the next year will be reduced. The new regulation also restricts subcontract work and requires bonded zones less than 10,000 square meters in size to relocate to industrial estates.

As stipulated by the 2007 Investment Law, the Indonesian Legislature (DPR) passed regulations on special economic zones (SEZ) in 2009. The government has created ten special economic zones so far, although development at the SEZ sites remains limited. The SEZs are in Tanjung Lesung, Banten, Sei Manke, North Sumatera, Palu, Central Sulawesi, Bitung, North Sulawesi, Mandalika, West Nusa Tenggara, Morotai, North Maluku, Tanjung Api Api, South Sumatera, Maloy Batuta in Kalimantan, Sorong in West Papua, and Tanjung Kelayang in Bangka Belitung. In March 2016, the government released Presidential Regulation 8/2016 that will change the status of Batam FTZ to an SEZ during 2016 in an effort to boost foreign and domestic investment. The government contends that the change will provide further investment incentives in Batam, including tax holidays and deductions, accelerated amortization, and other benefits in addition to the incentives currently offered in the FTZ. The Batam SEZ will continue to be operated by the Batam Industrial Free Trade Zone Authority, the agency that operates the existing free trade zone. Presidential Regulation 8/2016 does not affect the status of the neighboring FTZs on Bintan and Karimun islands.

In an effort to improve logistics and reduce costs, the government designated 11 companies bonded logistics centers in March 2016. Companies that utilize these multifunctional logistics warehouses will enjoy tax incentives such as deferred import duties and taxes, VAT exemptions, and other benefits. The government intends to designate up to 50 bonded logistics centers throughout Indonesia by the end of 2017.

Performance and Data Localization Requirements

Performance Requirements

The GOI expects foreign investors to contribute to the training and development of Indonesian nationals, allowing the transfer of skills and technology required for their effective participation in the management of foreign companies. As a general rule, a company can hire foreigners only for positions that the government has deemed open to non-Indonesians. Employers must have training programs aimed at replacing foreign workers with Indonesians. If a direct investment enterprise wants to employ foreigners, the enterprise should submit an Expatriate Placement Plan to BKPM to get a Limited Stay Visa or Semi-Permanent Residence Visa (VITAS/VBS). Expatriates are issued a Limited Stay Permit (KITAS) and a blue book, valid for two years and renewable for up to two extensions without leaving the country. The foreign worker must meet education, work experience, and Indonesian language requirements and commit to transfer knowledge to an Indonesian counterpart. Under Ministry of Manpower regulations, any expatriate who holds a work and residence permit must contribute USD $1,200 per year to a fund for local manpower training at regional manpower offices. Some U.S. firms report difficulty in renewing KITASs for their foreign executives. In 2013, the government issued new regulations on the employment of foreigners, including a regulation specific to the oil and gas sector that limits the types of positions expatriates can hold and imposes an age cap of 55 years on foreign executives. In December 2013, the Ministry of Manpower issued Regulation 12 on Procedures for Employing Foreign Manpower. The new regulation made some changes to the previous 2008 regulation, including the introduction of a new mechanism to hire temporary foreign workers and simplification of the permit process for foreigners married to Indonesians.

In October, 2015 the Minister of Manpower issued a regulation abolishing a previously-required ratio of foreign to local workers of 10:1 and abolishing the need for a short-term work permit for most business travelers. However, a short-term work permit (max 6 months) is still required for activities such as making a commercial movie, conducting audits, quality control, or inspections for periods exceeding 30 days. The GOI has repeatedly discussed establishing an Indonesian language proficiency requirement for long-term expatriates in Indonesia, and some local governments have language requirements in place, though they do not appear to be enforced.

With the passage of the defense law in October 2012 and subsequent implementing regulations in October 2014, the GOI established a policy that imposes offset requirements for procurements from foreign defense suppliers. Current laws authorize Indonesian end users to procure defense articles from foreign suppliers if those articles cannot be produced within Indonesia, subject to Indonesian local content and offset policy requirements. On that basis, U.S. defense equipment suppliers are still competing for contracts with local partners. The 2014 implementing regulations still require substantial clarification regarding how offsets and local content are determined, and the GOI has not yet completed production of an official English-language translation. According to the legislation and subsequent implementing regulations, an initial 35 percent of any foreign defense procurement or contract must include local content, and this 35 percent local content threshold will increase by 10 percent every five years following the 2014 release of the implementing regulations until a local content requirement of 85 percent is achieved. The law also requires a variety of offsets such as counter-trade agreements, transfer of technology agreements, or a variety of other mechanisms, all of which are negotiated on a per-transaction basis. The implementing regulations also refer to a “multiplier factor” that can be applied to increase a given offset valuation depending on “the impact on the development of the national economy.” Decisions regarding multiplier values, authorized local content, and other key aspects of the new law are in the hands of the Defense Industry Policy Committee (KKIP), an entity comprising GOI interagency representatives and defense industry leadership. KKIP leadership indicates that they still determine multiplier values on a case-by-case basis, but have said that once they conclude an industry-wide gap analysis study they will publish a standardized multiplier value schedule. According to GOI officials, rules for offsets and local content apply to major new acquisitions only, and do not apply to routine or recurring procurements such as those required for maintenance and sustainment.

WTO/TRIMS

The GOI notified the WTO of its compliance with Trade-Related Investment Measures (TRIMS) on August 26, 1998. The 2007 Investment Law states that the GOI shall provide the same treatment to both domestic and foreign investors originating from any country. The government pursues policies to promote local manufacturing that could be inconsistent with TRIMS requirements, such as linking import approvals to investment pledges, or requiring local content targets to be met some sectors.

Data Localization Requirements

In 2012, the government issued Government Regulation 82 requiring certain “public service providers” to establish data storage and disaster recovery centers on Indonesian soil. Regulation 82/2012 calls for “public service providers” to localize data domestically by October 2017, and ministries are moving ahead with data localization requirements in new regulations, including data privacy and peer-to-peer lending regulations issued in late 2016. The government continues to evaluate how to implement data localization requirements, including how to define “public service providers” under Regulation 82/2012, but it appears likely that data localization rules will affect financial and other service delivery companies. Despite prior public statements that the government will amend Regulation 82/2012 or otherwise ease data localization requirements, the GOI has yet to take definitive steps in this direction. Over the protests of foreign private-sector insurance companies, the OJK’s Regulation 69/2016 mandates insurance and sharia insurance companies to onshore their data by October 12, 2017.

Real Property

The Basic Agrarian Law of 1960, the predominant body of law governing land rights, recognizes the right of private ownership and provides varying degrees of land rights for Indonesian citizens, foreign nationals, Indonesian corporations, foreign corporations, and other legal entities. Indonesia’s 1945 Constitution states that all natural resources are owned by the GOI for the benefit of the people. This principle was augmented by the passage of a land acquisition bill in December 2011 that enshrined the concept of eminent domain and established mechanisms for fair market value compensation and appeals. The National Land Agency registers property under Regulation No. 24 of 1997, though the Ministry of Forestry administers all ‘forest land’. Registration is sometimes complicated by local government requirements and claims as a result of decentralization. Registration is also not conclusive evidence of ownership, but rather strong evidence of such. Government Regulation (PP) No. 103 of 2015 on house ownership by foreigners domiciled in Indonesia allows foreigners to have a property in Indonesia with the status of a “right to use” for a maximum of 30 years, with extensions available for up to 50 additional years. Indonesia ranks 118 on the World Bank’s Ease of Registering Property ranking of the Doing Business Report.

Intellectual Property Rights

Indonesia is currently on the U.S. Trade Representative’s (USTR) Special 301 priority watch list for intellectual property rights (IPR) protection. Indonesia’s failure to effectively protect intellectual property and enforce IPR laws has resulted in high levels of physical and online piracy. The International Intellectual Property Alliance estimates that in a given month, 18 million copies of pirated films, music, and software are circulating in Indonesian physical and online markets. Harco Glodok, Indonesia’s largest trade center for consumer electronics and related goods, is included on USTR’s Notorious Markets list in 2017.

Indonesian efforts to enhance IP protection policy were mixed this year. The revised Patent Law, enacted in July 2016, contains several provisions that threaten fundamental IP protections. Among these concerns are apparent restrictions on the patentability of computer programs and new uses and forms of existing drugs, requirements to manufacture products or use processes covered by patents in Indonesia, disclosure requirements related to traditional knowledge and genetic resources, and the grounds and processes for issuing compulsory licenses. Indonesia also enacted a new Law on Trademarks in November 2016 that includes provisions that have the potential to improve efficiency and consumer protection. Among these are a shortened and simplified examination period that may reduce Indonesia’s significant trademark application backlog. The new law also broadens protection for non-traditional marks, including three-dimensional, sound, and holographic marks, and increases criminal penalties and maximum fines (up to 10 years and approximately USD $155,000 in some cases). The law also provides a mechanism for Indonesia to accede to the Madrid Protocol, following implementing regulations.

In July 2015 the Directorate General for Intellectual Property (DGIP) and Ministry of Communications and Information Technology (Kominfo) jointly released implementing regulations under the Copyright Law to provide for rights holders to report websites that offer IP-infringing products and sets forth procedures for blocking IP-infringing sites. In August 2015, Indonesia’s Creative Economy Agency (Bekraf) launched an anti-piracy task force with film and music industry stakeholders. In late 2016, Bekraf reported that 43 websites were blocked following a recommendation from task force members to Kominfo, and that 160 websites containing infringing material were in process to be blocked.

The Directorate General for Intellectual Property (DGIP) now employs 20 investigators and conducted 58 investigations in 2016. BPOM, Indonesia’s food and drug administration, reported the seizure of more than USD $4 million in counterfeit drugs and cosmetics during the year. Trademark, Patent, and Copyright legislation requires a rights-holder complaint for investigations, and DGIP and BPOM investigators lack the authority to make arrests so must rely on police cooperation for any enforcement action. In 2012, the Supreme Court ruled that Customs may obtain rights for temporary injunctions to suspected counterfeit shipments at the border. However, Customs still cannot exercise ex officio powers, as intended in the 2006 amended customs law. The GOI is responsible for the storage and destruction of seized counterfeit goods, although rights-holders have contributed to the cost of destroying IP-infringing goods in the past.

Resources for Rights Holders

Additional information regarding treaty obligations and points of contact at local IP offices, can be found at the World Intellectual Property Organization (WIPO) country profile website http://www.wipo.int/directory/en/ .For a list of local lawyers, see: https://id.usembassy.gov/u-s-citizen-services/attorneys/

Capital Markets and Portfolio Investment

The Indonesia Stock Exchange (IDX) index has 535 listed companies and reached capitalization as high as USD $440.15 billion in March 2017. There were 16 initial public offerings in 2016. As of March 2017, domestic entities conducted more than half of total IDX stock trades (61 percent). In 2011, the IDX launched the Indonesian Sharia Stock Index (ISSI), its first index of sharia-compliant companies, primarily to attract greater investment from Middle East companies and investors. As of March 2017 the ISSI is composed of 329 stocks listed on IDX’s Jakarta Composite Index.

Government treasury bonds are the most liquid bonds offered by the GOI. Treasury bills are less liquid due to their small issue size. Liquidity in BI-issued Sertifikat Bank Indonesia (SBI) is also limited due to the three-month required holding period. The GOI also issues sukuk (Islamic treasury notes) treasury bills as part of efforts to diversify Islamic debt instruments and increase their liquidity. Indonesia’s sovereign debt as of March 2017 was graded as BB+ by Standard and Poor, BBB- by Fitch Ratings and baa3 by Moody’s.

The Financial Services Supervisory Authority (OJK) assumed BI’s supervisory role over commercial banks as of January 1, 2014 and began overseeing the capital markets and non-banking institutions on January 1, 2013, replacing the Capital Market and Financial Institution Supervisory Board.

Foreigners have good access to the Indonesian securities market and are a major source (38 percent of government securities) of portfolio investment. Indonesia respects International Monetary Fund (IMF) Article VIII by refraining from restrictions on payments and transfers for current international transactions. Foreign ownership of Indonesian companies may be limited in certain industries as determined by the Negative Investment List.

Money and Banking System

Although there is some concern regarding the operations of the many small and medium sized family-owned banks, the banking system is generally considered sound, with banks enjoying some of the widest interest rate margins in the region. As of December 2016 the ten largest banks have IDR 3,702 trillion (USD $278.35 billion) in total assets. Loans grew 7.9 percent in December 2016 (10.5 percent in 2015). Gross non-performing loans in December 2016 stood at 2.9 percent.

Foreigners may purchase up to 99 percent of the total shares of a domestic bank through private placement or on the stock exchange, but purchases of 25 percent or more require BI approval. Foreign banks may establish branches if the foreign bank is ranked in the top 200 global banks by assets. To establish a representative office, the foreign bank must be ranked in the top 300 global banks by assets. A special operating license is required from BI in order to establish a foreign branch.

BI has limited bank ownership to no more than 40 percent by any single shareholder, applicable to foreign and domestic shareholders, thus requiring foreign bank branches to become subsidiaries. An exception was granted in 2015 for foreign banks buying two small banks and merging them together.

On September 8, 2015 OJK eased rules for foreigners opening a bank account in Indonesia. Foreigners can open a bank account with a balance between USD $2,000-50,000 with just their passport. For accounts greater than USD $50,000, they will need to show a supporting document such as a reference letter from a bank in the foreigner’s country of origin, a local domicile address, a spousal identity document, copies of a contract for a local residence, and/or credit/debit statements.

Foreign Exchange and Remittances

Foreign Exchange

The rupiah (IDR), the local currency, is freely convertible. Currently, banks must report all foreign exchange transactions and foreign obligations to the Bank of Indonesia (BI). With respect to the physical movement of currency, any person taking cash into or out of Indonesia in the amount of IDR 100 million (approximately USD $7,450) or more, or the equivalent in another currency, must report the amount to the Director General of Customs and Excise.

Banks on their own behalf or for customers may conduct derivative transactions related to derivatives of foreign currency rates, interest rates, and/or a combination thereof. BI requires borrowers to conduct their foreign currency borrowing through domestic banks registered with BI. The regulations apply to borrowing in cash, non-revolving loan agreements, and debt securities.

Under the 2007 Investment Law, the GOI gives assurance to investors relating to the transfer and repatriation of funds, in foreign currency, on:

• capital, profit, interest, dividends and other income;
• funds required for (i) purchasing raw material, intermediate goods or final goods, and (ii) replacing capital goods for continuation of business operations;
• additional funds required for investment;
• funds for debt payment;
• royalties;
• income of foreign individuals working on the investment;
• earnings from the sale or liquidation of the invested company;
• compensation for losses;
• and compensation for expropriation.

U.S. firms report no difficulties in obtaining foreign exchange.

BI began in 2012 to require exporters to repatriate their export earnings through domestic banks within three months of the date of the export declaration form. Once repatriated, there are currently no restrictions on re-transferring export earnings abroad. Some companies report this requirement is not enforced.

In March 2015 GOI announced a regulation requiring the use of rupiah in domestic transactions. While import and export transactions can still use foreign currency, importers’ transactions with their Indonesian distributors must now use rupiah, which has impacted some U.S. business operations. The application of these rules to various financial transactions remains vague and uneven.

Remittance Policies

The government places no restrictions or time limitations on investment remittances. However, certain reporting requirements exist. Any transfer of funds in excess of USD $10,000, whether incoming or outgoing, must be reported to Bank Indonesia (BI) along with the reason for the transfer.

Carrying more than IDR 100 million (approximately USD $7,450) in cash out of Indonesia requires prior approval from BI, as well as verifying the funds with Indonesian Customs upon arrival. Indonesia does not engage in currency manipulation.

As of June 2015, Indonesia is no longer subject to the intergovernmental Financial Action Task Force (FATF) monitoring process under its on-going global Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance process. It continues to work with the Asia/Pacific Group on Money Laundering (APG) to further strengthen its AML/CTF regime.

Sovereign Wealth Funds

Indonesia does not operate a traditional sovereign wealth fund, but several SOEs invest in the domestic market. On December 21, 2015 the Finance Ministry authorized one of those SOEs, PT Sarana Multi Infrastruktur (SMI) to manage the assets of the Pusat Investasi Pemerintah (PIP), or Government Investment Center (which had previously been seen as a potential sovereign wealth fund). SMI can use the funds for direct investment in infrastructure financing, the placement of funds in the form of government securities, Bank Indonesia Certificates, and/or other financial instruments in accordance with the provisions of laws. Indonesia does not participate in the IMF’s Working Group on Sovereign Wealth Funds.

Indonesia had 118 central government SOEs as of December 2016, 10 of which contributed more than 85 percent of total SOE profit. Twenty are listed on the Indonesian stock exchange and 14 are special purpose entities under the SOE ministry with one under the Ministry of Finance (the Indonesian Infrastructure Guarantee Fund). Since mid-2016, the Indonesian government has been publicizing plans to consolidate SOEs into six holding companies based on sector of operations. Information regarding the SOEs can be found at the SOE Ministry website (http://www.bumn.go.id/ ) (Indonesian only). There are also an unknown number of SOEs owned by regional or local governments. SOEs are present in almost all sectors/industries including banking (finance), tourism (travel), agriculture, forestry, mining, construction, fishing, energy, and telecommunications (information and communications). In 2015 (the most recent data available), SOE profits increased by 0.2 percent year-on-year to IDR 149 trillion (USD $11.4 billion) compared to 2014. As of the end of 2016, SOEs employ around 781,760 people. As of December 30, 2016, the 20 listed state-owned companies had a market capitalization amounting to IDR 11,443 trillion (USD $86 billion) or 25.52 percent of the total capitalization of shares listed on the Stock Exchange. Spending by SOEs on research and development varies by sector.

Indonesia is not a party to the WTO’s Government Procurement Agreement. Private enterprises can compete with SOEs under the same terms and conditions with respect to access to markets, credit, and other business operations. However, many sectors report that, in reality, SOEs receive strong preference for GOI projects. SOEs purchase some goods and services from private sector and foreign firms. SOEs publish an annual report and are audited by the Supreme Audit Agency (BPK), the Financial and Development Supervisory Agency (BPKP), and external and internal auditors.

Privatization Program

While some state-owned enterprises have offered shares on the stock market, Indonesia does not have an active privatization program.

In general Indonesian businesses do not have awareness of the broad concept of responsible business conduct (RBC) as a comprehensive management paradigm. Indonesian companies tend to focus on corporate social responsibility (CSR) programs offering community and economic development, and educational projects and programs. This is at least in part caused by the fact that such projects are often required in the environmental impact permits (AMDAL) of resource extraction companies, which undergo a good deal of domestic and international scrutiny of their operations. Because a large proportion of resource extraction activity occurs in remote and rural areas where government services are limited or absent, these companies face very high community expectations to provide such services themselves. Despite significant investments – especially by large multinational firms – in CSR projects, there is limited general awareness of those projects, even among government regulators and officials.

The government does not have an overarching strategy to encourage or enforce RBC, but regulates each area through the relevant laws (environment, labor, corruption, etc.). These laws, as with all laws in Indonesia, are not always enforced evenly. The National Commission on Human Rights announced plans to create a National Action Plan on Business and Human Rights in Indonesia, which they say will incorporate the UN Guiding Principles on Business and Human Rights. The Commission reports that numerous companies violate human rights principles, most regularly in agrarian conflicts.

The Financial Services Authority (OJK) regulates corporate governance issues, but the regulations and enforcement are not yet up to international standards for shareholder protection.

OECD Guidelines On Corporate Governance Of SOEs

Indonesia does not adhere to the OECD Guidelines for Multinational Enterprises, nor does the government make efforts to encourage adherence to those guidelines or to the United Nations Guiding Principles on Business and Human Rights. The government does not encourage adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas or any other supply chain management due diligence guidance. Indonesia does participate in the Extractive Industries Transparency Initiative (EITI). Indonesia was suspended by the EITI Board in February 2015 due to a missed deadline for its first EITI Report, but the suspension was lifted following publication of its 2012-2013 EITI Report in November 2015. The EITI Board declared Indonesia EITI compliant on October 15, 2014.

President Jokowi was elected in 2014 on a strong good-governance platform. However, corruption remains a serious problem according to some U.S. companies, preventing increased FDI. Although the government has issued detailed directions on combating corruption in targeted ministries and agencies, there has not been a concerted government-led effort to encourage or require companies to establish internal codes of conduct, or effective internal controls, ethics, and compliance programs to detect and prevent bribery of public officials. A new Supreme Court regulation and statements by the national Corruption Eradication Commission (KPK) indicate that the government will begin prosecuting companies who engage in public corruption under new corporate criminal liability guidance.

Indonesia’s ranking in Transparency International’s Corruption Perceptions Index in 2016 is 90 out of 176 countries globally, a slight decline from 2015’s ranking of 88 and 4^th of the 10 ASEAN countries. Corruption remains pervasive despite laws to combat it. The KPK remains one of the most trusted institutions in Indonesian public life, and President Jokowi successfully opposed a bill that would have weakened the KPK’s ability to conduct its work. The KPK is authorized to conduct investigations, indictments, and prosecutions in corruption cases that involve law enforcement officers, government executives, or other parties connected to corrupt acts committed by law enforcement officers or government executives; have attracted the “attention and the dismay” of the general public; and/or involve a loss to the State of at least IDR 1 billion (approximately USD $74,500). Corruption cases are also handled by the Indonesian National Police and Attorney General’s Office, neither of which have the same organizational capacity to investigate or prosecute corruption cases. Giving or accepting a bribe is a criminal act, with possible fines ranging from USD $3,850 to USD $77,000 and imprisonment up to a maximum of 20 years or life imprisonment, depending on the severity of the charge.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Indonesia ratified the UN Convention against Corruption in September 2006. Indonesia has not yet acceded to the OECD Anti-Bribery Convention, but attends meetings of the OECD Anti-Corruption Working Group. In 2014 Indonesia chaired the Open Government Partnership, a multilateral platform to promote transparency, empower citizens, fight corruption, and strengthen governance. Several civil society organizations function as vocal and competent corruption watchdogs, including Transparency International Indonesia and Indonesia Corruption Watch.

Resources to Report Corruption

Komisi Pemberantasan Korupsi (Anti-Corruption Commission)

Jln. HR Rasuna Said Kav. C1 Kuningan
Jakarta Selatan 12920
informasi@kpk.go.id

Indonesia Corruption Watch
Jl. Kalibata Timur IV/D No. 6 Jakarta Selatan 12740
Tel: +6221.7901885 or +6221.7994015
Email: info@antikorupsi.org

As in other democracies, politically motivated demonstrations occasionally occur throughout Indonesia, but are not a major or ongoing concern for most foreign investors.

Fighting terrorism remains a top priority for the Indonesian government, and President Jokowi has demonstrated a continued strong commitment to combating terrorism. Since the 2002 Bali bombings, which killed over 200 Indonesians and foreigners, Indonesian police have applied sustained pressure to successfully degrade the capabilities of terrorists and their networks operating within Indonesia’s borders. Nonetheless, U.S. designated terrorist organizations Jemaah Islamiyah (JI) and Jemaah Anshourt Daulah (JAD), as well as other violent extremist groups continue to plot attacks. Indonesia has effectively pursued counterterrorism efforts through legislation and law enforcement. The January 14, 2016 terrorist attack in central Jakarta and subsequent small-scale attack linked to JAD demonstrated that these groups continue to demonstrate a willingness and ability to carry out attacks with little or no warning (though operational capabilities remain weak). There is also concern about Indonesians traveling to Syria or Iraq as foreign terrorist fighters; several hundred Indonesians are estimated to have traveled to the Middle East to join violent groups operating there. The primary target of terrorists remains local government and law enforcement entities, especially the police, though ISIL-affiliated Indonesians have increasing called for targeting U.S. and Western-affiliated interests‎ as well.

Foreign investors in Papua face certain unique challenges. Indonesian security forces occasionally conduct operations against the Free Papua Movement, a small armed separatist group that is most active in the Central Highlands region. Low-intensity communal, tribal, and political conflict also exists in Papua and has caused deaths and injuries. Anti-government protests have resulted in deaths and injuries, and violence has been committed against employees and contractors of a U.S. company there.

The Indonesian labor market is generally open and flexible, although there are significant restrictions on the use of contract workers. Recent significant increases in the minimum wage for many provinces have made unskilled and semi-skilled labor more costly. In the bellwether Jakarta area, following a 44 percent increase in 2012, the minimum wage was raised again from IDR 3.1 million (USD $229.6) in 2015 to IDR 3.3 million (USD $244.4) at the end of 2016. Unions staged largely peaceful protests across Indonesia in 2016 demanding a 20 percent increase in the minimum wage and the repeal of the new formulation used to set up the minimum wage. Under the new wage setting policy adopted as part of the October economic stimulus package, annual minimum wage increases will be indexed directly to inflation and GDP growth. Previously, minimum wage adjustments were subject to negotiations between local governments, industry, and unions, and the changes varied widely from year to year and from region to region. In response to labor protests, many local governments negotiated higher minimum wage levels at the end of 2016 resulting in different wage increase calculations based on sectoral formulas. With the new sector-based calculation, in Jakarta the new minimum wage in the electronics sector was 30 percent higher or IDR 4.0 million (USD $296.3), while in West Java, the minimum wage in the automotive sector was set at IDR 4.1 million (USD $303.7).

As only about 7.6 percent of the workforce is unionized, the benefits of union advocacy (including increases in minimum wage) do not always filter down to the rest of the workforce. While restrictions on the use of contract workers remain in place, continued labor protests focusing on this issue suggest that government enforcement continues to be lax. Unemployment decreased slightly to 5.5 percent in October 2016. Unemployment tends to be higher than the national average among young people.

Indonesian labor is relatively low-cost by world standards, but lack of adequate skills training and complicated labor laws combine to make Indonesia’s competitiveness lag behind other Asian competitors. Investors frequently cite high severance payments to dismissed employees, restrictions on outsourcing and contract workers, and limitations on expatriate workers as significant obstacles to new investment in Indonesia. In October 2015, the Ministry of Labor issued a revised regulation No.35/2015 on the Procedures of Hiring Foreign Workers to lighten requirements for companies to bring in foreign employees. The new regulation eliminates the provision that required companies to hire 10 local staff for every foreign worker hired, and dropped the requirement of work permits for foreigners who participate in seminars, speeches, workshops, board meetings, and trainings. The new regulation still prohibits local companies from hiring foreign employees as commissioners. Employers also note that the skill base provided by the education system is lower than that of neighboring countries, and successive Labor Ministers have listed improved vocational training as a top priority. Labor contracts are relatively straightforward to negotiate but are subject to renegotiation, despite the existence of written agreements. Local courts often side with citizens in labor disputes, contracts notwithstanding. On the other hand, some foreign investors view Indonesia’s labor regulatory framework, respect for freedom of association, and the right to unionize as an advantage to investing in the country. Expert local human resources advice is essential for U.S. companies doing business in Indonesia, even those only opening representative offices.

Minimum wages vary throughout the country as provincial governors set an annual minimum wage floor and district heads have the authority to set a higher rate. Indonesia’s highly fractured and historically weak labor movement has gained strength in recent years, evidenced by significant increases in the minimum wage. As noted above, recent changes to the minimum wage setting system may make the process less dependent on political factors and more aligned with actual changes in inflation and GDP growth. Labor unions are independent of the government. The law, with some restrictions, protects the rights of workers to join independent unions, conduct legal strikes, and bargain collectively. Indonesia has ratified all eight of the core ILO conventions underpinning internationally accepted labor norms. The Ministry of Labor maintains an inspectorate to monitor labor norms, but enforcement is stronger in the formal than in the informal sector. In January 2014, Indonesia launched a national insurance plan. In October 2011, the Indonesian government passed a revised Social Security Law, which took effect in January 2014, in which all formal sector workers must participate. Subject to a wage ceiling, employers’ must contribute an amount equal to 4 percent of workers’ salaries to this plan. In July 2015, Indonesia established the Social Security Organizing Body of Employment (BPJS-Employment), a national agency to support workers in the event of work accident, death, retirement, or old age.

A proposed revision to Indonesia’s 2003 labor law may establish more stringent restrictions on outsourcing, currently used by many firms to circumvent some formal-sector job benefits.

Additional information on child labor, trafficking in persons, and human rights in Indonesia can be found online through the following references:

• Child Labor Report http://www.dol.gov/ilab/reports/child-labor/indonesia.htm 
• Trafficking in Persons Report: http://www.state.gov/j/tip/rls/tiprpt/countries/2015/243456.htm
• Human Rights Report: http://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#wrapper

In 2010, the Overseas Private Investment Corporation (OPIC) updated its 1967 Investment Support Agreement between the U.S. and Indonesia by adding OPIC products such as direct loans, coinsurance, and reinsurance to the means of OPIC support which U.S. companies may use to invest in Indonesia.

Indonesia has joined the Multilateral Investment Guarantee Agency (MIGA). MIGA, a part of the World Bank Group, is an investment guarantee agency to insure investors and lenders against losses relating to currency transfer restrictions, expropriation, war and civil disturbance, and breach of contract.

*Bank of Indonesia, GDP from the host country website is converted into USD with the exchange rate 11,900 for 2015

*Bank of Indonesia

Table 3: Sources and Destination of FDI

Source: IMF Coordinated Direct Investment Survey for inward investment data. World Investment Report 2016 UNTCAD for outward investment data, country specific data for outward investment is unavailable.

Table 4: Sources of Portfolio Investment

Source: IMF Coordinated Portfolio Investment Survey, 2016

Joanne Gilles
First Secretary and Economic Officer
U.S. Embassy Jakarta
+62-21-3435-9000