VZCZCXRO0184
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3098/01 3111053
ZNR UUUUU ZZH
R 071053Z NOV 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6953
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHKL/AMEMBASSY KUALA LUMPUR 2408
RUEHBK/AMEMBASSY BANGKOK 8223
RUEHGP/AMEMBASSY SINGAPORE 6205

UNCLAS SECTION 01 OF 10 JAKARTA 003098 
 
SIPDIS 
 
SINGAPORE FOR SUSAN BAKER 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS, EAP/RSP, EB/TPP, EB/TPP/BTA 
COMMERCE FOR SBERLINGUETTE 
USTR FOR BWEISEL; GBLUE 
TREASURY FOR IA-BAUKOL 
 
E.O. 12598: N/A 
TAGS: BEXP ETRD EINV ECON ID
SUBJECT: Indonesia National Trade Estimate 2007 
 
¶1. (U) SUMMARY:  Below please find the full text of the 2007 
National Trade Estimate (NTE) report for Indonesia.  (A copy in 
Microsoft Word has been e-mailed to USTR as requested.)  End 
Summary. 
 
¶2.  (U) Begin text: 
 
--TRADE SUMMARY 
 
The U.S. goods trade deficit with Indonesia was $10.3 billion in 
2006, an increase of $1.4 billion from $9.0 billion in 2005.  U.S. 
goods exports in 2006 were $3.1 billion, up 0.8 percent from the 
previous year. Corresponding U.S. imports from Indonesia were $13.4 
billion, up 11.6 percent.  Indonesia is currently the 40th largest 
export market for U.S. goods. 
 
U.S. exports of private commercial services (i.e., excluding 
military and government) to Indonesia were $1.2 billion in 2005 
(latest data available), and U.S. imports were $348 million.  Sales 
of services in Indonesia by majority U.S.-owned affiliates were not 
available in 2004 ($1.1 billion in 2003- latest data available), 
while sales of services in the United States by majority 
Indonesia-owned firms were $21 million in 2004. 
 
The stock of U.S. foreign direct investment (FDI) in Indonesia was 
$9.9 billion in 2005 (latest data available).  U.S. FDI in Indonesia 
is concentrated largely in the mining, and non-bank holding 
companies sectors. 
 
The United States and Indonesia concluded a bilateral Trade and 
Investment Framework Agreement (TIFA) in 1996.  In recent years, the 
United States and Indonesia have held regular meetings under the 
TIFA.  The United States has used the TIFA to discuss and seek 
resolution of many issues that threaten to inhibit bilateral trade 
and investment.  The United States-Indonesia TIFA is a component in 
the Enterprise for ASEAN Initiative, which was launched by President 
Bush in October 2002. 
 
--OVERVIEW 
 
Since taking office on October 20, 2004, President Yudhoyono, 
Indonesia's first directly-elected leader, has pursued plans to 
improve Indonesia's business climate and regional competitiveness; 
attract greater foreign and domestic investment, especially in 
infrastructure and export sectors; and generate high-quality job 
growth needed for sustained economic development.  An October 18, 
2005 Presidential Decree established an interagency Indonesian 
National Trade Negotiation Team, with the Coordinating Minister for 
the Economy and the Minister of Trade as its chair and deputy chair, 
respectively.  This team has the goal of improving coordination of 
Indonesian government strategies and positions in trade dialogues 
and negotiations. 
 
President Yudhoyono's program to improve Indonesia's business 
climate and competitiveness seeks to address concerns over the wide 
range of business problems some United States industry encounters in 
Indonesia, including the lack of contract enforceability, arbitrary 
and inconsistent interpretation and enforcement of laws, the absence 
of a transparent and predictable regulatory environment, 
irregularities in government procurement tenders, poor 
infrastructure, labor market rigidities, discriminatory taxation, 
and ineffective enforcement of intellectual property rights.  These 
business problems cause uncertainty, which combined with widespread 
corruption, and an unreliable judicial system, hinders commercial 
dealings in Indonesia.  The Yudhoyono Administration has focused its 
reform agenda first on revising Indonesia's investment, tax, and 
customs laws; undertaking an effective anti-corruption campaign; and 
laying the foundation for judicial and civil service reform.  On 
March 2, 2006 the Indonesian government announced an "Investment 
Climate Improvement Package" containing 85 regulatory and 
institutional reforms it planned to take in 2006 to improve the 
investment climate.  The package focused on five areas: general 
investment policies; customs, excise and duties policies; taxation; 
labor; and small and medium enterprises (SMEs).  Indonesia also 
announced on February 17, 2006, an ambitious infrastructure policy 
reform package.  However, much of the reform agenda has yet to be 
implemented. 
 
President Yudhoyono continues to make progress in his multi-faceted 
 
JAKARTA 00003098  002 OF 010 
 
 
anti-corruption program.  He placed reformers in key positions, such 
as the chiefs of the tax and customs offices in April 2006.  The 
national budgets for 2006 and 2007 provided additional resources to 
government agencies engaged in anti-corruption efforts including the 
Attorney General's Office.  Meanwhile, anti-corruption institutions 
are active and growing in significance and donor assistance to 
improve public sector performance is robust. The Corruption 
Eradication Commission (KPK) is developing its institutional 
strength, continuing to prosecute minister and governor-level 
corruptors as well as building its capacity through continued hiring 
increases.  The Ministry of Finance is leading civil service reform 
including professional entrance exams and codes of conduct: other 
Ministries are copying its model. 
 
The United States and Indonesia reenergized Trade and Investment 
Framework Agreement (TIFA) talks in 2005, and continue to hold 
regular productive meetings to discuss outstanding trade concerns 
and to explore areas for future cooperation.  The Indonesian 
government generally has adhered to its long-term trade 
liberalization program, and the Yudhoyono Administration has 
actively pursued greater access to global markets through bilateral, 
regional and multilateral agreements. In August 2007, Indonesia and 
Japan signed an economic partnership agreement, Indonesia's first 
bilateral free trade agreement.  Indonesia fully implemented the 
first stage of its commitments under the ASEAN Free Trade Agreement 
(AFTA) on schedule in 2002, and has been active in ASEAN's efforts 
to pursue free trade agreements with China, Japan, South Korea, 
India, Australia and New Zealand. 
 
--IMPORT POLICIES 
 
-Tariffs 
 
The Indonesian government released a new tariff reduction package in 
January 2004.  The new tariff book categorizes tariffs into 
International Non-ASEAN Tariffs and ASEAN Tariffs.  Most Non-ASEAN 
tariffs fall into 0 percent, 5 percent, and 10 percent tiers, except 
for sensitive items such as automotive goods and alcohol.  ASEAN 
tariffs fall into three tiers, 0 percent, 2.5 percent, and 5 
percent, for all goods covered by the AFTA. 
 
In January 2006, Indonesia announced the results of the second and 
final phase of its Tariff Harmonization Program (THP).  Of 9,209 
tariff lines reviewed, Indonesia made changes to 800, lowering 635 
tariffs and increasing 165.  Most Indonesian tariffs are bound at 40 
percent.  Products for which tariff bindings exceed 40 percent or 
which remain unbound include automobiles, iron, steel, and some 
chemical products.  In the agricultural sector, 1,341 tariff lines 
have bindings at or above 40 percent, including the most sensitive 
and heavily protected products.  In the current WTO Doha 
negotiations, Indonesia, as leader of the G-33, has been advocating 
special product exemptions from tariff reductions for rice, sugar, 
soybeans, and corn. 
 
In addition, to implement the ASEAN Harmonized Tariff Nomenclature 
(AHTN), starting from September 14, 2007, the Indonesian Government 
amended its Harmonized System (HS) by lowering some tariff bindings 
including wire rods, steel strands, aluminum foil and automotive 
components to 20 percent from 45 percent. 
 
The Indonesian government instituted bans on sugar and salt and 
increased import duties on corn and soybeans from zero percent to 5 
percent and 10 percent, respectively.  Local agriculture interests 
continue to lobby the government to increase tariff rates above the 
levels bound in the WTO on sensitive agricultural products, such as 
sugar, soybeans and corn. 
 
-Non-Tariff Barriers 
 
During the Soeharto era, the National Logistics Agency (Bulog), had 
a monopoly on importing and distributing major bulk food 
commodities, such as wheat, rice, sugar, and soybeans, but it now 
has the status of a state-owned enterprise with responsibility for 
maintaining stocks for distribution to military and low-income 
families, and for managing the country's rice stabilization program. 
 Bulog is no longer entitled to draw on Bank Indonesia credit lines, 
a privilege it long enjoyed under the Soeharto regime, and must use 
commercial credit and pay import duties.  In conjunction with the 
minimization of Bulog's authority and role, some designated private 
 
JAKARTA 00003098  003 OF 010 
 
 
companies are now permitted to import rice, wheat, wheat flour, 
soybeans, garlic, and sugar. 
 
The Indonesian government imposed a rice import ban in February 
2004, which was only eased somewhat in November 2005, when the 
Ministry of Trade issued import permits to Bulog allowing for 
imports of about 70,000 tons of rice, and again in September 2006 
when imports of 210,000 tons were authorized.  Rice import 
regulations were imposed mainly during harvesting periods to protect 
paddy price at farm level. However, as the government felt that 
domestic prices were not getting better, it imposed policies to 
regulate imports until the end of 2006.  Rice import regulations are 
in place, but the need to import rice is reviewed regularly based on 
domestic supply and demand. In 2006, the GOI imported 550 thousand 
tons of rice.  This policy was designed to fill the gap between 
domestic needs and production.  However, these decisions met with 
sharp criticism from other ministries, producer groups, and Members 
of Parliament.  Minister of Trade Pangestu, in February 2007, 
announced that Indonesia was relaxing the ban on rice imports in 
2007 due to late rains and a poor harvest, but that this did not 
indicate an outright end to the ban on rice imports.  Historically, 
the United States has not made significant commercial sales of rice 
to Indonesia; most shipments have occurred through the P.L. 480 
Title I concessional loan program. 
 
Starting from August 2007, the Indonesian rice import regime changed 
when the government revoked its rice import ban.  According to the 
Ministry of Trade, Bulog can now decide when and how much rice to 
import.  Previously, Bulog was limited to acting as the implementer 
of interagency decision to import and limited only to medium quality 
rice.  Under new authority, Bulog can also import premium rice; 
however, Bulog must consult with the Minister of Trade before 
importing.  Bulog may also conduct price stabilizations based on 
their own judgment in areas where rice shortages and price 
fluctuation occur without waiting for the Minister of Trade's 
instruction likely in the past. Along with this, the Government of 
Indonesia also increased rice import duties to 550 rupiah per 
kilogram ($58 per ton) from 450 rupiah ($48 per ton). 
 
The Indonesian government continues to maintain a ban on imports of 
chicken parts originally imposed in September 2000 by the 
Directorate General of Livestock Services in the Ministry of 
Agriculture (MOA).  The U.S. Government has raised concerns about 
this issue, but the MOA continues to insist on the necessity to 
assure consumers that imports are halal (produced in accordance with 
Islamic practices).  U.S. imports comply with Indonesia's 
established requirements for halal certification, and several 
ministries have unsuccessfully sought to repeal the ban.  U.S. 
industry estimates the value of lost trade from this ban at roughly 
$10 million per year. 
 
Indonesia's government also imposes de facto quantitative 
restrictions on imports of animal based food products by requiring 
an import permit from Directorate General of Livestock.  In 
approving requests for such letters, the Indonesian government can 
arbitrarily alter the quantity allowed to enter, raising concerns 
that these Letters of Recommendation are being used to limit 
imports.  U.S. industry estimates the annual trade impact of this 
restriction to be between $10 million and $25 million. 
 
Following the June 2005 finding in the United States of a single 
case of Bovine Spongiform Encephalopathy (BSE), Indonesia's MOA 
banned imports of U.S. meat and other ruminant products on July 1, 
¶2005.   The MOA has yet to inform the United States what information 
it will need to reinstate this trade, nor would it be ready to 
reconsider U.S. beef imports.  U.S. beef exports had been growing 
rapidly and approached a record $15 million in 2005 prior to 
imposition of the import ban.  Recent movement to allow meat and 
bone meal (MBM) imports from the United States on a company by 
company basis following site inspection by the MOA has provided very 
limited access. 
 
In June 2004, the Ministry of Trade banned the importation of salt 
during the harvest season from July through the end of each year. 
Under the regulations, salt importing companies must be registered 
and source 50 percent of their raw materials locally.  A September 
2004 Ministry of Trade decree allows five companies to import sugar. 
 It also states that the Ministry of Trade decides which companies 
can import sugar and how much. 
 
JAKARTA 00003098  004 OF 010 
 
 
 
In May 2005, Indonesia issued a proposed regulation, Decree 37, 
which imposed new requirements for fresh fruit and vegetable 
imports.  The proposal inaccurately reflected the presence of fruit 
flies in the United States.  Although the United States corrected 
this information in its August 2005 response to the proposed 
regulation, Decree 37 became effective on March 27, 2006 without 
modification of the U.S. pest status. The final regulation requires 
imports of fruit fly host commodities to originate from fruit fly 
free areas or to be treated as a condition of entry.  Eleven U.S. 
fruit exports were affected by Decree 37, including apples and 
grapes.  Indonesia is the seventh-largest market for U.S. apples 
worth over $20 million in 2005.  In December 2006, following a 
Ministry of Agriculture inspection visit, Indonesia declared 
California as a pest free area for the Mediterranean fruit fly for 
grapes, opening the way to renewed grape exports.  The United States 
will continue to press Indonesia to permit resumption of U.S. fruit 
exports on the basis of sound science and in conformance with 
international sanitary and phytosanitary standards. 
 
Quantitative import limits apply to wines and distilled spirits.  In 
addition to the regular import duty of 170 percent, a 10 percent VAT 
and 35 percent luxury tax, the Indonesian government restricts 
imports of alcoholic beverages to three registered importers, 
including one state-owned enterprise. 
 
The U.S. Government has received reports that Indonesia's Customs 
Service uses a schedule of arbitrary "check prices" rather than 
actual transaction prices on importation documents to assess duties 
on food product imports.  Indonesian Customs officials defend this 
practice by arguing it combats under-invoicing.  They claim that 80 
percent of all Customs applications, electronic or paper, are 
accepted without extraordinary review.  Importers are notified, 
however, when an application appears to be suspicious and, if the 
matter is still not resolved, Customs makes an assessment based on 
an average of the price of the same or a similar product imported 
during the previous 90 days.  Indonesian Customs, however, does not 
publicize this methodology or a current list of such reference 
prices. As a result, although most food product import tariffs 
remain at 5 percent, the effective level of duties can be much 
higher.  For example, industry estimates that application of 
arbitrary check prices adds up to $2,000 per shipment of U.S. table 
grapes to Indonesia, leading to an estimated annual loss of around 
$3.5 million per year in potential trade for this product alone. 
The U.S. Government also has received many complaints from importers 
about costly delays and requests for unofficial payments from a 
number of companies importing goods through Indonesian ports. 
 
Parliament approved an amended Customs Law on October 18, 2006 that 
cuts red tape for importers and exporters and imposes stiffer 
sanctions on smugglers.  It establishes a code of ethics for customs 
officers and a set of penalties and incentives to punish corrupt 
behavior and reward good performance. 
 
-Import Licensing 
 
The Indonesian government continues to reduce the number of products 
subject to import restrictions and special licensing requirements. 
Currently, 141 tariff lines are subject to import licensing 
restrictions, down from 1,112 tariff lines in 1990.   Alcoholic 
beverages, lubricants, explosives, and certain dangerous chemical 
compounds, among other items, are subject to these requirements. 
 
In March 2002, the Minister of Industry and Trade issued a decree on 
Special Importer Identification Code Numbers (NPIK).  This decree 
requires importers of certain product categories to apply for a 
special importer identity card, without which products can be 
detained at port.  These goods include: corn, rice, soybeans, sugar, 
textile and related products, shoes, electronics and toys. 
 
On October 23, 2002, the Minister of Industry and Trade issued a 
decree concerning Textile Import Arrangements.  Only companies that 
have production facilities using imported fabrics as inputs for 
finished products, such as garments or furniture, may obtain import 
licenses.  The United States has raised concerns that the import 
licensing requirements restrict and distort trade and has 
recommended that the decree be rescinded.  The Indonesian government 
insists the regulations are designed to help curb smuggling from 
neighboring countries. 
 
JAKARTA 00003098  005 OF 010 
 
 
 
--STANDARDS, TESTING, LABELING AND CERTIFICATION 
 
In July 2000, the Indonesian government implemented the Consumer 
Protection Law of 1998 by requiring registration of imported food 
products.  Importers must apply for a registration number from the 
Agency for Drug and Food Control (BPOM).  According to U.S. 
importers, these requirements have proven to be overly complex, time 
consuming, and costly. 
 
BPOM tests imported food products although implementation of this 
requirement is not yet complete and enforcement is inconsistent. 
Some U.S. producers have expressed concerns that the extremely 
detailed information on product ingredients and processing they must 
provide may require them to reveal proprietary business information 
leading some of them to discontinue sales in Indonesia.  If fully 
implemented the annual level of trade adversely affected by this 
requirement is estimated by U.S. industry at between $10 million and 
$25 million. 
 
 
Beginning January 2001, Indonesia's regulations required labels 
identifying food containing "genetically engineered" ingredients and 
"irradiated" ingredients.  However, the Indonesian government has 
not implemented these new requirements because it has yet to 
establish minimum threshold-presence levels. U.S. industry estimates 
that the new regulation could affect sales of approximately $411 
million annually in soybeans and soybean meal from the United 
States. The U.S. Government is closely monitoring this issue. 
 
--GOVERNMENT PROCUREMENT 
 
Indonesia is not a signatory to the WTO Agreement on Government 
Procurement.  In 2004, Indonesia issued a Presidential Decree on 
government procurement aimed at simplifying procedures and 
increasing efficiency and transparency in the procurement process. 
However, the new rules grant some special preferences to encourage 
domestic sourcing and call for the maximization of local content in 
government projects, regardless of their source of funding. 
According to the Decree, foreign companies are eligible to bid on 
government contracts as part of a joint partnership or as a 
subcontractor to a domestic firm, and permissible foreign 
participation increased from $1 million to $5 million. 
Nevertheless, regional decentralization may introduce additional 
barriers as local and provincial governments adopt their own 
procurement rules.  Presidential decree 8/2006 requires agencies to 
announce projects, invite tender, and provide related information in 
one national newspaper, and by 2008 the announcement of tenders will 
also be publicized in a national procurement website currently under 
development. 
Bilateral or multilateral donors finance many large government 
contracts and often impose special procurement requirements.  For 
large, government-funded projects, international competitive bidding 
practices must be followed.  The Indonesian governmenv s"eks 
concessional financing for most procurement projectrQ 
 
Foreign firms bidding on high value government-sponsred projects 
have been aasked to purchase and exprt the equivalent value in 
selected Indonesian poducts.  Government departments, institutes, 
and orporations are expected to utilize domestic goodsand services 
to the maximum extent feasible, wit the exception of foreign 
aid-financed procurement of goods and services.  State-owned 
enterprises that publicly offer shares through the stock exchange 
are exempted from government procurement regulations. 
 
--EXPORT SUBSIDIES 
 
In 2004, the Indonesian government ended several credit programs 
that offered subsidized loans to agriculture and small and medium 
sized businesses to support exports. 
 
--INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION 
 
IPR protection and enforcement remains a concern in Indonesia, where 
widespread optical disc piracy and counterfeiting of consumer goods, 
including automotive parts and pharmaceuticals, cost U.S. firms and 
the Indonesian government hundreds of millions of dollars in lost 
revenues and pose serious health and safety concerns for 
Indonesians.  Indonesia has made considerable progress in the past 
 
JAKARTA 00003098  006 OF 010 
 
 
couple of years, and recent increased Indonesian commitment to IPR 
protection and enforcement led the U.S. Government on November 6, 
2006 to improve Indonesia's Special 301 standing to Watch List. 
 
-Copyrights 
 
Indonesia's copyright law came into force in July 2003.  The law 
contains a number of important provisions long sought by U.S. and 
Indonesian copyright holders, including criminal penalties for 
end-user piracy and the ability of rights holders to seek civil 
injunctions against pirates.  The Copyright Law establishes rights 
to license, produce, rent or broadcast audiovisual, cinematographic, 
and computer software.  It also provides protections for neighboring 
rights in sound recordings and for the producers of phonograms.  It 
stipulates a 50-year term of protection for many copyrighted works. 
An Optical Disk (OD) regulation became effective in April 2005.  The 
Ministry of Industry leads an interagency OD factory monitoring team 
that has registered 31 factories and has begun unannounced 
inspections with some support from local intellectual property 
industry associations. 
 
Following a December 2005 directive by Indonesia National Police 
(INP) Chief Sutanto, police stepped up with increased and sustained 
IPR enforcement activities, particularly against pirate OD vendors, 
distributors and factories.  The Jakarta and Surabaya police were 
particularly active, seizing and destroying millions of illegal ODs, 
arresting hundreds of suspects, and seizing or sealing illegal 
burners and OD production lines.  There are currently three factory 
cases scheduled for the criminal court resulting from two raids on 
July 1, 2007.  The Ministry of Industry has also applied 
administrative sanctions to the factory owners and has revoked their 
licenses pending the court verdicts.  In September 2007, the 
Attorney Generals (AG) Office raised the profile and priority of IPR 
issues by allowing the Terrorism and Transnational Crime Task Force 
to handle IPR cases.  However the AG has not yet assigned designated 
prosecutors to this unit.  These activities, while considerable, 
have yet to produce a significant increase in prosecutions and 
deterrent fines or custodial sentences, or the permanent impoundment 
or destruction of large scale production equipment used to 
manufacture pirated products.  While the success of recent police 
enforcement activities have resulted in some decrease in the 
quantity, quality and availability of pirated ODs, the rate of 
piracy in Indonesia remains high. 
 
-Patents 
 
Indonesia enacted its Patent Law on August 1, 2001.  The law 
consolidated three previous laws covering patents, and established 
an independent commission to rule on patent disputes and appeals. 
The law transferred jurisdiction over IPR civil cases to the 
Commercial Court from the District Court, and raised the maximum 
fine for patent violations to Rp 500 million ($60,000).  The term of 
protection remains 20 years with a possible two-year extension.  A 
patent is subject to cancellation only in the event the patent 
holder fails to pay annual fees within specified periods. 
Unauthorized use of a product or process invention that is the 
subject of a pending application constitutes patent infringement. 
 
Despite these measures, Indonesia continues to suffer from a lack of 
effective enforcement of patent rights.  The patent law does not 
address some of the weaknesses that concern foreign rights holders. 
Chief among these is the requirement that an inventor must 
physically produce a product or utilize a process in Indonesia in 
order to obtain a patent for the product or process. 
 
-Trademarks 
 
Indonesia enacted its trademark law on August 1, 2001.  The law 
raised the maximum fine for criminal trademark violations to Rp 1 
billion ($120,000), and slightly reduced the maximum possible prison 
term.  The Indonesian government justified this move by claiming 
that financial penalties were a greater deterrent to IPR violators 
than imprisonment.  Foreign rights holders, arguing that most IPR 
cases never result in the maximum sentence, had pushed for minimum 
sentencing guidelines rather than higher fines. 
 
The trademark law provides for the determination of trademark rights 
by priority of registration, rather than by priority of commercial 
use.  The law also provides for the protection of well-known marks, 
 
JAKARTA 00003098  007 OF 010 
 
 
but offers no administrative procedures or legal grounds under which 
legitimate owners of well-known marks can cancel pre-existing 
registrations.  Currently, the only avenue for challenging existing 
trademark registrations in Indonesia is through the courts, an 
often-burdensome undertaking that must be initiated within five 
years from the date of the disputed registration.  Faster processing 
(within 180 days) of trademark cases by the Commercial Courts has 
provided relief to some trademark holders.  However, industry 
representatives are seeking additional injunctions by the courts, 
especially in cases where a lower court eventually invalidates a 
false trademark registration. 
 
--SERVICES BARRIERS 
 
Despite relaxation of some restrictions, trade barriers to services 
continue to exist in many sectors. 
 
-Legal Services 
 
A few local law firms currently dominate the legal market, and 
foreign law firms cannot operate directly in Indonesia.  A foreign 
law firm seeking to enter the market must establish a relationship 
with a local firm.  Only Indonesian citizens with a degree from an 
Indonesian legal facility or other recognized institution may 
practice as lawyers.  Foreign lawyers can only work in Indonesia as 
"legal consultants" and must first obtain the approval of the 
Ministry of Justice and Human Rights. 
 
-Distribution 
 
In 1998-99, Indonesia liberalized portions of the distribution 
services sector under the terms of its agreements with the IMF after 
the financial crisis.  The Indonesian government eliminated 
restrictive marketing arrangements for cement, paper, plywood, 
cloves and other spices.  Indonesia allows up to 100 percent foreign 
equity in the distribution and retail sectors, with the condition 
that the investor enter into a "partnership agreement" with a 
small-scale Indonesian enterprise.  This partnership agreement need 
not involve an equity stake in the project. 
 
In the energy sector, Indonesia passed an Oil and Gas Law in 
November 2001 to deregulate the downstream oil and gas sectors, 
which includes refining, distribution, storage and retail 
activities.  Under the law, the state oil and gas company Pertamina 
was converted into a limited liability company (Regulation No. 
31/2003) and ended its public service obligation (PSO) two years 
after passage of the law.  The law also stipulates the formation of 
a new Oil and Gas Downstream Business Regulating Board (Badan 
Pengatur Kegiatan Usaha Hilir Migas, or BPH Migas) that effectively 
took control of Pertamina's former regulatory function over the 
downstream industry.  BPH Migas is an independent government 
institution that reports directly to the President.  Its primary 
functions include regulating the supply and distribution of oil 
fuel, allocating sufficient fuel oil to meet national fuel oil 
reserves, stipulating conditions on fuel oil transportation and 
storage, setting tariffs for natural gas pipeline use, setting the 
price of natural gas for households and small consumers, and 
regulating the transmission and distribution of natural gas.  The 
downstream sector is further regulated with President Regulation No. 
46/2004 on Oil and Gas Downstream Activities, issued October 14, 
2004, which outlines the general procedures, activities and licenses 
for downstream activities. 
 
In October 2005, Shell was the first private investor to open a 
non-Pertamina retail fuel station in Indonesia.  About 25 local and 
international investors, including Malaysia's national oil and gas 
company Petronas, are reported to have obtained initial licenses for 
downstream operation. 
 
-Financial Services 
 
Indonesia allows 99 percent foreign ownership of domestic banks.  In 
October 2006, BI launched a new banking policy package consisting of 
11 regulations.  The two-fold aim of the package is to expand the 
banks' role in the financing of development and to promote 
consolidation of small banks, which create a supervisory burden 
while generating little economic activity.  (More than 40 of 
Indonesia's 131 banks have capital of less than $11 million.)  The 
new rules ease lending limits and minimum capital requirements for 
 
JAKARTA 00003098  008 OF 010 
 
 
sound commercial banks.  The "single presence policy," will require 
banks with the same owner to consolidate their presence.  They must 
submit a restructuring plan to BI by December 2007 and report 
quarterly starting January 2008.  The restructuring is be completed 
by December 2010.  To promote banks' intermediary function, the 
regulatory package relaxes the Legal Lending Limit and creates more 
flexibility for banks to respond to financing needs in the real 
sector.   In September 2007, BI issued another regulation setting 
out additional incentives for bank consolidation.  The incentives 
include lower minimum reserve requirements, more flexible rules for 
banks to upgrade their status to foreign exchange banks, relaxed 
corporate governance requirements, and streamlined procedures for 
submitting a merger plan. 
 
-Audit and Accounting Services 
 
Foreign firms cannot practice under international firms' names, 
although terms such as "in association with" are permissible. 
Foreign accounting firms must operate through technical assistance 
arrangements with local firms.  Foreign agents and auditors may act 
only as consultants and cannot sign audit reports.  Foreign 
directors, managers and technical experts/advisors, unless mentioned 
otherwise, are allowed a maximum stay of two-years, with a possible 
one-year extension.  Licensed accountants must hold Indonesian 
citizenship.  A Ministry of Finance decree requires a five-year 
limit on general audits by an accounting firm (Indonesia is one of 
only a small handful of countries to require this.)  While many 
countries require the rotation of an audit partner, mandatory audit 
firm rotation is considered burdensome by many companies and the 
audit sector, due to the loss of expertise, data records, and 
overall decline of audit quality.  The issue has been raised in 
bilateral discussions by State and USTR.  Auditors practicing in the 
capital markets are prohibited from delivering specified non-audit 
services such as consulting, bookkeeping, and information system 
design. 
 
-Audio-Visual 
 
Indonesia bans all foreign investment in media businesses, including 
cinema construction or operation, video distribution and broadcast 
services.  Foreign investment is prohibited in broadcast and media 
sectors, including the film industry (film making, film technical 
service providers and movie house operations).  Films are also 
subject to review and censorship before screening domestically. 
Foreign investment in the provision of radio and television 
broadcasting services, radio and television broadcasting 
subscription services and media print information services also are 
prohibited. 
 
--Construction, Architecture and Engineering 
 
Foreign consultants working under government contract are subject to 
government billing rates.  Foreign construction firms are only 
permitted to be subcontractors or advisors to local firms in areas 
where the government believes that a local firm is unable to do the 
work.  In addition, for government-financed projects, foreign 
companies must form joint ventures with local firms. 
 
--Telecommunications Services 
 
Indonesia has recently made progress in making the 
telecommunications playing field more transparent and competitive in 
all but basic services delivery.  Foreign investors face some 
impediments to entering the Indonesian value-added 
telecommunications market however, notably increased ownership 
restrictions resulting from the GOI's newly issued negative list on 
foreign investment. 
 
As a result of the negative list, foreign investors are now limited 
to 65 percent ownership stake for telecommunication services and a 
49 percent ownership stake for landline and telecommunication 
networks. This is a step backward as in the past foreign investor 
were allowed up to 95 percent ownership in the entire 
telecommunication sector. 
 
Indonesia formed a telecommunication regulatory body (BRTI) in July 
2004 to improve transparency in regulation development and dispute 
resolution. BRTI is responsible for regulating, monitoring and 
enforcing the telecommunication law including its implementing 
 
JAKARTA 00003098  009 OF 010 
 
 
regulations. In 2007, BRTI has been active in improving the 
telecommunication sector to include producing interconnecting 
regulation, tariff rule as well as dispute meditation between 
related parties. Indonesia's cellular tariff has become lower in 
recent years due to large number of cellular providers competing in 
the sector. 
 
--INVESTMENT BARRIERS 
 
Indonesia's new Investment Law (25/1997) was approved by the 
legislature in March 2007.  Some fear that implementation of the law 
will not meet investor expectations of a more open investment 
regime.  While the law sets out affirmative principles, such as 
equal treatment of foreign and domestic investors, its success will 
depend on the accompanying implementing regulations.  Among those is 
the official "Negative Investment List" issued on July 3rd, 2007 
identifying restricted and closed sectors for investment.  According 
to the GOI, sixty-nine sectors are more open, 11 sectors more 
restrictive and 25 sectors closed to any investment.  The GOI 
insists that the list will not be applied retroactively and will 
only affect new investments; however implementing regulations 
clarifying that has yet to be issued.  While the increased 
transparency and legal certainty benefit investors, many have 
complained that a significant number of new investment limits are 
now officially lower than the upper limit of what was previously 
allowed. 
 
The new investment law also eliminates the divestment requirement 
and the limited duration of investment that existed in the old 
foreign investment law (Law No 1/1997).  Previously, foreign 
investors were required to divest at least 5% to local shareholders 
within 15 years, and investment approvals were good for a maximum of 
30 years.  No divestment requirements or duration limits exist in 
the new law.  The Government also issued four new decrees in 
September 2007 that are designed to streamline the business entry 
process for both local and foreign investors. 
 
On January 1, 2001, Indonesia began to implement a large-scale 
decentralization of authority and budget control from the central 
government to the provincial and district-level governments. 
Decentralization has complicated government efforts to improve 
Indonesia's investment climate.  While intended to reduce burdensome 
bureaucratic procedures and other requirements on foreign investors, 
decentralization has produced uneven results.  Some counties and 
cities have capitalized on decentralization to increase government 
revenues, attract foreign business, and improve social services. 
Some sub-national governments, such as Yogyakarta province, have set 
up one-stop service centers for businesses to get all required 
licenses in one place.  However, other sub-national governments have 
increased uncertainty among foreign investors with additional 
legislation or restrictive practices.  Despite being contrary to 
Indonesian law, some local governments have instituted trade 
distorting, revenue-raising measures.  In an effort to help 
alleviate this problem, under proposed revisions to the law, local 
governments would be granted the authority to tax based upon a 
"positive" list indicating affirmative local authority, rather than 
a "negative" list indicating areas where the central government 
retains authority. 
 
A World Bank study has found that it takes 105 days on average to 
establish a business in Indonesia.  In response to labor 
demonstrations in April and May 2006, Indonesia decided to 
indefinitely postpone plans to revise the country's labor laws. 
 
--ELECTRONIC COMMERCE 
 
Despite the proliferation of Internet service providers in recent 
years, several factors hinder the growth of electronic commerce in 
Indonesia. These include the lack of a clear policy in support of an 
open telecommunications infrastructure, monopoly provision of fixed 
landline service by PT Telkom, a low level of computer ownership by 
both businesses and individuals, lack of funding and weak IPR 
protection. U.S. industry has identified the lack of a legal 
framework for ensuring security of online transactions as a 
particularly significant impediment.  The Indonesian government 
completed drafting of cyber crime and electronic transactions 
legislation in September 2005 and the measures are currently being 
debated in the legislature. The last legislative debate was in May 
2007, but without resolution to indicate prospects for further 
 
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progress. 
 
--OTHER BARRIERS 
 
-Transparency 
 
Foreign companies continue to experience problems with corruption in 
Indonesia.  Companies have expressed concern about demands for 
unwarranted fees to obtain required permits or licenses, expedite 
processes, as well as to influence government awards of contracts 
and concessions.  The integrity of the legal system remains a 
concern, and courts at several levels are perceived as inefficient 
and corrupt.  Nonetheless, the central government is pushing for 
improvements. The President is urging state-owned enterprises to 
improve management performance and reduce corruption.  The Ministry 
of Finance is leading civil service reform efforts - a preventive 
strategy in the overall anti-corruption reform movement - and new 
leadership in the directorates of tax and customs is seeking to 
improve services and efficiency. 
 
Indonesia has empowered several corruption-fighting bodies.  The 
Corruption Eradication Commission (KPK) coordinates all 
anti-corruption efforts in the government and has the authority to 
investigate and prosecute high-level corruption cases.  It has 
continued to dramatically ramp up its activity since it set up 
operations in 2004, investigating and prosecuting more cases as well 
as increasing its staffing.  The KPK has a 100% successful 
prosecution rate since its inception and has successfully prosecuted 
39 cases, including 21 successful cases in 2007 (through August 31), 
up from 14 in 2006.  The Anti-Corruption Court handles all 
anti-corruption cases initiated by the KPK.  In addition, the 
Indonesian parliament passed new whistleblower protection 
legislation in August 2006.  Indonesia also ratified the United 
Nations Convention Against Corruption (UNCAC) in March 2006 and will 
host the 2nd Conference of State Parties for the UNCAC in January 
¶2008. 
 
-Automotive Policies 
 
The maximum tariff on automobiles is 80 percent.  Tariffs on 
passenger car kits imported for assembly range from 25 percent to 50 
percent, depending on engine size.  Tariffs on non-passenger car 
kits are a uniform 25 percent.  Tariffs on automotive components and 
parts imported for local assembly of passenger cars and minivans are 
a uniform rate of 15 percent.  Imports of motor vehicles are no 
longer restricted to registered importers or sole agents of foreign 
automakers, but are open to any licensed general importer.  U.S. 
motorcycle manufacturers remain concerned about the high tariff of 
60 percent (25 percent on knockdown kits), the luxury tax of 75 
percent, as well as the prohibition on motorcycle traffic on 
tollways as barriers to the Indonesian market. 
 
The luxury sales tax on 4,000 cc sedans and 4x4 Jeeps or vans is 75 
percent.   The luxury tax on automobiles with engine capacity of 
under 1500 cc ranges from 10 to 30 percent. The luxury tax on 
automobiles with engine capacity between 1,500 cc and 3,000 cc 
ranges from 20 percent to 40 percent, depending on the size of the 
engine and body style of the vehicle.   In 2006, a dramatic increase 
in fuel prices, which took effect in October 2005 led to a 
significant shift in motor vehicle sales to vehicles with engine 
displacement below 1500 cc   Forty percent of the market is made up 
of passenger cars with engine displacement under 1500 cc, with the 
MPV type vehicles accounting for 35 percent.  These MPV type 
vehicles, predominantly produced in Indonesia, have a luxury tax of 
10 percent. 
 
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HUME