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<NREC>Indonesiatoc
Indonesia: Table of Contents <A>=Indonesia Country Commercial Guide -
Indonesia Fiscal Year 1999 Table of
Contents Chapter 1 Executive Summary Chapter 2 Economic Trends and Outlook -- Summary -- Challenges for the Habibie Government -- U.S. Business Interests on Hold -- Response to the Crisis-The IMF Program -- Negative Outlook for Major Sectors Chapter 3 Political Environment -- Nature
of Political Relationship with U.S. -- The
Political System in Brief -- Major
Political Issues Affecting the Business Climate Chapter 4 Marketing U.S. Products and Services -- Distribution
Channels -- Representatives
and Agents -- Franchising -- Direct
Marketing -- Joint
Ventures/Licensing -- Steps
to Opening a Representative Office -- Selling
Techniques -- Press
Contacts -- Advertising -- Product
Pricing -- After-Sales
Service and Customer Support -- Selling
to the Government -- Counter
Trade Policy -- Selling
to Specialized Submarkets -- Protecting
Your Product from IPR Infringement -- Need
for a Local Attorney -- Trade
Promotion Chapter 5
Leading Sectors for U.S. Exports and
Investment -- Leading
Sectors for Non-Agricultural Goods and Services -- Leading
Sectors for Agricultural Goods and Services Chapter 6
Trade Regulations and Standards -- Trade
Barriers -- Customs
Valuation -- Import
Licenses -- Export
Controls -- Import
Documation Requirements -- Free
Trade Zones & Warehouses/Special Import Provisions/Temporary Entry -- Labeling
and Marking Requirements -- Prohibited
Imports -- Membership
in Free Trade Agreements Chapter 7 Investment Climate -- Openness
to Foreign Investment -- Conversion
and Transfer Policies -- Expropriation
and Compensation -- Dispute
Resolution -- Performance
Requirements and Incentives -- Right
to Private Ownership and Establishment -- Protection
of Property Rights -- Transparency
of the Regulatory System -- Efficient
Capital Markets and Portfolio Investment -- Political
Violence -- Corruption -- Bilateral
Investment Agreements -- OPIC
and Other Investment Insurance Programs -- Labor -- Foreign
Trade Zones/Free Ports -- Foreign
Direct Investment Chapter 8 Trade and Project Financing -- General
Financing Availability -- Types
of Available Export & Project Financing -- Asian
Development Bank -- World
Bank -- Islamic
Development Bank -- Financing
of Agricultural Exports -- Banks
with Correspondent U.S. Banking Arrangements Chapter 9 Business Travel and Environment -- Business
Customs -- Travel
Advisory and Visas -- Business
Infrastructure and Environment -- Holiday
Schedule Chapter
10 Economic and Trade Statistics Appendix A: Country Data Appendix B: Domestic Economy Appendix C: Trade Appendix D: Investment
Statistics Chapter
11 U.S. and Country Contacts Appendix E: U.S. and Country
Contacts Chapter
12 Market Research and Trade Events Appendix F: Market Research Appendix
G: Trade Event Schedule This
Country Commercial Guide (CCG) presents a comprehensive look at Indonesia's
commercial environment using economic, political and market analysis. The CCGs were established by the
recommendation of the Trade Promotion Coordinating Committee (TPCC), a
multi-agency task force, to consolidate various reporting documents prepared
for the U.S. business community. Country
Commercial Guides are prepared annually at U.S. Embassies through the combined
efforts of several U.S. Government agencies. -------------------------------------------- INTERNATIONAL
COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S.
DEPARTMENT OF STATE, 1998. ALL RIGHTS
RESERVED OUTSIDE OF THE
UNITED STATES <NREC>Indonesia01
Indonesia: Executive Summary <A>=Indonesia CHAPTER I - EXECUTIVE
SUMMARY Financial
and economic crises hit much of Asia the past year, and Indonesia was no
exception. It also suffered from
political malaise that culminated in the May 1998 resignation of President
Soeharto after 32 years in power, and social stress that reached a climax, also in May, with serious rioting
and looting in Jakarta and some other cities.
The riots traumatized the Chinese-Indonesian business community, which
bore the brunt of the attacks. Indonesia
unfortunately also was battered during the year by an unusual confluence of
natural disasters including extensive drought, forest fires and haze, and a
surge of locusts and dengue fever. The
depreciation of Indonesia’s currency, the rupiah, by some 70 percent vis-a-vis
the dollar, put the economy into a tailspin from which it has yet to
recover. Measured in dollars, GDP has
dropped to less than half of its previous level. The formerly growing “new” middle class has
returned to a more tenuous economic status.
Business confidence collapsed with the rupiah, after exposure of the
huge, un-hedged foreign exchange debts held by 2,000 Indonesian firms, and
questionable dealings by them and by the banking system. Since industry relies so much on imported raw
materials and components, the decline in the rupiah’s value made imports four
times more expensive than before.
Factory production (and factory labor) throughout the country has
dropped by more than half. The
bright side is that Indonesia’s extensive natural resources remain strong
foreign exchange earners -- oil, natural gas, various minerals including
copper, nickel, tin and gold, and tropical plantations (oil palm, spices,
coconut, coffee, cocoa). Exporters who
maximize local costs of production, such as wooden furniture, seafood and
foodstuffs, and handicrafts are doing very well. For U.S.
firms, now is a time of watching and waiting for the political and economic
systems to recover, for government policies to be made clear and enduring, and
for both domestic and export markets to grow again. Halted infrastructure projects and policy
changes affecting key sectors such as electric power and telecommunications
have forced some U.S. engineering and contracting firms to close their offices. Most U.S. firms, however, are staying to
await the expected economic turnaround two or more years away. They are reducing costs by downsizing and
Indonesianizing staff. Investors also
are biding their time until the market bottoms out, but then are expected to
take advantage of the many good-value opportunities offered by the private
sector and by government privatizations.
This CCG
guides American business executives through today’s thicket of economic and
political change, and points out niche opportunities both now and on the
horizon. Positive indicators for U.S. business are
the government’s continuing pro-private sector orientation, and the fact that
the private sector’s economic collapse makes Indonesian entrepreneurs more
desirous than ever to partner with foreign capital and technology. Areas of continuing concern include the
extent of transparency in government decision-making, a decision-making system
in private and public sectors that relies strongly on consensus and
long-standing personal relationships, systemic corruption, and lack of an
effective legal system. These concerns
are not unique to Indonesia and should be balanced by the profit potential of
business opportunities here, as well as current government efforts to address
them. ----------------------------------------------- Country
Commercial Guides are available for U.S. exporters from the National Trade Data
Bank’s CD ROM or via the Internet.
Please contact STAT-USA at 1-800-STAT-USA for more information. Country Commercial Guides can be accessed via
the World Wide Web at http://www.stat-usa.gov, http://www.state.gov; and
http://www.mac.doc.gov. They can also be
ordered in hard copy or on diskette from the National Technical Information
Service (NTIS) at 1-800-533-NTIS. U.S.
exporters seeking general export information/assistance and country-specific
commercial information
should contact the U.S. Department of Commerce, Trade Information Center by
phone at 1-800-USA-TRADE or by fax at (202)482-4473 INTERNATIONAL
COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S.
DEPARTMENT OF STATE, 1998. ALL RIGHTS
RESERVED OUTSIDE OF THE
UNITED STATES <NREC>Indonesia02
Indonesia: Economic Trends and Outlook <A>=Indonesia Chapter II: Economic Trends and
Outlook Summary Indonesia
was widely hailed as a leading economic success story as recently as mid‑1997. Real GDP growth averaged over 7 percent per
year for the decade since 1987. GDP per
capita surpassed US$ 1,000 by 1996, compared with US$ 70 in 1965. The rupiah was stable. Annual inflation was reported in the single
digits. Foreign capital was pouring
in. The
economic crisis that began in July 1997 changed all that. Indonesia experienced severe drought, low
world petroleum prices, regional financial instability, domestic social unrest,
and, ultimately, a change of government.
By mid‑1998, the government estimated that real GDP would contract
13 percent during 1998; private analysts projected a decline as large as 25
percent. GDP per capita had declined to
US$ 450. The exchange rate plummeted
from 2,450/US$ in June 1997 to 15,000/US$ a year later. Exchange rate volatility made business
planning all but impossible. Annual
inflation was running at an estimated 80 percent and the potential for higher
inflation remained a worry. Foreign
capital had fled, closing off access to new foreign lending, while the business
sector struggled to service existing foreign debts at increasingly unfavorable
exchange rates. Most observers agreed
that the economy had not yet bottomed out as of mid‑1998, making it
difficult to chart a path toward recovery. The shock
waves from this sudden reversal of fortune reverberated among a generation
familiar only with economic growth. The
reversal cast into stark relief weaknesses that were downplayed during the
preceding high growth period, including presidential succession uncertainty,
corruption, collusion, and nepotism, a weak banking sector, and the large but
then‑unknown amount of foreign commercial debt. As employment dropped and prices rose, the
loss of purchasing power, particularly among lower income groups, raised
concerns about the ability of the population to feed itself and about the
potential for social unrest. In May
1998, after fuel prices were increased and demonstrating students were shot,
riots and looting swept Jakarta and other cities, leading to the May 21
resignation of President Soeharto, who was replaced
by his Vice President, B.J. Habibie.
President Habibie announced that parliamentary elections would take
place in May 1999. The deep
financial, economic, and political crisis that developed during 1997‑98
obscured underlying strengths of the Indonesian economy. With a population of 201 million, the world's
fourth largest country was the anchor of Southeast Asia and a sizable market
with an emerging middle class. Its
strategic location, large labor force earning relatively low wages, abundant
natural resources, financial and trade sector deregulation efforts, and stable
political climate had unleashed a domestic and foreign investment boom and
fueled the development of a robust manufacturing economy concentrated on the
main island of Java. Once dependent on
petroleum, natural gas, and commodities including coffee, tea, spices, timber,
and shrimp, Indonesia by 1997 exported US$ 45 billion in non‑petroleum,
labor‑intensive products such as garments, footwear, plywood, and basic
machinery, on top of its US$ 12 billion in oil and gas exports. It had also become a significant market and
imported US$ 5 billion in goods from the United States in 1997. Challenges for the Habibie
Government The list
of challenges facing the new Habibie government in mid‑1998 was daunting: * The
financial sector was in dire condition.
Many major banks were surviving only because of direct government
liquidity support, most loans were thought to be non‑performing, and
public confidence in banks was low. A
major overhaul of the financial sector was just beginning, and it was not clear
how many banks would emerge from it or how recapitalization of banks would be
funded. * The
external debt burden was a drag on confidence and recovery. Indonesian private banks and businesses owed
roughly US$ 73 billion to foreign creditors, and the Indonesian government owed
another US$ 66 billion. Private bank and
corporate debt rescheduling talks were underway, but were likely to be
protracted, meaning that there would be a delay in the resumption of
foreign lending to Indonesian businesses.
Lack of offshore trade financing was hindering export growth. Sovereign debt rescheduling was under
discussion. * The
real sector continued to contract, leading to concerns about massive
unemployment. Each week brought
additional reports of firms cutting back or ceasing operations, as inputs
became unavailable and demand slumped.
Construction sites stood idle and factories empty. An estimated 9 million persons in the wage‑earning
economy were unemployed as of April 1998, and the number was expected to reach
13 million by the end of the year, up from 4 million at the end of 1997. * The
food situation was a growing concern, more in terms of affordability for lower
income groups than of availability. The
government was subsidizing prices of essential commodities such as rice, but
the subsidies had become a serious drain on the government budget, and food
price increases continued. Though
reliable statistics were unavailable, the share of the population in poverty
was increasing. * The
government's budget deficit was expected to reach 8‑10 percent of GDP in
fiscal year 1998/99 (April‑March). * The
political climate remained uncertain.
The Habibie government appeared to be consolidating its hold on the
machinery of government, but there was wide disagreement within society about
its legitimacy and about how the political reform process should proceed. General parliamentary elections were
scheduled for mid‑1999, to be followed by parliament's election of a
president in December 1999. * The
riots of mid‑May 1998 remained a traumatic issue, particularly for the
ethnic‑Chinese minority who dominate Indonesia's modern economy. Although
Indonesia still enjoyed many of the advantages that fueled its earlier growth ‑
abundant natural resources, a large and literate population, a modest birth
rate, and modern infrastructure ‑ and had begun to introduce economic
reforms, the timing of economic recovery remained uncertain. As poor as conditions were, few observers
believed that economic activity had bottomed out. Recovery appeared likely to be a painful,
years‑long process. An overriding
issue was the restoration of sufficient confidence to encourage domestic
businesses and foreign investors to resume their activities. U.S. business interests ‑ on
hold The
substantial range of U.S. business interests in Indonesia was adversely
affected by the deep crisis. Many major
infrastructure projects, including independent power projects sponsored by U.S.
and other foreign investors, were on hold.
Contractors supplying petroleum, natural gas, and electricity to
government agencies were not being paid reliably. U.S. banks and other creditors were grappling
with unpaid loans to Indonesian banks and companies (though U.S. exposure was
small in comparison to that of Japan and Europe). Investors were scaling back manufacturing
operations or delaying projects. The
high level of uncertainty surrounding Indonesia's immediate future led most
U.S. businesses, like other foreign firms, to adopt a wait‑and‑see
attitude. U.S. firms by and large said
they were committed to Indonesia for the long haul. The
political and economic reform process that was beginning in May 1998 offered
hope that Indonesia will emerge from the crisis with a business climate that is
more open and transparent, and therefore more favorable for U.S. firms. Longstanding monopolies, including those
controlled by the Soeharto family, were beginning to be dismantled. Limits on foreign ownership of a range of
businesses, including banks and retail sales networks, were slated to be
removed. Public calls to eliminate
"collusion, corruption, and nepotism" were putting pressure on the
government to tackle the "high cost economy." At the same time, the depth of the economic
contraction led some observers to fear that social unrest could recur and
derail the reform process, further delaying economic recovery. Response to the Crisis ‑ the
IMF program To
respond to the worsening economic situation in Asia, the Soeharto government
initially took bold measures including floating the rupiah in August 1997 and
reducing budget outlays in September 1997.
By October 1997, worsening conditions led Indonesia to request IMF
support. The Indonesian government
signed its first Letter of Intent to the IMF on October 31. The letter called for a three‑year
economic recovery program, supported by loans from the IMF (US$ 10 billion),
the World Bank, the Asian Development Bank, and bilateral donors. Apart from financial support the
international community was offering detailed technical assistance to the
government. Governments and private
organizations were also contributing food and other humanitarian assistance. Indonesia's
agreement with the IMF was revised January 15, 1998, April 10, June 24, and
July 29 in response to deteriorating macroeconomic conditions. The result is a complex, multi‑faceted
program to address macroeconomic imbalances, financial weaknesses, real sector
inefficiencies, and the loss of private sector confidence. The latest versions of the program expanded
the focus of the earlier programs to cover the entire spectrum of economic
challenges facing Indonesia: (1) fiscal
policy; (2) monetary policy; (3) structural reform and deregulation; (4)
corporate debt and bankruptcy proceedings; (5) banking sector reform and
restructuring; (6) restoration of trade financing to promote exports, and (7)
food security, the distribution system, and social safety net policies. Fiscal
Policy The
Indonesian government has historically maintained a "balanced"
budget: expenditures were covered by the
sum of domestic revenues and foreign borrowing, without resort to domestic
borrowing. Often the government ended
the year with a slight surplus. This
fiscal year (April 1998‑March 1999), the gap between domestic revenues
(shrinking because business was moribund, and because oil prices were low) and
expenditures (skyrocketing, because of subsidies for basic goods) will be
large, perhaps 8.5 percent of GDP or over US$ 8 billion. The challenge for the government was to
balance the need for continued subsidies on essential goods against the need
for fiscal prudence. Foreign financing
was considered key to maintaining that balance.
In July 1998, the international financial institutions and bilateral
donors pledged an extraordinary increase in financial support to Indonesia for
social safety net outlays. Monetary
and Exchange Rate Policy In
parallel with its fiscal policy, the Indonesian government earned a reputation
for prudent monetary policy in recent years that helped keep consumer price
inflation in the single digits (see Table 1).
However, the massive depreciation of the rupiah that began in mid‑1997
(after the government decided to let the rupiah float freely rather than
deplete its reserves in an effort to defend the rate) and huge liquidity
injections into the banking system contributed to significant inflation (see
Table 2). The Indonesian monetary authorities attempted to dampen inflationary
pressure and reduce pressure on the exchange rate by controlling the growth of
the money supply (see Table 3). Table
1. Historically low inflation and slow
depreciation Rp/US$ CPI inflation, %/year 1992 2,030
4.9 1993 2,087
9.8 1994 2,161
9.2 1995 2,249
8.6 1996 2,342
6.5 1997 2,909 11.1 Source: Bank Indonesia Inflationary
pressures remained a serious potential threat, because of the large budget
deficit and continuing depreciation of the rupiah. Moreover, prices remained low by purchasing
power parity standards, even after a 47 percent consumer price index (CPI)
increase during January‑June 1998.
The alternative to price increases ‑ disappearance of certain
goods from the market as producers sought higher prices abroad ‑ was
complicating the supply situation for certain essential goods including cooking
oil. Table
2. Significant month‑on‑month
inflation in 1997‑98 Rp/US $ CPI inflation Rp %
of July 97 %
per mo. value in USD terms July‑97
2,599
0.7 100% August‑97 3,035 0.9 86% September‑97
3,275
1.3 79% October‑97
3,670
2.0 71% November‑97
3,648
1.7 71% December‑97
4,650
2.0 56% January‑98
10,375 6.9 25% February‑98
8,750 12.7 30% March‑98
8,325
5.5 31% April‑98
7,970
4.7 33% May‑98 10,500 5.2 25% June‑98
14,850 4.6 18% Source:
Bank Indonesia Table
3. Changes in Base Money and Broad
Money, Rp trillions, July 1997‑June
1998. Base Change Broad Change Money on prev. mo. Money on prev. mo. July‑97 39.9 ‑1% 317.5 1% August‑97 33.3 ‑16% 325.9 3% September‑97 36.6 10% 329.1 1% October‑97 33.6 ‑8% 340.7 4% November‑97 33.8 1% 330.6 ‑3% December‑97 46.1 36% 355.6 8% January‑98 56.0 22% 450.7 27% February‑98 49.6 ‑11% 430.2 ‑5% March‑98 59.4 20% 449.8 5% April‑98 61.1 3% 453.4 1% May‑98 67.8 11% 493.9 9% June‑98 70.4 4% N/A N/A Note: M2
includes foreign currency deposits, so changes are partly the result of exchange
rate shifts. Source: Bank Indonesia Exchange
rate policy went through several phases after the government eliminated the
rupiah intervention band (which allowed limited fluctuation of the exchange
rate) in August 1997. First, the
government adopted a high rupiah interest rate policy to defend the exchange
rate. The policy was effective (the
rupiah only depreciated slightly in September 1997), but collateral damage to
the domestic business sector was considered too painful. After lowering interest rates somewhat, the
Indonesian government turned to direct intervention in the foreign exchange
market in what it called an effort to stave off exchange rate volatility,
rather than defend a particular rate. As
depreciation continued ‑ fueled by economic instability in South Korea,
questions about President Soeharto's health, and doubts about reform program
implementation ‑ the monetary authorities announced an end to the direct
intervention policy, though occasional interventions appear to have continued. During early 1998, after the sudden plunge of
the rupiah in January (see Table 2), President Soeharto considered setting up a
currency board system, with a fixed exchange rate backed by foreign exchange reserves. The idea was ultimately abandoned. As of mid‑1998, the government had
returned to the high interest rate policy, and was intervening in the domestic
money market to absorb excess liquidity.
The exchange rate remained weak, however. Demand for dollars remained high with supply
limited, and demand for rupiah was low.
Most observers believed that political risk factors, rather than purely
economic factors, were influencing the exchange rate. Structural
Reform and Deregulation Although
structural reforms were an important element of the program adopted in October
1997, the January 1998 revision increased emphasis on them, both to eliminate
high profile distortions immediately and to set the stage for greater systemic
efficiency in the longer run. External
trade liberalization measures have been enacted. Perceived lack of progress in other reform
areas, particularly on domestic trade and investment issues, in the early
months of 1998 undermined confidence in the government's will to carry the
program out fully. The April 24
Supplementary Memorandum to the IMF spelled out structural commitments in
greater detail and more progress was made.
Indonesia pledged to eliminate monopolies and cartels; reform its wood
sector; embark upon a program to privatize state enterprises; and eliminate
many distortions in the agricultural and food marketing sectors, including a
dramatic downsizing of the National Logistics Agency (BULOG). In the June and July memoranda, the Habibie
government reconfirmed its intention to carry out the structural commitments
made earlier. Major areas included: *
Monopolies and Cartels: elimination of
paper and wood cartels and the clove monopoly. Significant
progress was made toward the elimination of monopolies and cartels, including
those for cloves, paper, and plywood.
After President Soeharto's resignation, public attention to this issue
grew under the banner of reform for the elimination of "corruption,
collusion, and nepotism." As a
result, additional monopolies not addressed under the IMF program but which
caused significant economic inefficiencies were under review. *
Privatization: privatization of at least
seven state‑owned enterprises and sale of additional shares in partially
privatized companies; development of plans to improve the health of other state
firms. This was
politically sensitive in light of concerns that foreign interests would gain
control of key economic assets and because of concerns about the fairness of
the privatization process. Some progress
was being made as of mid‑1998.
Minister for State‑Owned Enterprises Tanri Abeng was moving to
prepare state firms for privatization.
Twelve international investment banks had been selected to assist in the
privatization process. Firms slated for
privatization included state‑owned steel, toll road, airport management,
mining, and plantation companies.
Additional shares were to be sold in state‑owned
telecommunication, cement, and mining companies that had already been partially
privatized through listings on the Jakarta Stock Exchange. * Wood,
Wood Products, and the Forestry Sector:
introduction of a resource rent tax on forestry products and reduction
of export taxes on logs and timber; dismantlement of joint marketing boards for
wood products and reforms of forestry concession ownership rules. Consistent
with its commitments, Indonesia lifted its prohibitively high export taxes on
the export of timber and logs and replaced them with a 30 percent export tax,
though technical issues concerning this tax remained unresolved. Joint marketing boards for wood products were
disbanded. * Palm
Oil: removal of quantitative
restrictions on the export of crude palm oil (CPO) and derivative products and
issuance of criteria for determining locational restrictions on investment in
palm oil plantations. The
government replaced the ban on palm oil exports with an export tax and issued
criteria governing investment in plantations.
The government also announced that revenue from the CPO export tax would
be used to subsidize domestic cooking oil prices. * Food
Marketing/BULOG: removal of BULOG import
and distribution monopolies for all commodities except rice. BULOG
monopolies were eliminated in theory. In
practice, however, BULOG remained the sole importer of important commodities,
in part because it had access to government exchange rate subsidies for the
procurement of certain basic foodstuffs, including rice, soybeans, and
wheat. Corporate
Debt and Bankruptcy Indonesia's
offshore corporate debt turned the exchange rate crisis of 1997 into the full‑fledged
economic crisis of 1998. As of mid‑1998,
efforts to grapple with this core problem were still in an early stage, though
the outlines of a debt‑rescheduling scheme were in place. Table
4. INDONESIA: External Debt, as of March 31, 1998 US$
billions Public
Sector Government 54.4 State‑owned Enterprises State Banks Bank Credit 5.0 Commercial Paper, etc. 0.6 Subtotal 5.6 Non‑Bank Enterprises Bank Credit 3.8 Commercial. Paper, etc. 1.7 Subtotal 5.6 Total
Public Sector 65.6 Private
Sector Banks Bank Credit Indonesian‑owned banks 3.1 Joint‑venture banks 4.3 Foreign‑owned banks 0.4 Commercial. Paper, etc. 0.2 Subtotal 8.0 Corporations Bank Credit Foreign‑owned firms 29.0 Domestic firms 31.8 Commercial. Paper, etc. 3.7 Subtotal 64.5 Total
Private Sector 72.5 Total
External Debt 138.0 Source:
Bank Indonesia Note: The
Commercial Paper category also includes medium‑term, floating‑rate,
and promissory notes, and certificates of deposit, all owned by non‑residents. Table
5. Balance of Payments, US$ billions 94/95 95/96 96/97 97/98 98/99 (Budget) Current
Account Exports
42.16
47.75 52.04 56.16
56.55 Imports ‑34.12 ‑41.50
‑45.82 ‑42.70 ‑37.88 Services, net ‑11.53 ‑13.24
‑14.29 ‑15.36 ‑17.24 Current
Account ‑3.49 ‑6.99 ‑8.07
‑1.90 1.42 Balance Financial
Account Official 5.65
5.73 5.30 8.49 18.15 capital Debt repay ‑5.55 ‑5.94 ‑6.12 ‑4.10 ‑2.97 (Principal) Other capital 4.65 11.67 13.49 ‑10.36 ‑11.31 Total
Balance 1.26
4.48 4.60 ‑7.86 5.29 Errors
& omissions ‑0.62 ‑2.65 ‑7.35 ‑3.45 0.00 Monetary
movements ‑0.65 ‑1.83
2.75 ‑10.02 ‑5.29 Official
Reserves 13.32 15.98
19.87 N/A N/A Source: Ministry of Finance When
Indonesian corporations began borrowing abroad in significant numbers in the
early 1990s, the trend was seen as a rite of passage for a maturing
economy. The rationale for borrowing
abroad was simple: domestic interest rates were much higher than foreign rates,
and the modest, predictable depreciation of the rupiah exchange rate made the
currency risk appear negligible. As
Table 4 indicates, Indonesian corporations ran up over US$ 70 billion in debt,
much of it short‑term and most of it unhedged. Conversely, high domestic interest rates
attracted a large amount of foreign portfolio capital into Indonesia (see
"other capital" in Table 5).
International lenders were keen to participate in Indonesia's rapidly
growing economy. The
downhill slide of the rupiah during the latter half of 1997 put most Indonesian
borrowers (with the exception of those who had hedged their currency exposure,
and those with foreign currency earnings) in a very difficult position. The collapse of the rupiah in early 1998 ‑
which was in part fueled by the demand for dollars to pay short‑term debt
‑ combined with the slowing of economic activity, made their situation
untenable. Further compounding the
problem was the withdrawal of foreign portfolio capital from Indonesia, and the
unwillingness of foreign lenders to roll over short‑term loans as they
had in the past. A vicious circle
developed, where corporations' inability to pay debts, both domestic and
foreign, crippled local banks and made foreign lenders unwilling to lend new
money into Indonesia. Starved for
working capital, the economy contracted sharply, making it more difficult for
corporations to generate cash. The
downward spiral had not abated as of mid‑1998. An
Indonesian private debtors contact committee set up by the government in
January 1997 proposed a "temporary pause" in offshore private debt
payments while rescheduling was worked out, with the understanding that those
companies that could continue to pay would do so. Between January and July, the debtor and
creditor committees, with the participation of the Indonesian government and in
concert with the IMF, worked out a three‑part framework for addressing
the private debt issue: * Trade
credit: the Indonesian government agreed that the arrears on trade credits from
Indonesian banks to foreign banks (US$ 1‑2 billion) would be repaid in
full by end‑June. In return,
foreign banks would reinstate trade credit lines at their end‑April
levels (US$ 4‑6 billion). As of
mid‑July, bankers reported that most of the trade arrears had been
repaid, though some issues (payment of past‑due interest, for example)
remained to be settled. *
Exchange of interbank debt: a second part of the framework calls for foreign
banks to exchange interbank loans due through March 1999 (US$ 8‑9 billion)
for loans with maturities of 1‑4 years, backed by an Indonesian
government guarantee. The plan was
promoted in major cities abroad in July 1998, but foreign banks were hesistant
to accept the plan as of late July. *
Corporate debt: The third part of the debt restructuring framework was the most
complex and significant, covering US$ 65 billion in Indonesian corporate
debt. Under the terms of a voluntary
plan, the Indonesian government established the Indonesian Debt Restructuring
Agency (INDRA) in August 1998 to guarantee the availability of foreign exchange
at a market‑determined exchange rate (the best 20‑day‑average
over the entry period, August 1998‑June 1999, with a possibility for
adjustment if the exchange rate later strengthens), and to act as payment
intermediary between debtors and creditors.
The first step in the process is for debtors and creditors to agree
individually on a debt rescheduling plan that will include a grace period on
principal payments at least until end‑December 2001, and a final maturity
no earlier than end‑December 2006.
Debt forgiveness is not built into the overall plan, but is expected to
be worked out on an individual basis.
The next step is for debtors to buy foreign exchange from INDRA, either
upon entry into the program, or in installments. Finally, INDRA is to make foreign currency
payments to creditors in accordance with the rescheduling agreement. In
addition, a revision of the 1905 bankruptcy law was scheduled to take effect in
August 1998, and was expected to provide an impetus for debtors to reach
agreement with creditors. Concern over
the effectiveness of the new bankruptcy code remained, however, because of the
poor reputation of Indonesia's legal system as a whole. Banking
Sector Reform Indonesia's
banking sector was in dire condition as
of mid‑1998, and a major effort to restructure the sector was taking
shape. Most bank loans were not being
serviced; banks were in turn unable to service their debts; and the collapse in
bank credibility had all but shut off the flow of interbank credit. The public's confidence in Indonesian banks
was low. After a
decade of banking sector liberalization, the Government of Indonesia found
itself forced to play an increasing role in banking as the economic crisis
deepened. Bank Indonesia first provided
a substantial amount of liquidity credits to banks (over Rp 140 trillion as of
June 1998, or about 20 percent of 1997 GDP) ‑ in effect becoming the part
owner of many troubled banks ‑ after several potentially disastrous runs
on banks. As the extent of banking
sector weakness became clear, the Government established the Indonesian Bank
Restructuring Agency (IBRA), charged with taking over and eventually
recapitalizing ailing banks. The
Government also issued a sweeping guarantee on bank deposits and other
liabilities. Under the
restructuring plan that was being worked out with the assistance of the
International Monetary Fund, the World Bank, and the Asian Development Bank,
the banks under IBRA supervision were to undergo full portfolio reviews by
international accounting firms. An asset
management unit (AMU) was being set up to take ownership of and then sell off
non‑performing assets. Viable
banks were to be recapitalized ‑ with foreign participation invited ‑
while non‑viable banks were to be closed.
The scope of the task was enormous, because worsening economic
conditions meant that previously sound banks continued to deteriorate along
with the economy as a whole. Estimates
were that over 50 percent of loans were non‑performing. Observers believed that most of the banks not
under IBRA supervision were in serious financial condition as well. Thus, it was difficult to estimate how many
banks would remain after the restructuring process was complete. Against
the backdrop of bad news for the banking sector as whole, the conditions facing
U.S. and other foreign banks in Indonesia were improving in terms of market
access and national treatment, for two reasons.
First, in December 1997, Indonesia submitted a far‑reaching offer
in the World Trade Organization Financial Services negotiations that, among
other improvements, guaranteed the ownership rights of existing financial
services firms. Second, partly in response the banking sector crisis, the
Government was preparing legislation that would allow full foreign ownership of
existing Indonesian banks. Trade
Issues Growth of
the export sector has been a leading factor in Indonesia's rapid
development. Total exports increased
from US$ 20 billion in 1988 to US$ 56 billion in 1997, growing at an average
rate of 21 percent per year over the period.
As its diverse basket of non‑oil exports increased in value (see
Table 6), Indonesia markedly reduced its dependence on income from petroleum
exports. In 1985 the oil and gas sector
contributed 68 percent of export earnings and 60 percent of government
revenues. By 1997, these figures were
cut to 23 percent and 17 percent respectively.
Leading the non‑oil export boom were natural‑resource based
industries (plywood, rubber, copper) and labor‑intensive manufactures
(garments, furniture, shoes). Indonesia
had not yet moved up to high‑technology exports such as computer
equipment, but was becoming known as a world‑class exporter of paper and
a growing source of basic machinery and electronics. With the
decline in domestic demand, strong export performance was essential for
Indonesia's recovery. The depreciation
of the rupiah should have increased export competitiveness. Many firms shifted their production toward
exports in early 1998 for two reasons:
domestic markets were drying up, and dollar‑denominated export
revenues, translated into rupiah, were extremely attractive. However, exporting firms were having trouble
importing raw materials in early 1998 because foreign banks refused to accept
letters of credit from Indonesian banks.
The government addressed the problem in part by introducing a cash
collateral facility: foreign banks had a
total of US$ 1 billion in cash on deposit from Bank Indonesia with which to
finance trade. In addition, the trade‑finance
agreement reached in Frankfurt (see section on Corporate Debt) was expected to
lead to restoration of some trade lines.
In July, the government designated 21 Indonesian banks to support trade
finance. The U.S. Export‑Import
Bank offered a US$ 1 billion short‑term trade facility; other countries
also worked to restore adequate levels of trade finance. As Table 7 indicates, the export picture was
mixed as of early 1998, partly because of declines in wrold prices of
commodities such as copper, but the dollar value of exports was increasing
overall. Over the longer term, the
export sector was expected to play an important role in the recovery. Table
6. Leading Exports, 1992‑1997, US$
billions Category 1992 1993 1994 1995 1996 1997 Avg. growth/yr. 1992‑97 Garments 3.2 3.4 3.1 3.3 3.2 4.2 5% Plywood 3.2 4.1 3.7 3.5 3.5 3.5 2% Textiles 2.5 2.3 2.5 2.9 2.7 3.4 7% Elec.
Appliances 1.0 1.3 1.8 2.7 3.6 3.3 26% Pulp and
Paper 0.4 0.5 0.8 1.5 1.4 2.0 37% Palm Oil 0.5 0.5 0.9 1.0 1.0 1.7 29% Copper 0.7 0.6 0.9 1.6 1.4 1.5 18% Rubber 1.0 1.0 1.3 2.0 1.9 1.5 8% Shrimp, Lobst.,Tuna 0.8 0.9 1.1 1.1 1.1 1.1 6% Handicrafts 0.5 0.7 1.0 0.7 0.5 1.0 14% Other non‑oil
exports 9.4 11.7 13.4 16.8 17.8 21.5 18% Oil/gas
exports 10.5 9.6 9.9 10.5 12.2 11.7 2% Total 33.8 36.6 40.2 47.5 50.2 56.3 11% Source:
Bank Indonesia Table
7. Leading non‑oil Exports, Jan‑Apr
1997 vs. Jan‑Apr 1998, US$ billions Category Jan‑Apr 97 Jan‑Apr 98 % change Garments 1.05 1.20 15% Plywood 1.17 0.87 ‑25% Textiles 0.95 1.33 39% Elec.
Appliances 0.95 0.94 ‑1% Pulp and
Paper 0.46 0.80 73% Palm Oil 0.35 0.10 ‑73% Copper 0.57 0.32 ‑43% Rubber 0.56 0.33 ‑41% Shrimp,
Lobst., 0.30 0.34 15% Tuna Handicrafts 0.27 0.93 239% Other non‑oil 5.84 6.73 15% exports Total 12.47 13.89 11% Source: Bank Indonesia Food
Security and Distribution Following
1997's El niño induced drought, there was growing concern in 1998 that
Indonesia's financial and economic crisis had the potential to become a
humanitarian crisis if adequate food supplies were not made available at
affordable prices. The significant price
increases of essential commodities (see Table 8) occurred during a period when
wages were generally flat and unemployment was increasing, making them
especially burdensome for lower income groups.
With the approval of the IMF, the government began subsidizing imports
of rice and other essential commodities in early 1998. BULOG, whose role was supposed to be cut
sharply as part of the liberalization of the real economy, instead expanded its
role as food wholesaler for rice, soybeans, wheat, sugar and other
commodities. The government provided
exchange rate and consumer subsidies for basic commodities, incurring
significant costs as the exchange rate continued to deteriorate. Apart from their burden on the budget, subsidies
introduced other complications. In July
1998, the government imposed a temporary ban on export ban on several
subsidized goods in the wake of reports that large quantities of these goods
were being shipped to neighboring countries.
The export ban was scheduled to be replaced by export taxes in August
1998. Efforts were also underway to
target the subsidies at lower income groups rather than across‑the‑board. Table
8. Price increases of the nine essential
commodities, July 1997‑April 1998 Java non‑Java Rice 50% 37% Salted
Fish 56% 42% Palm Oil 134% 80% Granulated
Sugar 36% 31% Salt 66% 32% Kerosene 8% 6% Washing
Soap 77% 72% Textiles 38% 39% Batiks 25% 30% General 51% 39% Source: Central Bureau of Statistics After
riots in May 1998 that targeted ethnic‑Chinese businesses in Jakarta and
other cities, concerns arose that the Indonesian retail distribution system,
operated in large part by ethnic‑Chinese traders, might not function properly. As of July, however, most observers agreed
that the distribution system was still operating, although it was hobbled by
lack of credit, decreased demand and security concerns. The affordability of basic goods, rather than
their availability, was the problem. In
late July, the government offered rebuilding assistance to businesses that were
destroyed in May, and offered assurances that businesses, warehouses, and
trucks would be protected. Negative Outlook for Major Sectors In the
sweeping economic crisis of 1997‑98, contraction, rather than growth, was
the order of the day. Preliminary
figures for the first half of 1998 indicated that real GDP had declined 12
percent compared to the first half of 1997.
As Table 9 indicates, the Indonesian Central Bureau of Statistics
projected that real GDP would decline by 13 percent for the year, in marked
contrast to real GDP growth of recent years (1993: 6.5 %, 1994: 7.5 %, 1995:
8.2 %, 1996: 8.0 %, 1997: 4.6 %).
Private analysts and securities firms expected a real GDP decline as
large as 25 percent. The domestic and
regional economic uncertainties combined
with political change made it difficult to predict when growth would
resume. The
government expected a contraction in all major sectors, with the exception of
negligible growth in agricultural output.
The comparatively positive outlook for agriculture was significant
because it was the largest employment sector, accounting for 41 percent of
workers in 1997. Sectors with a
significant export component (agriculture, mining) or receiving large subsidies
(public utilities) were projected to do relatively better than others. At the opposite extreme was the construction
sector, which was projected to contract 35 percent for the year. Manufacturers
faced a declining domestic market, mounting debts, difficulty obtaining trade
credit or working capital, and, in some cases, labor unrest. Auto assembly and manufacturing, previously a
rapidly growing area, suffered an 82 percent decline in sales during the first
half of 1998, compared with the same period in 1997. Where possible, a shift toward exports was
underway. An East Java lighting firm
reported that it was exporting 75 percent of its output as of mid‑1998,
compared to 40 percent a year earlier. In the
trade sector, which includes hotels and restaurants, it was easy to find
evidence of distress. Most four‑
and five‑star hotels in Jakarta had percentage occupancy rates in the
teens or low 20's as of mid‑1998, down from the 70‑percent range a
year earlier. In
property and finance, the slowdown in overall activity led to declines in
property prices and occupancy rates.
Rental prices in Jakarta's prime shopping malls, traditionally priced in
U.S. dollars, fell from US$ 80/m2/month in June 1997 to US$ 10 in June
1998. Jakarta office occupancy rates,
already down to 87 percent in late 1997, reportedly dropped to 70 percent by
June 1998. The banking sector was
expected to continue to contract. Table
9. Real GDP (1993 prices) rupiah trillions 1997 1998* %
change Agriculture 64 64 0.3% Mining
and quarrying 38 36 ‑6.9% Manufacturing 109 96 ‑12.0% Electricity
gas and water 5 5 ‑2.2% Construction 35 23 ‑35.4% Retail
and wholesale trade, hotels, and restaurants 73 57 ‑21.4% Transportation
and communication 32 28 ‑11.6% Finance,
rentals, and company services 39 32 ‑18.6% Services 38 36 ‑5.2% GDP 434 377 ‑13.1% GDP
excluding oil/gas 399 343 ‑14.1% *preliminary
projection, based on Jan‑Jun 1998 data Source: Central Bureau of Statistics INTERNATIONAL
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UNITED STATES <NREC>Indonesia03
Indonesia: Political Environment <A>=Indonesia Chapter III-Political Environment Nature of the Political
Relationship with the U.S. Relations
between the United States and Indonesia are good. The United States has assumed a lead role in
the international community’s response to the devastating economic-financial
crisis that struck Indonesia in the latter half of 1997 and continues to plague
the country. In addition, the Indonesian
people are generally aware of the fact that the United States publicly supports
reform and urges the Indonesian government to practice restraint in dealing
with its student demonstrators and other critics. The strong support of financial assistance
and political reform has strengthened U.S. relations with the government, NGOs
and the Indonesian people in general. U.S.
leadership in the provision of critically needed assistance in 1997-1998 marked
a significant shift from what had been a steady, but shrinking stream of
largely development assistance to Indonesia since its independence. A large portion of United States assistance
is now aimed at responding to the humanitarian needs of the population, many of
whom are rapidly slipping below the already very low poverty level. U.S. companies were among the first to invest
in Indonesia following the rise of the “New Order” government under President
Soeharto, and many have opted to remain, despite the economic crisis. Notwithstanding
the abrupt political changes in Indonesia in May, when public pressure forced
the resignation of President Soeharto, United States engagement with the
Government of Indonesia (GOI) has remained intense with frequent senior level
visitors to Jakarta, as well as senior GOI visits to Washington. Despite a scaling back of training exercises
for the Indonesian military, and the fact that U.S. Congressional scrutiny of
U.S. involvement with ABRI in the area of military equipment sales and training
remains high, military to military relations have been maintained in part by
regular senior United States military visits to Indonesia. In addition to good government relations, the
United States has continued to expand cooperative relations with Indonesian
NGOs, continuing efforts to foster the development of a network of civil
society institutions. The good
relations with both civil and military institutions and NGOs has provided the
basis for United States support of the new Indonesian government as it pursues
fundamental reform in the areas of human and civil rights, political freedoms
and market economic reforms. The
United States values close relations with the world’s fourth most populous
country because of its past and future economic dynamism and the potential of
its markets. Moreover, its strategic
location astride a number of key international straits, and its moderating
influence in regional and international bodies such as the Asia Pacific
Cooperation (APEC) Forum, the Organization of the Islamic Conference (OIC) and
the Non-Aligned Movement (NAM) add to the overall importance of good relations.
The
United States also appreciates Indonesia’s contribution to the maintenance of
regional stability through its membership in the Association of Southeast Asian
Nations (ASEAN). Indonesia’s leading
role in addressing complex political developments in Cambodia, and efforts to
resolve both the conflict in the Southern Philippines and conflicting claims in
the South China Sea are also appreciated. For its
part, Indonesia values its access and success in U.S. markets, the security
provided by continuing United States military presence in the region, and the
influx of capital from U.S. investors. Friction
points in the U.S.-Indonesian relationship in recent years have centered on
human rights concerns and labor rights.
The resignation of President Soeharto and the inauguration of the
government of President Habibie has led to a significantly improved human
rights and worker rights climate, with many chronic issues of the bilateral
human rights agenda relieved. The
release of political prisoners, new legislation that permits new labor unions to organize and operate, and
the relaxation of media restrictions are some of the major improvements that
have recently begun to transform Indonesian society. Human rights concerns still exist,
however. Security forces have recently
engaged in extra-judicial killings in East Timor and Irian Jaya and the
government has been criticized by NGOs and the media for its slowness in pursuing
investigations of the May 1998 riots, including disappearance cases and the
killing of four university students in Jakarta.
All of these incidents transpired in the final months of the Soeharto
administration. The Political System in Brief As
stipulated by the 1945 Constitution, supreme governmental authority in
Indonesia is vested in the 1,000-member people’s consultative assembly, the
MPR. The MPR meets at least every five
years to select the president and vice president and establish the broad
outlines of government policy for the next five years. In the past, half of the MPR members were
appointed by the President, while 425 were elected in a process heavily
controlled by the President. Under the
system maintained during the Soeharto era, only three political groupings were
permitted by law. The largest grouping,
Golkar, was a government-sponsored organization comprised of government, civil
and military cadres, and various “functional groups.” During elections, Golkar competed against two
minority parties who faced insurmountable systematic disadvantages. The
Habibie administration has pledged to overhaul the “political laws” that
precluded a democratic electoral outcome.
It has also pledged to hold national parliamentary elections in
mid-1999, with a session of the newly elected MPR set to meet in late 1999 or
early 2000 to select a new president and vice president. Foreign and domestic observers are monitoring
the progress of these promised reforms with great interest. One of the anticipated reforms, the lifting
of restrictions on party formation, is already changing the political
landscape, as a plethora of parties now organizing, reflecting a wide range of
perspectives and interest groups. Major Political Issues Affecting
the Business Climate The
political issue that affects the business climate the most is political and
social stability. While the Habibie
administration has recognized the importance of stability to the business
climate and has taken steps to foster stability, the continuing economic crisis
that now generates severe pain, especially among the poorest sectors of
society, poses risks of social unrest.
The government’s pledge to call early elections that will be based on rules
that will be more fair than the election rules under the strongly authoritarian
Soeharto regime, offers some hope that a smooth transition to a more stable,
elected government will occur. A
democratically elected government will be in a stronger position to restore
confidence because of improved legitimacy. The
government has pledged to end “corruption, collusion and nepotism,” offering
hope that the corrupt practices that undermined the economy and contributed to
the “high cost economy” during the Soeharto era will not continue to poison the
business climate. Labor law
reform, by creating a more clear and more equitable system of industrial
relations, is anticipated to reduce the prospect of violent strikes that have
occasionally clouded the business climate in the past. Modern,
transparent bankruptcy laws and an impartial judicial system will also
strengthen investor confidence in the Indonesian economy, as will consistent
government practice in honoring contracts, a policy under pressure because of
the economic crisis. Finally,
a more stable political system will permit Indonesia to enunciate clearly and
credibly its economic policy directions.
The Habibie administration, with the support of the international
financial institutions and other governments, is formulating an economic reform
program that could lead to an improved business climate. In a more open political climate, elements of
the program could be modified. INTERNATIONAL
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UNITED STATES <NREC>Indonesia04
Indonesia: Marketing U.S. Products and Services <A>=Indonesia CHAPTER IV - MARKETING U.S.
PRODUCTS AND SERVICES Distribution Channels The
government decided in 1998 to open wholesale and “large” retail trade (e.g.
department stores) to foreign investors, with some restrictions, as part of its
agreements with the IMF to open up the economy.
An Indonesian minority partner is required for retailing but not for
wholesaling. A foreign firm can have
either a wholesale or retail license, but not both. The new regulations opening these fields to
foreigners remain to be tested, and a learning experience for investors and the
government can be expected. Relevant
regulations include: Minister of Investment Decrees 11 and 12 of April 30,
1998; Government Regulations 15 and 16 of January 21, 1998 both signed by the
President; earlier Government Regulations Nos.41 and 42 of 1997; Government
Regulation No. 2 of 1996; and various Minister of Industry and Trade Decisions,
including 23/MPP/KEP/1 of 1998. Historically,
import/export, wholesale and retail distribution have been reserved for
Indonesian companies, and dominated by several hundred of the largest
conglomerates. Many of these firms have
warehouses and distribution centers throughout the archipelago. Representatives and Agents Foreign
companies may open and maintain one local representative
office in each of the 27 provinces, with the permission of the Indonesian
Department of Industry and Trade. The
representative may be an Indonesian company, an Indonesian individual, or a
foreign national. Foreign representative
offices are not permitted to engage in direct sales but may engage in sales
promotion and marketing, market research, and technical advice. Nonetheless,
the services of an aggressive, active Indonesian citizen agent or distributor are an important means of expanding sales in
Indonesia because they know the cultural minefields and systemic processes that
foreigners would need years to begin to master.
The variety of relationships between foreign principals and Indonesian
representatives can take many forms, including the secondment of expatriate
staff to the Indonesian company to oversee service delivery according to the
foreign party’s expectations. In many
instances, foreign companies have established close connections with Indonesian
national importers, allowing the two companies to operate virtually as
one. The Indonesian company acts as an
importer/distributor for overseas principals and the foreign company promotes
its products within Indonesia. Appointment
of an Indonesian agent (or distributor) requires care, since it is difficult to
get out of a bad relationship.
Indonesian law allows the severing of an agency agreement only by mutual
consent or if a clause permitting the severance is contained in the original
agency agreement. As in many countries,
the Indonesia’s network of contacts and personal power dictate what it costs to
buy oneself out of a bad agency agreement. The
appointment of an Indonesian sole agent
is not required by law, except for a few product lines: fertilizer, certain
types of heavy equipment, including road rollers, hoisting and lifting
apparatus, tractors, cement‑mixing machines, motorcycles, cars and
trucks. Since
1980, in order to spur the development of indigenous enterprise, particularly
new, small, economically weak enterprises, the government began requiring the
state oil company Pertamina and other government agencies to deal through
Indonesian agents when purchasing imported goods or services. The government also began to pressure foreign
firms into dealing through an Indonesian agent, rather than third‑country
middlemen. The predilection of some
foreigners for regional representatives, often based in Singapore, rather than
Indonesian-based representatives, is particularly unwelcome by the government
although it is not prohibited by law.
For these reasons, a foreign firm selling to government agencies would
do well to appoint an Indonesian firm as its agent. Many
Indonesian importers do not specialize in particular product lines, and
represent a multiplicity of foreign manufacturers and product lines. Generally, however, large conglomerates
establish discrete company units that tend to specialize around a product
range. Medium and smaller importers also
specialize in a narrow range of goods, but no one is averse to adding a
completely different product line if profit can be foreseen. In mid-1998, many agents of industrial
products whose market collapsed with the recession began looking at new,
income-generating lines as diverse from their norm as Louis XIV furniture (for
export) or consumer foodstuffs. It
is generally advisable to set up agency arrangements with firms that handle a
complementary range of products. These
are not essential, however, since substantial sales can often be made by firms
active in quite different product lines.
An increasing number of firms identifying themselves as suppliers of
"technical goods" concentrate on general industrial machinery and
equipment. These firms often have
engineers on their staff and are prepared to provide engineering assistance and
after‑sales technical support. The
main difference between a representative
office and an agent is that the
former cannot “sell” or sign contracts but only market and do research, while
the latter can perform all trade activities.
Only Indonesians can function as agents.
Foreign
principals often work out a management agreement that allows the foreign
company in Indonesia to play a more active role in the marketing efforts of its
Indonesian agent or distributor. In many
cases, a separate agreement is signed between the expatriate personnel and the
foreign employer to regulate this relationship.
The tax liability of the foreign firm is limited to the income of the
expatriates assigned to the representative office, while any other taxes are
assessed to and borne by the agent.
Types of management agreements include: (1) technical assistance
agreements; (2) management agreements; and (3) management agreements coupled
with financial agreements. The
technical assistance agreement limits the foreign firm's function to providing
technical assistance to the Indonesian company.
The management agreement allows the foreign firm to manage the company
or a division within the company. In the
management agreement coupled with a financial agreement, the foreign firm also
finances the Indonesian operation, either under the name of the Indonesian
company or a division thereof. Remuneration to the foreign company can be in
one of the following forms:(1)fixed fee;(2) commission; or (3) profit‑sharing. Whatever basis is used for remuneration, it
must be formulated clearly in the agreement, and it must be applicable under
the present Indonesian laws. To protect
the foreign company's interests properly, a bona fide and comprehensive
agreement should be drawn between the parties concerned. Franchising Franchising
is only a few years old in Indonesia, but until the 1997-98 recession, it was
rapidly becoming a popular business approach for U.S., other foreign, and
Indonesian companies. The depreciation
of the rupiah has made virtually impossible the payment of franchise royalties
in foreign exchange. Creative
arrangements must be agreed at the current time, generally involving a deferred
payment scheme until the rupiah and the economy recover. Franchises
facilitate the transfer of know-how and managerial expertise to the franchisee
companies while simultaneously allowing the franchisor to quickly establish a
presence in the country. Under a typical
franchising agreement, the franchisor receives royalties and fees as stipulated
in the contract. In exchange, the
franchisee has the right to use (and manufacture) copyrighted, patented or
service-marked materials identifying the enterprise. The franchisor typically provides training
and organizational guidance in return for a guarantee that the franchisee will
follow these operational directions. Although
there is no specific law regulating franchising, the legal underpinnings for
franchising are specified in article 1338 of the Indonesian Civil law (KUH
Perdata ‑ Kitab Undang Undang Hukum Perdata) which states that business
persons are free to conclude contracts.
Further legal grounding for franchising can be found in the 1992 law on
trademarks No. 19, article 44-50. There
are no widely accepted models for business contracts covering franchise
agreements. However, the foreign
principal usually provides the franchisee with his own standard contract format
which is used as a basis for developing franchise agreements with the local
business enterprise. The franchise
agreement should be reviewed and notarized by a public notary in Indonesia in
order to make it legally binding. Franchise
agreements should be accompanied by other contractually binding arrangements
such as loan agreements, site leases, building agreements, graphics, employee
selection, standard description and promotion.
Franchise agreements should also include a provision regarding the
settlement of disputes through arbitration which may arise out of breach of
contract or disagreements between the contracting parties (See “Need for a
Local Attorney” later in this chapter). Direct Marketing Direct marketing is used in
Indonesia to sell many kinds of products, from insurance to sewing
machines. Companies such as Avon and
Amway have built up large businesses by direct marketing through local
distributors. Independent Indonesian
companies have copied their methods and success. Joint Ventures/Licensing Since
1994 the government has removed most requirements for domestic equity and joint
ventures. Foreign investors who opt for
100 percent initial ownership are obligated to divest to Indonesians some share
-- as little as one percent -- after 15 years.
This can be accomplished through the stock market. This requirement is too new to have been
tested yet. As
a practical matter a local joint venture partner is often essential for success
in this market, for the same reason that an activist Indonesian agent or
distributor has advantages over a foreign trade representative office. The choice of an Indonesian joint venture
partner is critical for many reasons, especially for knowledge of the local
scene and contacts, which are important for successful operations in
Indonesia. A few experienced firms
provide background, credit-type reports on Indonesian entrepreneurs and firms
(See Chapter XI for list of Consultants and contact information). A
partnership in Indonesia is difficult to dissolve. Consequently, the first choice has to be the
correct choice. Business sense is as
crucial to any commercial endeavor and contacts in Indonesia as anywhere else;
“contacts” alone, while important in Indonesia, can not substitute for business
skills in an Indonesian partner. Because
Indonesians place great importance on personal relationships and mutual
understanding, partnerships tend to be based primarily on genuine accord, with
the written contract playing a less significant role. It is therefore important that any agreement
be well understood by both sides. A
contract over which there are conflicting interpretations is certain to cause
future problems. In
some cases, licensing arrangements for products/services are more
cost-effective options for U.S. companies doing business in Indonesia, but
firms should apply the same cautions recommended for joint venture partners. Steps to Opening a
Representative Office Statements
emanating from the Indonesian Investment Bureau (BKPM) in mid-1998 offer hope
of changes that will reduce the paperwork process and delay in applying for the
necessary government permit for a foreign investment in Indonesia. At present, a business permit issued by the
appropriate government agency is required to establish an office in
Indonesia. Several government agencies
may be involved in issuing a business permit, depending on the nature of the
business. To
open a foreign representative office in Indonesia, the firm must appoint a
representative: the representative may be an Indonesian company, Indonesian
national, or an expatriate. A foreign
representative office in Indonesia is actually more of a liaison office. According to Indonesian law, a representative
office is restricted in the types of activities that it can pursue. These offices are restricted from signing
sales contracts, collecting payments, and participating in other related
business activities. Prior to opening an
office, however, the firm must establish itself as a legal entity by
registering with the proper Indonesian government authorities. The process is as follows: 1. A letter of intent and a letter of
appointment [indicating the appointed representative], both from company
headquarters and on official letterhead, must be sent to the Indonesian Embassy
or an Indonesian Consulate for notarization.
A letter of reference from the embassy or consulate is also required
(See Chapter XI for contact information). 2. The notarized letter of intent, the notarized
letter of appointment, and the letter of reference, along with the resume of
the appointed company representative and his or her Indonesian work permit
(KIMS Card) needs to be submitted. If
the appointed company representative is an Indonesian citizen, a copy of the
Personal Identity Card (KTP) needs to be submitted instead. All the material is submitted to: Rifana Erni Director for Domestic Business Development Director General of Domestic Trade Ministry of Trade and Industry Jl. MI Ridwan Rais 5,
Jakarta 10110 Tel.: (62-21) 385-8189 Fax: (62-21) 345-3114 Email: erni@pusdata.dprin.go.id Regional
representative offices, classified as serving two or more other ASEAN nations,
can also be established in Indonesia.
The regional representative office is also limited to more of a liaison
role and is restricted from participating in many business transactions. Interested firms should contact the Capital
Investment Coordinating Board (BKPM)for procedure information: Hamza Has Minister and Chairman Capital Investment Coordinating Board
(BKPM) Jalan Jend. Gatot Subroto 44 Jakarta Selatan, Indonesia Tel.: (62-21) 525-0023 Fax: (62-21) 514-945 Representative
offices that are involved in construction, engineering, or related consulting
are required to register with the Ministry of Public Works. Foreign representative offices in these
fields, in conjunction with Indonesian companies, are allowed to seek project
opportunities, submit proposals, participate in tenders, and oversee projects
at all levels. Foreign engineering firms
with representative offices can participate in government projects. For procedure information, interested firms
should contact the Ministry of Public Works. Drs. Inu Endro Sayano Chair of the Working Group for Construction
Services and Public Works Ministry of Public Works Jl. Pattimura 20 Jakarta Selatan, Indonesia. Tel.: (62-21) 739-6640, 720-3371, 739-5588 Fax: (62-21) 739-6640 Many
foreign firms opt to have local consulting firms or their Indonesian
representatives take care of the registration process. The application process time varies from two
to four weeks. Representative offices
are also required to submit reports of business transactions and employee
information on an annual basis to the Department or Ministry that it is
registered with. Selling Techniques Indonesian
consumers, particularly from the middle and lower income groups, are sensitive
both to price and to general economic trends (e.g. interest rates). Thus, importers of U.S. goods and services
here will pay close attention to pricing, more than to product quality and
promptness in delivery when making purchasing decisions. They will seek low interest financing,
particularly in the coming year. Other
key success factors for doing business in Indonesia are patience and
presence. Companies that have made a
commitment to the country by establishing an office, or some other significant
presence, will be more successful in marketing their products than those that
attempt to sell their product on annual whirlwind trips. Brand loyalty and name recognition are highly
valued by the Indonesian consumer. To
sum up, ways by which foreign interests can engage in business in Indonesia
include: -the appointment of agents and/or
distributors -representative office -technical assistance or licensing
agreements -joint venture operations -establishing a 100 percent foreign-owned
subsidiary A
joint venture production operation can be a good option for products that have
sales potential in both the domestic market and as exports throughout the rest
of Asia. Press Contacts Personal
contacts are important in Indonesia, and businesses should foster open
communication with the press. The U.S.
Information Service (USIS), located at the American Embassy, is available to
help businesses make initial contacts with the local media. USIS can arrange an introductory meeting
between company representatives and the Indonesian press through a press
conference or an informal gathering.
Please contact the Press Attaché at the American Embassy for further
information (See Chapter XI for contact information). Advertising Advertising
in local media and newspapers is recommended for introducing new products,
particularly in areas of purchasing power concentration, such as Jakarta and
West Java. However, advertising is
currently restricted by government decree to 35 percent of a newspaper's
content. A maximum length of 24 pages
per newspaper edition is also mandated by the government. These restrictions have resulted in very high
advertising rates in the leading newspapers.
In July 1998, the price quoted
for a full color, quarter page ad ranged from about Rp. 4,050,000 ($405: US$ 1
= Rp. 10,000) to $16,500 in five daily newspapers. In those same newspapers, a black and white 2
column, 150 cm ad ranged from about Rp. 3 million ($300: US$ = Rp. 10,000) to
about $1,800. A
listing of major, recommended newspapers and business journals (in Bahasa-Indonesia,
except where noted) follows: Newspapers (all dailies): Kompas Suara
Pembaruan Media
Indonesia Bisnis
Indonesia Neraca
Harian Ekonomi Jakarta
Post (English) The
Indonesian Observer (English) The
Indonesia Times (English) Weekly Newsmagazines: Gatra Tajuk
Forum Kontan Business Journals: Warta
Ekonomi (weekly) Eksekutif
(monthly) Properti
(monthly) Prospek
(weekly) Swasembada
(monthly) Economic
and Business Review Indonesia (weekly or bi-weekly, English language) Indonesia
Business Weekly (English language) In
most cases, direct mail advertising is efficient and effective, if the mailing
lists are properly prepared and updated.
Local advertising agencies can also assist in arranging films, slides, and posters and signboards for
bus exteriors, bus stop shelters, and bridges. Television
advertising has grown rapidly and surpassed newspaper advertising in dollars
spent since 1992. Indonesia has five
commercial television stations (TPI, RCTI, SCTV, Indosiar and An-Teve) and one
state-owned outlet (TVRI). RCTI and SCTV
are the most popular stations in major cities and are available in 19 and 20
major cities, respectively. The potential
viewership for any station is approximately 120 million people. Another
advertising medium is the "Standard Trade and Industry Directory of
Indonesia," an official publication of the Indonesian Chamber of Commerce
and Industry (KADIN). Requests may
be made to the publisher at Jl. Hayam Wuruk 4 SX, PO Box 4556, Jakarta Pusat. Product Pricing Given
the competition that American suppliers face from products supplied by foreign
competitors, product pricing must take into account the costs of delivery,
distribution, advertising, and image. As
product pricing is one critical factor in determining the product's success in
the market, market research is a useful tool.
This includes studies on both consumer preferences and competitive
practices. Pricing is best developed
with advice from local distributors, who are well attuned to the competitive
factors at play in the specific market.
U.S. companies may conduct their own market research, obtain information
from the U.S. Commercial Service, or contract with private research firms (See
Chapter XI for a list of consultants and contact information) . After-Sales Service and
Customer Support One
critical aspect of a product's successful penetration into any market is
customer support and after-sales service.
Some American firms face difficulties in providing this support due to
distance and the costs of maintaining product support facilities in a foreign
country. Although
some local distributor partners normally establish such mechanisms, firms
should be prepared to invest substantial amounts of capital and manpower into
making their local partner a first-class service provider. Regardless of the reputation a company may
have internationally, Indonesian consumers value a firm that has on-the-ground
customer support. They expect not only
to have their needs handled locally, but also quick turnaround times. Selling to the Government Although
plans are underway to privatize 159 state companies, the Government of
Indonesia is still a major customer of a variety of products and services. These cover the full range of defense
materials, items needed for infrastructure projects, research and development
programs, and several of the pure industrial needs categorized under
"Strategic Industries."
Strategic industries are under the control of the newly established
Department for the Empowerment of State Enterprises. Though
it may be possible in some cases to sell directly to the government, there is
good reason to use the services of an agent or distributor for the early stages
of project development, delivery, installation and service needs. Traditionally, this is because most
government procurement has been decided on the basis of influence
peddling. This has not always mean that
corrupt payments need be involved; pre-selection sometimes is based simply on
favors to friends. This means that
traditionally the rest of the tendering process simply has been a matter of
“going through the motions” or a shadow play theater. New-to-the-market U.S. firms need the careful
advice of local representatives to avoid wasting time and money in
participating in a fake competition whose outcome is not transparent. The value of a local representative in this
case is to make sure the outcome is favorable to his/her client, not the
reverse. U.S. firms also need to be sensitive to the difficulty some
Indonesians have in declaring bad news to someone; if your agent knows a tender
is “cooked” against you, he may be reluctant to disappoint you with the bad
news in advance. A close relationship
with the agent is the best way to ensure frankness. New
efforts since May 1998 to root out corruption, collusion and nepotism (KKN, in
Indonesian initials) in the government procurement process may make the process
more legitimate. Also, Presidential
Decree No. 7 of January 1998 was drafted to make transparent the tendering
process for infrastructure projects, which until recently often resulted from
an initiative of a private proponent, generally someone close to the
Presidency. Implementing regulations have
not been issued for this decree. Most
sales to the military must be carried out through an Indonesian agent. Often the customer will assist in the
identification of the proper agent. American
firms should become familiar with the "Blue Book", a listing of major
projects identified by the Government of Indonesia as essential to national
development priorities. The document is
published annually by the National Planning Agency (BAPPENAS) and constitutes
the official list of projects that are open to foreign official assistance and
other sources of external financing.
Most of the projects listed in this book require "soft loan"
(low interest rate) financing. The U.S.
government does not initiate soft loan financing, and although the U.S.
Eximbank offers “matching” soft loans from its “war chest,” Indonesia almost
never has accepted offers that would displace other donor commitments made
through the annual World Bank-sponsored Consultative Group on Indonesia
(CGI). Rarely, some U.S. firms have been
successful at convincing Indonesian authorities to accept Eximbank matching
soft-loans as “add-on’s” rather than displacements to another donor’s
offer. Ad-hoc soft loans offered outside
the CGI may offer opportunities for using Eximbank matching loans. (Note: As
this document went to print, Eximbank no longer was committing to any loan
project in Indonesia.) Projects
listed in the Blue Book are classified into three categories, A, B, and C,
according to their stage of preparation (i.e. feasibility). A Category C project, for example, is one for
which feasibility has yet to be established.
With such projects, there may be opportunities for foreign firms
(especially engineering firms, consultants, etc.) to assist in determining
feasibility. Category A and B projects,
on the other hand, are ones for which feasibility has been or will soon be
established. U.S. firms should also
familiarize themselves with opportunities available through ADB or World
Bank-funded projects. Counter Trade Policy The
Government of Indonesia has since 1982 nominally required winners of some large
government tenders to undertake reciprocal purchase or sale of Indonesian
non-oil/gas products. It is stipulated
for any imports of goods by government institutions that exceed 500 million
rupiah in value and is financed by the State budget or other commercial
credit. A foreign firm that wins this
kind of government procurement is obligated to purchase Indonesian non-oil/gas
commodities in an amount equal to a specified percentage of the value of goods
and services bought by the government.
Usually the foreign firm does not directly undertake this trade, but
pays a fee to one of an approved list of Indonesian trading companies to
undertake the trade on its behalf. Procurement
from the following is exempt from counter trade requirements: procurement
funded by soft loans from multilateral banks; the domestic cost element of a
foreign firm’s supply contract; services used by the government provided by
professional experts such as accountants, lawyers, consultants and the costs of
patents, fees, and the like; and purchases undertaken within the framework of
joint ventures between a foreign company and a state-owned company. In
1995 the value of counter trade reached $1.2 billion; in 1996 it decreased to
$834 million and involved 67 countries.
The United States was first with $166 million worth of counter trade,
followed by Japan, Singapore, South Korea, and Philippines. The
Department of Industry and Trade is the coordinating and regulatory agency for
counter trade deals. Contact: Mr. Edi Putra, Head, Counter Purchase Division, Directorate of Exports Directorate General of International
Trade Department of Industry and Trade Jalan M.I. Ridwan Rais, No. 5, Block
II, 9th Floor Jakarta 10110, Indonesia Tel: 62-21-385-8171, ext. 1189 Fax: 62-21-385-8191 Selling to Specialized
Sub-Markets Pertamina: The national oil and gas
monopoly oversees all oil and gas activities, although Production Sharing
Contractors (PSC’s) produce most of the hydrocarbons under contract. Purchases by either Pertamina or PSC’s must
be made through a local, Indonesian-owned limited liability company. Foreign suppliers have a choice of
relationships they can establish, e.g. a temporary relationship for a specific
sale or purpose; an agency relationship; or a joint venture, in which the
Indonesian partner owns at least 5 percent of the venture. Only Indonesian companies can bid on most
service contracts to Pertamina. Most
purchases of goods and services are through tender and generally only vendors
with a registered vendor ID (Tanda Daftar Redajan -- TDR) are considered
qualified contractors (Daftar Redanan Mampu - DRM) and able to bid. Sometimes direct purchasing is permitted,
without competitive bidding. While PSC
contractors can draft their own tenders, procurement by them valued at more
than 2 million rupiah and up to 10 million rupiah requires approval from
Pertamina/BPPKA (Foreign Contractors Regulating Agency). Procurements over 10 million rupiah require
approval of the Coordinating Minister for the Economy. Tender
awards by Pertamina are based on price, Indonesian content, technical
advantage, and reputation. Domestic
goods and services must be used, if available, even at higher cost. All equipment purchased by PSC’s is
considered Pertamina property upon arrival in Indonesia. PT. Freeport Indonesia: As the largest American and foreign investor
in Indonesia, producing copper and gold in Irian Jaya, Freeport is a major
buyer of U.S. and other overseas goods and services for its workforce of 16,000
and its production that is planned to reach 160,000 tons of ore per day in 1998
with mining facilities worth more than $4 billion. The company considers quality, price,
delivery, and technical specifications of products needed. Under terms of its Contract of Work, Freeport
Indonesia must allow local Indonesian suppliers to bid on all contracts, and
the company follows a practice of attempting to increase procurements from
Indonesia within the practical limitations of its selection criteria. Freeport Indonesia maintains purchasing
offices in New Orleans (for U.S. and European suppliers), Singapore, Cairns
(Australia) and Jakarta. U.S.
firms interested in selling to Freeport Indonesia should contact: PT Freeport Indonesia Company 1615 Poydraw St., P.O. Box 51777 New Orleans, Louisiana 70112 Tel: 504-582-4176 Fax: 504-582-4190 Regional “Growth Nodes” Marketers
and investors may also find advantage by establishing distribution or
assembly/manufacturing operations in 14 “growth node” regions in Indonesia,
which are targeted for economic development via special tax incentives. They include obvious large cities such as
Jakarta, Surabaya, Bandung, Medan and Ujang Pandang, and less obvious districts
such as Biak Island in Irian Jaya, and the Manado area of North Sulawesi. Although the government has established the
“growth nodes,” it depends upon private initiatives to bring value to the idea. The same
is true concerning four “growth triangles” involving areas of Indonesia and
neighboring ASEAN countries, and an “Australia Indonesia Development Area” --
all of which offer intra-regional incentives for regional distribution and
assembly/manufacturing. The “Growth
Triangles” include: Singapore/Riau Islands (Batam, Bintan and Karimun -- which
are being developed as off-shore additions to Singapore’s industrial base; an
international airport exists on Batam, which is 12 km. from Singapore); the
Indonesia/Thai/Malaysia Growth Triangle (IMT-GT) including the northern-most
Sumatran provinces of Aceh, North Sumatra, West Sumatra and Riau; the
Indonesia/Malaysia/Singapore Growth Triangle (IMS-GT) including the Central and
Southern Sumatran provinces including and south of Riau; and the
Brunei/Indonesia/Malaysia/Philippines East ASEAN Growth Area (BIMP-EAGA) that
was expanded in 1996 to include all Indonesian provinces in Kalimantan and
Sulawesi, plus Maluku and Irian Jaya. Finally,
the “Australia Indonesian Development Area (AIDA)” aims to focus development
attention on all of Indonesia except the islands of Sumatra and Java. U.S. firms having strategic alliance with
Indonesian or Australian entities can participate in AIDA projects. Protecting Your Product from
IPR Infringement Protection
of intellectual property rights (IPR) in Indonesia is hampered by inadequate
enforcement of the relevant laws and regulations. Foreign companies therefore must be vigilant
in protecting their products from IPR infringement. Some choose to go through the Indonesian
legal system, but cases may take several years before they are finally
resolved. Occasionally,
foreign companies work with local law firms and law enforcement officials to
conduct police raids on counterfeiters.
Others conduct periodic seminars on the adverse effects of IPR
infringement on the Indonesian economy, one of which is reduced investment by
foreign companies. Ultimately,
the course taken by companies to protect their intellectual property rights
will depend on their product. As an
example, one U.S. company first identifies the counterfeiters of its products
and then proceeds to work with them and sign them as legal licensees of its
products. Some computer software
companies provide free training and/or sell their software at competitive
prices, while warning that copies of their product may contain damaging
viruses. Also, companies with well-known
trademarks must be vigilant in defending their marks by registering them early
or seeking a cancellation of an unauthorized registration through the Ministry
of Justice. In general, acquiring a
strong local partner or agent can help in defending trademarks and intellectual
property, as long as the arrangement remains amicable. (See
also Chapter VII - "Investment Climate" - for background on
Indonesian laws and regulations regarding the protection of intellectual
property rights.) Need for a Local Attorney Because
Indonesia’s legal system is currently being overhauled and modernized, firms
are strongly advised to locate and retain a local attorney early in the
investment process. In the event of a
commercial dispute, one should first attempt to reach consensus through
negotiation, using a mediator acceptable to both parties if necessary. If deliberation fails to achieve consensus,
then companies may enter into arbitration.
To prepare for this eventuality, an arbitration clause should be
included in any commercial contract with Indonesia chosen as the site of arbitration. This is recommended because foreign arbitral
awards have proven difficult to enforce locally. Badan Arbitrase Nasional Indonesia (BANI) is
the local arbitration board and companies may employ BANI or select their own
arbitration vehicle and procedures (i.e. ICC or UNCITRAL). Only when arbitration fails should companies
consider litigation. The Indonesian
court system has proven to be an ineffective means of recourse for American
companies. Although
foreign legal firms cannot yet open offices in Indonesia, a number of American
attorneys consult with Indonesian firms, some having consulted locally for more
than ten years. These attorneys are well
placed to assist American firms in working their way through the Indonesian
legal structure (See Chapter Xi for a list of lawyers and contact information). Trade Promotion The Ronald H. Brown U.S.
Commercial Center The
U.S. Commercial Center, located at the World Trade Center complex on Jalan
Sudirman in Jakarta’s business district, is a good place for firms interested
in the Indonesian market to begin. The
U.S. Commercial Center offers a variety of services that are beneficial to
those wishing to take advantage of the many opportunities available in
Indonesia. Services include: Market Assessment The
U.S. Commercial Center has a team of commercial specialists who are able to
provide market assessments and counseling in a number of sectors. Facilities The
President’s Room, located in the U.S. Commercial Center, is a well-equipped
meeting room with catering options.
Rental prices of
this facility are less than that of an equivalent room in a hotel. Trade Shows The
U.S. Commercial Center maintains a presence at all the major trade shows in
Indonesia and promotes U.S. goods and services through U.S. National Catalog/Video Pavilion. Interested firms can partake in the
Catalog/Video Pavilion and for a small fee, the following is offered: a. Company catalogs and promotional literature
are exhibited at the U.S. National Pavilion at the major Indonesian trade shows
in a number of sectors. In addition,
trade show visitors can view promotional videos and websites using the
Pavilion’s two touch screen computers. b. A record of Pavilion visitors who have
reviewed promotional material and expressed interest is kept. That record, along with bio information on
interested companies is sent to the Catalog/Video Pavilion participant. c. Promotional materials used in the trade show
are also exhibited for one full year in the permanent Catalog/Video Exhibit at
the U.S. Commercial Center. Over 1,800
Indonesian representatives visited the U.S. Commercial Center last year. Contacts The
Agent/Distributor Service, offered through U.S. Export Assistance Centers, is
an inexpensive way to build a shortlist of potential local
representatives. This service, using our
Commercial Specialists who contact local firms to determine their interest in
representing the American principal, costs $250 and takes about 45 days to
complete. The
Gold Key Service offers an appointment service for business executives visiting
Indonesia. Upon receiving company
promotional material, commercial specialists investigate the local market,
select potential business contacts, communicate with them, and build an
appointment schedule with firms that appear to best meet the interested
business’ needs. When he or she arrives
in Indonesia, a full schedule of appointments is already established. To
determine whether or not the Gold Key Service is an appropriate investment,
free preliminary evaluations of products’ potential in the Indonesian market
are offered. To take part in this free
evaluation, fax product literature and a half-page description of
products/services. Upon completion of
the preliminary evaluation, results and recommendations will be faxed back to
you. The
full range of Gold Key Services is listed below: a. Standard Gold Key Service: $500 for research
on one line of products and the scheduling of one day of appointments
(generally at least four per day) in one city.
Each additional day is $250 more.
Six weeks of lead time is required, from the day product literature is
received. b. Gold Key Turbo: A priority service, requiring
only three weeks lead time. The cost is
$600 for the first day of appointments and $350 for each additional day. c. Two-City Gold Key: A full day of appointments
in Jakarta, followed by another full day in Surabaya, Indonesia’s second
largest city. The cost is $775 for these
two days, and $250 for each additional day in either city. To
join the U.S. National Catalog/Video Pavilion or use any of the Gold Key
Services, contact Richard Rothman, Commercial Officer, Trade Promotions at fax
(62-21) 526-2855 or Email: Rrothman@cs.doc.gov.
More extensive contact information for the U.S. Commercial Center is
available in Chapter XI. The Agricultural Affairs Office The
Agricultural Affairs Office (AAO) in Jakarta is the USDA office in Indonesia
that works closely with U.S. exporters, Indonesian importers, trade
associations and Indonesian Government officials to increase sales of U.S. bulk
and intermediate agricultural products.
In addition, the AAO reports on a number of commodities and is
responsible for agricultural trade policy issues. A branch of AAO is the Agricultural Trade
Office which covers the promotion of U.S. high value agricultural
products. The AAO is able to assist
interested agricultural exporters in a variety of ways: Product and Market
Information:
Commodity reports and Indonesian contact lists are available on request. Services and Facilities: Visiting exporters can take
advantage of in-country briefings and five-star hotel arrangements at
competitive U.S. embassy rates. Trade Shows: The AAO encourages
participation by U.S. companies in appropriate trade shows for bulk and
intermediate commodities. Trade Leads, Buyer Alert and
AgExport Kit Services: The USDA Washington office provides a variety of services to
U.S. companies. Please contact Sharon
Green or Linda Conrad for more information, at phone: (202) 690-3416, fax (202)
690-4374. Foreign Agricultural
Service’s (FAS) Home Page: http://www.fas.usda.gov.
The FAS Home Page provides exporters, producers, processors,
researchers, trade organizations, financial institutions, and other interested
individuals and groups with access to facts, figures, analysis, and activities
of agricultural trade - around the clock and around the world. U.S. Agricultural Trade
Office (ATO) The
Agricultural Trade Office in Jakarta is the USDA office in Indonesia that works
closely with U.S. exporters, Indonesian importers, trade associations, and
Indonesian Government officials to increase sales of U.S. high value or
consumer ready food products. The ATO is
a branch of the Agricultural Affairs Office.
The ATO is able to assist interested food exporters in a variety of
ways: Product and Market
Information:
Lists of importers and commodity reports are available upon request. Services and Facilities: Visiting exporters can take
advantage of in-country briefings, five-star hotel arrangements at competitive
U.S. Embassy rates, and temporary office space. Promotion Activities: A multitude of promotion
opportunities are offered by the ATO, including trade shows (every year the ATO
stages one major food show and several category specific food shows in
Jakarta), agent shows (an opportunity for regional agents to join ATO sponsored
trade shows and seminar series in major cities outside of Jakarta), in-store
promotions (3-4 in-store promotions are held each year), a monthly newsletter
(sent to about 300 Indonesian traders featuring news about various products),
and a library and showcase in our office that displays company information and
products. To
take advantage of the activities that ATO offers, contact Dennis Voboril,
Director, at fax (62-21) 571-1251, or phone at (62-21) 526-2850. Also, please see the list of offered AAO
services above. U.S. Information Service
(USIS) Programs for Trade Development USIS
organizes programs to foster trade and investment. USIS programming highlights the advantages
U.S. investment provides in terms of consumer value, technology transfer and
human resources development. USIS
programs also promote the reduction of trade barriers, protection of
intellectual property rights, and encourage sustained Indonesian support for
trade liberalization. USIS
operates the Zorinsky Research and Information Service (ZoRIS), a
state-of-the-art electronic research facility located in the USIS building on
the U.S. Embassy compound. ZoRIS
resources include Internet access and a variety of databases accessible
on-line. These include the U.S.
Information Agency’s Public Diplomacy Query (PDQ) database, Dialog, Legi-Slate,
and Westlaw. ZoRIS’s
large collection of CD-ROMs include the UMI/PROQUEST series, which indexes
hundreds of periodicals, with over 200 available in full image text, the U.S.
Code Annotated, Phonedisc, and North American Fax. ZoRIS staff maintains the U.S. Embassy
Jakarta home page, a website with current information about the U.S. Mission,
with direct links to the U.S. Department of State Foreign Affairs Network
(DOSFAN), other U.S. government agencies, and additional sites related to
foreign affairs, trade, and important bilateral issues. USIS
recruits speakers for events such as the annual Economic Seminar, co-sponsored
with the Indonesian Economists Association, and on topics including U.S. trade
policy and trade promotion. For further
information on the speakers program, please contact the Cultural Affairs
Officer at (62-21) 344-2211, extension 2525. The
USIS Press Section, through press releases, its Book Translation Program and
Worldnet interactive television dialogues, communicates U.S. views on trade and
investment issues to Indonesian policy makers and the public. Books translated into the Indonesian language
under the auspices of the program include The Language of Trade by
Michael Smith, The Rise of the Trading State, by Richard Rosecrance, Protectionism,
by Jagdish Bhagwati and Preparing for the 21st Century, by Paul Kennedy. See
Chapter XI for more extensive contact information regarding USIS and its
programs. United States Agency for
International Development (USAID) Through
its development activities, USAID promotes the adoption of open trade and
investment regimes and creates opportunities for U.S. technology, equipment,
and services. USAID supports Indonesia's
efforts to strengthen its commitments to free and open trade through reductions
in tariff and non-tariff barriers through its technical assistance to the GOI. Much of this work is being carried out in the
context of Indonesia's international agreements within APEC, ASEAN and the
WTO. USAID is also facilitating adoption
of updated laws and regulations which will facilitate commerce and economic
development as Indonesia enters the 21st century. This work has already assisted in the
promulgation of new legal frameworks for capital markets, companies law, and
commodities futures trading. Current
work is focused on competition law, bankruptcy, secured transactions, and
arbitration. Urban
infrastructure development is one area that has prominent USAID involvement
that offers extensive trade and investment opportunities. The Indonesia Cleaner Industrial Production
(ICIP) Program is a USAID supported project in the field of urban
infrastructure development. Its goals
are twofold: To reduce industrial damage to the environment by helping the
Indonesian Government assume appropriate policies and programs, and to develop
the capability of the Indonesian public and private sectors to reduce the
generation of industrial waste with an emphasis on increased industrial
efficiency and potential economic benefits. ICIP's
industry assistance is focused on industrial firms with significant emissions
problems. It is aimed at increasing
industry demand for cleaner production services and technologies; assistance is
in the form of cleaner production facility assessments, assistance to implement
cleaner production projects, and the delivery of training, workshops and
information regarding cleaner production to various audiences. Assisted
by the National Development Planning Agency and the Ministry of Industry and
Trade, the ICIP Secretariat is responsible for the day-to-day implementation of
the ICIP program, at the following address: Mashill
Tower-20th Floor Jl.
Jend. Sudirman Kav.25 Jakarta
12920 Tel:
(62-21)526-7681 through 7684 Fax:
(62-21) 526-7680 Private
Participation in Urban Services (PURSE) is another ongoing USAID project in the
area of urban infrastructure development.
The PURSE project is designed to help the Indonesian government
effectively deal with rapid urbanization.
The project supports Indonesian Government efforts to increase private
participation in the provision of urban environmental services, water supply,
waste water and solid waste management through operating contracts,
concessions, and investment. Support is
offered by helping the government develop the necessary legal/regulatory
national framework, building local government capacity and facilitating
transactions. Under
the auspices of USAID, The United States-Asia Environmental Partnership
(US-AEP) was founded in 1992 to assist in addressing environmental degradation
and sustainable development issues in the Asia-Pacific region by mobilizing
U.S. environmental experience, technology, expertise and practice. See the following section for a more thorough
description of US-AEP activities and the business opportunities available to
U.S. firms. USAID's
Indonesia energy program promotes the sustainable application of technologies
that reduce local and global pollutants.
These technologies include both grid-connected and off-grid renewable
energy as well as supply and demand side energy efficiency. Activities include pilot projects, resource
mapping, cost-sharing feasibility studies with developers, training, transfer
of technologies for cleaner generation from fossil fuels and support for the
state utility's new small private power producer program, which emphasizes
renewable energy. In addition, the
USAID-supported Utility Partnership Program funds a series of executive level
exchanges between U.S. and host country utilities to examine how each addresses
issues of mutual interest. The first
Indonesian partnership under this program is between PLN, the Indonesian
national electric utility, and Southern Energy, Inc. of Atlanta, Georgia. Of
special interest to U.S. renewable energy developers is the assistance
available through Yayasan Bina Usaha Lingkungan (YBUL), a USAID-supported
Non-Government Organization specializing in the commercialization of renewable
energy. Yayasan
Bina Usaha Lingkungan Tel.:
(62-21) 520-3313 Fax:
(62-21) 525-4305 Email:
ybul@indo.net.id USAID's
CLEAN/Energy activity supports the Government's efforts to restructure the
power sector by removing the links between the generation, transmission and
distribution processes. CLEAN/Energy provides technical assistance, including a
long term advisor, to help address restructuring and regulatory issues in order
to encourage development of a financially viable power sector that can mobilize
the significant levels of private infrastructure investment required to meet
the rapidly increasing energy demands of Indonesia while doing so with the
least environmental impact. Information
on these activities can be obtained through: Office of Urban Environmental
Management, USAID/Indonesia (See Chapter XI for contact information regarding
USAID/Indonesia). United States-Asia Environmental
Partnership (US-AEP) U.S.
companies interested in business opportunities created by the
privatization of urban infrastructure should contact the United States-Asia
Environmental Partnership (US-AEP).
Under the leadership of USAID, US-AEP promotes urban infrastructure
development in Asia through improved access to U.S. systems, the introduction
of policies and approaches to the provision of urban environmental services,
and accelerated U.S. technology transfers. All US-AEP activities are focussed on the
objective of promoting an Asian “clean revolution,” by encouraging countries to
develop and adopt less polluting and more resource-efficient products,
processes, and services to use during the development process. US-AEP promotion of environmentally sound
technology and services provides business opportunities for a number of U.S.
firms. In Indonesia, US-AEP has two
programs: US-AEP Environmental Technology
Representatives: US-AEP provides services to assist U.S. firms
in introducing responsible environmental products and technologies to decision
makers in Asia’s public and private sectors.
Under the Technology Representatives, there are two programs: A. Technology Cooperation: US-AEP, in
conjunction with the U.S. Commercial Service, has opened an Office of
Technology in Jakarta. The establishment
of this office and the presence of Technology Representatives enables the
US-AEP to actively promote the goals of the program in Indonesia. B. Environmental Exchange Program (EEP): This
program provides Asian professionals and organizations opportunities to address
critical environmental needs in areas such as pollution prevention,
environmental and hazardous waste management, air pollution, clean and
efficient technology, water supply, solid waste management, and wastewater
treatment. EEP programs usually take
place in one of the following forms: Environmental Business Exchanges,
Environmental Technical Exchanges, and Environmental Fellowships. US-AEP Environmental
Infrastructure: This program helps local governments and
communities deal with the environmental problems brought on by rapid
urbanization. US-AEP assists local
authorities address such environmental challenges, such as the lack of
municipal sewage and solid waste facilities and insufficient water supplies
through the transfer of U.S. environmental technologies, services, and
management techniques. If
interested in any of these two US-AEP programs, contact US-AEP in Washington or
the US-AEP office in Jakarta (More extensive contact information for US-AEP is
available in Chapter XI): In
Washington, D.C.
United
States-Asia Environmental Partnership (US-AEP) Agency
for International Development 320
Twenty-First Street NW Suite
3319 Washington,
D.C. 20523 Tel.:
(202) 647-5806 Fax:
(202) 647-8327 In
Jakarta Office of
Technology Cooperation Tel.:
(62-21) 526-2848 Fax:
(62-21) 526-2849 Office of
Environmental Infrastructure Tel.:
(62-21) 526-2844 Fax:
(62-21) 526-2846 Office of the Military Attaché for
Defense Programs (OMADP) OMADP is
the principal point of contact for most U.S. defense industry representatives
marketing defense equipment in Indonesia.
In general and subject to releasability considerations (including export
licensing), OMADP’s main function is to facilitate the flow of information
regarding U.S. systems to help Indonesian buyers make acquisition decisions,
either commercially or through Foreign Military Sales (FMS). OMADP can
assist industry representatives by arranging both appointments within the U.S.
Embassy and appointments with Indonesian military offices. Additionally, OMADP is a valuable source of
information on the Indonesian military procurement system. OMADP
offices can be contacted at the U.S. Embassy, phone (62-21) 344-2211, ext. 2603
or fax (62-21) 384-3339 (More extensive contact information is in Chapter XI). INTERNATIONAL
COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S.
DEPARTMENT OF STATE, 1998. ALL RIGHTS
RESERVED OUTSIDE OF THE
UNITED STATES <NREC>Indonesia05
Indonesia: Leading Sectors for U.S. Exports & Investments
<A>=Indonesia Chapter V--Leading Sectors for
U.S. Exports and Investment The
following highlights “leading sector” sales prospects, i.e. sectors of the
Indonesian economy that remain active despite
or because of the current economic recession. It also includes sectors that will bounce
back quickest when economic improvement begins.
The list is not a shopping guide to immediate sales opportunities,
however, because unfortunately there are few such mirages on the horizon. As this is written, the bottom unfortunately
has not yet been reached in Indonesia’s economic shake out. Indonesia’s
economic recovery likely will be led by private sector exporters, private --
especially foreign -- investment in existing and new facilities, and by
donor-funded infrastructure investment.
Major project activity will become more dependent than ever before upon
donor financing from IBRD, ADB, Japanese OECF and bilateral lenders. TDA, USAID, and US-AEP training grants,
orientation visits, and technical assistance and TDA feasibility studies will
become even more crucial to U.S. firms confronting competitor subsidies. In
addition to the leading product and service sectors mentioned below, other sectors
that bear watching as they weather the current recession include: Boats (commercial and fishing):
Previous bans on new and used commercial and fishing boats have been
removed. Export oriented deep sea
fishing and fast ferries offer business opportunities. The government wants to open more distant
islands to tourism; with cuts in air flights because of high costs, ferries
offer an alternative means. Hotel and
Restaurant Equipment:
If tourism remains among Indonesia’s healthier sectors, especially on Bali and
resort islands near Singapore, there will be a continuing good market for
equipment in this sector. Even in
Jakarta, 28 new hotels containing 6,000 rooms are scheduled to be built over
the coming two years. Boutique and three
star hotels in outer islands offer growth opportunity. Information
Technology:
Businesses will want efficiency-inducing new technology to enhance
competitiveness, train employees, and take advantage of market openings caused
by the IMF-induced new openness. Swings
in the exchange rate suggest a need for real-time data networks and financial
software. Enhancements in tax auditing
and other financial services will require IT. Security and
Safety Equipment:
A rash of newspaper ads have appeared since the riots of spring 1998 offering
the security of fire proof safes and cabinets, and a miscellany of surveillance
and security equipment for office, shop, and home. A prominent kidnaping in September 1997 shows
the need for private protective security systems. Business ennui in general, combined with
traditional inattentiveness to fire safety and the demonstrated shortcomings
this year of city fire departments will prompt owners to buy fire protection
gear for their properties. Another
subsector relates to forest and brush fire fighting equipment that would
protect plantation owners and land clearers from the threat of uncontrolled
fires. Textile
Equipment: Although
U.S. firms have been under represented in this sector, textiles and clothing
are expected to lead Indonesia’s export-led economic recovery and new,
efficient equipment is needed. Used Equipment
(in
general): New regulations permit the import of used equipment, especially
complete assembly or process lines for new factory investment. The rationale is cost-savings and technology
that improves upon existing technology, even if it may be used and therefore
not the “latest.” Cost conscious
Indonesian investors, shy of foreign exchange, are the target customers. In
addition to export opportunities, there are investment and marketing
opportunities that opened in Indonesia because of the recession. Investors from Taiwan and Hong Kong, Japan,
South Korea, Europe and the United States have already bought Indonesian real
estate and bought out local partners’ shares of manufacturing ventures. Some wealthy Indonesians are doing the same,
as local assets become increasingly attractive in value. Long-term opportunities exist for foreign
ownership alone, or in joint venture with Indonesians, in the operation and
maintenance of public utilities, transport facilities such as toll roads,
ferries and airlines, residential and commercial real estate, industrial parks,
export-oriented or import substitution factories, and a plethora of service
industries. Wholesale
and retail trade was opened to foreign investment in 1998 as a result of the
IMF agreements. Although the regulations
in these fields remain to be tested and retain some restrictions particularly
in retail trade, they give clear, new rights to foreigners that previously were
restricted to Indonesians. The
“leading” sectors of opportunity are listed below, both in non-agricultural and
agricultural sectors. Best Prospects for
Non-agricultural Goods and Services Best
Prospects are ranked by estimated growth, in U.S. dollar values, of U.S.
exports over the coming year. U.S.$1 = Rp. 10,000 1 Oil and Gas Equipment (OPG) Oil and
gas exploration and production in Indonesia has been largely unaffected by the
monetary crisis. Up until the year 2000,
it is estimated that this sector will pull in at least a $4 billion of foreign
investment per year. In the
past five years, 76 oil contracts were signed, representing an investment of
approximately $20 billion in exploration, field development, and production
activities. In 1997, investments in
exploration and production amounted to $4.5 billion. Investments in these activities are projected
reach $6.3 billion in 1998, of which $1.5 billion will be for exploration. The target for 1998 is to drill 206
wells. The number of production sharing
contracts signed has increased to more than 20 in 1997, up from an average of
15 per year. In the first two months of
1998, up to February 24, 1998, six more contracts had already been signed. Indonesia
imported $570.5 million worth of oil and gas equipment in 1997. Equipment (including pile-drivers and pile
extractors, parts of boring/sinking machinery, line pipe used for oil or gas
pipelines, drill pipe used in drilling for oil and gas, other forms of drill
and line pipes, and floating or submersible drilling or production platforms)
was all imported from various countries. U.S.
products amounted for $280 million, or 49.1% of the total import
equipment. American suppliers are
particularly strong in the following equipment: tools for drilling (not rock
drilling), self propelled boring and sinking machinery, other forms of boring
or sinking machinery, parts of boring/sinking machinery, longitudinally
submerged arc welded line pipe, other types of pipe line used for oil or gas
pipelines, casing and tubing used for drilling for oil or gas, and floating or
submersible drilling or production platforms. It is
predicted that the market for oil and gas equipment will slightly increase in
the next two years. Some oil and gas
companies with ongoing operations are expected to try to increase their
production capacity. In addition, new
equipment demands will come from new contractors concentrating on exploration
activities. Based on past history,
equipment from the United States is expected to lead the market, capturing
almost 50% of market share, as American oil and gas equipment has dominated the
Indonesian market for the past three years. USD
millions 1997 1998 1999
(Est) (Est) A. Total market size 625.0 687.5 756.5 B. Total local production 90.0 100.0 110.0 C. Total exports 35.5 40.0 45.0 D. Total imports 570.5 627.5 690.5 E. Imports from the U.S. 280 310 345.0 Note :
The above statistics are unofficial estimates. 2 Telecommunication Equipment TEL Indonesia
has displayed a strong commitment to the development of its telecommunication
infrastructure. In 1997, despite the
economic turmoil, Indonesia’s telecommunications equipment imports was
increased more than 9% from 1996. In
that year, Indonesian import value for telecommunications equipment was
US$1,504 million. In 1997, with a 30%
market share, United States played a substantial role in Indonesian
telecommunications equipment imports.
This figure is nearly double compared to that of 1996. In 1997,
the largest Indonesia’s telecommunications equipment imports were digital line
systems (H.S. 8517.50.000: Other Apparatus for Carrier-Current Line Systems),
accounting for 22% of telecommunication imports. The biggest supplier for this
telecommunications equipment was the United States (39%), followed by Finland
(15.4%), Germany (13%), and the United Kingdom (9.2%). Most of the telephonic switching apparatus
imports(H.S. 8517.30.100), accounting for 15.3% of telecommunication imports,
came from Germany (52.7%). U.S. imports
(30.5%), and imports from the Netherlands (3.6%) followed. Imports of telephone set parts (H.S.
8517.90.100) accounted for 10.8% of imports, and they mostly came from the
United States (69.6%), Germany (11.5%) and Taiwan (5.7%). USD
million 1997 1998 1999 (Est) (Est) A. Total market size 1,973 2,008 2,068 B. Total local production 678 684 717 C. Total exports 209 205 251 D. Total imports 1,504 1,529 1,602 E. Imports from the U.S. 455 459 481 Note: The
above statistics are unofficial estimates. Exchange
Rates: 1 US Dollar equals: 1997 : Rp. 5,000 1998 : Rp. 10,000 (GOI target by the year of 1998) Future
inflation rate: 70% 3 Mining Equipment MIN Indonesia’s
main mineral resources are coal, gold, some conventional metals, rare metals,
industrial metals and building materials.
The mining sector comprises about 15% of the national economy, of which
10% is attributed to the oil and natural gas sector, and 5% to the general
mining sector, consisting mostly of
surface mining activities. In 1997,
the government signed Sixth Generation Contract of Works (COW) with 65 mining
companies and Third Generation coal COWs with 68 companies. From January 1998 to June 1998, the
government approved 72 mineral COWs and eight coal COWs. During
the past ten years, the export of mining products increased at an annual growth
rate of about 21.1%. Coal became the
largest export commodity in 1997, with a total value of US$ 1.65 billion. Copper was the second largest export
commodity, with a total export value of US $1.58 billion. Almost 95% of tin production is exported,
while exports of coal amount to 77% of total production. Indonesian nickel, copper concentrate and
aluminum are all exported. The total
market for surface mining equipment has grown at an average annual rate of 22%
over the past five years. Imported
products account for about 82% of all surface mining equipment purchased in
Indonesia. Imports of surface mining
equipment totaled $724.8 million in 1996, 57.7% greater than 1995 levels of
$459.7 million, which were in turn 26.1% greater than 1994 imports, valued at
$364.5 million. Because
of the current economic situation, the demand for surface mining equipment is
projected to decrease 30% from the demand in 1997. U.S. products accounted for $147.4 million,
or 18.1% of all surface mining equipment imported by Indonesia in 1997. American suppliers are particularly strong in
the following equipment: parts of boring and sinking machinery, other machinery
for processing earth, stone ore and the like, pile drivers and pile extractors,
self-propelled machinery, miscellaneous cranes, bulldozers, parts of loading
machinery, conveyors, crushing and grinding machines for stones, and pneumatic
elevators. USD
millions 1997 1998 1999
(Est) (Est) A. Total Market Size 948.2 663.5 730.0 B. Total local production 174.0 174.0 191.5 C. Total exports 41.2 81.0 89.5 D. Total imports 815.4 570.5 628.0 E. Imports from the U.S. 147.4 103.2 113.5 Note: The
above statistics are unofficial estimates. 4 Industrial Pumps PVC The
economic crisis that began in July 1997 is responsible for the decline in
demand of industrial pumps; however, prospects remain relatively good for the
coming years. Due to the lack of
advanced technology, domestic competition will continue to be limited to low to
medium-price and medium quality segments.
The technological level of the country’s pump industry is not expected
to improve significantly, and foreign suppliers will continue to dominate the
medium to high end markets.
American-made industrial pumps are well represented in Indonesia and
enjoy an excellent reputation. U.S.
brands, known for their quality and durability, have progressively gained
market share, particularly in the petrochemical, oil and gas and energy
industries. In addition, the majority of
oil industry consultants are American. Promising
Subsectors: oil and gas (API standards) pumps and chemical pumps. USD
millions 1997 1998 1999 (Est) (Est) A.
Import Market 130.3 52.1 78.1 B.
Local Production 2.0 2.0 2.1 C.
Export Market 1.6 1.7 1.7 D.
Total Market Size 130.6 52.5 78.6 E.
Imports from the U.S. 36.5 18.2 21.9 Note: The above statistics are
unofficial estimates. 5 Food Processing & Packaging Equipment FPP Although Indonesia is currently
suffering from the economic crisis, Indonesia’s food processing sector is still
viable for U.S. exporters. The market
growth for food processing machinery and equipment in 1996 showed an increase
of around 33% from the previous year. The Government of Indonesia made
several reforms that positively effected the growth of the food processing
sector in 1998. These reforms include
the liberalization of foreign investment in plantation sectors, particularly in
the palm oil industry and the sugar industry.
The import figures in 1997 for sugar manufacturing machinery and
machinery used in the milling industry showed an increase of more than 70% from
the previous year. In 1997, imports of
palm oil equipment totaled $397 million: this represents a 36% increase over
1996 levels. Main competitors for U.S.
products come from Germany, Italy and Japan. USD millions 1997 1998 1999 (Est) (Est) A.
Total market size 418 393 393.5 B.
Total local production 38 42 46 C.
Total exports 13 14 15.5 D.
Total imports 393 365 363 E.
Imports from the U.S. 24 21 23 Note: The above statistics are
unofficial estimates. 6 Forestry and Woodworking Machinery FOR Currency turmoil has led to
increased activities in Indonesia’s timber and wood-processing industries, as
these industries are capable of providing additional sources of foreign
exchange and employment and are needed to clear land for plantation crops. Foreign exchange earnings from exports of
wood and other forest-related products are estimated to reach $8.25 billion in
1998. In addition, the opening of palm
oil plantations to foreign investment will result in more forest clearing in
Kalimantan and Sumatra islands, and potential business for U.S. suppliers of
forestry cutting equipment. The
government has converted 3.4 million hectares of forest into plantation areas,
2.4 million of which has been converted into oil palm estates. Promising Subsectors: wood-working
equipment. USD millions 1997 1998 1999 (Est) (Est) A.
Import Market 749.7 374.8 431.1 B.
Local Production -- -- -- C.
Export Market -- -- -- D.
Total Market Size 749.7 374.8 431.1 E.
Imports from the U.S. 8.1 4.0 4.5 Note: The above statistics are
unofficial estimates. 7 Medical Equipment MED Despite the economic crisis,
medical equipment and supplies will continue to be in demand due to Indonesia’s
population of 202 million people, an expanding hospital and health center
system, and the growing awareness of the dangers of communicable and infectious
diseases, particularly cholera, AIDS, malaria, hepatitis, and dengue
fever. Hospitals are expected to cut
back on purchases of capital medical equipment, but will concentrate on buying
basic supplies, particularly disposable medical equipment. The largest buyer of equipment and supplies,
representing about 60% of purchases is the Indonesian government. The government is heavily dependent on soft
loan financing for its capital purchases. The market consists of over
90% imports with very few locally sourced or manufactured items. As a result of high costs caused by the
rupiah’s devaluation, there has been a shortage of supplies for hemodialysis
equipment, i.e. dialysers, bloodlines, and AV fistulas. Other products that will continue to have
good market prospects are disposable medical equipment, catheters and
reagents. We estimate that the market
size for disposable will be at $19 million.
The market for disposable medical equipment is dominated by Japan,
followed by the United States. U.S.
products are considered to be of excellent quality and very reputable;
therefore we envision that the demand for U.S. disposable medical products will
continue. USD millions 1997 1998 1999 (Est) (Est) A. Total Market Size 75.2 31.3 32.9 B. Total Local Production 35.8 37.6 39.5 C. Total Exports 34.0 35.7 37.5
D. Total Imports 73.4 29.4 30.9 E. Imports from the U.S. 3.8 1.5 1.6 Note: The above statistics
are unofficial estimates. 8 Hand and Power Tools TLS Market activity for the supply of
hand and power tools has grown continuously during the last few years in
Indonesia. Demand for hand and power
tools has declined in several industries such as automotive and construction
because of the current currency turmoil, but other sectors, such as oil and
gas, mining, and wood working show stronger demand. Government plants, such as IPTN (aircraft
industry), PAL (shipyard building), and PINDAD (munitions industry),
maintenance and repair facilities purchase only the highest quality tools and
tools sets. In the absence of any
significant domestic production, the demand for all types of hand and power
tools is satisfied mainly by imports.
Until the overall economic condition of the country improves, the
outlook in this sector is relatively good. Promising Subsectors: oil and gas,
mining, and food industries and repair and maintenance tools. USD thousands 1997 1998 1999 (Est) (Est) A.
Import Market 76.6 38.3 42.1 B.
Local Production 2.0 2.0 2.1 C.
Export Market 12.4 7.4 8.2 D.
Total Market Size 66.1 33.0 36.3 E.
Imports from the U.S. 3.5 4.6 5.5 Note: The above statistics are
unofficial estimates. 9 Educational and Training Services EDS The Government of Indonesia (GOI)
is planning to release a set of new regulations which will allow foreign
educational institutions, at all levels of study, to operate in Indonesia. This
deregulation offers U.S. educational institutions tremendous opportunities in
Indonesia, since U.S. education is considered to be of very high quality to
Indonesians. As the worlds’s 4th largest
country, with a population of 202 million, Indonesia offers a huge potential
market. In 1997, there were 76 state‑run
and 1,228 private universities in Indonesia with approximately 1,500,000
students and 850,000 students respectively.
Places at state universities are highly sought after because of lower
tuition fees and relatively higher quality.
In addition to the number of students enrolled in universities across
Indonesia, the number of Indonesian students studying in the United States
increased to approximately 13,000 students in 1997, with 70% undergraduate and
25% postgraduate. Because of the on-going economic
crisis, studying abroad has become prohibitively expensive for many Indonesians
who seek a foreign education. Thus,
educational institutions that are able to provide the benefits of a foreign
education without the costs of traveling abroad are likely to be popular options. Recently, through cooperation with a local
Indonesian company, Australia’s Monash and New South Wales University announced
plans to open pre-university classes in Jakarta. Note: statistics for this sector
are not yet available. 10 Accounting and Financial Services ACT and FNS As a result of the monetary
crisis, many companies have started to streamline their operations and
restructure their organizations, while others have gone bankrupt. Mergers and acquisitions activities, involving both foreign and domestic companies
have also increased. In addition, as a
result of the agreement in between the Government of Indonesia (GOI) and the
International Monetary Fund (IMF), the GOI is initiating major reforms of the
country’s monetary sector. A number of
banks have been liquidated while others have been put under the GOI’s
supervision. Also, a large portion of
Indonesia’s insurance industry is technically bankrupt and it is likely that
many Indonesian insurers will merge with or be taken over by foreign investors
within the next two years. Given the
situation, the demand for the internationally-accredited accounting and
financial services is expected to increase, especially in assisting mergers and
acquisitions activities involving foreign companies. At the present time, U.S. companies dominate
this field, and competition among them has been tight. USD millions 1997 1998 1999 (Est) (Est) A.
Total market size 13,161 13,819 15,200 B.
Sales by local firms n/a n/a n/a C.
Foreign sales by local firms n/a n/a n/a D.
Sales by foreign-owned firms n/a n/a n/a E.
Sales by U.S.-owned firms n/a n/a n/a Note: The above statistics are unofficial
estimates. Exchange Rate 1995-1996 1 US$ = Rp
2,500 Exchange Rate 1997-1999 1 US$ = Rp
10,000 11 Pollution Control Systems and Equipment POL The two major markets for
environmental technology sales are Industrial and Municipal. Indonesia has fairly rigorous environmental
laws and regulations. However, pollution
is a major and growing social problem because there is little or no "Best
Available Technologies" (BAT) used on municipal infrastructure
projects. Enforcement of the laws and
regulations are lax because the cost of pollution or the value of the
environment is not factored into government or industrial policies’ cost‑benefit
analysis. Therefore, pollution reduction
or control is performed through manufacturing process upgrades during
"business‑cycle” linked expansion or reactive ad‑hoc
government intervention in the case of major spills or problems. However, there is a new government
program of rating manufacturers according to a color scheme (i.e., gold to
black). The government has and will
continue to publicize these ratings.
There has been limited success in encouraging manufacturers to at least
be aware of or to exercise some control over their emissions. The initial group of 300 companies has had
their plants audited by independent consultants. The government wants at least 750 firms in
this rating program by the year 2000.
The government figures that when 2,000 firms are in this program, the
program will be catalytic in driving the industries to quickly adopt greener
standards. As a result, opportunities exist
for U.S. environmental products and services.
The large multi‑national corporations operating in Indonesia
usually adhere to environmental standards and buy U.S. environmental services
and products. In addition, new power
plants are required to adhere to stricter environmental standards. Although local manufacturers are
less willing to spend money on pollution controls equipment, their spending
habits may change with the implementation of ISO 14000 in the coming
years. Although participation in ISO 14000
is voluntary, manufacturers will probably need to upgrade their environmental
compliance standards if they wish to continue to export to Europe. Although the industrial waste
treatment industry is still in its early stages of development, there are
indications that it will grow in the coming years. One such indication is the willingness of
large foreign waste management firms to invest in hazardous waste treatment
facilities in Indonesia in the past few years. The best prospects for U.S.
environmental technologies are in the following industries: Textile Industry,
Pulp and Paper Industry, Mining Industry, Chemical and Petrochemical Industry,
Food Processing Industry, Electronics Industry (including electroplating),
Leather Tanning/Leather Products Industry. The environmental market on the
municipal side includes the construction and management of wastewater
treatment, water supply, and solid waste facilities. The Indonesian government is taking a hands‑off
approach, assigning the private sector a greater role in building up the
country's much needed urban environmental infrastructure. This approach gives American C&M firms
the opportunity to not only bid on large environmental infrastructure projects,
but also provide financing and manage revenue collection. U.S. firms interested in the
sector can take advantage of programs offered by the U.S. ‑ Asian
Environmental Partnership located in the U.S. Commercial Center in Jakarta (See
Chapter XI for more contact information). USD Millions 1996 1997 1998 (Est) (Est) A. Total Market Size 900 1,100 180 B. Total Local Production 0* 0* 0* C. Total Exports 0* 0* 0* D. Total Imports 900 1,000 180 E. Imports from the U.S. 175 280 40 Note: the above statistics are
unofficial estimates, pending donor loans. * Negligible amounts, if any. BEST PROSPECTS FOR AGRICULTURAL PRODUCTS COTTON With a large textile industry and
insignificant domestic cotton production, Indonesia remains a major cotton
importer. Imports approached 470,000 mt
in cotton marketing year 1997, with the United States capturing a market share
of 24 percent. The textile industry has
been seriously affected by the economic crisis that began during the latter
half of 1997, leading to a restructuring of the industry. However, the export-oriented mills are
expected to lead the recovery, with Indonesia remaining a major importer of
U.S. cotton. 1,000 Metric Tons 1996/97 1997/98 1998/99 Aug/Jul
Marketing Year (Est) A.
Total Market Size 475 390 360 B.
Total Local Production 3.8 3.8 3.8 C.
Total Exports 0 0 0 D.
Total Imports 467 375 360 E.
Total Imports from U.S. 114 83 79
SOYBEANS Indonesia is a major consumer of
soybeans for food use. Per capita
consumption of soybeans, primarily in the form of tofu and tempe, is over six
kilograms annually. The United States is
the dominant suppier of the large and growing import market for soybeans. Increased emphasis on corn produciton
suggests that domestic soybean production will remain flat while demand and
imports continue to rise. Domestic
consumption has not been affected by increased prices, as soybean products remains the most
inexpensive protein source for the Indonesian consumer. 1,000 Metric Tons 1996/97 1997/98 1998/99 Oct/Sept Marketing Year (Est) A.
Total Market Size 2,130 2,080 2,200 B.
Total Local Production 1,460 1,360 1,500 C.
Total Exports 0 0 0 D.
Total Imports 672 700 700 E.
Total Imports from U.S. 672 650 500 SOYBEAN MEAL
During this decade, demand for
poultry and other meats showed impressive growth due to the rapid economic
expansion and concomitant rise in incomes.
Though this sector has been particularly affected by the economic situation,
medium to long-term prospects remain bright.
Consolidation of the poultry industry and some initial plans to enter
the export market for processed poultry products may lead to increased
opportunities for higher quality soybean meal from the United States. 1,000 Metric Tons 1996/97 1997/98 1998/99 Oct/Sep
Marketing Year (Est) A.
Total Market Size 1,065 470 380 B.
Total Local Production 0 0 0 C.
Total Exports 0 30 0 D.
Total Imports 1,104 430 350 E.
Total Imports from U.S. 56 60 60 WHEAT As home to the largest flour mill
in the world and the world’s largest producer of instant noodles, Indonesia
consumer up to four million tons of wheat annually. No wheat is grown in Indonesia, making it
totally dependent on imports. Australia
remains the major supplier, but de-monopolization of the state trading firm
known by its Indonesian acronym of Bulog is expected to lead to expanded
opportunities for U.S. wheat. 1,000 Metric Tons 1997 1998 1999 (Est) (Est) A.
Total Market Size 3,800 3,500 3,600 B.
Total Local Production 0 0 0 C.
Total Exports 0 0 0 D.
Total Imports 3,742 3,500 3,600 E.
Total Imports from U.S. 65 100 100
Consumer Ready Food Products Most consumer ready food product
imports are consumed by Indonesia’s upper and middle class, business travelers
and tourists. U.S. imports have dropped
by about 50 percent since the crisis hit in July, 1997. Before the crisis, Indonesia was one of the
fastest growing markets for U.S. suppliers and the market should pick back up
quickly when the economic situation begins to improve. Imports of U.S. Consumer Ready
Food USD 1,000,000 1997 1998 1999 (Est) (Est) Fresh Fruit 50 25 50 French Fries 16 8 16 Dairy 16 8 16 Meat 13 6 13 Snack Foods 2 1 2 Total Consumer Ready Food 116 58 116 INTERNATIONAL COPYRIGHT, U.S.
& FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE,
1998. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES <NREC>Indonesia06 Indonesia:
Trade Regulations & Standards <A>=Indonesia Chapter VI Trade Regulations
and Standards In recent years, Indonesia has
liberalized its trade regime and taken a number of important steps to reduce
protection. Since 1996, the Indonesian
Government has issued deregulation packages that have reduced overall tariff
levels, simplified the tariff structure, removed restrictions, replaced
non-tariff barriers with more transparent tariffs, and encouraged foreign and
domestic private investment. The GOI
issued a deregulation package in July 1997, which introduced additional tariff
reductions. In conjunction with its
stabilization program agreement with the International Monetary Fund, the
government has issued a steady stream of reform measures which reduced taxes,
tariffs, and quantitative restrictions on exports and imports. Trade barriers Indonesia's tariff regime is in
rapid flux, with accelerated tariff reductions included in many of the reform
measures put into place since last November.
Indonesia's applied tariff rates range from 5 to 30 percent. Major exceptions to this range are the 170
percent duty applied to all imported distilled spirits and the 125 percent duty
assessed built up passenger vehicles (subject also to a 75 percent import
surcharge.) In May 1995, the Indonesian
Government unveiled a comprehensive tariff reduction package covering roughly
two thirds of all traded goods, designed to reduce most tariffs to under 5
percent by 2003. All tariff items with a
rate of 20 percent or less are to be reduced to no greater than 5 percent by
2000 while items with rates of more than 20 percent are to be brought to no
more than 10 percent by 2003. Tariffs on
all food items were cut to a maximum of 5 percent in February 1998. Services trade barriers to entry
continue to exist in many sectors, although the GOI has loosened restrictions
significantly in the financial sector.
Foreign law firms, accounting firms, and consulting engineers must
operate through technical assistance or joint venture arrangements with local
firms. Indonesia is liberalizing its
distribution system, a trend which is likely to accelerate as it implements the
IMF package which includes an end to restrictions on trace in the domestic
market. For example, restrictive
marketing arrangements for cement, paper, cloves, other spices, and plywood
were eliminated in February 1998.
Indonesia opened wholesale and retail trade to foreign investment,
lifting most restrictions in March 1998. Customs valuation Since April 1997, the Customs
Directorate of the Ministry of Finance has operated a post-entry audit system,
which relies primarily on verification and auditing rather than inspection to
monitor compliance. A paper less
electronic data interchange system that links importers, banks, and customs was
also introduced and is slowly being adopted. Import licenses The GOI continues to reduce the
number of items subject to import restrictions and special licensing
requirements. Goods such as alcoholic
beverages, motor vehicles, hand tools, artificial sweeteners, engines and
pumps, tractors, rice, lube oil, and explosives continue to regulated. Export controls Like Indonesia's import tariff
regime, export controls are in a state of rapid change as the government works
to implement reforms associated with the IMF program. Many of the restrictions and taxes placed on
exports affect agricultural products, including major cash crops like rubber,
palm oil, coffee, and copra. Export
restrictions and controls are applied by the government to a number of food
commodities in an effort to ensure adequate domestic availability and stable
prices of such products, particularly with the economy in such poor shape. Import documentation requirements The government requires the
following for most imports: pro-forma invoice commercial invoice certificate of origin bill of lading insurance certificate special certificates According to the Indonesian
Customs Law that came into effect in April 1997, importers are now required to
notify the Customs Office in the first stage by submitting the import documents
on a standard form computer diskette.
Customs Inspections of imported goods may be made after they are
imported in the importer’s warehouse.
Typically, the Indonesian importer takes care of this process. Free trade zones & warehouses/Special import provisions/Temporary
entry The government encourages foreign
investors who export to locate in bonded or export processing zones (EPZ). There are a number of EPZs in Indonesia, the
most well known being Batam Island, located 20 km. south of Singapore. Indonesia also has several bonded zones or
areas that are designated as entre ports for export destined production (EPTE). Companies are encouraged to locate in bonded
zones or industrial estates whenever possible.
Other free trade zones include a facility near Tanjung Priok, Jakarta's
main port, and a bonded warehouse in Cakung, also near Jakarta. There is a duty drawback facility
(BAPEKSTA) for exports located outside the zones. Producers located within the bonded areas are
allowed to sell up to 15% of their product into the local market. Foreign and domestic investors
wishing to establish projects in a bonded area must apply to the National
Investment Coordinating Board (see Chapter VII, Investment Climate). Labeling and marking requirements Regulations of food labeling are
currently in place and the government is currently in the process of approving
new food labeling guidelines. The market for foreign
pharmaceuticals has been open since the October 1993 Deregulation Package,
which previously limited pharmaceutical imports to those that incorporated high
technology and were the product of their own company’s research. The Deregulation package is also responsible
for relaxing the registration requirements for pharmaceuticals approved in
other countries. Prohibited imports The government bans the import of
printed material in Chinese languages, Bahasa Indonesia, and other Indonesian
dialects. Video tapes and laser discs
are subject to review by the censor board. Membership in free trade agreements As a member of the Association of
Southeast Asian Nations (ASEAN), Indonesia is party to the ASEAN Free Trade
Agreement (AFTA). Through AFTA, ASEAN
members are phasing in a Common Effective Preferential Tariff (CEPT) scheme,
which will be completed for most traded goods in 2003. INTERNATIONAL COPYRIGHT, U.S.
& FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE,
1998. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES <NREC>Indonesia07 Indonesia:
Investment Climate <A>=Indonesia Chapter VII-Investment Climate Openness to Foreign Investment Since the middle of 1997,
Indonesia has faced its most severe economic crisis in three decades. The economic downturn has coincided with a
prolonged political crisis, which culminated in severe rioting in the capital
and other cities, and the resignation of President Soeharto, Indonesia's leader
for more than 30 years. The Indonesian government turned
to the International Monetary fund in October 1997 for assistance in
surmounting its economic difficulties which included a substantial depreciation
of the Indonesian Rupiah, rising inflation, and a collapsing banking system. The program has had several major revisions
and includes major structural reforms, which should ultimately result in an
improved investment climate. The Indonesian government
continues its policy of actively encouraging foreign investment and issued
several new regulations in 1998 to ease the entry of foreign firms and capital
into Indonesia. The Foreign Capital
Investment Law of 1967, however, continues to provide the basic framework for
foreign investment. The Capital Investment
Coordinating Board (BKPM) plays a key role in promoting foreign investment and
approving project applications. The
relevant technical government departments handle investments in the oil and gas,
mining, banking and insurance industries. All other foreign investment must be
approved by BKPM, which also approves domestic investments when the owners seek
investment incentives. BKPM aims to
function as a one‑stop investor service; however, investors are routinely
required to work closely with relevant technical government departments and
regional and local authorities. A recent
package of reforms unveiled in June 1998 freed investors from some of the
cumbersome documentary requirements resulting from the need to work with local
governments. Other reforms have been
announced but not finalized which would free small investments from the Jakarta‑based
approval process by granting greater autonomy to the regional foreign
investment boards. Private entities may establish,
acquire, and dispose of interests in business enterprises. Current regulations permit foreign firms to
acquire domestic firms in sectors open for foreign investment without referring
the purchase to BKPM. In practice,
however, foreign firms are required to petition BKPM for approval. When reviewing applications from foreign
firms seeking to acquire locally established firms, BKPM frequently requires
the buyer to reserve a small stake for a local buyer or the original owner and,
in cases where the local firm is being "rescued" by a foreign buyer,
to inject capital, not just provide management expertise, technology or assume
outstanding loans. The approval process
to take over a "sick" firm may take as long as two months. In all cases, the purchase of domestic firms
is limited to sectors open to foreign investment. Indonesia encourages the
participation of small and medium sized indigenous firms in certain sectors of
the economy. Foreign investors in these
sectors are required to partner with small businesses or cooperatives before
investment applications are approved. A
"negative" list published by the Ministry of Investment outlines
sectors closed to foreign investment as well as those which require the
participation of small and medium sized partners. The most recent revision of
the negative list for investment was released in July 1998. Copies of the negative list are available
from U.S. Commercial Center, Jakarta (See Chapter XI for Contact Information). In June 1998, the government of
Indonesia eliminated many restrictions on foreign investment retail
operations. Foreign firms are now
allowed to operate retail outlets in most major urban areas although
restrictions remain in the provinces. In
addition, many foreign firms use franchising, licensing, and technical service
agreements to distribute their goods. In June 1998, Indonesia also
lifted many restrictions on foreign participation in domestic distribution
services. Under the present regulations,
foreign companies manufacturing in Indonesia may distribute their locally
produced goods at the wholesale level and may apply for permits to import and
distribute other products as well.
Companies engaging in wholesale distribution may not conduct retail
operations directly, but must form a separate retail company. The number of expatriate employees, which may
be granted visas to work in any single wholesale and retail business, is
limited. In June 1994 and May 1995 several
previously restricted sectors were opened, some conditionally, to foreign
investment, including harbors, electricity generation, telecommunications,
shipping airlines, railways, and water supply.
Foreign investment opportunities in many services remain restricted,
however. The government is continuing to
develop policies on the private provision of infrastructure through build‑own‑operate
and build operate‑transfer schemes, particularly for electric power,
telecommunications, and roads. Oil and gas:
The state owns all oil and mineral rights; foreign firms participate in their
extraction through exploration and production sharing contracts. The Department of Mines and Energy has the
primary responsibility for oil and energy; it oversees the state oil company,
Pertamina, and its production‑sharing contractors. Contractors are required to finance all
exploration, production, and development costs in their contract areas; they
are entitled to recover operating, exploration, and development costs out of
the oil and gas produced. The government
is considering changes to the basic petroleum law to allow private sector
participation in downstream marketing of petroleum products. Mining: Foreign investors operate under contracts of
work for general mining and production sharing contracts for coal. The
contractor conducts all stages of the operation and assumes all financial and
operational risks. Changes in mining law
now under consideration may allow coal producers to operate under contracts of
work. After the Busang affair, touted in
1996 as the world's richest gold strike but determined to contain no
significant gold in May 1997, some anticipated that the government may tighten
regulations regarding foreign prospecting and mining operations. This has not occurred. Banking, Securities and Insurance: A 1988
deregulation package opened the banking, securities and insurance industries to
foreign investment; all entrants had to be in the form of joint ventures, and
foreign insurance and securities firms were subject to discriminatory capital
requirements. In 1997, the government
lifted restrictions on foreign ownership of non‑bank firms listed on
Indonesian stock exchanges. It intends
to submit amendments to the banking law to Parliament in 1998 to ease
restrictions on foreign investment in the banking sector. The Department of Finance licenses new
securities and insurance ventures; Bank Indonesia, the central bank, licenses
banks and regulates banking activity. New programs to enhance the
efficiency of state‑owned enterprise and to expose them to greater
competition have been announced as part of the Indonesia's ongoing IMF
program. Specifically, the government
has committed to divest majority ownership in at least 7 major parastatals,
including parts of the state‑owned steel, telecommunications, mining,
plantation, and cement firms.
International investment houses have been appointed to assist the
government in evaluating and packaging these firms and foreign investors are
actively being sought. Conversion and Transfer Policies The Indonesian rupiah has
depreciated in excess of 70 percent since July 1997 and remains volatile. The Indonesian rupiah is freely convertible
and is traded on in an interbank market in Jakarta. Indonesia maintains no capital controls and
foreign exchange may flow freely in and out of the country. No prior permits are necessary to transfer foreign
exchange. Foreign investors have the
right to repatriate capital and profits at the prevailing rate of
exchange. The government does not place
restrictions on outward direct investment.
In comparison with recent years, however, the foreign exchange market is
extremely thin. Prior to the onset of
the economic crisis, more than USD 5 billion of rupiah routinely changed hands
each day. At the present time, exchange
flows rarely amount to more than a few hundred million per day. In July 1997, the Indonesian
rupiah began to weaken and Indonesia was forced to widen its trading band to 12
from 8 percent. As other regional
currencies slumped and the rupiah faced even greater depreciation pressures,
the government chose in August 1997 to abandon its managed float entirely to
allow the rupiah to float freely. Since
the last quarter of 1997, the rupiah has been extremely volatile and
depreciated very sharply against the dollar. The rapid depreciation comes
against a backdrop of exchange rate predictability against the dollar. Since 1986, the rupiah's depreciation against
the dollar had ranged between 2.3 percent and 5.9 percent. Depreciation against currencies of other trading
partners has been larger, reflecting the changing value of the dollar. In 1991, the government instituted a system
of ceilings for foreign commercial borrowing by public sector entities,
commercial banks and private sector projects that have a connection with the
government. Expropriation and Compensation Article 21 of the 1967 Foreign
Capital Investment Law stipulates that the government shall not initiate
nationalization of foreign investments except by law and when such action is
necessary in the interest of the state.
According to BKPM, no foreign investment has been expropriated since the
passage of the 1967 law. There is
concern at the present time that the government may nationalize projects or
abrogate contracts awarded to firms connected to the family of former President
Soeharto. Government officials have stated
that foreign firms will not be expropriated as it dismantles the business
empires of former first family members. Dispute Settlement The Indonesian government has
agreed to submit any investment disputes to the International Center for the
Settlement of Investment Disputes (ICSID) in Washington, D.C. An investment arbitration board, BANI, is
available when both parties to a dispute agree to submit to its
arbitration. A long‑pending
investment dispute involving a U.S. investor was resolved through the ICSID in
1993. Indonesia is also party to the
1958 New York Convention on Recognition and Enforcement of Foreign Arbitral
Awards. The record of enforcement of
foreign arbitral awards is, however, negative.
In one recent case, Indonesian courts refused to recognize the
applicability of third country negotiation clauses in a joint venture
contract. Although the suit continues,
the Indonesian court's refusal to recognize international arbitration resulted
in the foreign investor's abandoning its assets in Indonesia. The court system has not provided
effective recourse for solving commercial disputes. The judiciary has not been independent and
there is no law requiring Indonesian courts to enforce money judgements of non‑Indonesian
courts. The GOI has recognized that the
legal system must be modernized. The tax code was reformed in 1983 and amended
in 1991 and 1995. New laws on banking,
insurance, and pensions were passed in 1992, which codify deregulation measures
previously contained in ministerial decrees.
Comprehensive company and capital markets laws were enacted in
1996. Work has begun on a new commercial
code. One of the government's priorities
is the continuing rationalization and modernization of laws and regulations. As part of Indonesia's program
with the IMF, a new bankruptcy law has been promulgated to assist foreign
creditors in collecting outstanding obligations. This law is scheduled to come into effect
August 20, 1998. Performance Requirements and Incentives Various fiscal incentives are
available to both foreign and domestic investors. A company producing for the domestic market
may apply for import duty exemptions on all required machinery and equipment as
well as on raw and supporting materials needed during the first two years of
commercial production. A company producing 65 percent for
export has additional incentives. It may
apply for restitution of import duties paid on inputs, which are subsequently
re‑exported in finished form. In
June 1998, the Ministry of Investments announced that it was revising the
criteria for the provision of tax holidays to make them transparent and more
easily applied. Several drafts have been
proposed but no official version has been issued. Various criteria include investments in the
less‑developed eastern provinces, employment‑generating industries,
export‑oriented industries, and risky high‑tech investments. Special investment incentives in
the form of income tax, value‑added tax, and luxury tax facilities are made
available on a case‑by‑case basis by BKPM. Indonesia has a relatively open
foreign investment regime and looks to foreign investment to help the country
out of the current economic crisis. The
government 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, which the government has deemed
open to non‑Indonesians. Employers
must have manpower training programs aimed at replacing foreign workers with
Indonesians. Indonesia does not have rules
requiring that investors purchase from local sources or export a certain
percentage of output. Rules that
encouraged investors to locate in industrial estates were diluted in June 1998. Foreign firms are not required to disclose
proprietary information to the government as a requirement to invest. Right to Private Ownership and Establishment Indonesia recognizes the right to
private ownership and establishment and has relied heavily on the private
sector as the principal engine of its economic growth. Parastatals have traditionally played an
important role as well. Their role
shrunk in recent years as private sector activity grew and privileges awarded
to state‑owned enterprises decreased. Protection of Property Rights Indonesia has suspended many
private infrastructure projects, especially in the field of private power
generation, for economic and political reasons.
The Embassy has vigorously emphasized to the Indonesian government the
importance of honoring internationally binding contracts and that all project
reviews should be conducted in a rule‑based, consistent, objective, and
transparent manner. Many government
officials recognize the importance of honoring contracts, but a risk remains
that the Indonesian government may unilaterally abrogate projects and
contracts. Mortgages and secured interests in
chattels and real property are recognized but a recording system is not in
place. Enforcement of secured interests
is problematic. The court system does
not provide effective recourse for settling property disputes. Although it remains on the Special
301 priority watch list, Indonesia has made considerable progress in improving
regulatory protection for intellectual property rights. Enforcement is an ongoing problem. Indonesia is a member of the World
Intellectual Property Organization and a party to the Paris Convention for the
Protection of Intellectual Property. In
March 1997, the Parliament passed amendments to Indonesia's patent, copyright
and trademark laws designed to bring them into compliance with the TRIPS
agreement of the Uruguay Round. In 1997,
Indonesia also reacceded to the Berne Convention and signed the Trademark Law
Treaty. Other international agreements
to which Indonesia is party include the Nice Agreement for the International
Classification of Unclassified Goods and Services, the Strasbourg Agreement
Concerning the International Patent Classification, and the Budapest Treaty on
the International Recognition of the Deposit of Microorganisms. Patents: Indonesia's first patent law entered into
effect on August 1, 1991. The law and
its implementing regulations outline patent application procedures, application
fees, registration of patent consultants, and patent announcements. Products and production processes are in
principle patentable subject to certain requirements for a period of 14 years
commencing from filing of the patent application. The duration of a patent may be
extended for another two years. In
addition to this relatively short term of patent protection, other drawbacks in
the law include compulsory licensing provisions, and a provision allowing
importation of 50 specific pharmaceutical products by non‑patent holders. Trademarks: The current trademark law took effect on
April 1, 1993. This act states that
trademark rights are determined on a first‑to‑file basis rather
than on a first use basis. After
registration, the mark must actually be used in commerce. The law offers protection for service marks
and collective marks and sets forth a procedure for opposition prior to
examination by the trademark office. It
also provides well‑known mark protection, although, to the detriment of
several foreign marks, procedures for registering trademarks as well known have
not been fully developed. Cancellation
actions must be lodged within five years of the trademark registration date. Copyright: Parliament passed amendments to the 1982
copyright law in 1987 and March 1997.
The amended law affords protection to foreign works, expands the scope
of coverage and raises the terms of protection to international standards. The United States and Indonesia concluded a
bilateral copyright agreement extending reciprocal protection in 1989. In May 1997, Indonesia reacceded to the Berne
Convention on copyright protection. New technologies: Indonesian law does not include specific protection for
biotechnology. Legislation covering
integrated circuits is being drafted for presentation to Parliament. The U.S.‑ Indonesia Science and
Technology Agreement ensures protection for intellectual property derived from
cooperative activities under the agreement's umbrella. Transparency of the Regulatory System Indonesia has a tangled regulatory
and legal environment where most firms, both foreign and domestic, attempt to
avoid the justice system. Laws and
regulations are often vague and require substantial interpretation by
implementing offices, leading to business uncertainty. Deregulation has been somewhat successful in
removing barriers, creating more transparent trade and investment regimes, and
has alleviated, but not eliminated, red tape.
Transparency problems and red tape are routinely cited by U.S.
businesses as factors hindering their operations in Indonesia. Efficient Capital Markets and Portfolio Investment Indonesia's banking sector was in
dire condition as of June 1998, when a major effort to restructure the sector
was taking shape. The economic crisis
that swept Southeast Asia starting in July 1997 had nearly paralyzed
Indonesia's financial sector. Most bank
loans were not being serviced; banks were in turn unable to service their
debts; and the collapse in bank credibility had all but shut off the flow of
interbank credit. After a decade of banking sector
liberalization, the Government of Indonesia found itself forced to play an
increasing role in banking as the economic crisis deepened. Bank Indonesia first provided a substantial
amount of liquidity credits to banks ‑‑ in effect becoming the part
owner of many troubled banks ‑‑ after several potentially
disastrous runs on banks. As the extent
of banking sector weakness became clear, the Government established the
Indonesian Bank Restructuring Agency, charged with supervising and eventually
recapitalizing ailing banks. The
Government also issued a sweeping guarantee on bank deposits and other liabilities. Because of the overall weakness of
the commercial and banking sector, very little credit is available on the local
market. BKPM has also announced that it
is contemplating rules barring foreign investors from borrowing locally. Individual banks determine deposit and
lending rates. Accounting standards and
practices are not consistent with international norms. All the major international accounting firms
operate in Indonesia under arrangements with domestic accounting firms. Indonesia's capital market
expanded rapidly over the last decade, led by growth of the equity market. Trading on the Jakarta Stock Exchange ‑
the dominant securities market in the country ‑ increased from only
27,000 shares per day in 1988 to 254 million shares per day in mid‑1998. Like the banking sector, however, the stock
market was hard hit by the economic crisis that struck Indonesia beginning in
mid‑1997. Market capitalization
declined by 30 percent in Rupiah terms from May 1997 to May 1998, and by an
even more dramatic 83 percent in U.S. dollar terms (see table 2). Indonesians described this collapse with the
proverb, "already brought down, then hit by the falling ladder." The lack of a well‑developed
bond market remained a limiting factor for Indonesia's financial sector, and
arguably contributed to the financial and economic crisis. Lacking a deep domestic market for bond
financing, and facing relatively high domestic interest rates for bank loans,
many rapidly expanding Indonesian companies borrowed abroad during the early
1990s, running up private offshore debts of about US$ 80 billion by 1997. These loans were largely unhedged, because
companies counted on the Rupiah's continuing depreciation at a slow and predictable
rate against the U.S. dollar. The loans
were also largely short‑term, but it was common practice for lenders to
roll over the principal on a yearly basis. When the exchange rate crisis hit
in mid‑1997, companies suddenly faced loan payments that were very large
in Rupiah terms. In addition, lenders
balked at providing new loans and became increasingly reluctant to roll over
short‑term loans. The supply of
foreign capital that Indonesia had come to rely on abruptly dried up. The flow of capital reversed course as
foreigners and Indonesians alike began taking their wealth out of the
country. As of mid‑1998, a
priority issue for the Indonesian Government and business sector was to restore
confidence so that capital inflow would resume.
A longer‑term issue was development of a more vibrant and self‑reliant
domestic capital market. Foreign firms generally enjoy good
access to the Indonesian securities market.
Financial reforms introduced in 1987 allowed foreign firms to form joint
ventures with Indonesian partners in the securities market as underwriters,
broker‑dealers, and investment managers. The 49‑percent restriction
on foreign purchases of all listed firms, with the exception of banks, was
lifted in 1997. Discriminatory capital
requirements on foreign securities firms are expected to be removed in
1998. Portfolio investment is regulated
by BAPEPAM, the Indonesian equivalent of the Securities and Exchange
Commission. There are no formal restrictions
regarding mergers and acquisitions.
However, Indonesian companies are closely held and, prior to the
economic crisis, their owners rarely put up more than 20 percent of their stock
for public offering. The Indonesian
Parliament has enacted a comprehensive capital markets law with the aim of
increasing transparency, certainty, and accountability. Powerful business conglomerates
own Indonesia's largest private companies.
The companies within each conglomerate share directors and major
shareholders. Articles of association
and incorporation do not limit or prohibit foreign investment or participation. Political Violence In May 1998, major rioting in
Jakarta and other cities and towns led the U.S. Department of State to
recommend that all American citizens depart Indonesia and, with the exception
of essential staff, all U.S. government employees and their dependents were
ordered to leave. Many other countries,
including Canada, Australia, Singapore, and Japan, issued similar
warnings. By mid‑June the
Department of State authorized the return of all U.S. government employees and
dependents, but continued to warn American citizens to exercise caution. Because of the continuing
potential for civil unrest, Indonesia has recently been added to the War Risk
Rating List for insurance underwriters.
Nascent insurrections exist in several parts of the country including
East Timor, Irian Jaya and Aceh. Corruption In recent years, considerable
attention has focused on the costs of corruption and influence peddling to
local and foreign businesses, and the economy as a whole. Local and foreign companies have long
reported that corruption is commonplace, and surveys of business executives
working in Asia have ranked Indonesia among countries where corrupt practices
are most pervasive and act as a disincentive to direct foreign investment. Demands for "facilitation fees" to
obtain required permits or licenses, government award of contracts and
concessions based on personal relations, and a legal system that is often
perceived as arbitrary are frequently cited problems. Foreign companies have had little success in
filing formal complaints, either through legal or administrative channels that
lead to corrective action. Foreign
companies frequently report difficulties in obtaining and renewing necessary
immigration permits for expatriate staff based in Indonesia. Efforts to combat corruption have
not been effective although a 1996 report from the National Planning and
Development Board recognized the judicial system's shortcomings. Since the resignation of President Soeharto
in May 1998, however, the identification and elimination of corruption,
collusion and nepotism has become a national obsession. Untangling the webs the former first‑family
and crony‑controlled businesses and contracts has been problematic for
the Indonesian authorities and there is considerable maneuvering on this front.
Bilateral Investment Agreements Indonesia has signed investment
protection agreements with many countries, including the United States,
Belgium, Denmark, France, Germany, the Republic of Korea, the Netherlands,
Norway, Switzerland, and the United Kingdom.
It has also signed treaties for the avoidance of double taxation with
several countries, including the United States.
On February 1, 1997, a new U. S. ‑ Indonesia tax treaty went into
effect that reduced withholding rates to 10 percent, on par with rates accorded
by Indonesia to Japan and major European countries. OPIC and Other Investment Insurance Programs Since 1967, all three types of
Overseas Private Investment Corporation (OPIC) insurance ‑‑
inconvertibility, expropriation, and war, revolution and insurrection ‑‑
have been available to U.S. investors in Indonesia. OPIC coverage was extended to bid bonds on
service contracts in 1987. OPIC also
offers project financing to U.S. firms.
At this time, OPIC is not processing any applications for insurance in
Indonesia, but this policy may change because of improved labor rights since
June 1998. Labor The labor force is estimated at
about 90 million, of which about 75 percent are between the ages of 15 and
34. The labor force has grown by an
average of 2.5 percent over the past 30 years, though this rate is decreasing
with the drop in fertility rates, increasing urbanization and lengthening
school attendance. Women make up
approximately 40 percent of the work force.
Before the economic crisis began in 1997, the Indonesian government
estimated "open" unemployment (defined as a person who is working
less than one hour a week) to be roughly 5 percent. Now the government estimates that 15 million
persons, 17 percent of the labor force and 50 percent of the industrial work
force, is unemployed. Unions and non‑governmental
observers estimate that more than half of the population is under‑employed. Before the economic crisis, the
education level of Indonesia's labor force had risen to the point that some 26
percent of non‑agricultural workers have graduated from high school, and
about five percent had educational achievement at a university level. Only 25 percent of the non‑agricultural
workers had not completed primary school, although this figure reached almost
50 percent within the agricultural work force.
However, high price inflation and large‑scale layoffs have
squeezed family incomes and caused at least 20 percent of all students to drop
out of school during the last year, according to Indonesian government
estimates. The United States has
traditionally been a top choice for Indonesians who wish to study abroad. In 1996, there were an estimated 12,000
Indonesians studying in the United States, most in the fields of business and engineering. The sharp drop in the rupiah's value in
relation to the dollar, however, has significantly reduced the number of
Indonesians who can afford foreign study. Job creation and the alleviation
of underemployment are targets of economic policy making, especially in light
of the massive layoffs caused by the economic crisis. The unemployment rate for higher education
graduates was much higher than the overall unemployment rate even before the
crisis. At the same time, Indonesia is
experiencing shortages of managerial and professional personnel. Education and human resource development
remain high priorities for the government. The government sets minimum wages
by region. The minimum wage in Jakarta
and West Java was set at Rp. 198,500 (approx. $17.00 at Rp. 14,100 per dollar)
per month as of August 1, 1998.
Regulatory requirements, such as that for 30 days full pay per month,
increase the take home amount. Labor
strikes have been common in recent years.
Strikes usually relate to failure of employers to pay the minimum wage,
denial of benefits, lack of an effective union, and termination of
employees. The Indonesian government
promulgated a new regulation in May 1998 which make it easier for labor
organizations to register as trade unions, and several new unions have formed
to join the Federation of All‑Indonesian Trade Unions (FSPSI), which was
the sole government‑recognized union prior to 1998. Indonesia's industrial relations
system is based on the national ideology of Pancasila. In its industrial relations application,
Pancasila emphasizes the traditional Indonesian values of harmony and
consultation leading to consensus. In
reality, such consensus is hard to reach and enforcement of labor regulations
is a major problem. However, a foreign
joint venture can expect more rigorous enforcement of labor regulations as well
as other laws than a local firm. Foreign Trade Zones/Free Ports Investments in the manufacturing
sector which are located in designated bonded zones pay no duty on imported
inputs until the portion of production destined for the domestic market is
"exported" to Indonesia, in which case duty is owed on that portion. This benefit is available to domestic and
foreign firms alike. Foreign Direct Investment Statistics Foreign investment interest in
Indonesia has fallen substantially since the onset of the economic crisis in
mid‑1997. From 1967 through 1996,
BKPM approved foreign investment applications worth more than $173 billion;
over half were approved after 1993.
Foreign investment approvals reached almost $24 billion in 1994, $40
billion in 1995, and $30 billion in 1996.
In 1996, foreign investors were most attracted to the chemical industry,
including two oil refineries that accounted for 25 percent of approved
investment. BKPM also approved
significant foreign investment for infrastructure (electric/gas/water) and
housing projects, with 13 and 9 percent respectively. Metal goods and the pulp/paper industry each
attracted some 10 percent of approved foreign projects in 1996. Foreign investment in oil, gas, mining, banking
and insurance all fall outside BKPM's purview;there are several billion dollars
more annual foreign investment in these sectors. Japan is the biggest cumulative
foreign investor in Indonesia, excluding the oil/gas sector. Between 1967 and 1996, BKPM‑ approved
Japanese investment applications reached some $35 billion, 20 percent of the
total. Indonesia's second largest
company, Indonesia Petroleum, is a Japanese joint venture, as is the largest
automobile manufacturer, P.T. Astra.
Japanese partners also figure heavily in the pulp, paper and
petrochemicals industries. Japan was
Indonesia's largest foreign investor in 1996, with approvals worth some $7.7
billion. The United States ranks fifth in
cumulative BKPM‑approved investment from 1967‑1996, with a total of
$12.5 billion. However, the BKPM
statistics do not include investment in the oil and gas sector, where the
United States is by far the largest player. U.S. companies, including Caltex,
Maxus, Arco, Mobil, Union Texas, and Unocal pump the lion's share of
Indonesia's crude petroleum and natural gas.
U.S. oil services companies have significant investments in Indonesia to
serve the oil fields, including fabrication yards for offshore oil platform
development. P.T. Freeport Indonesia, an
affiliate of the U.S. mining firm Freeport McMoRan, is the largest direct U.S.
investment. Freeport Indonesia is
implementing a $500 million mine and mill expansion and recently signed a new
30‑year contract of work for its copper and gold concession in Irian
Jaya. Major U.S. companies produce
consumer and other products and provide services for the domestic market. General Motors is building a $110 million
vehicle assembly plant and the General Electric Capital Corporation has
established a multi‑million dollar automobile financing joint
venture. In 1996, General Electric
opened the first locomotive factory in Southeast Asia and created the second
largest lighting company in Indonesia. Mission Energy has taken the lead
in a consortium to build a multi‑billion dollar coal‑fired power
plant in East Java. Investors have been
increasingly interested in producing in Indonesia for export, with Batam Island
a newly favored investment site. Four
U.S. banks have branches in Indonesia and there are nine U.S. bank
representative offices. Indonesia's other major foreign
investors include the United Kingdom, Hong Kong, Singapore, the Netherlands,
Taiwan, and South Korea. INTERNATIONAL COPYRIGHT, U.S.
& FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE,
1998. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES <NREC>Indonesia08 Indonesia:
Trade and Project Financing <A>=Indonesia CHAPTER VIII - TRADE AND PROJECT FINANCING The economic crisis that began in
mid-1997 completely changed the trade and project financing landscape in
Indonesia. After nearly ten years of
rapid expansion, Indonesia’s banking system is crippled, with the vast majority
of local banks now technically bankrupt.
Moreover, most local businesses are currently insolvent and cannot
qualify for loans, whether sourced locally or from foreign lenders. Letters of credit are essentially unobtainable;
when they can be secured from Indonesian banks, they are generally not accepted
abroad. For the moment, foreign banks --
including official credit agencies such as the U.S. Ex-Im Bank -- have stopped
lending to Indonesia, based on general prudence as well as a loss of confidence
brought on by the political and social turmoil that has accompanied Indonesia’s
economic problems. |