Indonesia: Investment Climate Statement 2000

A.8. 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. Please refer to Overview and Corruption sections for information on GOI reform efforts.

Back to Table of Contents

A.9. Efficient Capital Markets and Portfolio Investment

The key institution managing Indonesia’s bank restructuring effort is the GOI's Indonesian Bank Restructuring Agency (IBRA), set up in January 1998), with the counsel of the international financial institutions. To date, the restructuring effort has entailed the closure of over 60 private banks, Government takeover of 11 others including the two largest private banks, and recapitalization of 7 banks in May 1999 (with Government providing up to 80 percent of the required capital and banks owners the other 20 percent). Restructuring of the state-owned banks, which held the largest non-performing loan portfolios, began in late 1999 after merger of four of the state banks into a new bank called "Mandiri."

Scandals and mismanagement have interfered with Indonesia's efforts to reform and restructure its banking sector. The Bank Bali scandal was uncovered in mid-1999. Suspects have been named in the scandal but to date, none has been sentenced by the courts. On June 21, 2000, the Attorney General’s office detained Central Bank Governor Syahril Sabirin for his alleged involvement in the Bank Bali scandal.

Individual banks determine deposit and lending rates, although the blanket government guarantee on banks’ payment obligations covers interest on deposits up to a stipulated percentage only. As of mid-2000, very little new lending had occurred. Interbank overnight interest rates averaged 10.3 percent per annum as of late June 2000.

Underlying problems remain. For example, all the major international accounting firms operate in Indonesia under arrangements with domestic accounting firms, but accounting standards and practices are not considered consistent with international norms.

Indonesia’s capital market expanded rapidly over the last decade, led by growth of the equity market. The Jakarta Stock Exchange is the dominant securities market in the country. The lack of a well-developed bond market remains a limiting factor for Indonesia’s financial sector.

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 shares in non-bank listed firms was lifted in 1997, and for banks in 1999. Discriminatory capital requirements on foreign securities were removed in 1998. Portfolio investment is regulated by BAPEPAM, the Indonesian equivalent of the Securities and Exchange Commission.

As of June 2000, Indonesia’s USD 67 billion offshore corporate debt still remained largely unresolved, though a framework was in place for debt workouts: the Jakarta Initiative, launched in November 1998, was available to provide debt workout facilitation; the Indonesian Debt Restructuring Agency (INDRA) offered borrowers access to foreign exchange at a stable exchange rate; and a commercial court to hear bankruptcy cases had been established.

Back to Table of Contents

A.10. Political Violence

American citizens traveling to Indonesia and East Timor should exercise caution. Political activity, demonstrations, and localized hooliganism in Jakarta have increased recently and are expected to continue throughout the lead-up to and during the People’s Consultative Assembly (MPR) session, which will take place in August 2000.

Indonesia welcomed its first democratically elected government in October 1999. The government’s widespread support led to a general decrease in the level of civil unrest. At the same time, however, unrest in various regions of Indonesia continues and security forces have had difficulties maintaining law and order.

East Timor voted for independence from Indonesia in an August 30, 1999 referendum and is currently under the authority of the United Nations’ Transitional Administration in East Timor (UNTAET). UNTAET was established by a unanimous vote of the UN Security Council on October 25, 1999 for the purpose of rebuilding East Timor and helping to establish a new government. Violence erupted throughout East Timor after the August 30, 1999, United Nations-sponsored ballot in that province. Although stability has largely returned to the territory following the arrival of international forces, crime and lawlessness remain a major problem. American citizens are strongly encouraged to exercise caution in East Timor and to avoid areas along the border between East and West Timor.

The western half of the island has been the scene of several physical assaults on foreigners by disgruntled pro-integration Timorese militia forces. American citizens are encouraged to defer non-emergency travel to West Timor, especially in areas where East Timorese refugees are concentrated.

In Maluku (also known as the Molucca Islands or the Moluccas), serious communal violence broke out on the island of Ambon in January 1999 and has now spread throughout this island group. The intensity of the violence compelled the Government of Indonesia on June 26, 2000, to declare a "Civil State of Emergency." American citizens are urged to avoid all travel to Maluku, including the provinces of both Maluku and North Maluku, and to depart immediately if they are already there. Although anti-Christian sentiment is not widespread in Indonesia, inflammatory statements by community leaders, as well as violence in Maluku, have sparked some tension between Moslem and Christian communities elsewhere in Indonesia. Serious communal violence has also broken out in the province of Central Sulawesi.

On January 17, 2000, anti-Christian violence broke out on the resort island of Lombok, leading to looting and the burning of a number of churches. Although there has not been a recurrence of major violence since January, American citizens should take this earlier unrest into account when planning travel. Lombok is about 25 miles from the island of Bali.

Political changes have given new impetus to aspirations for independence in Aceh and Papua (formerly known as Irian Jaya). Violent incidents continue to occur in Aceh and American citizens are strongly urged to defer all travel to that province. Violence has targeted American companies with growing frequency. American citizens resident in Aceh should consider departing. In Papua, violence has been less frequent. The government of Indonesia has restricted the travel of U.S. and other foreign government officials to the provinces of Aceh, Papua, and Maluku. Security concerns are cited as the reason for this prohibition. American citizens should take this into account when planning travel to these regions. As of mid-2000, this restriction remained in effect.

The Department of State encourages American citizens considering travel to Indonesia to review carefully the information available in the State Department’s , available on the Internet at or on the Bureau of Consular Affairs’ home page at . All Americans resident or traveling in Indonesia are encouraged to register with the U.S. Embassy in Jakarta (tel: 62-21-344-2211), the U.S. Consulate General in Surabaya (tel: 62-31-568-2287), or the U.S. Consular Agency in Bali (tel: 62-361-233-605) and to obtain updated information on the security situation. Registration may be completed in person, by fax or through the U.S. Embassy homepage. Although a U.S. liaison office will open in East Timor in the coming months, there is currently no official presence there.

Back to Table of Contents

A.11. 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. Since the fall of Soeharto, the identification and elimination of corruption, collusion and nepotism (KKN) have become national issues with a newly freed press providing extensive coverage of past and current corruption investigations. In 1999, the Parliament passed two landmark laws designed to fight corruption, particularly in government activities. The first, Law No. 28, requires senior government officials to disclose their wealth and subjects them to audits. A commission is to be established, with enforcement powers, to review those audits and take appropriate action. The second, Law No. 31, widens the definition of corruption, increases penalties and establishes an anti-corruption commission. That commission is to be operational by early 2001.

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. Despite President Wahid’s pronouncements against corruption, progress on individual cases has been slow. A number of high-profile corruption cases have been widely reported in the press although none of the accused has been brought to trial. Meanwhile, petty corruption appears to be flourishing. Foreign companies have little success in filing formal complaints through either legal or administrative channels. Foreign companies continue to report difficulties in obtaining and renewing necessary immigration permits for expatriate staff based in Indonesia. In some cases, unsubstantiated corruption allegations have been made by government officials against foreign companies, particularly those operating in the resources sectors, but there has been no evidence presented or prosecution of corruption cases against foreign investors.

Back to Table of Contents

B. Bilateral Investment Agreements

Indonesia has signed investment protection agreements with 52 countries, including the United States (Agreement on Investment Guarantees), Argentina, Australia, Bangladesh, The Netherlands, Belgium, Chile, People’s Republic of China, Czech Republic, Denmark, Finland, Hungary, United Kingdom, Italy, India, Jamaica, Germany, Jordan, Cambodia, South Korea, Cuba, Kyrgyzstan, Laos, Malaysia, Morocco, Mauritius, Mozambique, Egypt, Mongolia, Norway, Pakistan, France, Poland, Romania, Singapore, Slovak Republic, Spain, Sri Lanka, Sudan, Suriname, Syria, Sweden, Switzerland , Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, Uzbekistan Vietnam, Yemen, and Zimbabwe. Indonesia has also signed treaties for the avoidance of double taxation with 50 countries, including the United States. On February 1, 1997, an amendment to the 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.

Back to Table of Contents

C. 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 provided to U.S. investors in Indonesia. OPIC coverage was extended to bid bonds on service contracts in 1987. OPIC has also provided project financing to companies with at least 25 percent U.S. ownership.

Back to Table of Contents

D. Labor

The labor force is estimated at about 95 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. As recently as March 2000, the Indonesian Minister of Manpower estimated that 36 million persons (38 percent of the labor force) were unemployed or underemployed. However, the government’s August 1999 annual Labor Force Survey reported that only 6.03 million persons over age 15 (6.4 percent of the labor force) were unemployed (i.e., worked less than one hour the previous week). In 1998, the Labor Force Survey reported that 34.3 million persons (39 percent of the labor force) were working less than 35 hours per week. The Labor Force Survey includes workers employed in the informal sector, while government estimates focus on job losses from formal sector employment. Some economists, unions, and other non-governmental observers have criticized the Labor Force Survey as understating real unemployment; these other sources estimate that more than half of the population is under-employed.

Before the economic crisis, the educational level of Indonesia's labor force had risen to the point that some 26 percent of non-agricultural workers had 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 inflation and large-scale layoffs have squeezed family incomes and caused four to five percent of all students to drop out of school during the last year, according to Indonesian government and World Bank estimates.

The United States has traditionally been a top choice for Indonesians wishing to study abroad. In the 1998-1999 academic year, there were an estimated 12,142 Indonesians studying in the United States, marking a 8.6-percent decline from the 1997-1998 academic year (Institute for International Education (IIE) statistics). Approximately 68 percent were in undergraduate programs, 26 percent in graduate programs, and the remaining 6 percent in non-degree programs, including English language studies. The decline in enrollment of Indonesian students in U.S. colleges, universities, and other institutes of higher education is largely attributed to the drop in the rupiah's value in relation to the dollar. While Indonesian students are the eight largest foreign national group studying at the higher education level in the United States, they are the fourth largest group studying at community colleges. Community colleges offer more affordable academic programs, an attractive advantage to students whose financial resources may have declined with the devaluation of the rupiah.

Job creation and the alleviation of underemployment are targets of economic policymaking, 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. Nonetheless, Indonesia is experiencing shortages of qualified managerial and professional personnel.

The government sets minimum wages by region. The minimum wage in Jakarta was set at Rp. 286,000 (approx. USD 33.00 at Rp. 8,700 per dollar) per month as of April 1, 2000. Labor strikes have become increasingly common in recent years. There were fewer strikes in 1997-1999 due to the economic downturn, but the frequency of strikes has increased in 2000. 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 September 1998 which makes it easier for labor organizations to register as trade unions, and more than two dozen new unions have formed as alternatives to the Federation of All-Indonesian Trade Unions (FSPSI), which was the sole government-recognized union prior to 1998.

Indonesia's industrial relations system is in flux. As of July 2000, the Indonesian Parliament was considering two draft laws that would make significant changes in the registration, status, and rights of trade unions and in the industrial dispute resolution system. A third law is being drafted to replace the 1997 law on manpower affairs, which has never been put into effect because workers’ and human rights groups have charged that it provides inadequate protection of worker rights. In addition to uncertainties about changes in labor law, there is considerable confusion about enforcement and interpretation of existing law and regulations.

Back to Table of Contents

E. Foreign Trade Zones/Free Ports

Foreign and domestic industrial companies located in any of Indonesia’s seven designated bonded zones are provided with several incentives. The largest bonded zone is Batam, located just south of Singapore. Investors in bonded zones are not required to apply for additional implementation licenses (location, construction, and nuisance act permits and land titles), and foreign companies are allowed 100 percent ownership. These companies do not pay import duty, income tax (Article 22), value added tax (VAT), and sales tax on imported capital goods, equipment, and raw materials until the portion of production destined for the domestic market is "exported" to Indonesia, in which case fees are owed only on that portion. Companies operating in bonded zones may also lend machinery and equipment to subcontractors located outside of the bonded zone for a maximum two-year period. The companies have also enjoyed exemption from VAT and sales tax on luxury goods on the delivery of products to subcontractors for further processing outside of bonded zones.

In April 2000, regulations on VAT and luxury tax exemptions were modified (Tax Department Circular No. SE. 10/PJ.52/2000) as they pertain to Batam. Starting April 1, 2000, all sales of goods for internal consumption in Batam were to now be subject to VAT and luxury taxes. Goods for export would remain exempt from these taxes. However, after Batam authorities and residents protested the change in policy, President Wahid agreed to postpone its implementation to January 1, 2001.

Back to Table of Contents

F. Foreign Direct Investment Statistics

Foreign investment interest in Indonesia has fallen substantially since the onset of the economic crisis in mid-1997. According to statistics from the Capital Investment Coordinating Board (BKPM) from 1967 through December 1999, the GOI approved 7,665 foreign investment applications worth more than USD 228.2 billion (excluding investment approvals in oil and gas, banking, and financial services). While foreign investment approvals reached almost USD 34 billion in 1997, they declined to less than USD 14 billion in 1998, and reached only USD 10.89 billion in 1999. However, realized foreign investment showed modest signs of recovery in 1999, rising from USD 2.9 billion in 1998 to USD 7.6 billion in 1999 (USD 3.0 billion of the 1999 total was for a single proposed project, an oil refinery).

The downward trend of investment approval values continued to show very modest signs of abatement in 2000. According to the most recent BKPM statistics covering January 1, 2000 through June 15, 2000, foreign investment approvals were up 16.7 percent, rising from USD 1.8 billion for the same period in 1999 to USD 2.1 billion in 2000. The number of approved projects rose from 483 to 589.

Through June 15, 2000, the basic metals sector (approvals valued at about USD 700 million) was the most attractive sector for foreign investment applications, followed by textile and chemical sectors (each about USD 200 million), food and trade sectors (each about USD 100 million), property (USD 90 million), and construction (USD 80 million). Through the same period, Japan led in approved foreign investment applications (42 projects worth about USD 900 million), followed by Singapore (96 projects worth USD 200 million), The United Kingdom (28 projects worth USD 200 million), the United States (23 projects worth USD 80 million, and South Korea (105 projects worth 70 million).

Japan is the largest cumulative foreign investor in Indonesia, excluding the oil/gas sector, where the United States is the leading investor. Between 1967 and 1999, BKPM-approved Japanese investment applications reached about USD 35.3 billion, about 15 percent of the total. According to Indonesian government statistics through December 1999, The United States ranked sixth in cumulative BKPM-approved investment since 1967, with a total of USD 10.4 billion, although not all approved investment was realized. Through May 31, 2000 the United States still ranked sixth among foreign investor nations with cumulative BKPM investment approvals of USD 10.5 billion.

Table: BKPM Statistics on Top Ten Investing Countries (Cumulative BKPM Approvals)/Top Five Sectors January 1, 1967-May 31, 2000

(Billions of USD)

Note: These numbers are approvals only and do not include oil and gas and financial and insurance sectors.

Not included in the BKPM-approved investment figure is substantial U.S. investment in Indonesia's hydrocarbon sector. In 1999, Caltex (Chevron and Texaco) retained its position as Indonesia's number one oil producer, with close to half of crude and condensate output. It was followed by several other U.S. companies including Conoco, Unocal, Arco, Mobil, and Vico. According to Ministry of Mines and Energy data, petroleum companies planned to spend USD 4.8 billion in 2000 on exploration, drilling, and production -- a USD 500 million increase over the actual spending for 1999. The 2000 budget figure includes USD 743 million for exploration, USD 867 million for development drilling, and USD 2,755 million for production.

According to the Ministry of Mines and Energy, investment in Indonesia's mining sector (gold, coal, etc.) totaled USD 15.9 billion over the last 32 years, with U.S. companies accounting for USD 7.1 billion. P.T. Freeport Indonesia, an affiliate of the U.S. mining firm Freeport McMoRan, is one of the largest foreign investors in Indonesia and accounted for the bulk of investment in the mining sector.

Another significant investor in Indonesia's mining sector is Denver-based Newmont Mining Company, which operates a gold mine in North Sulawesi and the Batu Hijau copper and gold mine on Sumbawa Island. According to Newmont, the Batu Hijau mine, operating since December 1999, was the largest greenfield mine operation ever, with USD 1.8 billion invested.

Major U.S. companies produce consumer and other products and provide services for the domestic market. General Motors has built a USD 110 million vehicle assembly plant, and General Electric Capital Corporation and Ford Credit are both active in automobile financing joint ventures. In 1996, General Electric opened the first locomotive factory in Southeast Asia and created the second largest lighting company in Indonesia. In 1998, H.J. Heinz Co. formed H.J. Heinz ABC Indonesia by purchasing a majority share in PT. ABC Central Food company. Also in 1998, Newbridge Capital purchased Astra Microtonic Technology microchip factory in Batam.

Several U.S. independent power producers (IPPs) have invested in Indonesia's electric power sector. Although the government in 1997 put on hold a number of the IPP projects, some, such as Unocal's geothermal plant in West Java and El Paso's gas-fired plant in South Sulawesi, are currently in operation. Edison Mission Energy's large coal-fired plant in Paiton, East Java, has also begun to provide electric power, and will soon be joined by a Siemens/PowerGen plant at the same site.

In addition to Japan, the UK, and the United States, Indonesia's other major foreign investors include Hong Kong, Singapore, the Netherlands, Taiwan, South Korea, Germany, and Australia.

Back to Table of Contents

Download the complete report:
Adobe Acrobat version | zipped Microsoft Word version  

Trends | Reports | Energy | Petroleum | Coal | Investment