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IV. TRADE POLICIES BY SECTOR
(1) INTRODUCTION
1. Since its previous Review, Indonesia has continued to undertake reforms aimed at further
liberalizing its economy;  these reforms include reducing border protection and domestic support for
specific sectors.  Nonetheless, some sectors are still  protected or otherwise assisted more than others,
constituting a potential impediment to the efficient allocation of resources in the economy as a whole.
2. Labour-intensive agriculture has maintained its dominant role in the economy, thus
preserving Indonesia's position as a major producer of several commodities.  A few programmes have
been implemented to ensure food security through, inter alia,  self-sufficiency in certain staples.
Average of applied MFN tariff protection for the agriculture sector is only 4%, compared with 7.5%
for manufacturing.  Some sensitive items, such as rice, cloves, corn, soya beans, and sugar, have been
subject to special import licensing;  rice, cloves, and sugar have also been subject to exclusive import
rights granted to domestic producers of these products.  Following the elimination of BULOG'simport monopoly rights, however, rice may now be traded freely, although market price support
remains in place and a fertilizer subsidy for small-scale producers has been re-introduced.
Deregulation of rice has led to fluctuating (and therefore unpredictable) tariff protection for this
product and intervention by BULOG to smooth out such fluctuations.  Trade-distorting domestic
support for rice production accounted for more than tw o thirds of total support (including the so-
called "green" subsidies) for all agricultural products, as notified to the WTO in 2000, albeit staying
within de minimis  levels.  Export taxes have been levied on a few commodities (palm oil, crude palm
oil and their derivative products, wood, and rattan).  Voluntary export restraints under certain
arrangements have covered a few commodities, notably manioc (destined for the EU), coffee and its
derivatives, rubber (as from 2002), veneer and plywood or similar laminated wood, and teakwood).
3. Regulatory controls and export restrictions have done little to address the forestry sector's
problems, including over-exploitation.  A ban on round (unprocessed) log exports was re-introduced
in 2001, ostensibly to address the problem of over-exploitation.  However, such bans (and other
export restraints) may do little to curtail over-exploitation of Indonesia's forests and instead depress
the domestic prices of logs, thereby assisting downstream processors of such products.
4. New regulations on tax and environmental issues were passed concerning mining, in which
state involvement is apparently being somewhat reduced.  Indonesia, a major oil and gas supplier, has
moved further towards becoming an eventual net importer of petroleum products.  Deregulation of the
hydrocarbons market has been under way and is to be completed by the year 2005.  Similar
deregulatory efforts as well as a reduction in subsidies for electricity are expected to lead to largely
free competition in the electricity market by 2007.  A petroleum fuels subsidy has been maintained for
the benefit of the manufacturing sector.
5. While peak tariff rates applicable to a few items (e.g., chemicals, fabricated metal products,
motor vehicles, motor cycles, and bicycles) have been reduced, the pattern of tariff protection in
manufacturing has hardly changed;  nevertheless, the average applied MFN tariff on imports of
manufactures has dropped slightly; similarly to agriculture, non-tariff protection for certain sensitive
items has been maintained or strengthened through special licences (e.g. textiles, textile products,footwear, electronics, toys) and/or exclusive import rights to domestic producers of the item
(alcoholic beverages, textile cloth, hot- and cold-rolled coil from iron and steel).  Assistance in the
form of corporate income tax holidays is still accorded to certain industries.  New export-oriented and
liberal Automotive Development policy has been put in place for the automobile industry, while theIndonesia WT/TPR/S/117
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luxury tax has implicitly targeted foreign-made vehicles.  A trade restrictive policy in the aerospace
industry has also been pursued.
6. Since the onset of the crisis at the time of its previous Trade Policy Review in 1998,
Indonesia has taken major steps to liberalize key services, notably financial services,
telecommunications, and shipping, which are essential for the smooth functioning of the economy.1
Liberalization measures, which were prompted by the financial crisis and/or sponsored by the IMF,
have, by and large, exceeded Indonesia’s commitments under the GATS.
7. Given the importance of a sound financial system for the economy as a whole, reform of the
financial sector has been at the heart of Indonesia's economic recovery programme.  Reforms in this
sector have focused on bank rehabilitation, especially by the Indonesian Bank Restructuring Agency
(IBRA), due to be closed in early 2004.  This has involved recapitalization of banks, with theGovernment increasing its equity holdings.  As a result, bank privatization has been rather slow,
although major privatizations occurred in 2002.  More comprehensive divestment is planned for 2003.
In addition, Bank Indonesia’s statutory independence and prudential powers have been increased;  it
now handles bank licensing (previously under the purview of the Ministry of Finance).  Prudential
regulation, supervision, and compliance/enforcement have been strengthened, and Indonesia is toadopt the BIS’s Basel core principles on effective supervision.  A Financial Supervisory Authority is
planned, to regulate prudential provisions pertaining to all financial institutions, and the blanket
guarantee on bank liabilities is to be progressively replaced with a selective deposit insurance scheme.
8. New telecommunications legislation was introduced (effective September 2000) to open the
sector progressively;  the legislation included abolition of the monopoly ahead of schedule.
Concurrently, the regulatory framework was enhanced to safeguard competition.  Foreign
participation in the three licensed telecom suppliers remains limited;  however, the Governmentdivested overseas 42% equity in one of these suppliers, Indosat, in late 2002.
9. Foreign investment in inter-island shipping services is prohibited;  on the other hand, up to
95% foreign equity is allowed in joint ve ntures providing ocean freight services.
10. Responsibility for the regulation of tourism is being transferred increasingly to the provinces.
(2) A
GRICULTURE AND FORESTRY
(i) Features
11. Despite a declining share in output and exports, labour-intensive agriculture has maintained
its dominant role in the economy (Table IV.1, Chart I.1).2  In 2000, agriculture accounted for 16.9%
of GDP and provided work for around 40% of the active population3;  this indicates that labour
productivity in agriculture is less than half the national average.   The rupiah devaluation helped boost
agricultural exports (in value terms), particularly during the post-crisis period.
                                                     
1 An inefficient banking system hinders exporters' access to trade finance, and thus their ability to
export, as well their access to finance for investment.  Insufficient telephone connections disrupt production ofgoods and services, while a poor transport system impedes the export and distribution of goods.  As aconsequence, the costs of doing business in Indonesia are unnecessarily high, which impairs the competitiveness
of firms operating there.
2 At the time of the economic crisis in 1998, the resilience of the agriculture sector was reflected in its
capacity to grow and create 432,350 additional jobs, at a time when the national economy in aggregate
underwent a serious contraction leading to a decline in employment (Ministry of Agriculture, 2001).
3 Asian Development Bank (2001).WT/TPR/S/117 Trade Policy Review
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Table IV.1
Sectoral shares in GDP, employment and exports
(Per cent)
Agriculture Industry Services Oil/gas
GDP
1977 29.6 34.4 36.1 ..
1987 23.4 36.3 40.3 ..
1997 16.1 44.3 39.6 ..
1999 19.5 45.3 35.2 ..
Employment
1996 44.0 14.7 41.3 ..
1997 41.1 14.0 44.9 ..
1998 44.9 11.3 43.8 ..
1999 41.0 14.1 44.9 ..
Exports
1996 5.9 64.8 5.1 24.2
1997 5.6 66.8 6.8 20.8
1998 7.2 73.6 4.5 14.7
1999 5.8 68.2 6.1 20.0
.. Not available.
Note: Industry exports also include processed metals and minerals.
Source: Asian Development Bank (1999);  and CIEC (2000).
12. Indonesia has remained the world's largest producer of coconuts, second largest producer of
copra, palm kernels, palm oil, and natural rubber, and the third largest producer of rice.  Small-scalesubsistence farms account for about 87% of total cultivated land and grow predominantly food crops
(rice, maize).
4  Large state-owned and private estates account for the remaining 13% of cultivated
land and dominate export crops;  they use hired or contracted labour.  Sectoral labour productivity is
lower than in industry and services;  this seems to be due to the rapidly growing population.  The
outcome is periodic shortages of key foods (including rice) and failure to meet self-sufficiency
objectives (see below).5  During the period under review, self-sufficiency for rice ranged from 82.2%
(1998) to 95.4% (2001), and that of sugar from 40.9% (2000) to 45.2%(1998).
(ii) Main policy developments
Objectives and strategy
13. Indonesia's long-standing policy objective has been  to foster food production in order to meet
the demand of a growing population, and achieve self-s ufficiency in the main staple foods (especially
rice).6  Food security has remained a sensitive issue as  political stability has traditionally been linked
to the Government's ability to ensure an adequate supply of rice and other basic commodities at
affordable prices.7  The strategy for enhancing food output has been aimed at, inter alia,  increasing
farm accessibility and productivity;  reducing farming risks;  developing appropriate modern farming
practices and sustainable farming systems;  augmenting participation by farmers and enhancing equity
both in the distribution of income-earning opportunities  and in access to an adequate supply of food.8
                                                     
4 Australian Department of Foreign Affairs and Trade (2000).
5 Australian Department of Foreign Affairs and Trade (2000).
6 WTO document G/STR/N/7/IDN and G/STR/N/8/IDN, 28 August 2002.
7 UNDP (undated).
8 Ministry of Agriculture (2001).Indonesia WT/TPR/S/117
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14. Under the Guidelines for National Development 1999-2004 (GBHN)9, agricultural business
development has a strategic position in the economic development of Indonesia through:  the
strengthening of food security based on diversified food commodities, local culture and institutions;
and the acceleration of rural development within  the context of empowering the rural population,
especially farmers and fisherman.
15. Since 1998/99, one fishery export enhancement programme and three self-
reliance/sufficiency programmes ( Gema ) have been launched.10  The Gema PaLagung 2001  was to
increase rice, soybean, and maize production to attain self-sufficiency by 2001, the Gema Proteina
2001  to increase animal protein production by the same year, and the Gema Hortina 2003  to increase
national production of tropical horticulture by 2003.  The aim of Protekan 2003  was to raise the
export value of fishery products to US$10 billion by 2003.
16. As indicated earlier (Chapter II(8)(i)), since 2000 freshwater fishery activities and milk
processing/packaging have been opened to foreign investment;  however, a number of other activities
remain closed to foreign investors (e.g. exploiting natural forests, lumbering, collecting and exploiting
sponges, and producing alcoholic beverages).11
17. In 2002, the authorities considered raising import tariffs on food commodities, notably rice
and sugar, and using price support to protect farmers against unfair competition from cheap imports.12
(a) Border measures
Tariff protection and binding commitments
18. Since its previous Review, Indonesia's average level of applied tariff protection for the sector
has been reduced slightly from 4.2% to 4% (see Table AIV.1, Chart IV.1)13;  peak rates and tariff
ranges have remained unchanged.  As indicated earlier (Chapter III(2)(ii)(d)), a specific rate has been
applied to imports of rice since 2000, and to imports of sugar as from July 2002 (both items bound onan ad valorem  basis);  restrictive tariff rate quota commitments on rice or milk and milk cream have
never been implemented.
Non-tariff border protection
19. Imports of agricultural and livestock (and food) products have been subject to special import
licensing (rice, cloves, corn, soya beans, sugar), bans (e.g. chicken parts) and compliance withmandatory SNIs and labelling (infant formula, food) requirements for health and environmental
reasons (Chapter III(2)(v) and III(2)(xi)(b)).  At present 647 SNIs affect agriculture-related items (e.g.
foodstuffs, raw sugar).
14  A few sensitive items (rice, cloves, sugar) have been affected by exclusive
import rights granted to domestic producers of the same item (Chapter III(2)(vi)).  Since September
1998, the National Logistic Agency (BULOG), which is being turned into a semi-profit-makingorganization, no longer has import monopoly rights on rice, sugar, wheat and wheat flour, soybean,
                                                     
9 Ministry of Agriculture (2001).
10 Embassy of the Republic of Indonesia, Ottawa - Canada.
11 Australian Department of Foreign Affairs and Trade (2000).
12 The Jakarta Post, Tariff on Farm Produce , Available online at:
http://www.securities.com/doc.html?pc=ID&doc_id=27269862&query=price_support&hlc=en [16 June 2002].
13 This tariff average is lower than that indicated  in Chapter III(2)(ii) owing to different product
classification (i.e. the average rate of 7.2% (Table III.1) is based on HS calculations).
14 FAO/WHO Global Forum of Food Safety Regulations (2002).WT/TPR/S/117 Trade Policy Review
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garlic, and cloves;  as a result, it seems that imports of some of these items have risen.  The authorities
indicated their intention to use import quotas for managing imports of rice, sugar, and corn.
Export taxes
20. As described earlier (Chapter III(3)(iii) and (iv)), Indonesia has maintained its export taxes on
certain commodities (palm oil, crude palm oil and their derivative products, wood, rattan);  it reduced
the scope and the tax rates (level, dispersion), which are now ad valorem  only and calculated on the
basis of a formula containing a minimum/benchmark export price or export check price (HPE).
Export restrictions
21. Indonesia has continued to regulate exports of certain commodities on a voluntary basis
(voluntary export restraints) in line with its commitments under certain arrangements.  Restraints
cover certain types of manioc (destined to the EU)), coffee and its
extract/essence/concentrate/preparations (Associa tion of Coffee Producing Countries), rubber (as
from 2002, section IV(2)(iii)), veneer and plywood or similar laminated wood, and teakwood.
(b) Domestic support measures
22. As indicated earlier (Chapter III(4)(ii)), the sector has benefited from domestic support;  it is
unclear whether subsidized fertilizers and credit (put in place to reduce the impact of eliminating the
former) as well as consumption subsidies continue to be provided.15  In the context of the WTO
                                                     
15 Warr, Peter (1999).0246810121416Per centChart IV.1
Tariff averages by 2-digit ISIC category, 1998 and 2002
 MFN 1998
 MFN 2002 Average 2002
(7.2%)Average 1998
(9.5%)
Calculations for 2002 exclude 12 lines carrying specific rates.WTO Secretariat calculations, based on data provided by the Indonesian authorities. Note:
Sourc e:Indonesia WT/TPR/S/117
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Committee on Agriculture, Indonesia clarified issues re lating to the type of support provided through
certain development programmes;  it also indicated the value of rice production eligible for trade-
distorting market price support (first notified in 2000, with no de minimis  claimed (see below)), and
that for the period 1995-99 it had notified this type of support under the Green Box procurement
operations of BULOG.16
(iii) Selected items
Rice
23. Indonesia is the world's third largest producer and consumer of rice as well the largest rice
importer17;  thus, even small domestic production shortfalls may offer foreign exporters significant
opportunities.  Recent reforms seem to have helped to raise rice productivity steadily to above world
average levels (in 1999) and significantly higher than that of other major producers (4th after
Australia, China, and India).18
24. Indonesia's rice policy has been governed by the necessity for some independence from world
market supply/conditions, concerns regarding reduced foreign policy options in case of
overdependence on imports19, and targeted food subsidization (rather than price stabilization) and
social protection (Rice for the Poor).  Under the 1998 IMF Structural Adjustment package, as fromApril 1999,  (rice prices were to be determined by market mechanisms;  general importers were to be
permitted to import rice;  special market operations for rice at subsidized prices were to be targeted at
people considered "food insecure" (i.e. those with incomes below the official poverty line);  and the
rice subsidies were to be reduced.
20
25. The state-trading enterprise, BULOG has continued to support domestic rice producers and to
stabilize consumer and producer prices through domestic procurement, sales/distribution,
import/export and management of rice stock.  BULOG negotiates long-term contracts or carries outtransactions to fulfil contractual obligations entered into by the Government;  it implements the
bilateral long-term contracts on a government-to-government basis, countertrade, food aid, etc.
Between 1998 and 2002, Indonesia imported 203,634 tonnes of rice (mostly in 1999) through,
inter alia,  government-to-government arrangements;  most of these imports were carried out from the
United States under PL480 (long-term loan) conditions.  During the same period, another393,096 tonnes were imported under the UN World Food Programme (Protracted Relief and
Recovery Operations, Emergency Operations) to en sure food assistance to urban poor as well as
victims of drought and the economic crisis.
21
26. Following its loss of monopoly rights (section (ii)(a)), BULOG's imports of rice in 2001 had
dropped to almost a third of their level of 1999;  no rice exports were undertaken directly between1999-01.
22  At the same period, BULOG purchased an average of 7.6% of the national production and
its sales satisfied 10.2% of domestic consumption.
                                                     
16 WTO document G/AG/R/29, 27 February 2002.
17 WTO document G/STR/N/7/IDN - G/STR/N/8/IDN, 23 August 2002.
18 Australian Department of Foreign Affairs and Trade (2000);  and National Information Agency
(2002).
19 WTO document G/STR/N/7/IDN - G/STR/N/8/IDN, 23 August 2002.
20 Warr, Peter (1999).
21 See also World Food Programme online information.  Available at:  http://www.wfp.org/
index.asp?section=5 [3 April 2003].
22 WTO document G/STR/N/7/IDN - G/STR/N/8/IDN, 23 August 2002, Tables I, II and III.WT/TPR/S/117 Trade Policy Review
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27. During the period under review, border protection seems to have been relatively
unpredictable.  As indicated earlier (section (ii)(a)), tariff levels varied before a change from an
ad valorem  to specific rates in January 2000.   Furthermore, special licensing and exclusive import
rights have been introduced for domestic producers.
28. Since 1970 direct market price support has been made available to domestic production
(Chapter III(4)(ii));  although budgetary outlays for this type of support have increased, the de
minimis  support level has not exceeded 7.3% so far (Table IV.2).  Floor prices, which may be adjusted
to production costs by plus or minus 30%, have been set at levels ranging from 22.7% (2000) to
30.3% (1999), or 26% higher than world prices (1999-01).23  The authorities indicated that as from
2000 the floor price has been closely linked to produc tion costs rather than th e border price. BULOG
intervenes in the market and smooths-out price fluctuations at times when the market is considerednot to work well, especially in the harvest season, but its operations are adversely affected by cheap
imports.
24  It seems that BULOG may purchase up to 2 million tonnes of rice per year on a first-come-
first-served basis.
Table IV.2
Market price support and de minimis  levels for rice, 1998-02
1998 1999 2000 2001 2002
Floor prices (dry paddy for milling) Rp/kg. 600 1,400 1,400 1,500 1,519
Applied administered price Rp/kg. 1,660 2,310 2,310 2,470 2,804
External fixed price (average 1996-98)
Rp/kg.367.77 367.77 367.77 367.77 367.77
Eligible production (milion tonnes) 249,231 2,448,752 2,173,585 2,010,792 2,131,608
Total AMS (Rp billion) 322 4,756 4,222 4,227 5,193
Total value of production (Rp billion) 53,102 68,172 57,875 66,567 73,779
De minimis (%) 0.61 6.98 7.29 6.35 7.04
Source: Indonesian authorities.
29. For the period 2003 to 2005, domestic support to small-scale rice producers has been
reinforced through a subsidy for certain types of locally made fertilizers (Chapter III(4)(ii));  it is
expected to ensure an output of 53 million tonnes in 2003.
Coffee
30. Indonesia is the world's fourth largest coffee producer, behind Brazil, Colombia, and
Viet Nam.  For the 1999/00 harvest year (1 October 1999 to 30 September 2000), Indonesia's coffee
export quota was reduced by 3% to 5.68 million 60-kg. bags (from 5.85 million bags) in accordance
with the agreement involving the Association of Co ffee Producing Countries, in an attempt to prop up
coffee prices in the world market.  However, according to authorities, these arrangements are now
defunct, and no such voluntary coffee quotas have applied since January 2002.
Rubber
31. To ensure price stability through reduced world rubber supply, in December 2001 Indonesia
joined Malaysia and Thailand in signing a Tripartite Rubber Cooperation (TRC)agreement/arrangement, with agreed  export volume limits and a supply management scheme aimed at
                                                     
23 WTO document G/STR/N/7/IDN - G/STR/N/8/IDN, 23 August 2002, Table I.
24 Economist Intelligence Unit (2002), p. 49.Indonesia WT/TPR/S/117
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cutting back annual production by 4% in 2002 and 2003.25  As from 1 February 2002, Indonesia has
allocated annual export quotas of 1.23 million tonnes, as part of the plan to reduce exports by 10%.
The export quotas apply when the international price of rubber falls below an agreed reference price,
which is not publicly released.  Quotas are allocated to exporters by the industry on the basis of
previous export sales.  According to authorities, Indonesia has not applied the quota since mid 2002
when the world price rose above reference levels.
(iv) Forestry
32. Indonesia's sectoral objectives have been aimed at improving the efficiency of forestry based
on sustainable management.26  The new forestry policy for 2002-04 has the priorities of combating
illegal logging, controlling forest fires, restructuring forest-based industries, developing plantation
forests and reforestation, and decentralizing forest management.
33. Forests remain publicly owned, thus seemingly allowing the authorities to control forestry
resources.  The Ministry of Forestry designates logging areas, controls investment, and grants 55-year
concessions (previously 20 years).  The area of concessions has been reduced from one million
hectares to between 100 to 50,000 hectares.  The forest-based industries, such as sawmills, wood-
working factories, plywood and pulp mills, were allowed to expand very rapidly, and concessions forlogging exceed sustainable levels almost three fold.  The forest-based industry had become heavily
concentrated in a small number of "exclusive" companies.  A large number of these operations, with
substantial debts, have been placed under supervision.  There are currently some 270 concessionaires
working an area of 29 million hectares.  By 2001, 2.3 million hectares of the targeted 3.03 million
hectares (76%) of land reforestation had been completed.
34. Following a short period when log exports were unrestricted, an export ban on round
(unprocessed) logs was reintroduced in October 2001 to combat illegal logging and to ensuresufficient lumber supplies to domestic industries (section (ii)(a) and Chapter III(3)(ii)).
27  Its
replacement with export taxes is currently being considered.  Exports are authorized only for
companies with Forest Concession Rights (HPH) and a certificate of analysis of the environmental
impact (Amdal);  exporters are generally large HPH companies running a forest concession integrated
with timber-processing facilities.  At the time of the previous Review, it was indicated that theconcession granting regime, in connection with the imposition of export restrictive measures, had
encouraged the proliferation of saw and plywood factories;  in addition domestic log prices were
lowered below international prices, thus reducing the prices of inputs and thereby assisting
downstream processing industries.
28  However, according to authorities, the re-imposition of the log
export ban has had no effect on domestic lumber prices.   A moratorium on logging and trading in
ramin was also introduced in 2001.
35. An export tax (of 15%) has remained in force for rattan and wood.
36. Weak law enforcement together with institutional and policy failures, including poor
monitoring and evaluation, appear to be major factors behind the substantial illegal logging and
                                                     
25 Currently, the output of the three countries accounts for almost 62% of the world's natural rubber
production.  See International Rubber Research and Development Board online information.
26 National Information Agency (2002), pp. 120-121;  and Economist Intelligence Unit (2001),  p. 29.
27 Nevertheless, according to UNSD Comtrade statistics, since 1998 exports of wood (chips, particles,
waste, rough, roughly squared, simply worked) have grown steadily and strongly.
28 WTO (1999).WT/TPR/S/117 Trade Policy Review
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timber trade.29  Steps are being taken to rectify these deficiencies.  In July 2002, the Minister of
Forestry issued decrees to help ensure that only forest concessionaires operating legally and within
sustainable limits could operate.  Logging quotas have been reduced from over 20 million cubic
metres in 2002 to 6.9 million cubic metres in 2003.   Changes to the legislation, introduced in 2002,
require loggers to pay reforestation levies to the Reforestation Fund in advance each November before
the cutting year.  Indonesia has also introduced a selective cutting and planting system for loggers.
(3) MINING AND ENERGY
37. Since the previous Review of Indonesia, sector al reforms have targeted the regulatory and
institutional framework as well as "unhealthy" business practices30, industry competitiveness, and
increased value added.31  As from 1999, when legislation on regional autonomy and fiscal
decentralization was passed (Chapters II(2)( i) and III(4)(i)(a)) 32, there have been misunderstandings
on the operation/distribution of mining, and oil and gas revenues (land rent, royalties, taxes,
acquisition duties).  The Department of Energy and Mineral Resources is preparing legal-technical
guidelines to be followed by regional governments in the preparation of their local regulations.
(i) Mining
38. In 2001, mining engaged about 0.5% of the employed labour force, but contributed 3.1.% of
GDP.  Indonesia's principal mineral resource is petroleum, and the country has remained the world's
leading exporter of liquefied natural gas since the 1980s.  Other important resources are tin, bauxite,
nickel, copper, gold, silver, and coal.
39. Average tariff protection has dropped to 3.9% and the peak rate has fallen to 15%
(Table AIV.1).  Since the financial crisis in 1998, royalty rates have been increased.33  A refund of the
10% VAT on imported mining equipment has been in operation since 2001.  It appears that state
involvement in mining (e.g. gold, nickel, tin, coal) is being reduced slowly (Table III.2).
40. The enforcement of new regulations has seemingly compounded uncertainty surrounding
mining industries.  Since January 2000, under new legislation, local administrations have issued
mining licences and have received 80% of net revenues from mining royalties.  Exploration and
exploitation of natural resources within "protected forest" 34 have been prohibited since
30 September 1999.35  The 1999 revision of toxicity characteristics leaching procedures (TCLP) for
hazardous waste, pursuant to the 1989 Basel Convention on the Control of Transboundary
Movements of Hazardous Wastes and their Disposal, seems to embody stringent requirements that
may shut down companies in the mining sector (a nd other industries).  The introduction of water
                                                     
29 Illegal logging seems to be a serious problem in Indonesia.  Estimates suggest that similarly to many
other timber-producing countries 50-70% of timber used by the wood processing industry comes from illegalsources (Economist Intelligence Unit, 2001, p. 29).
30 In the process of eliminating KKN practices (c orruption, collusion, and nepotism) and creating a
healthy climate for investment, measures have been  taken to control 159 KKN-suspected projects (financed
through budgetary outlays) of the state-owned Pertamina so  as to prevent a loss am ounting to Rp 212 billion and
US$92.9 million.
31 Embassy of the Republic of Indonesia, Ottawa (2000).
32 Laws Nos. 22/1999 and 25/1999.
33 For example, royalties on gold rose from 1-1. 5%, to 3.75%, and those on copper doubled to 4%
(Regulation No. 13/2000;  and Australian Department of Foreign Affairs and Trade (2000).
34 According to the Indonesian Mining Association (IMA), between 33% and 68% (depending on the
region) of the area with potential for mining exploration is covered by protected forest.
35 Forestry Law 41/1999 and Hazardous Waste regul ation PP 18/1999 (U.S. Embassy Jakarta, 2001c).Indonesia WT/TPR/S/117
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quality standards (seemingly stricter than international standards) in 2001 has further inhibited the
operation of mining firms.36
(ii) Energy
(a) Hydrocarbons
41. Indonesia, which is a major producer of crude oil and natural gas, is the only Southeast Asian
member of the Organization of the Petroleum Expor ting Countries (OPEC).  The contribution of the
oil and gas sectors to GDP, although declining as a result of the diversification of the economy,
remains significant, at 9.7%.  As of 1 February 2003, Indonesia's crude oil production quota increased
to 1.192 million barrels per day (b/d).  Despite large petroleum output and exports, a faster growing
demand has continued to move Indonesia towards eventual net importer status because the discovery
of new oil and gas fields has lagged.37  Indonesia also became one of the main producers of liquified
gas, and, as little is used domestically, it is the world's largest exporter.
42. In October 2001, new oil and gas legislation was passed to remove the state-owned
Pertamina's monopoly on upstream oil development within two years (i.e. in 2003).38  Until then the
production of oil and gas is to remain tightly controlled by Pertamina, which has "exclusive authority
to mine mineral oil and natural gas throughout the statutory mining territory of Indonesia".  However,a large number of foreign companies are allowed to participate in the exploration and exploitation of
oil and gas fields, under production-sharing contracts (PSCs) with Pertamina.
43. Under the new legislation, Pertamina's monopoly on the distribution of petroleum products is
to be terminated within four years (i.e. in 2005).
39  Until then, the import and export of petroleum and
gas is to remain under Pertamina's monopoly;  under this regime contractors may import a limited
number of products, subject to Pertamina's control and licencing (Chapter III(2)(v)).  As indicated in
the previous Review of Indonesia, oil and gas may be exported only by approved exporters.  Foreignfirms are prevented from directly marketing downstream oil products, unless they establish a separate
legal entity in Indonesia and obtain a business licence for trading.
44. The market price on fuels (Mid Oil Platt's Singapore plus 5%) is charged only to general
mining, oil and gas mining, foreign-flag-bearing ships, and ships with foreign destination
(Chapter III(4)(ii)).  Ceiling and floor prices are in force.  Fuel prices were raised across the board inOctober 2000 and in June 2001.
40  The price of kerosene for household use and small enterprises was
fixed at Rp 600 per litre in 2002.
45. In line with IMF commitments, and to restrain increases in domestic consumption, subsidies
for domestic petroleum products have been reduced under a fuel subsidy elimination policy Indonesia
agreed to reduce the fuel subsidy rates (Chapter III(4)(ii));  expenditure for this measure is to drop
                                                     
36 Government Regulation 82/2001on Water Pollution Management.
37 In 2000, Indonesian crude oil imports rose to 90 million barrels, largely from Saudi Arabia, Nigeria,
and Malaysia, with imports valued at US$2.3 billion for th e year.  Indonesia's nine refineries, with installed
capacity to process over 1.02 million barrels per day (b/d) of crude oil, continued to experience difficulties in2000, and domestic fuel consumption increased to 54.8 m illion kiloliters, about 4.5 million kiloliters higher than
pre-crisis levels.
38 The Ministry of Mines and Energy will take over from Pertamina in awarding and supervising
production-sharing contracts (PSCs) with foreign oil comp anies.  Foreign firms are also to be freed from some
of the regulatory approval requirements, which they argue hinder their efficiency.  Energy InformationAdministration (2002).
39 Energy Information Administration (2002).
40 Pertamina Online News (2002).WT/TPR/S/117 Trade Policy Review
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from Rp 61.6 trillion in 2001 (more than 21% of central government spending) to Rp 30.4 trillion
(over 13%);  the subsidy was to be cut to Rp 13.2 trillion in 2003.
46. Since 2002, a new oil and gas authority (BALAK) has been in place.41  BALAK, which took
over the management of the sector from Pertamina, grants oil and gas concessions, signs contracts,
supervises companies operating in Indonesia, and regulates the industry.
(b) Electricity
47. Indonesia's installed capacity increased by 4.07% between 1998 and 2002 (thermal 87%,
hydroelectric 13% in 2001).  Indonesia set a 53% electrification target for 2002.
48. An important element of the comprehensive restructuring of the power sector involves the
state-owned electricity company, Perusahaan Listrik Negara (PLN), whose role has been of concern to
the IMF, World Bank, Asian Development Bank, and other donors.42  The authorities indicated that
power generation activities are now dominated by private firms, while power distribution remains a
PLN monopoly.
49. Under its 1998 power sector restructuring policy, Indonesia envisaged setting up a simplified
competitive power pool in the short term and the establishment of a fully competitive multiple
buyer/seller power market by 2003;  the costs of the reform were to be met by direct budgetaryoutlays, external loans, and the proceeds from sales of PLN assets.
43  The policy envisages
rationalizing the existing power purchase agreements (PPAs) with a number of independent power
producers (IPPs), and integrating PLN into a new structure foreseen in two different models
depending on the region (Java-Bali Region model, Outside Java-Bali model).
50. On 4 September 2002, a new electricity law was passed to open up the country's power
generation business to free competition within five years (i.e. 2007).44  The PLN is to retain its
monopoly in distribution and transmission of electri city until 2007, ostensibly to avoid shortages in
coming years, but it will allow private companies to  gradually take part in the development of power
plants.
51. At present, electricity tariffs and subsidies remain the same across the country;  annual
budgetary outlays aimed at subsidizing consumers of up to 450VA have ranged from Rp 3.9 trillion
(2000) to Rp 4.6 trillion (2001).  In September 2002, in an effort to cut (fuel and) power subsidies,there were plans to raise electricity tariffs on a quarterly basis as from 2003;  nevertheless subsidies
will be preserved for Indonesia's remote areas.
45
(4) MANUFACTURING
52. The contribution of manufacturing to GDP, employment, and exports has risen (Table IV.1).46
                                                     
41 Law 22/2001;  Government Regulation No.42/2002, 16 July 2002;  and OPEC (2002).
42 Other donors include the Japan Export Import Bank (JEXIM), the German Kreditanstalt fur
Wiederaufbau (KfW), and the United States Agency for International Development (USAID).  These agencieswere heavily involved in the development of the power sector prior to the financial crisis.
43 British Embassy in Indonesia (1999).
44 Law No.20/2002;  Bank Indonesia (2002b).
45 Bank Indonesia (2002b).
46 Foreign ownership or acquisition of an Indonesian manufacturing plant results in higher wages for
the plants employees (Lipsey and Sjöholm, 2002).Indonesia WT/TPR/S/117
Page 83
53. Indonesia's average applied MFN tariff (based on ISIC basis) and tariff range have been
reduced, but certain sectors (e.g. chemicals, fabricated metal products, motor vehicles, motor cycles,
bicycles) have continued to be subject to peak rates ranging from 60% to 170% (Table AIV.1).
Import restrictions and special licensing requirements have remained in force for certain goods
(textiles, textile products, footwear, electronics, toys, engines and pumps, hand tools, and tractors) and
exclusive import rights are accorded to local producers of certain goods (alcoholic beverages, textilecloth, hot- and cold-rolled coil iron and steel) (Chapter III(2)(v) and (vi)).
54. Region- and/or industry-specific tax incentives have remained in force and have been
strengthened with a view to, inter alia,  cutting production costs and boosting domestic consumption,
as well as to providing support for research and development activities.  No information on
implementation aspects (beneficiaries, results/benefits to the economy, forgone tax revenue) wereavailable from the authorities.
(i) Textiles, clothing, and leather
55. This sector has remained the most important manufacturing activity in Indonesia.  It
accounted for 13.7% of total exports in 2001 (Chart I.1).
56. Average MFN tariff protection has dropped to 10.3% (Table AIV.1).  However, since 2002,
tariffs have been accompanied by the introduction of special import licences and exclusive import
rights for local textile producers (Chapter III(2)(v) and (vi)) with the stated objective of preventing the
sale of illegally imported textiles, which has created "unfair trading conditions" and inflicted losses on
domestic producers.
47  Therefore, textile imports may be used for the production process only.
Indonesia has notified to WTO Textile Monitoring Board, the list of products integrated in the third
phase pursuant to the Article 2.8(b) and 2.11 of the Agreement on Textiles and Clothing.48  By 2004,
it is to integrate the remaining 92 HS items, which represent a considerable trade volume (i.e. almostequivalent to the total volume integrated during the three previous phases).
57. As indicated earlier (Chapter III(3)(ii)), exports to major markets such as the EU, the
United States, Canada, and Turkey have been subject to MFA quotas or bilateral restraints;  quota
utilization has varied depending on the product category and market.  Export quotas have been
allocated by the Ministry of Industry and Trade to exporters on the basis of past performance, and toeconomically weak firms;  quotas may be traded between holders and big new exporters.  No further
information was available from the authorities on quota allocation.
(ii) Automotive
58. Domestic output in the automotive industry has seemingly dropped to one sixth of its 1998
level.  As indicated in the previous Review, aided by high import protection and stringent local-content requirements, Indonesia had developed a motor-vehicles industry specializing in assembly
operations (sedan cars, light trucks, vans).  Most assemblers operate in joint venture with
multinational companies (Toyota, Nissan, Daihatsu, Isuzu, BMW, and Peugeot) and are highly
dependant on imports of components.  In 1998, the market collapsed leaving considerable excess
capacity in the industry.
49
59. Since June 1999, a new export-oriented Automotive Development Policy has been
implemented to comply with WTO commitments and promote the component sectors.  Tariff rates in
                                                     
47 Decree 732/2002.
48 WTO document G/TMB/N/381, 5 February 2001.
49 Astra International, Indonesia's largest car maker, temporarily suspended production in June 1998.WT/TPR/S/117 Trade Policy Review
Page 84
all market segments for motor vehicles were substantially lowered (Table AIV.1);  the tariff peak was
reduced from 200% to 80%, and tariffs on CKD (completely knocked down) kits fell from 65% to
25%-50% depending on the engine size.  The tariff schedule for auto components and parts imported
for local assembly has been simplified to a flat ra te of 15% for imported parts for passenger cars and
mini-vans.  Imports of raw materials have been exempt from import duties and VAT.  Tax incentives
for local content have been ph ased out (Chapter III(2)(ix)).
60. Luxury tax rates have remained high, apparently for revenue purposes, and have implicitly
targeted foreign-made vehicles.50  In January 2001, luxury tax rates on sedans and SUVs with engine
size above 4,000cc were raised from 50% to 75%.51  Since  July 2001, motorcycles have been subject
to a luxury tax of 60% (engine size from 250cc to 500cc) or 75% (engine larger than 500cc);  no
distinction is made in CKD or CBU (completely built-up) items.52
61. Import restrictions on all CBU cars have been abolished.53  The importation of used cars with
minimum GVW of 24 tonnes is prohibited.54
62. In the light of these measures, imports of motor vehicles and parts began to pick up as from
1999, to attain around US$1.9 billion (2000 and 2001).55
(iii) Aerospace
63. Indonesia is not a signatory to the Plurilateral WTO Agreement on Trade in Civil Aircraft.  Its
active industrial policy, aimed at fostering aviation construction, has centred on the operations of the
state-owned Indonesian Aerospace Company (name changed from IPPN in 2000).  It is producing a
new passenger aircraft designed in collaboration with a Spanish manufacturer;  about 60% of
components are imported and it has about 10,000 employees.  Exports to South-east Asia have mainly
been under counter-purchase arrangements.  According to the authorities, the company receives no
direct government subsidies.  Currently, there are no plans for its privatization.
64. Although no import duties affect aircraft parts, a 10% VAT and a 30% luxury goods sales tax
are levied on some imported items, including aircraft engines/turbines, turbo jets, turbo props,
airframes, wings, brakes, wheels, tyres, gears, pumps, etc.  Neither tax is applied to imports of
components or parts for use by state-owned companies such as PELITA, Garuda, and Gapura
Angkasa (Airport Services).  When state-owned companies purchase aircraft, the subsequentprovision of parts is normally secured by contract, which sometimes requires a countertrade
agreement.
65. According to the authorities, the prohibition on im ports of aircraft (including helicopters) that
are of the same type or have a function similar to aircraft produced in Indonesia, was removed.
Importation of light aircraft, such as gliders and hang gliders is also permitted when in line withexisting regulations.  All imported aircraft require an import licence;  the Directorate-General of Air
Communications (DGAC), the Bureau of Technology Development and Application (BPPT), and the
                                                     
50 Dun & Bradstreet, Inc. (2001), p. 632.
51 Dun & Bradstreet, Inc. (2001), p. 632.
52 USTR (2002).
53 Ministry of Industry and Trade Decree No. 279/1999 and No. 278/2000.
54 APEC (2002a).
55 Statistics available by UNSO Comtrade for items under HS87.Indonesia WT/TPR/S/117
Page 85
State Secretariat (a ministerial-level body) are involved in the approval and issue of import licences.56
The process should take about six months, but seemingly can take up to two to three years.
(5) SERVICES
66. Services accounted for an estimated 43.9% of GDP in 2001, and approximately 41% of the
employed labour force.  Wholesale and retail trade dominate services (13% of GDP in 2001),
followed by construction (5.6%), public administration (5.5%), transport (4.2%), hotels andrestaurants (3.1%), banking and finance (2.8%), communications (1.2%), and electricity, gas and
water (1.2%).
67. Trade barriers remain in many services sectors.  However, since its last Trade Policy Review,
which coincided with the 1998 economic and financial crisis, Indonesia has relaxed certain trade
restrictions as a result of implementing the IMF's economic reform programme.   Although Indonesiaundertook many additional commitments in the extended negotiations on financial (Fifth Protocol)
and telecommunication (Fourth Protocol) services, including adoption of the Reference Paper, IMF-
sponsored policy reforms since then have surpassed these commitments.  Indonesia's other GATS
commitments, including computer and related services, other business services (e.g. architecture),
professional services (e.g. engineering), construction and related engineering services, do not ingeneral cover cross-border supply, consumption abroad, and presence of natural persons.  Supply of
these services by commercial presence is li mited to joint operations/ventures involving a
representative Indonesian office/Indonesian partner.  Indonesia also made commitments on certain
maritime (e.g. international freight) and tourism services, such as hotels, tourist resorts, and
travel/tour operators.
(i) Financial services
68. Financial sector reform has been at the heart of Indonesia's economic recovery programme.
While implementation of reforms has been slower than expected, some notable progress has been
made, and the sector has been strengthened follow ing the financial crisis.  However, the remaining
reform agenda is substantial, and the process of bank rehabilitation incomplete;  outstanding issues
cover legal, policy, and technical factors.
57
(a) Banking
Background and recent developments
69. Reforms since the last Trade Policy Review of Indonesia have focused on bank rehabilitation,
assisted by the IMF, in the aftermath of Indonesia's financial and economic crisis.  Many non-viable
banks were closed, and troubled banks extensively recapitalized and restructured.  Prudential
regulation and supervision has also been strengthened to improve the banking system's resilience andto restore public confidence.  The Indonesian Bank Restructuring Agency (IBRA), under the auspices
of the Ministry of Finance, was established in January 1998 to implement the rescue package.  Its
mandate was to close, merge, take over, and recapitalize troubled banks with a view to their eventual
sale.  It also has the tasks of recovering bad loans of banks taken over or closed, and of monitoring
and selling corporate assets pledged or transferred from former bank owners, including any personalguarantees, under shareholder settlement agreements as collateral for emergency central bank
liquidity credits.  In addition, the Government introduced a blanket system, guaranteeing all
                                                     
56 BPPT provides approvals on aircraft type, DGAC determines the demand of the passenger/cargo
aircraft, and the State Secretariat grants approvals on the import of the aircraft.
57 World Bank (2003), p. 13.WT/TPR/S/117 Trade Policy Review
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commercial bank liabilities (both on-sheet and off-sheet) and third-party deposits, administered by
IBRA for commercial banks and Bank Indonesia for rural banks.
70. IBRA is due to close in February 2004.  While meeting its financial targets, IBRA's
performance has been mixed;  overall progress in asset restructuring and disposal has been relatively
slow due at times to political and institutional obstacles, including initial uncertainty over interpreting
IBRA's mandate, especially regarding asset disposal, and its legal authority.58  Political interference in
the bank rehabilitation and restructuring processes has also added to delays and inconsistencies.59  An
Oversight Committee (OC), reporting to the Minister of Finance and with strong links to the Financial
Sector Policy Committee (FSPC), was established in July 2000 to enhance IBRA’s performance,
governance, and transparency.60  Despite attempts to accelerate the process, including setting
ambitious targets for IBRA in 2002, achieving its 2004 sunset deadline will be a major challenge;asset transfers to IBRA continued during 2001.  At end 2002, it still had assets with a face value of Rp
270 trillion (Rp 475 trillion at end 2001).  Asset recovery rates, at 42% on average, have also been on
the low side.
61  It is increasingly likely that total IBRA recoveries will not meet bank recapitalization
costs, thereby leaving a large public debt.62  The new arrangements that will be needed to complete
outstanding matters following IBRA's envisaged closure in February 2004, such as disposal of itsremaining stock of assets and transferring responsibility for troubled banks, have yet to be announced.
This has created uncertainty, especially following delays in establishing the Financial Supervisory
Authority (see below).
71. The Government has acquired equity in recapitalized private banks:  four banks taken over by
IBRA and seven joint national domestic banks (Table IV.3).
63  All seven state banks also needed
substantial recapitalization and restructuring;  four of them (Bank EXIM, BDN, BBD, and Bapindo)
were merged to become Bank Mandiri in September 1998.64  State ownership of banks has increased
substantially, and now dominates the sector (almost 85% of total third-party bank liabilities and three-
quarters of the sectors' assets at end 2001).  State bank divestment has lagged.  It was initially due to
be completed by end 2001 with BCA and Bank Niaga being divested in 2000;  at end 2001, only
32.5% of BCA had been divested (10% to the public).65  However, in 2002, IBRA sold a 51% stake
(out of a total state share of 97.2%) in Bank Niaga for Rp 5.6 trillion to a joint-venture, and 40% (outof total state share of 70.3%) of BCA.  Bank Bali was also merged with four weak recapitalized banks
(Bank Universal, Bank Patriot, Bank Prima Express, and Bank Artamedia) to form Bank Permata in
September 2002.  In early 2002, the Government presented a comprehensive plan to Parliament for
divesting remaining banks by 2004, including majority stakes in Bank Lippo and Bank Danamon, and
                                                     
58 IBRA's quasi-judicial powers are contained in the 1998 Indonesian Banking Law (Article 37A) and
expanded in Government Regulation 17.
59 Pangestu and Habir (2002).
60 The OC helped ensure that the restructuring of IBRA's largest debtors met the Corporate Debt
Rescheduling Principles, and has a key role in the Government's new policy of enforcing shareholder settlementagreements.
61 This is due to several factors, including the high degree of impairment of transferred non-performing
loan assets;  overvaluation of pledged shareholder asse ts when originally transferred to IBRA;  and weaker
conditions than expected in Indonesia's financial and property markets.
62 At end 2001, the total value of government bonds issued to fund these activities was Rp 703 trillion,
equivalent to 55% of GDP.  This comprised bank recap italization bonds of Rp 435 trillion (two thirds for state
banks) and inflation-indexed bonds of Rp 267 trillion issued to Bank Indonesia to fund the guarantee scheme.
63 Of the 13 banks taken over by IBRA, nine were merged with Danamon in 2000, and BCA, Niaga,
and Bali were recapitalized.
64 The other state banks (BNI, BTN, and BRI) have continued operations subject to recapitalization and
restructuring.  The four state banks accounted for some half of total banking assets at end 2001.
65 Bank Bukopin was fully divested in late 2001 by the original owners exercising share option rights.Indonesia WT/TPR/S/117
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of 30% of Bank Mandiri, in 2002.66  The Government's latest timetable, announced in November
2002, is to divest at least 51% of Bank Danamon in early (March) 2003 by placement with a strategic
partner, and to sell (as yet unspecified) shareholdings to the public in Bank Lippo, Bank Mandiri, and
Bank International Indonesia.67
Table IV.3
IBRA equity stakes in joint-recap and taken over banks
(Per cent and Rp trillion)
Bank IBRA ownership stake Book value of investment
Joint-recap banks
BII 57 6.6
Lippo 60 6.1
Arta Media 77 0.4
Patriot 81 0.1
Prima Express 89 0.5
Universal 79 4.1
Bukopin 76 0.4
Taken-over-banks
Bali 98 5.3
BCA 93 28.5
Danamon 99 70.6
Niaga 97 9.5
Note: Before sales of equity in BCA and exercise of share option rights by owners of joint-recap banks.
Source: IMF, Indonesia:  Selected Issues , Country Report No. 02/154, July, 2002, p. 33.
Regulatory framework
72. Bank restructuring efforts by Bank Indonesia was focused on achieving a mandatory
minimum capital adequacy ratio (CAR) of 8% ( up from 4%) and an indicative target for non-
performing loans of 5% initially, by end 2001.  Six banks failed to meet the minimum CAR at end
2001;  this had fallen to two by end June 2002.  However, some recapitalized banks with CARs of
under 10% remained fragile, particularly because of the slow economic recovery and corporate debt
restructuring.68  Bank recapitalization was completed in 2000, and in line with the National
Development Programme (PROPENAS) 2000-04, state and private banks were treated uniformly.  No
further recapitalizations are authorized under the legislation.  The share of banks' non-performing
loans has fallen substantially; many such loans we re transferred to IBRA.  The non-mandatory target
of 5% was reset for end 2002, and subsequently postponed again to June 2003.  At end 2002, the
overall ratio of non-performing bank loans was 8.3%;  about 70% of banks had met the 5% target.
Bank intermediation remained sub-optimal; banks continued to hold substantial assets (over one third)
in riskless bonds (such as Bank Indonesia securities and "recap" bonds) and had low loans to deposit
ratios.69  Enhanced prudential requirements, such as  increased minimum capital requirements and
CARs, have applied equally to foreign-owned banks.
                                                     
66 Parliament established a special committee to oversee each bank sale.
67 Indonesia's latest agreement with the IMF included launching the sale of majority stakes in Bank
Danamon (for conclusion by end 2002) and in Bank Lippo by July, to be finished December 2002.  The majority
divestment of Bank Niaga was to be completed by 15 September 2002 (see IMF, 2002d).
68 Bank Indonesia (2002c).
69 To support bank intermediation and help develop a secondary bond market, the share of assets banks
could hold in bonds was raised from 35% to 100% (Bank Indonesia Circular Letter No. 3/18/DPM,31 July 2001).WT/TPR/S/117 Trade Policy Review
Page 88
73. Prudential supervision and regulation, including corporate governance and risk-based bank
monitoring, has been strengthened.  Bank audits following the financial crisis had revealed major
weaknesses in Indonesia's prudential supervision:  key regulations, such as minimum CARs (then 4%)
and legal lending limits, were not properly supervised;  and non-compliance with prudential rules was
widespread.70  Concentrated bank ownership, including links to politically influential business
conglomerates, had contributed to weak enforcement of regulations and supervision.71  A s  a
consequence, banking regulations were amended in 1998 (Act Concerning Banking, No. 10, 1998,
and Bank Indonesia Regulation No. 2/27/2000 Con cerning Commercial Banks, 2000).  The
independence and prudential responsibilities of Bank Indonesia were also enhanced;  it was made an
"independent state institution free from any interference of the Government and or other parties"
tasked specifically with bank regulation and supervision, including both "direct and indirect
supervision" (Act Concerning Bank Indonesia, No. 23, 1999).72  Primary responsibility to issue (and
withdraw) bank-operating licences was also transferred from the Ministry of Finance to Bank
Indonesia.
74. The statutory criteria Bank Indonesia must consider in granting a banking licence includes an
economic needs test whereby it assesses the degree of healthy competition among banks, the degreeof bank density within certain areas, and the distribution of national economic development.   Opening
(and closing) of bank branches and sub-branches, including representative offices of foreign banks,
must also be approved by Bank Indonesia.
73  Licensing provisions are generally applied uniformly to
domestic and foreign banks.   Restrictions limiting foreign bank branches outside Jakarta to six other
commercial cities were removed in 1999 (Bank Indonesia Decree No. 32/37/KEP/DIR, 12 May).
Foreign banks have generally maintained about two to  three branches each in Indonesia, especially in
Jakarta.  Due to bank closures and mergers, the number of banks fell from 238 in 1997 to 145 in 2001,and to 141 in 2002;  34 had foreign interests.
75. Commercial banks may be established only by Indonesian interests or as joint ventures.
Foreign banks operate in Indonesia as licensed branches (ten in 2001, e.g. Citibank, Standard
Chartered, ABN Amro, and the Hong Kong Shaghai Bank), provided they are among the 200 largest
world banks (and have at least an "A" credit rating from an international credit agency) and have anoperating fund of at least Rp 3 trillion
74;  or if they operate as joint venture banks in partnership with
Indonesian interests.  Foreigners may also purchase shares of an Indonesian commercial bank directly
or on the stock exchange;  such arrangements were  relaxed in 1999 to facilitate foreign ownership.
Foreign investors can own up to 99% (previously 85%) of paid-up capital in national commercial
banks, both listed and unlisted (including joint ventures).
76. Bank Indonesia is implementing a Master Plan for the Enhancement of Bank Supervision
Effectiveness as a blueprint to strengthen supe rvision.  It incorporates a special surveillance
programme involving off-site and on-site examinations.  Bank management will also be improved,
through good governance and better banking infrastructure, including expansion of prudentially sound
sharia banking networks.  Bank Indonesia must take certain corrective measures to restructure
                                                     
70 For example, all state banks and most private national banks had violated legal lending limits and
limits on net open positions in foreign exchange.
71 Pangestu and Habir (2002).  Although there were many banks, the top ten private banks and the top
six state banks had accounted for three-quarters of total bank assets.
72 As an independent state institution, Bank Indonesia has full autonomy to formulate and implement its
tasks and authority as stipulated in the Act, and external parties are strictly prohibited from interfering.  It must
refuse or disregard any such attempts in any form from any party.
73 Only the top 300 largest banks can open representative offices in Indonesia.
74 Board of Directors of Bank Indonesia Decrees No. 32/37/KEP/DIR and No. 32/36/KEP/DIR,
12 May 1999.Indonesia WT/TPR/S/117
Page 89
troubled banks, and to revoke licences where necessary to safeguard the banking system;  and initiate
criminal action against bank owners and management that "knowingly and wilfully" fail to adhere to
legislative requirements, including prudential controls (Act Concerning Banking, No. 10, 1998).
Bank Indonesia has implemented a three-tiered surveillance system (Bank Indonesia Regulation No.
3/25/PBI/2001, December 2001).  Normal, at least yearly, supervision is supplemented by intensive
supervision for banks experiencing difficulties.  These banks are more closely monitored, and mustprepare an approved action plan to correct problems.  Seriously troubled banks are subject to special
surveillance, and must meet Mandatory Supervisory Actions, e.g. they are prohibited from making
dividend payments, implemented by Bank Indonesi a Cease and Desist Orders.  Banks covered by
such surveillance (a maximum of six months for non-listed banks and nine months for listed banks)
are either placed under IBRA's control as a "bank under restructuring" or if insufficient or unfeasible,designated as a "bank suspended from business operations" and liquidated.   Following the release of
two banks late in 2002, no banks were under special surveillance.
77. The supervision plan calls for the adoption of the BIS's 25 Basel Core Principles for Effective
Banking Supervision.  By September 2000, Indonesia had complied fully with two of these principles,
and was largely compliant with six others (Table  IV.4).  Bank Indonesia has also implemented "fit
and proper tests" for bank owners and managers, as well as "know-your-customer" principles.  The
blanket government guarantee on bank liabilities is to be removed progressively and replaced with a
deposit insurance scheme, originally by 2004 (Act Concerning Banking No. 10, 1998).   The Deposit
Insurance Agency Working Team, a Task Force of Ministry of Finance and Bank Indonesia officials,
is examining introduction of the new scheme, including the phasing out of existing guarantees.   The
scheme will provide for a limited guarantee for commercial and rural credit bank depositors so as to
reduce "moral hazard" problems associated with bank and customer behaviour towards risk.  It will beadministered by an independent deposit insurance institution and funded by bank premiums, initially
flat rate, but subsequently adjusted across banks to reflect banks' risk levels.
75  It will be compulsory
for all, including foreign, banks.
78. The large spread between the average rate of interest charged on loans (working capital) and
the rate paid on deposits is indicative of a lack of competition in the banking sector and its resultinginefficiency.  The spread on interest charged by both commercial and state banks rose in 2000;
according to authorities, this reflected mainly the increased costs of doing business in Indonesia
owing to political uncertainties, bu t this narrowed in 2001(Chart IV.2).  In addition, the rates charged
by both types of banking institution have converged.
79. An independent Financial Supervisory Authority (FSA) is to be established, initially by
end 2002 (Act Concerning Bank Indonesia, 1999).  Draft legislation was to be submitted to
Parliament during 2002.  This is now expected to be by mid 2003, and the FSA will become fully
operational within two years of being established.  It will supervise all financial institutions, including
their adherence to prudential rules;  supervisory functions, including licensing, will be gradually
transferred from Bank Indonesia.
76  The non-bank financial activities covered will include insurance,
venture capital, pawn operations, leasing, pension funds, securities, and public fund managers.
                                                     
75 Bank Indonesia (2002a) , pp. 149-150.
76 Bank Indonesia (2002a) , pp. 153-154.WT/TPR/S/117 Trade Policy Review
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Table IV.4
IMF Assessment on Indonesia’s compliance of 25 Basel core principles (CPs)
Degree of compliance Principles Remarks
Compliant
2 CPs CP 1(1) Objectives
CP 1(2) Independence and resources
CP 1(30 Legal framework
CP 1(4) Enforcement powers
CP 1(5) Legal protection
CP 2 Permissible activities
Largely compliant, and
CP 21 Accounting efforts to achieve full compliance
under way (2 CPs);CP 22 Remedial measures
CP 1(6) Information sharing
CP 5 Investment criteria
CP 24 Host country supervisionefforts to achieve full compliance not
under way (4 CPs)
CP 25 Supervision of foreign establishments
Source: Bank Indonesia, Annual Report 2001 , p. 133.
(b) Insurance
80. At end 2002, there were 173 insurance companies, of which 63 were life insurance
companies.  There was one state and 23 joint-venture life companies, and three state and
24 joint-venture non-life companies.  The sector's total assets amounted to Rp 41 trillion
(US$4.6 billion) at end 1997.  Joint venture companies account for just over half of life insurance
business, with AIG-Lippo Life (with U.S. interests) the second largest Indonesia insurer.10.015.020.025.030.035.040.0
1997 1998 1999 2000 2001 2002Chart IV.2         
Interes rates on credit and deposit, 1997-2002
Per cent
Bank of Indonesia, Indonesian Financial Statistics , September 2002. Source : State bank, credit , working capitalState bank, deposit , 3-months
Commercial banks, deposit , 3-monthsCommercial banks, credit , working capitalIndonesia WT/TPR/S/117
Page 91
International penetration has been much lower in the non-life insurance market, where the state-
owned Jasa Indonesia the main company.
81. The Ministry of Finance (Directorate General of Financial Institutions, Directorate of
Insurance) will continue to regulate and supervise the insurance industry until the FSA is established.
Confidence in Indonesia's insurance industry, and more generally in its commercial legislation and
enforcement, suffered a setback following the prot racted two-year legal dispute involving Manulife
Indonesia (AJMI), a joint venture involving the Canadian firm of Manulife Financial as controlling
shareholder, and its former bankrupt Indonesian partner, PT Dharmala Sakti Sejahtera (DSS).  After
Manulife Financial acquired its local partners' shares in October 2000, it was involved in nine court
cases, including five unsubstantiated attempts by its former partner for it to declared bankrupt in
commercial courts.77  In June 2002, Manulife Financial was declared bankrupt, but this decision was
overturned on appeal to the Supreme Court in July.  AJMI was Indonesia's fourth-largest insurance
firm.
82. All insurance companies must be licensed and meet certain prudential requirements, such as
minimum capital levels and expertise, "and support the industry's growth" (Insurance Law, No. 2,
1992).  The Government improved prudential supervision, including new regulations, effective April2000, requiring insurance companies to phase in solvency requirements over five years based on
"risk-based capital", and new companies to have minimum capital levels of Rp 100 billion.  Joint
ventures have relied in practice on foreign partners' contributing greater capital to meet these
requirements.  The Government also introduced more  stringent financial disclosure requirements for
insurers.
83. Only a locally incorporated insurer can supply insurance products, except those unavailable in
Indonesia.  However, wholly foreign-owned companies in Indonesia may purchase any form ofinsurance from overseas.   Foreign branches are not permissible.  Foreign insurers (including
reinsurance companies) can operate in Indonesia only as a joint venture with a local firm or as a
shareholder of a listed company.  There are no restrictions on reinsurance overseas, except that it must
have a minimum BBB rating.   Maximum foreign ownership in a joint venture is 80%.
78  There is no
limit on foreign shareholding of a listed company.  Indonesia eliminated the discriminatory treatmentin minimum capital requirements for foreign-owne d insurance and reinsurance firms in Indonesia
in 1999.
(c) Capital markets
84. The Indonesian securities and exchange commission (Bapepam) is responsible for prudential
regulation and supervision of stockbrokers and securities firms.  It is under the Ministry of Finance,which licenses such firms.  These functions are to be transferred to the FSA.
85. Since 1997, foreign investors have been allowed to purchase up to 100% of publicly held
stock of non-bank financial institutions both in the primary market and on the stock exchange
(Minister of Finance Decree No. 455/KMK.01/1997).  However, for securities companies, foreign
securities financial institutions licensed and regulated by their home regulator may own a maximumof 99% of shares, unless obtained under an Initial Public Offering, in which case 100% ownership is
allowed (Minister of Finance Decree No. 90/KMK.010/2001).  Foreign non-securities financial
institutions can own up to 85% of a joint-venture securities firm.  Minimum capital requirements for
local securities companies are lower than for joint ventures.  Finance companies engaged in leasing,
                                                     
77 World Bank (2003), p. 34.
78 According to the authorities, foreign ownership above 80% may be possible if, for example, a joint
venture required additional capital that the local partner could not provide.WT/TPR/S/117 Trade Policy Review
Page 92
factoring, credit cards, and consumer finance services must be licensed by the Minister of Finance
(Minister of Finance Decree No. 448/KMK.017/2000).79  Joint-venture finance companies are
allowed, with a maximum 85% foreign ownership.  Minimum capital requirements for local finance
companies are lower than for joint ventures, which must deposit 100% more paid-in capital.  As of
September 2002, there were 244 finance companies, with total assets of Rp 39.4 trillion.  The
dominant activity was consumer credit services.
86. Market capitalization of stocks listed on the Jakarta Stock Exchange fell in 2001 from
Rp 259.6 trillion to Rp 238.3 trillion.  Foreign transactions fell from 20.1% of the total amount traded
to 9.9%, owing to security and political uncertain ties and international downgrading of Indonesia's
sovereign credit rating.  Bapepam's organizational structure was revised.  Corporate bond trading also
fell;  a 0.3% tax on the transaction value of bonds traded, which was levied in 2001, was replaced in2002 with a withholding tax of 20% on interest from bonds.  Trading of government bonds in the
secondary market expanded substantially in 2001.
87. Indonesia has taken steps to establish a government bond market, which over time should
help reduce its excessive dependence on foreign borrowing.  An Office for Debt Management has
been established in the Ministry of Finance, and money markets are being deepened by creating asound trading and settlement infrastructure, and enhancing the legal framework for debt securities.
Primary dealers are also being selected to deal in government securities in the secondary market.
(ii) Communications
(a) Telecommunications
88. Indonesia's telecommunications market has expanded substantially since 1998.  The number
of fixed lines rose from 5.6 million in 1998 to 7.1 million at end September 2001, equivalent to a
teledensity per population of over 3.7%.  There were 5.3 million mobile subscribers, equivalent to2.5% of the population (up from 1.1 million (0.5%) in 1998).  The number of Internet users was
2 million at end 2000, up from 0.5 million at end 1998;  there were 27 Internet service providers.
During 2000, total telecom revenue was Rp 19.1 trillion (up from Rp 10.9 trillion in 1998);  about half
came from telephony services, especially mobile communications (36%).   
89. Indonesia’s development targets for telecommunications are to increase teledensity for fixed
lines to 8.7% (19 million lines) by 2004 (Repelita VII) and to 12.4% (29 million lines) by 2009
(Repelita VIII).
Background and recent developments
90. Indonesia has traditionally encouraged business or private investment in basic
telecommunications services through joint operations, joint ventures or management contracts incooperation with the state-owned monopolies, Telkom (P.T. Telekomunikasi Indonesia) for domestic
(local and long distance) calls and Indosat (P.T. Indonesian Satellite Corporation) for international
calls.  For example, joint operating schemes (known as KSOs) provided 15-year concessions to
private operators (all including at least one foreign telecommunications company) to provide fixed-
line services in five of Telkom's seven operating regions (excluding Jakarta and Surabaya) on a
                                                     
79 The deadline for finance companies to meet minimum capital requirements was extended for
two years from end-October 1998 (Minister of Finance Decree No. 446/KMK.o17/1998, 12 September 1998).Indonesia WT/TPR/S/117
Page 93
revenue-sharing basis.80  Telekom and Indosat were corporatized and partially divested in 1995 and
1996 when equity was offered to the public (Telekom is 24.15% privately owned and Indosat 25%).
Telekom was given statutory monopolies for national services of 15 years (until 2011) for local and
ten years (until 2006) for long-distance calls.  A second international operator, Satelindo (P.T. Satelit
Palapa Indonesia), a joint-venture between Teleko m (22.5%), Indosat (7.5%), Deutsche (25%) and
other Indonesian interests (45%), was licensed in 1993 and a statutory duopoly accorded to Indosat oninternational calls until 2005.  Price competition was prohibited;  both had to charge the tariffs set by
the Government and could compete only on quality.  Satelindo was also awarded a digital mobile
GSM licence in 1994.
91. Non-basic telecommunication services, such as mobile telephony, data transmission, paging,
Internet services and satellite systems were liberalized under the 1989 Telecommunications Law andopened to independent private participants.  The mobile market has grown rapidly;  almost all
suppliers use GSM facilities.  At end 2000, there were seven mobile cellular operators;  three
nationwide GSM-900 networks (upgraded to GSM-1800)  and four regional analogue networks.  All
were joint ventures involving Telekom.
81  Telkomsel's market share of mobile subscribers was 46%
and Satelindo's was 29% at end 2000.
92. Indonesia agreed with the IMF to reform its telecommunications market, including rapid
restructuring and privatization.82  It is intended to establish an independent regulatory agency and to
provide for interconnection and universal service obligations.  Telekom and Indosat were to be
transformed into competing full-service providers;  all non-core equity holdings were to be divested
by end 2001.  In May 2001, Telekom increased its holding in the largest mobile operator, Telekomsel,
to 77.7% by purchasing Indosat's 35% equity (for US$945 million), while Indosat bought (for
US$186 million) Telekom's 22.5% shareholding in Satelindo, raising its stake to 30%.  Indosat alsopurchased Telekom's shares in PT Lintsarta, a major data service provider, and received Telekom's
operations in KSO IV in Central Java (for US$375 million).  Telekom is renegotiating and buying out
KSOs, most of which became technically bankrupt after the financial crisis.  It repurchased the KSO
VI covering Kalimantan.  These ownership changes further concentrated telecommunications in the
state duopolies.  Indosat in particular now has control over one fifth of Indonesia's fixed lines and,having gained management control over Satelindo, has an effective monopoly on international calls.
83
Regulatory framework
93. Telecommunications is regulated by the Directorate General of Posts and
Telecommunications (Postel), a unit of the Ministry  of Communications.  Indonesia aims to convert
Postel into an independent regulator, which would separate the policy and regulatory functions.  TheGovernment's Blueprint of Policy on Telecommunications, issued in July 1999, called for substantial
changes, including improved sector performance, liberalization through competition to end
monopolies, increased regulatory transparency, and enhanced strategic alliances with foreign
investors.
                                                     
80 These accounted for almost half of Indonesia's fixed telephone lines in 2000.  There was also a build-
operate-own scheme whereby private operators entered a joint-venture with Telekom to develop and operatetelephone services in a designated area.
81 For example, of the other two GSM nationwide operators, Telkomsel is 42.7% owned by Telkom
(also 35% by Indosat, 17.3% by KPN (Netherlands), and 5% by PT Setdco Megacell Asia);  and Excelcomindois 6.9% owned by Telekom (also 64.7% by Rajawali, 23.1% by Verizon (USA), and 5.2% others).
82 Government of Indonesia (2000).
83 ITU (2002), p. 7.WT/TPR/S/117 Trade Policy Review
Page 94
94. A new Telecommunications Law (No. 36, 1999, effective 8 September 2000) and
accompanying regulations (Government Regula tion on Telecommunication Operation, No. 52, 2000)
eliminated the concept of "organizin g entities";  it is no longer a requirement for Telekom to have a
stake in all telecommunication operators.  It also classified telecommunication suppliers into network,
service or special operators.  Private entities may operate networks and provide services either by
leasing network facilities from network operators or using their own.  Network providers must allowinterconnection upon request at rates agreed according to government guidelines. Telecom services
must also be priced according to government gu idelines.  All operators must be licensed by the
Minister of Communications;  a principle licence and a business licence are needed.  Licence fees are
set as a percentage of revenue.  In August 2001, a new Ministry of Communication and Information
was created.
95. Current legislation allows for early termination of Telekom's exclusive rights subject to
compensation agreed with the Government.  In August 2000, it was announced by decree that removal
of exclusive licences would be accelerated.  Exclusivity for local services is to terminate by
August 2002, and by August 2003 for national long-di stance and international calls.  Indosat was
awarded a local telephony licence in August 2002 and is to be granted a long-distance licence in2003.
84  Telekom is to be given an international licence in 2003.   This would mean a duopoly in
national telephony and three operators for international services.  While no restrictions exist on
foreign operators entering the basic telecommunications market, joint ventures in telecommunication
services were limited to a maximum foreign equity of 35%.  However, the divestment of a 42% stake
in Indosat in December 2002 has exceeded this limit.   Bypass and call-back services remain
prohibited.
96. Telecommunication network operators are required to develop and provide
telecommunication networks in accordance with a Technical Basic Plan agreed with the Minister.
Conduct that "causes monopoly practices and unfavourable competition" in telecommunications are
legislatively forbidden.  Service and network providers cannot discriminate between users.  All
network and service operators must contribute to th e provision of universal services in remote areas.
97. The Government also issued guidelines and a five-year action plan for information and
communication technology developments in 2001.85
(b) Broadcasting and audio-visual
98. After the Ministry of Information was abolished in 1999, Postel and the Ministry of
Transportation assumed responsibility for regulating broadcasting until the Ministry of
Communications and Information was formed in early 2001.  Film censorship is conducted by theFilm Censorship Board of the Ministry of Culture and Tourism.
99. Radio and television broadcasting services are reserved for government and licensed private
broadcasting institutions (Act on Broadcasting, No. 32 of 2002, which replaced Act No. 24, 1997).
The Ministry issues (extendable) five-year licences for television and ten-year licenses for radio.  All
other broadcasting services are to be provided by special broadcast management institutions, whichmust be licensed Indonesian companies.  Foreign ownership of private or special broadcast
institutions is prohibited.  Foreign investors are also prohibited from investing in film production,
technical filming services, export and import of mo vies, film distribution, and screening.  Indonesia
                                                     
84 Initially, Indosat was allowed to serve only Jakarta and Surabaya until 30 November;  thereafter it
was issued with a nationwide licence.
85 Presidential Decree No. 6, Guidelines for the Development and Implementation of Information and
Communication Technologies in Indonesia , April.Indonesia WT/TPR/S/117
Page 95
prohibits foreign film and videotape distributors from establishing branches or subsidiaries.  Under
the Film Law, provision of importation and distribution services is reserved for 100% Indonesian-
owned companies. Importation and domestic distribution of U.S. films must be handled through a
single organization, the European and Amer ican Film Importers' Association (AIFEA).86
100. Private and government broadcasters must meet  local-content provisions and 60% of air time
must comprise locally made programmes.  English may be used only if it is needed to support orintroduce a specific programme.  English broadcasts must have either Indonesian narrative (or text for
movies).  The independent Commission for Broadcasting handles broadcasting issues.
(iii) Transportation
(a) Road and rail
101. The state-owned corporation, PT Jas Marga, handles the construction, operation, and
maintenance of toll roads.  Foreign investment in developing toll roads is sought through joint
ventures.  To improve transparency, the Toll Road Development Renegotiating Team, formed in
April 2002, examines joint-venture arrangements;  agreements found to be infeasible and unable to
start within one year can be revoked and re-offered for open tender.
87  PT Jasa Marga has also
resumed construction of certain toll roads financed by bonds.
102. The Directorate General of Land Communicat ions (Ministry of Communications and
Information) is responsible for road and rail transportation.   Transportation of dangerous goods,
special goods, and heavy-duty equipment is regulated, including by technical requirements.   Transport
border crossings were informally established with Malaysia, Brunei Darussalam, and Papua New
Guinea in 2002.   Transport border crossing regulations apply to both goods and passengers, and
cabotage restrictions apply.  Foreign investment is prohibited in public transport (taxi and bus
services).  The Government subsidizes passenger rail and bus (economy) travel, but intends to phaseout such subsidies gradually.
103. Trains are the most common form of transportation.  In 2000, they carried 19.5 million tonnes
of freight and 19.2 million passengers.  The state-owned railway company became a limited liability
company in June 1999 and was re-named PT Kereta Api Indonesia.  A double-track railway will be
constructed between Jakarta and Surabaya; priority is to be given to the Cikampek-Cirebon section.
There has been considerable investment in rail infrastructure, including in passenger transportation.
The Government is rehabilitating rail services in Aceh, including widening the track gauge from
750 mm to 1,067 mm as used in North Sumatra.
104. The private sector can develop railway infrastructure, operate railway networks, and manage
related facilities, mainly through revenue sharing contracts and joint operating schemes. Foreigninvestment of up to 95% in joint ventures is allowed in public train services.  A number of urban mass
transit systems, such as the Jakarta MRT project, postponed after the financial crisis, are being re-
considered.
(b) Air
105. Indonesia relies heavily on air transport because of its island geography.  In 2000, there were
9 million international and 19 million domestic passenger movements (corresponding amounts of
cargo carried were 242,000 tonnes and 279,000 tonnes).  There are some 500 airports and/or air strips;
                                                     
86 U.S. Embassy Jakarta (2002).
87 British Embassy in Indonesia (2001b).WT/TPR/S/117 Trade Policy Review
Page 96
about 150 are administered by two state-owned enterprises, PT. Angkasa Pura I and PT. Angkasa
Pura II;  the rest are operated by missionary or ganizations, mining companies, and other private
groups.  The Directorate General of Air Comm unications (Ministry of Communications and
Information) is responsible for regulating civil aviation, including flight safety.  The Civil Aviation
Act No. 15, 1992, is being revised to reflect regional autonomy, fair competition legislation, safety,
and security issues.  The airline industry has been adversely affected by reduced tourism following the
bombings in the United States in September 2001 and in Bali in October 2002.
106. Privatization of the State's 49% stake in PT. Angkasa Pura II, which operates and manages
Soekarno-Hatta Jakarta International Airport, was postponed, initially until 2001.  Its privatization is
still being discussed by Parliament and the Ministry of State-owned Enterprises, and there is no
specific time frame.
107. Scheduled domestic flights are open so that licensed private operators can compete with the
national state carrier, Garuda, and its domestic subsidiary, Mepari Nusantara, including on the busiest
routes e.g. Jakarta to Surabaya.  Foreign operators of scheduled domestic services are required to
undertake a joint venture, in which foreign ownership of up to 49% is allowed.   Foreign airline
companies may provide international and domestic passenger air charter services, based on point-to-point services (without having to appoint general sales agents in Indonesia), but must be genuine
charter operations and cannot advertise or sell tickets to the public.
108. Indonesia has 64 bilateral agreements governing international aviation;  34 foreign airlines
from 25 countries operate from the country.  Such agreements normally exchange "third and fourth
freedom" traffic rights to operate direct services between Indonesia and bilateral partners, on a
reciprocal basis.  "Fifth Freedom" traffic rights apply to airlines from a few countries, such as
Singapore.  Almost all bilateral agreements allow multiple carriers and destination points within
Indonesia;  carriers can fly between these points.  Indonesia does not allow cabotage ("eighth
freedom") rights i.e. carriage of domestic passengers and cargo  between destinations within
Indonesia.   Indonesia participates actively in the International Civil Air Transport Organization
(ICAO).  It also participates in ASEAN civil air transport agreements, at both the sub-regional and
regional level, for example the Air Transport Working Group.
(c) Maritime
109. Maritime transport, especially inter-island services, is also important to Indonesia.  Foreign
investment in inter-island shipping services is prohibited.  Cabotage restrictions also apply;  the
Government may relax these restrictions on some routes, selectively, to allow foreign ships to carry
certain commodities if there is a lack of Indonesian shipping capacity (price of domestic services isnot a factor in this assessment).  Measures have been taken, however, to allow greater foreign
participation.  Foreigners can hold up to 95% equity in ocean freight services in a joint venture with
Indonesian partners (well above the 51% commitment in the WTO).  There are no entry barriers for
foreign vessels in Indonesian ports that are open for international trade, provided they meet
international safety, operation, and crew standards.  Foreign ships dominate international shipping.
Port services, such as pilotage, towing, tug assistance, anchorage and wharf access, and emergency
repair facilities are provided on reasonable and non-discriminatory terms and conditions.
88  Foreign
shipping companies operating international serv ices to and from Indonesian ports must, however,
appoint an Indonesian shipping company as an agent (Government Regulation No. 82/1999).
Indonesia is a member of the  International Maritime Organization (IMO).  It does not participate in
any international shipping cartels.  Ports are classified into public ports (for public use) and special
                                                     
88 APEC (2002b).Indonesia WT/TPR/S/117
Page 97
(industrial) ports that support industries such as manufacturing, forestry, fishing, mining and tourism.
There are approximately 725 public ports;  111 are managed by four state-owned port operators (PT
Pelabuhan Indonesia (Peli ndo) I, II, III and IV).89  In 2001, the Government divested 51% of PT
Pelindo II’s equity in PT Jakarta International Container Terminal, which operates terminals at
Tanjung Priok port in Jakarta.  It also sold 49% of shares of PT Pelindo III in PT Terminal Petikemas,
which operates a container terminal in Tanjung Perak port in Surabaya.  There are 1,156 special ports,run by public or private industrial concerns.  There are 156 ports open for international maritime
transport;  these are both public and privately owned.  The Directorate General of Sea
Communications at the Ministry of Communications and Information is in charge of long-term port
development.  A foreign investor can participate in certain port activities, such as extending port
capacity, construction, and management, but only as a joint venture with a local partner, as anIndonesian legal entity, or in joint operations with the Indonesian Port Corporation (foreign equity is
limited to 49% for the development of basic infrastr ucture and 95% for super infrastructure, such as
port handling equipment, building and utilities).  In 2000, the four major ports of Belawan, Tanjung
Priok, Tanjung Perak, and Makassar handled 23 million tonnes of international freight;  corresponding
inter-island freight was 36 million tonnes.
(iv) Tourism
110. International tourism is increasingly important for Indonesia, particularly for Bali where one
third of the economy depends directly on tourists.  Nationally, there were approximately 5.1 million
visitors, accounting for 9% of total exports (in value terms), in 2001.
90  However, the industry has
suffered severely from several recent developments, including the political upheavals during 1998 and
the East Timor crisis in 1999.  The industry was again hit by the 11 September 2001 events in the
United States, which adversely affected global tourism, and the bombing in Bali in October 2002.Occupancy rates at hotels in major tourist destina tions have declined recently from already low levels
to around 30%;  in Bali they dropped from 60% to below 10% after the bombing.  The Government
implemented various rescue (in late 2002), rehabilitation (first half of 2003) and normalization
programmes (second half 2003).  The rescue programme included special support arrangements and
additional overseas export promotion.  Bali tourism is beginning to rebound. Most foreign tourists,especially in Bali, are Japanese, Australian, or Taiwanese.
111. As part of the decentralization of government responsibilities, regulatory functions for
tourism are increasingly being transferred to the provinces.  Regulation and licensing of hotels, travel
agents, tour operators, resorts, and tourism consultancy services will be fully transferred to district
governments.
91  Foreign investment is limited to 3, 4 or 5 star hotels.  A tour operator must be a travel
agent located in Jakarta or Bali;  while the maximum number of travel agents and tourist operators
scheduled in Indonesia's WTO commitments is 30, there are actually 55.92  Tourism consultancy
services must be registered with the Ministry of Justice and Human Rights.93  Foreign investment in
tourist resorts, covering 3, 4 or 5 star hotels, marinas, golf courses, and other sporting facilities, is
allowed up to 100% in the eastern part of Indone sia, Kalimantan, Bengkulu, Jambi, and Sulawesi.94
In other areas, foreign investors are subject to maximum equity of 49% and lower-capital restrictions.
                                                     
89 British Embassy in Indonesia (2001b).
90 World Bank (2002).
91 APEC (2001).
92 APEC (2001).
93 APEC (2001).
94 APEC (2001).Indonesia WT/TPR/S/117
Page 99
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