Indonesia National Trade Estimate 2007

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