Indonesia National Trade Estimate 2007

UNCLAS SECTION 01 OF 10 JAKARTA 003098

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SINGAPORE FOR SUSAN BAKER

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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

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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

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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.

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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,

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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

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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

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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