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Cablegate: Indonesia Trade and Investment Highlights - May-

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E.O. 12958: N/A
JUNE 2006

1. Summary: Minister of Trade Mari Pangestu met with
Parliament on June 7 and 22 to outline key provisions of the
Government of Indonesia's (GOI) draft investment law.
Investment Coordinating Board (BKPM) figures showed foreign
investment approvals dropped to USD 3.66 billion for the
first five months of 2005 from 4.87 billion during the same
period in 2005, a decline of 33.1 percent YoY. Indonesia
and Singapore signed a framework agreement on June 25 to
develop a "Special Economic Zone" in the Indonesia islands
of Batam, Bintan and Karimun. Major labor federations on
June 19 cancelled earlier plans to hold a national bipartite
meeting with employers at the end of June to discuss
proposed revisions to Indonesia's labor law. Minister of
Manpower and Transmigration Erman Suparno announced the same
day the GOI would focus on establishing social guarantees
for workers instead of amending the labor law. Minister of
Trade Pangestu noted on June 19 that her ministry had
compiled a list of ten priority sectors to guide Indonesia's
participation in bilateral and multilateral trade
negotiations. The Ministry of Industry said it expects USD
2.5 billion in new investment in Indonesia's electronic
sector by 2009. The GOI signed agreements on May 29 with
investors to build seven toll roads worth USD 1.4 billion.
The Business Software Alliance, with support from the
police, is investigating over 300 tips to its hotline of
suspected end-user software piracy. End Summary.

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Parliament Debates Draft Investment Law

2. Minister of Trade Mari Pangestu met with members of
Parliamentary Commission VI on June 7 and June 22 to outline
key provisions of the Government of Indonesia's (GOI) draft
investment law. In the two meetings, Commission VI members
asked questions or raised concerns about a number of
provisions in the draft law, including the wisdom of moving
from an investment approval to an investment registration
regime and reorganizing the Investment Coordinating Board
(BKPM) into an investment promotion agency. The MPs also
raised concerns about providing national or non-
discriminatory treatment for foreign investments and
permitting the uninhibited repatriation of profits and
capital. They urged the Minister to protect vulnerable
industries through a clearly defined "negative list" and set
up a system of investment incentives.

3. On June 22, Pangestu told the Commission VI members that
the new law would simplify and shorten procedures for
establishing a new business by establishing online
registration systems managed by regional Ministry of Justice
offices. The draft law would provide foreign and domestic
investments with equal treatment, with the exception of
investments in sectors the GOI specifies in a negative list.
She emphasized that under the draft law, the GOI would
continue existing policies for repatriation of profits.

Foreign Investment Declines

4. The BKPM announced on June 17 that foreign investment
approvals dropped to USD 3.66 billion from January to May
2006 from 4.87 billion during the same period in 2005, a
decline of 33.1 percent. Meanwhile, domestic investment
approvals for the first five months of 2006 rose to Rp 60.48
trillion (USD 6.6 billion) from Rp 35.18 trillion (USD 3.8
billion) during the same period in 2005, a 72 percent
increase. BKPM also reported that foreign realized
investment from January to May 2006 rose to USD 3.14
billion, a 5.2 percent increase from USD 2.98 billion in
2005. Metals, electronics, paper and printing, textiles,
automotive and transportation, and the trade and repair
sectors attracted the greatest investor interest.

5. Analysts have raised questions about the accuracy of
BKPM data as a barometer of Indonesia's investment picture
because the agency's data do not include the financial
services or extractive industries sectors (oil, gas and
mining). In addition, analysts have noted significant
discrepancies between BKPM and Bank Indonesia investment
data likely due to delays in BKPM field verification
surveys. BKPM Chairman Muhammad Lutfi explained in June

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that the data discrepancies are in part due to the fact that
BKPM figures include local investor equity and domestic
loans in support of foreign investments.

Indonesia-Singapore SEZ Cooperation

6. Indonesian President Susilo Bambang Yudhoyono and
Singaporean Prime Minister Lee Hsien Loong met in Batam on
June 25 to witness the signing of a bilateral framework
agreement to establish "Special Economic Zones" (SEZ) on the
Indonesian islands of Batam, Bintan and Karimun. Yudhoyono
expressed hope that the agreement would attract foreign
investment to the islands by providing one-stop services
that will reduce the high cost of doing business. Indonesia
also hopes to benefit from Singapore's massive business
network, as well as technological and promotional skills.
Singapore, in return, will provide investment advice, help
promote the three islands as manufacturing destinations, and
provide capacity building for Indonesian officials and
workers. According to GOI officials, the Batam framework
will serve as a model for other planned SEZ's throughout the

Labor Law Reform Losing Steam?

7. At a June 19 meeting, representatives of Indonesia's
largest labor federations reportedly decided to cancel plans
to hold a "national bipartite meeting" with the Indonesia
Employers Association (APINDO) in late June. The meeting
had been planned to try to resolve differences over GOI
plans to revise the country's labor laws. Investors have
complained that restrictions in Indonesia's labor law,
particularly provisions related to severance pay and
contract workers, significantly deter new manufacturing
investment in Indonesia. President Yudhoyono has instructed
an independent academic team from five universities to study
the issue and provide its recommendations. Separately, on
June 19, Minister of Manpower and Transmigration Erman
Suparno reportedly said that the GOI was focusing its
attention on establishing social guarantees for workers
rather than amending the labor law (Law 13/2003). However,
Suparno did not specifically state that the GOI had
abandoned its stated plans to amend the labor law in 2006.

GOI Announces Ten Priority Products

8. On the sidelines of the annual congress of the
Indonesian Economists Association (ISEI), Minister of Trade
Mari Pangestu announced on June 19 that the GOI had
prioritized ten economic sectors for further development.
The list of priority products would guide and facilitate GOI
positions at bilateral and multilateral trade negotiations.
They are:

-- Textiles and garments
-- Electronics
-- Automotive spare parts
-- Cocoa
-- Coffee
-- Shrimps
-- Crude palm oil
-- Furniture
-- Handicraft
-- Shoes/footwear

GOI Targets USD 2.5 Billion Electronics Investment
--------------------------------------------- -----

9. Ministry of Industry Director of Electronics Abdul Wahid
announced on June 19 that the GOI expects new investment in
the electrical and electronics sectors to reach USD 2.5
billion by 2009. Although Indonesia's electronic industries
are currently located primarily on Java and Batam Islands,
Wahid noted that the GOI would seek to develop the industry
in other areas such as Medan and Makassar. With an
additional USD 2.5 billion in investment, Wahid said he
expects the sector could directly employ another 150,000
workers. In 2005, Indonesia's exports of electrical and

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electronic products reached USD 7.38 billion and the sector
employed 230,000 workers. Indonesia's main exports of
electronic and electrical products include:

-- Flat screen televisions, LCD 29 inch and above;
-- Air conditioners;
-- Washing machines; and
-- Refrigerators.

Investors Sign Toll-Road Project Agreements

10. On May 29, the GOI singed agreements with six separate
investors for 155 km of toll road projects worth an
estimated Rp 12.7 trillion (USD 1.4 billion). The
expressways will be located in Java and Sulawesi and
construction will begin next year, according to the Ministry
of Public Works. Investors hope the toll roads will be
operational by 2009 or 2010.

Table 1: Toll Road Projects
Road Length Investment Investor
(km) (Rp trillion)
--------------------------------------------- -----------
Cinere-Jagorawi 14.7 1.7 Translingkar Kita Jaya

Depok-Antasari 21.7 2.3 Citra Wasphutowa

(Section IV) 11.6 0.4 Toll Road Section 4

Kanci-Pejagan 34 2.1 Semesta Marga Karya

Pandaan-Malang 30 2.9 Setdco Intrinsict

Bogor Ring Road 11 1.6 Jasa Marga

Gempol-Pasuruan 32 1.8 Jasa Marga

TOTAL 155 12.7

Hotline Receives Hundreds of Tips on End User Piracy
--------------------------------------------- -------

11. The Business Software Alliance (BSA) announced on May
15 that it is investigating numerous tips to its telephone
hotline for reporting suspected end-user software piracy by
private businesses, including foreign companies. According
to one BSA official, the association has received 300 tips
on companies using illegal software since it established the
hotline in 2005, including 64 reports this year. BSA says
it will cooperate with the Indonesia National Police in the
coming months to raids some of the companies suspected of
using illegal software. On June 6, BSA established a
representative office in Jakarta.

Table 2: Indonesia Trade Performance Jan-May 2006:
(in USD billions)
--------------------------------------------- ------
May May Pct 2006 2005 Pct
2006 2005 YoY Jan- Jan- YoY
May May
--------------------------------------------- ------
Exports 8.3 7.2 15.3 38.4 33.8 13.6
Oil and Gas 1.8 1.4 28.6 8.6 7.3 17.8
Non-oil and Gas 6.5 5.8 12.1 29.8 26.5 12.4

Imports 5.1 4.9 4.1 23.1 23.6 -2.1
Oil and Gas 1.7 1.2 41.7 6.8 6.6 3.0
Non-oil and Gas 3.4 3.7 -8.1 16.3 17.0 -4.1

Balance of Trade 3.2 2.3 39.1 15.3 10.2 50.0

Source: Central Bureau of Statistics (BPS)


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