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IV. TRADE POLICIES AND PRACTICES BY SECTOR
(1) OVERVIEW
1. Although Indonesia has taken significant additional steps to liberalize its trade, investment,
and regulatory regimes during the period under review, the scope of such liberalization has affected
some sectors more than others.  The various remain ing trade and internal measures (described in the
previous chapter), including the Government's tolerance of anti-competitive practices, such as
monopolies, oligopolies, and all forms of formal and informal marketing arrangements, continued
until late 1997 to provide considerable protection or assistance, which was directed at specific sectors,
industries and even firms.  For example, whereas domestic producers of most agricultural, fish and
forestry commodities received low levels of tariff protection, domestic producers of beverages, motor
vehicles, iron and steel, and certain chemicals were protected by high tariffs.  The high tariffprotection afforded to the so-called strategic industries were often reinforced by, inter alia, restrictive
import licencing.  Export restrictions such as licencing and very high taxes affected a large share of
agricultural, mining, petroleum and forestry products;  these measures were essentially designed to
promote downstream industries.  For example, high taxes on the export of logs have enabled domestic
processors to obtain log inputs at prices considerably below world prices, thereby constituting anindirect subsidy to plywood producers at the expense of log producers.  Other measures, including
regulation (or lack of enforcement of existing regulations), public ownership, or non-transparent
government procurement were used in services to limit to market access (notably to
telecommunications and  transportation), and hence protect certain monopolies.  Both individually
and in combination, such protection or assistance has produced "winners", namely the net
beneficiaries, and relative "losers", that is, industries or firms that do not benefit from such measures
or practices, or are adversely affected by them.
2. While the ultimate losers are consumers, who have to pay higher prices for products sheltered
from competition, given the interlinkages between s ectors, measures applied to one sector may feed
through to others.  Consequently, even if a protective measures does not apply to a particular sector
directly, it may affect it indirectly.  Insofar as measures applied to goods and services produced in one
sector tend to increase their prices, and those goods  and services are used as inputs by other import
competing or exporting sectors, the latters' cost s and therefore international competitiveness are
adversely affected.  Contrariwise, financial and other assistance accorded to firms producing goods
and services in one sector, reduces not only the cost s of those firms, but also of firms elsewhere for
which these goods and services are inputs.  Similarly, measures directly applicable to inputs,
particularly capital and labour, affect the costs faced by firms using those inputs.  Even seeminglygeneral measures, such as investment incentives, affect different industries and firms differently,
depending on their capital intensity.
3. It would be surprising, therefore, if the existing array of measures and restrictive practices
used in Indonesia did not significantly impede the efficient allocation of resources between and within
sectors.  In the absence of sufficiently large social benefits from these distorting measures, theoutcome is inevitably lower productivity, not just in industries and firms sheltered from competition,
but in the economy as a whole, which impairs Indonesia's competitiveness.  Notwithstanding
Indonesia's fast overall rate of growth during the early part of the period under review, by and large
sectors that have received relatively lower protection or assistance, such as the electronics, textiles
and footwear industries, have experienced better economic performance, including faster export
growth, than the protected sectors (wood processing or  motor vehicles).  Furthermore, with the onset
of the Asian crisis and the associated sharp contraction of the Indonesian economy, the distortingeffects of these measures and practices on competition have become less bearable for the rest of the
economy.WT/TPR/S/51 Trade Policy Review
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4. There has been a growing realization on the part of the Government that these distortions to
competition constitute serious impediments to the restructuring, and thus recovery, of the Indonesian
economy.  Therefore, the Government has taken major steps to further reduce, if not eliminate, many
forms of protection or assistance that previously favoured some sectors and enterprises at the expense
of others, and thereby promote competition.  In the past year, Indonesia has to a large extent
deregulated trade and distribution in the agricultural sector, eliminated certain protection and tradeprivileges in manufacturing (such as high tariffs in the steel and chemical sectors, licensing in
automobiles and privileges to the National Car, Government support to IPTN aircraft), and prepared
further liberalization in telecommunications and financial services.  In addition, the Government has
committed itself to an extensive programme of privatization, which is currently under way.  These
measures, altogether, are likely to foster the recovery of the Indonesian economy and enable it toachieve more balanced, and sustainable economic growth in the future.
(2) A
GRICULTURE AND FORESTRY
(i) Policy trends and reforms
5. Reflecting slower growth than manufacturing and services, the share of agriculture in GDP
continued to fall in the period under review, from 21% in 1990 (first Trade Policy Review ofIndonesia) to 17.5% in 1994 (second Review) and 16.5% in 1996.  Despite rapid industrial and urban
development, agriculture remains the main source of employment, activity and livelihood for half of
Indonesia's population of 200 million.  The average farm  size is small  half a hectare countrywide and
a quarter of a hectare in Java.  A large share of agricultural output is domestically consumed.  The
share of output exported grew from 10% at the tim e of the 1994 Review to about 15% in 1996, but
remains small in comparison to manufacturing (60%).  The share of agriculture in total exports was
9% in 1996 (and 14% of non-oil exports).
6. As indicated in previous Reviews, the Govern ment's long-standing policy in the sector has
been to foster food production, in order to meet the needs of a growing population, and whenever
possible, achieve self-sufficiency in the main staple foods.
1  This was attained for rice in the
mid-1980s, but a succession of severe droughts in the period under review (1994 and 1997-98)
reduced production in the most populous regions of Java and Sumatra.  As a result, Indonesiaimported record quantities of rice in 1997, about 3.5 million tonnes, and is expected to import similar
amounts in fiscal year 1998/99 (a projected 3.1 tonnes).  When Indonesia came close to achieving
self-sufficiency in rice in the 1980s, the Government also undertook to encourage diversification into
other commodities such as sugar, soybeans, corn  and dairy products, through intensification
programmes.
7. Until 1997, reforms and liberalization in agriculture and in forestry, somewhat lagged behind
the rest of the economy.  Production and trade continued to be tightly regulated by the Government
through a combination of tariffs and tariff quotas, licensing requirements, price control schemes,
distribution arrangements, and export restrictions.  The Government's main instrument in the sector,
BULOG (the National Logistics Agency), retained, until late 1997, a monopoly over the import andexport of key commodities such as rice, soybeans, sugar, wheat and wheat flour, and garlic.
2  In the
                                                          
1The Government has described the objectives of its policy in the food sector as follows:  (a) increasing
food production in order to meet domestic demand;  (b) providing for income transfers;  (c) ensuring food
availability in the country at reasonable and affordable prices;  and (d) improving the nutritional status of the
people.  (Notification to the Working Party on State-Trading, WTO document G/STR/N/1/IDN, 7 July 1995.)
2Under Presidential Decree of 10 May 1967, which established BULOG.  The Agency is responsible
for stabilizing prices of commodities, particularly for stap le food, both at the producer and consumer level.  As a
result, BULOG is entitled to intervene on the market "whenever necessary", by participating in domesticIndonesia WT/TPR/S/51
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domestic market, BULOG operated price support schemes as well as marketing arrangements on
these products.  Other products were also subject to  a wide variety of trade impediments, including
local taxes on interprovincial trade, informal market sharing arrangements and quotas.
8. As described in Chapter III(3), until the crisis  Indonesia operated a complex system of export
restrictions in natural resource sectors, especially agriculture and forestry.  These measures covered a
large number of commodities, going far beyond those controlled solely by BULOG.  They included
the "supervision" of exports of salt, certain livestoc k, and vegetable oils; the "regulation" of exports of
coffee and certain forestry products;  the imposition of high and variable export taxes on timber,
lumber, rattan, palm and coconut oil;  and, in certain cases, the imposition of export bans, such as on
palm oil.  Certain of these measures could be applied cumulatively ("supervision" plus a tax, for
example).
9. The implementation of Indonesia's Uruguay Round commitments in the sector did not involve
major structural adjustments (Chapter II(3)(i)).  While 100% of agricultural lines were bound, rates
were set significantly above the applied tariffs (on average, a difference of about 40%;  see
Chapter III(2)(ii)).  As a result, little tariff adjustment was needed.3  The commitment to remove non-
tariff barriers in agriculture over ten years concerned mainly local-content requirements applying tothe dairy sector and to soybean cakes used for animal feed.  BULOG's operations, and its monopoly
over the import of Indonesia's main agricultural commodities, were covered by the Agreement on
State-Trading.  Nonetheless, Indonesia removed local-content requirements well ahead of schedule.
4
Any further liberalization, therefore, had to be largely unilateral.
10. Prior to the 1997 drought, Indonesia's farm policy had clearly contributed to the expansion of
agricultural output.  This is evident for rice, with an increase in production of about 3% in 1996, but
also for secondary crops (Table IV.1).  Self-sufficiency in rice was attained in the period 1984-94,when domestic prices were kept broadly in line with world prices.  However, supply managed
policies, in particular in respect of product diversification, seem to have had adverse economic effects
on the various actors concerned, including:
- farmers, who in some cases have been diverted from more efficient use of land by
government-sponsored production programmes (sugar).  Export restrictions may havealso discouraged them from engaging in higher quality production (coffee).
5  And in
other cases, monopoly distribution arrangements (cloves) have clearly been
depressing prices and thus their incomes;
- consumers, who have been paying relatively high domestic prices for commodities
under monopoly, such as sugar (between 40 and 80% above world prices), andsoybeans (Table IV.2);
- taxpayers, who bear the costs of BULOG's operations
6;  and
- downstream industry users, such as bake rs, who have been offered lower quality,
high-priced flour as a result of restrictive marketing practices.7
                                                                                                                                                                                    
purchase, sales/distribution, and import/export and stock management (WTO document G/STR/N/1/IDN,
7 July 1995).
3For example, although Indonesia's bound tariffs on rice and sugar are 176% and 107%, respectively,
they are actually imported duty-free.
4The commitment to remove local-content requirements on the production of soybean meals was
implemented in 1996, 21 months ahead of schedule.  Requirements on dairy products were removed on
1 February 1998, under the second Letter of Intent, several months ahead of schedule.
5See in particular GATT (1994), pp.98-99.
6In its fourth Letter of Intent of June 1998, Indonesia committed itself to launch an international
financial audit of BULOG.WT/TPR/S/51 Trade Policy Review
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Table IV.1
Output of major agricultural products, 1995-97
('000 tonnes unless otherwise specified)
1995 1996 1997a
Foodstuffs
Rice (paddy production) 49,744 51,101 49,135
Corn 8,246 9,307 9,182
Soybeans 1,680 1,517 1,459
Cassara 15,441 17,002 16,186
Peanuts 760 738 711
Sweet potatoes 2,171 2,029 1,881
Cash crops
Rubber 1,573 1,614 1,654
Palm oil 4,480 4,960 5,357
Coconut 2,704 2,719 2,829
Coffee 458 475 486
Tea 154 159 162
Cloves 90 94 99
Sugar cane 2,077 2,076 2,194
Tobacco 140 140 140
Livestock products
Meat 1,507 1,632 1,744
Eggs 736 780 818
Milk (million tonnes) 433 441 447
a Preliminary figures.
Source: Government of Indonesia.
Table IV.2
Domestic and world prices of major commodities, before deregulationa
Commodities Average domestic wholesaleb
price (US$/tonne)World priceb
(US$/tonne)
1996 1997 1996 1997
Rice 412.87 331.57 346.90c308.75c
Sugar 576.18 464.41 295.37 276.10
Soybeans 489.06 400.44 290.33 305.00
a The figures provide an indication of price gaps when these commodities were still under BULOG's control.  Since the
devaluation, domestic prices of any commodity produced in Indonesia has become internationally competitive, when expressed
in US$.
b The exchange rates for the US$ are:  Rp 2,347.33 for 1996 and Rp 2,951.75 for 1997.
c Thai 15% broken.
Source: Government of Indonesia.
11. While the burden of these costs and the bearer of the burden depended on the policy tools
used in the individual commodity market, there was undoubtedly scope for increasing efficiency in
food distribution and reducing monopoly rents, particularly at times of deteriorating incomes,
worsening climatic conditions (the "El Niño" phenomenon) and disruption of supplies.  As a result,
the Government committed itself to bold liberalization measures, under each of the first two Letters ofIntent (November 1997 and January 1998).
                                                                                                                                                                                    
7World Bank (1995), pp.43-44.Indonesia WT/TPR/S/51
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12. In the first Letter of Intent, Indonesia agreed to phase out, over three years, import and
marketing monopolies as well as price controls on all agricultural commodities except rice, sugar and
cloves.  As of 3 November 1997, imports of wheat and wheat flour, soybeans and garlic were
liberalized; importers were also allowed to market these products (except wheat and flour)
domestically.  Under the second Letter of Intent, the Government removed most of these exceptions,
including those on the marketing of wheat and flour, and on the import and marketing of sugar andcloves;  it decided to abolish the Clove Marketing Board and to remove the remaining barriers to the
domestic sale and distribution of other commodities such as cashew nuts, oranges and vanilla;  to cut
tariffs on all agricultural commodities across the board, to a maximum of 5% (except for a few
products such as wheat flour);  and made strong commitments in respect of exports, including the
reduction of export taxes (notably for logs, sawn timber and rattan), their gradual replacement byresource rent taxes, the replacement of the export ban on palm oil by an export tax (itself to be
gradually removed), and the dismantling over three years of all other restrictions and controls on
exports.
13. As a result, domestic and international trade in agriculture has been largely deregulated in
only few months. Imports have been the most affected, with a large reduction in tariffs and theremoval of BULOG's monopoly rights
8;  obstacles to domestic trade are also being removed to a large
extent, as traders are given the freedom to buy, sell, and transfer commodities across all districts and
provincial boundaries, quotas are eliminated, and marketing arrangements dismantled.  Export
restrictions are also being substantially relaxed.  A summary of the main measures announced in the
second Letter of Intent is presented in Box IV.1.
14. While the potential long-term economic benefits of trade reforms are evident, if implemented
in normal circumstances, there are difficulties in liberalizing agriculture under the present extremelydifficult economic and social circumstances.  With the large depreciation of the rupiah already
increasing the cost of imported food, deregulation could trigger further price increases on essential
commodities
9;  in addition, at the current exchange rate, it is very profitable for newly liberalized
distributors or traders to buy food on the domestic market and to make large profits by selling it on the
international market, thereby putting further pressure on domestic supplies as well as prices.  Thisraises the question of whether reform in agriculture can restore equilibrium market prices in the face
of what appears to be an unduly large devaluation.  As emphasized in Annex I of Indonesia's fourth
Letter of Intent, large subsidies are currently necessary to stabilize domestic prices of essential food,
which account for a large and increasing part of expenditure by poor households.
                                                          
8As shown in Table AIII.1, Indonesia's average tariff for agricultural products (ISIC definition,
excluding alcoholic beverages and tobacco) was 4.2% in 1998.
9Successful liberalization of agriculture, as for  other sectors of the economy, requires careful
preparation, so as to create the proper legal and market environment that will generate sufficient competition(through the entry of new importers and traders) and benefits for the consumers.  Otherwise, well-established(although possibly inefficient) marketing and distribution channels may be disrupted, without crediblealternatives.WT/TPR/S/51 Trade Policy Review
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Box IV.1:  Deregulation of Indonesia's agriculture –  January 1998 package
Implementing its commitments under the second Letter of Intent, the Government has taken major
deregulatory steps concerning agriculture in the January 1998 reform package.
(1) Foreign trade:  Presidential Instruction 4/1998 together with a decree of the Minister of Industry
and Trade eliminated local-content regulations on dairy products, effective immediately;  Minister of Finance
Decrees SK16 and SK17/KMK/01/1998 cut tariffs on all ( about 500) food items to a maximum of 5%, and
reduced tariffs on all non-food agri cultural items such as wool and fla x by 5%, effective 1 February 1998.
(2) Domestic trade:  Presidential Decision 22/1998 established the right of all farmers to freely buy and
sell cloves to and from all agents at freely determined  market prices.  In addition, the Clove Support and
Marketing Board (BPPC) is required to complete a ll activities, and will be dismantled by 30 June 1998;
Presidential Decision 19/1998 limits BULOG's assignments to managing the supply and price of rice,effectively freeing up the import, purchase and sale of other controlled products such as sugar, wheat andwheat flour, and garlic; Presidential Instruction 5/1998 orders the Ministers of Agriculture and Home Affairsas well as Provincial Governors to release farmers from all formal and informal requirements to plant sugar
cane;  Minister of Industry and Trade Decree SK21/ MPP/Kep/1/1998 frees BULOG from the responsibility of
distributing flour.  Flour millers will therefore be allowe d to sell and distribute flour to any agent, effective
1 February 1998.  In order to implement the commitment to remove restrictive marketing arrangements onplywood, the Minister of Industry and Trade issued a series of Decrees, eliminating trade regulations on woodand rattan (SK 26 to 34/MPP/Kep/1/1998, on: the elimination of trade regulations, the allocation of exportsand the abolition of the joint marketing boards for plywood, sawn timber and processed wood and lampit
rattan exports), all effective 1 February 1998.
(3) Provincial regulations:  Presidential Instruction 2/1998 prohibited any intervention or restriction on
trade in any commodity within or between provinces .  All commodities including cloves, cashews, oranges,
and vanilla may be bought or sold by any party acro ss any district or provin cial boundary; Presidential
Instruction 1/1998 prohibits local taxes at all levels on export goods.
(4) Investment:  Presidential Instruction 6/1998 orders the BKPM to remove barriers to foreign
investment in palm oil plantations, and to complete processing of pending applications for approval.
(Economic and Financial Resilience Council' s Press Release of 21 January 1998.)
Source:  WTO Secretariat.
(ii) Sectoral developments in agriculture10
(a) Rice
15. Indonesia's main cereal, and crop in general, is rice (followed by maize).  Partly due to rising
yields and productivity efforts, Indonesia's production of unhusked rice exceeded the 1996 target of
50 million tonnes under the REPELITA VI Plan.  Self-sufficiency has generally been attained sincethe early 1980s, except in years of drought or other unusually adverse climatic conditions.  The 1997
drought reduced output by 2 million tonnes. Destocking by BULOG limited imports to
750,000 tonnes but as a result of continuing dry weather, 1998 production is not expected to exceed
46-48 million tonnes.  As a result, imports reached a high of 3.5 million tonnes in 1997 (the
equivalent of two months of c onsumption), and are expected to remain at that level in 1998.
11
                                                          
10This section focuses on rice, Indonesia's main staple food, and commodities that have been recently
undergoing major reform (wheat and wheat flour, sugar, cloves).
11The Government has announced plans to import 2. 5 million tonnes by the end of March 1998.  In
addition, BULOG pledged to supply 4.3 million tonnes of rice to the Indonesian market in the next fiscal year(1998/99) starting 1 April, two-thirds of which will be imported (L. Pardomuan, "Indonesia rice imports to
ensure stability", Reuters, 3 March 1998).Indonesia WT/TPR/S/51
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Indonesia exports rice only under exceptional circumstances, mainly in connection with countertrade
arrangements.
16. While rice is imported duty free, trade remains under the control of BULOG.  Its sole rights to
import and export rice were unaffected by reforms.12  In addition to the monopoly on trade, BULOG
dominates the domestic market through a system of floor and ceiling prices, set by the Government.
As described in GATT 1994, floor intervention prices are determined through a complex formulataking into account factors such as production costs, farm income levels, international price
variations, the budgetary cost of support, and potent ial inflationary effects of higher rice prices.
Through a combination of import controls, price support schemes and stock management, the
Government has generally been successful, at least until late 1997, in keeping domestic prices within
the set limits and close to international prices (see below). The margin between floor and ceiling
prices has been sufficient to encourage the expansion of a dense network of private traders in local
areas, who operate under competitive conditions;  BULOG generally procures only a tenth of the
annual production.
17. Rice production and consumption have traditionally benefited from substantial government
assistance.  The Government was involved in the promotion of rice production through riceintensification programmes in certain areas, although in other areas, diversification programmes
aimed at expanding the cultivation of other crops seem to have worked at the expense of rice.
13  To
assist farmers, the Government subsidizes the price of inputs, notably fertilizers, tractors, and
irrigation water.  BULOG's operations are financed directly through budgetary transfers.  They
include the provision of weekly rice allowances to government employees (civil servants and military
personnel), and of rice at subsidized prices for the less privileged groups of the population, in
particular in remote areas, or regions affected by serious climatic problems.
18. In recent months, the continuing drought, together with the large depreciation of the rupiah,
has placed the rice market under strain, justifying an increase in government support and intervention.
On the farmer's side, rising inflation has increased the cost of inputs such as pesticides and fertilizers.
To compensate for the rise in production costs, the Government has raised the floor price of unhusked
rice from Rp 700 to 1,000 per kg. and is considering raising subsidies on fertilizers.  On theconsumers side, panic purchases of rice at the beginning of 1998 in the main urban areas led BULOG
to increase imports in order to restore depleted st ocks.  However, the Government has been forced to
put in place a heavy subsidy scheme, whereby rice, like other commodities, is imported at a
subsidized exchange rate of Rp 6,000 per US$, rather than the actual rate (currently around
Rp 14,000).  The cost of the subsidy is borne by the state budget.
(b) Wheat and wheat flour
19. There is little domestic production of wheat, so that consumption depends largely on imports.
As a result of growing demand, due to changing consumer preferences, annual imports have increased
by 20% since 1992, reaching about 4 million tonn es in 1997.  At the end of 1997, the Government
liberalized the import of wheat, which was prev iously under BULOG's control, so that private
                                                          
12In its notification on BULOG's activities, the Government of Indonesia indicated that as a highly
populated country, Indonesia cannot depend entirely on world markets, especially the rice market.  The worldrice market is very thin, dominated by a few countries and the world price of rice is very unstable". (WTO
document G/STR/N/1/IDN of 7 July 1995).
13As suggested in paragraph 43 of the second Letter of Intent, the formal and informal requirements to
plant sugar cane have diverted farmers from more efficient use of land.  Therefore, Indonesia committed itself toterminate the forced planting of sugar, which, accord ing to the Government, "would increase rice output, as
farmers switched from growing cane on irrigated land to producing higher value-added paddy".WT/TPR/S/51 Trade Policy Review
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importers are now free to import any quantity of wheat.  While in the first Letter of Intent, the
Government allowed BULOG to retain control over the marketing and distribution of imported
products, this was dropped under the second Letter of Intent. Consequently, since February 1998,
private importers have been free to distribute and market (i.e. supply users and millers) imported
wheat in Indonesia.
20. The first Letter of Intent also perpetuated BULOG's monopoly/monopsony relationship with
domestic wheat flour millers for a period of 3-5 years to allow time for structural adaptation in the
industry.14  While millers were entitled to import wheat,  they were required to continue distributing
flour through BULOG.  This requirement was dropped in the second Letter of Intent, and flour millers
can distribute flour through any agent.15
(c) Sugar
21. The production of sugar in Indonesia has been encouraged by the Government as part of its
diversification policy. Treated as a strategic commodity, sugar had been placed under the authority of
BULOG, which, in contrast to the situation concerning rice, controlled trade of virtually all domestic
production.  The production and transformation of sugar has never been a particularly efficient
activity in Indonesia, resulting in domestic prices of 40-80% above world prices (depending on theyear).  The authorities admit that the decline in the production of sugar in the recent years, "is due to
inefficient sugar mills and a decline in the sugarcane intensification programme".
16  In the context of
the first two Letters of Intent, Indonesia deregulated the import and distribution of sugar, which is
now open to private importers and traders.  In order to encourage better use of land, whenever
possible, the Government also committed itself to remove all formal and informal requirements on
farmers to plant sugar cane.
(d) Soybeans
22. The Government committed itself in the first Letter of Intent to liberalize the importation and
marketing of soybeans.  Previously, the production, marketing and importation of soybeans was under
BULOG's control.  The Government has encouraged soybean growing through intensification
programmes (including subsidized lending and fertilizers subsidies) and price intervention.  As for
other commodities under its control, BULOG operated a floor/ceiling price intervention scheme.However, import restrictions and price intervention to support farmers' incomes in this sector
combined to raise domestic prices above those of the import-competing soybean and soybean
derivatives, thereby penalizing downstream processors as well as exports.
23. While BULOG allowed soya meals to be imported by users under producer-importer (IP)
licences, Indonesia applied until 1996 a local-content plan to soyabean meal used by animal feedmanufacturers.  This plan was removed as part  of its Uruguay Round commitment, 21 months ahead
of schedule.
                                                          
14Domestic production of wheat flour has increased rapidly in recent years, exceeding 2.5 million
tonnes in 1995, while imports fell sharply (from about 40,000 tonnes in 1992 to under 15,000 tonnes in 1995).
15The World Bank had recommended the deregulation of wheat and wheat flour trade, arguing that both
the lack of competition in flour milling and the fixed price structure constituted disincentives to produce a widervariety of flours, including higher qualities.  User industries complained about poor quality flour, and associatedeffects on demand. World Bank (1995a).
16BULOG (1997), pp.5.Indonesia WT/TPR/S/51
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(e) Cloves
24. In the second Letter of Intent, Indonesia committed itself to free the importation and the
marketing of cloves across the country.  Since February 1998, traders have been allowed to buy, sell
and transfer cloves across Indonesian districts and boundaries, at unrestricted prices, and to all agents.
The Clove Marketing Board (BPPC) was disbanded in the spring of 1998, after some resistance from
private interests (Chapter III(4)).  The deregulation of the clove market follows a decade of closemarket control by BPPC.  The Agency, a semi-official private body, had received from the
Government sole marketing, distribution, and importation rights for cloves, and benefited from
subsidized loans from state banks and the Govern ment (GATT, 1994).  As indicated in the 1994
Review, the arrangement yielded substantial profits to the Board at the expense of users and farmers,
as its government-sanctioned market power allowed it to maximize the spread between the purchaseprice to clove farmers and the selling price to consumers.  The elimination of the Clove Marketing
Board is likely to restore market conditions for cloves and rationalize their production.  The
Government's attempts to control production and marketing through a system of intervention prices
and administratively determined production areas did not prevent over production and falling prices
paid to farmers in recent years.
17
(iii) Forestry and logging
25. Recent data indicate that Indonesia's natural forest area covers about 140 million hectares, of
which slightly less than half is designated for production (64 million hectares).18  Three quarters of
production forest consists of mixed hill forests, which are located 1,300 meters above sea level.19  The
Government has set itself the objective of establishing 6.2 million hectares of new plantation, of
which 1.2 million hectares has already been planted.  In total, there is at present 3.2 million hectares
of forest plantation in Indonesia, of which two-th irds are located on the island of Java.  Forestry
accounts for about 1.5% of GDP.  In the mid-1980s, the Government banned the export of
unprocessed timber (logs) in order to promote wood processing, and exports of semi-finished or
finished wood products.  The ban was replaced in the early 1990s by prohibitive export taxes
(Chapter III(3)).
26. Forests are publicly owned in Indonesia and the Government has traditionally played an
important role in the control of forestry resources. The Ministry of Forestry designates logging areas,
controls investment and grants concessions (generally for 20 years).  The number of timber
concessions has been relatively stable over time at 500.  The Government has linked the granting (or
withdrawal, if conditions are not met) of logging concessions to the establishment by the applicant
company, or its affiliate, of a wood processor near the territory of the concession.20  This measure, and
the imposition of export restrictions on unprocessed logs and sawn timber (Chapter III(3)), have
                                                          
17As explained in GATT (1994), BPPC left the responsibility of clove procurement and stock
management to the village cooperatives (KUDs) in their individual "production areas", while retaining the
exclusive right to sell cloves to cigarettes manufacturers and to manage its own stocks. The requirement on
KUDs to purchase and store cloves - at the floor price  that cannot be sold has proven increasingly costly forvillage cooperatives. Despite the price support scheme, domestic prices for cloves have regularly fallen belowthe floor price.
18About 34 million hectares are designated for prot ection (of soils and water) and 19 million hectares
are designated for conservation (wildlife, sanctuaries).
19The main commercial species are Meranti, Kenuing, Kapur, Mersawa, Agathis, Ramin and Merbau.
20Several concessionaires can be affiliated to one processor.  Logging licences are also conditional
upon compliance with government requirements in respect of sustainable forest management (such as selectivecutting, replanting, taking aerial surveys of conces sions) and other social objectives (such as building
infrastructure in surrounding villages).WT/TPR/S/51 Trade Policy Review
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greatly encouraged the proliferation of saw and plywood factories21, and hence plywood exports.  By
lowering domestic log prices below international prices, export measures have resulted in cheaper
inputs for downstream processing industries, allowing them to export products at
internationally-competitive prices.22
27. However, recent studies have identified drawbacks associated with export taxes and
requirements on concessionaires to establish wood-processing factories.23  These include poor logging
practices, a misallocation of high quality (and relatively rare) logs among users and inefficient wood
processing.  Wastage ratios in certain Indonesian factories, for example, have reached 50%, about
twice the international average.  The incidence of export taxes and the impact of various other
restrictions are discussed in Boxes IV.2 and IV.3.
28. The use of export licensing requirements and high export taxes may also have reflected the
Government's concerns over the rapid depletion of forestry resources.  Export measures, along with
the imposition of logging fees and royalties, selective cutting programmes, and replanting
requirements for concessionaires, were intended to prevent the over-exploitation of forests.  During
the review period, the Government significantly increased logging fees and royalties, which had fallen
in real terms between 1985 and 1994 (royalty fees were last increased by 10% on 1 April 1997);  ithas also opened consultations with private conces sionaires and local authorities to rationalize forest
management in production areas;  in addition, it has strengthened the monitoring of logging practices
and removed certain concessions from operators that have not respected contractual requirements (in
the last five years, more than 120 concessions with unsatisfactory performance were revoked).
29. Despite these measures, it is estimated that log output remains nearly double the sustainable
level.
24  Current production levels might result in a falling share of the forestry sector in GDP and
exports by the year 2010.  Non-governmental organizations have recently tried to estimate, based onindependent studies, the economic damage caused by the recent forest fires in Indonesia.
25  The study
draws a link between forestry practices or policies and environmental degradation.  Several features of
these practices and policies are highlighted:  the programmes to drain and convert peat forest into rice
cultivation;  unclear land ownership laws that encour age companies to clear land to ensure their claim;
insufficient means to enforce regulations regarding the use of fire for land clearing;  policies thatdepress log prices, which provide little incentive to protect timber and to sell scrap wood rather than
burn it;  and short concession periods, which provide little incentive to use sustainable forest
management techniques.
                                                          
21According to statistics from the Ministry of Forestry, there are about 2,300 saw mills, 120 plywood
mills, 100 block-board mills, 13 chip mills, 4 pulp mills and 600 secondary wood-processing mills in operation.
22GATT (1994) notes that plywood mills obtain even more advantageous log prices as they are
generally affiliated to the logging concessionaires. The World Bank estimates that the difference between theprices for logs on the open market and the price charged to users in Indonesia is US$25-50 per cubic meter,
which represents a subsidy for the industry of US$600-1,200 million a year.  World Bank (1998).
23World Bank (1998b), World Bank (1997);  and World Bank (1995b).
24While log production is estimated at over 40 million cubic metres a year, the Indonesian Ministry of
Forestry considers that the sustainable output for the conservation of natural forests would be around 22 millioncubic metres per annum.  (World Bank (1998b)).
25The Environmental Program for South East Asia (EEPSEA) and the World Wide Fund for Nature
(WWF) estimated that the Indonesian forest fires of 1997 resulted in over US$3 billion of damage including
US$493 million of timber loses, US$470 million in forgone agricultural production, US$1.8 billion in "forgone
ecological services" provided by forests (such as food and medicine, water supply, erosion control) andUS$272 million for the cost to global warming of the releas e of carbon.  According to the study, land clearing
for planting of oil palm and timber caused up to 80% of the 1997 fires.Indonesia WT/TPR/S/51
Page 105
Box IV.2:  Export restrictions to promote domestic processing and environmental conservation
Many developing count ries, such as Indonesia, resort to taxe s or bans on exports of natural resources,
especially lumber, for the purposes both of conserving their use and promoting greater domestic value-addedprocessing.  The expectation is that these restrictions will generate employment, raise export receipts and boostthe economy generally.  However, the efficacy of using ex port restrictions to achieve these objectives is highly
questionable.
Restricting exports of the primary resource encourages downstream processing by providing, in effect, an input
subsidy to processors.  By diverting export sales of the resource onto the home market, export restrictions lower
the resource's domestic price.  While processors benefit from lower domestic prices, raw material suppliers arepenalized.  Fostering production and exports of processe d products indirectly, through export restrictions on
major raw material inputs, risks encouraging inefficient  industries which could b ecome permanently dependent
on government support.  Additional processing is only wort hwhile if it can be performed economically at world
prices for both outputs and inputs.
Moreover, encouraging greater domestic processing by re stricting raw material exports may conflict with,
rather than help to achieve, environmental objectives.  For example, lowering domestic log prices by restricting
lumber exports, not only encourages processors to expand production, but reduces the financial incentives forprocessors to adopt efficient, less wasteful technology and processing practices.  Similarly, the incentives for
owners of natural resources to engage in conservation and re-afforestation practices are diminished.  Export
restrictions are likely therefore to be environmentally counterproductive since they reduce the market incentivesboth for owners and processors to conserve and use natural resources efficiently.  Moreover, this situation iscompounded in Indonesia by the require ment that firms recei ving logging concessions must establish nearby
wood processing (plywood) mills.
The most effective method of conserving natural resources is not through trade-distorting measures, but rather
through a comprehensive resource management policy, including, for example, the use of logging quotas, which
could be auctioned,  and an obligation to replant wh ere logging has been carried out.  In addition, the problem
of over-exploitation of forests would be largely reduced if log prices were market-determined, to enable theprice of logs to rise to reflect their true economic value.
Source:  WTO Secretariat.
30. In an effort to address both economic distortions and environmental protection objectives, the
Government agreed to important reforms in the context of the second Letter of Intent.  The reforms
are aimed at removing the anti-export bias of previous measures while maintaining a tax on the
exploitation of forestry resources.  As a result, in March 1998 the Government reduced the exporttaxes on logs, sawn timber and rattan from prohibitive levels to a maximum rate of 30% ad valorem
(to be gradually reduced to 10% by the turn of the century) and introduced a "resource rent tax" on
logs and sawn timber.  Procedures have been established to revise the rate of the tax according to
world prices.  In addition, the Government committed itself to promote greater transparency in the
management and accounts of the re-afforestation fund.
26  Another important measure for the sector
was the elimination of the export cartel and marketing arrangement governing the wood, plywood and
rattan markets.  While the Government promptly  issued the necessary decrees and regulations to
enforce this commitment (January 1998), there was some resistance initially from the producers'
Wood Panel Association, Apkindo.27  Finally, the Ministry of Forestry is determined to review its
                                                          
26In the past, PT IPTN, the aircraft manufacturer, had received financing from the re-afforestation fund,
in the form of interest-free loans (GATT 1994).  As an off-budget fund, the operations of the re-afforestation
fund were not published.  The accounts were held and managed by Bank Indonesia.  The Government
committed itself in the second Letter of Intent to incorpor ate the fund into the central government budget at the
beginning of the 1998/99 fiscal year.
27According to international press reports, the plywood cartel's shipping service, which allows
members to control export shipments, changed name and continued its operations after the release of theWT/TPR/S/51 Trade Policy Review
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policy in respect of the allocation of logging concessions and the management of forestry resources.
It is considering the introduction of an auction system for new concessions, transferability or
re-auctioning of existing concessions, de-linking logging and processing activities, and strengthening
the monitoring of logging practices.
Box IV.3:  The incidence of export taxes
Whether it is the domestic producer or the foreign consumer who bears the incidence of an export tax depends
on the demand conditions facing the product in the world mark et.  If a country is "small" in the sense that the
international demand for its exports of the taxed good is perfectly elastic, the country has no market power andis a price taker in the world market.  Consequently, reduced export volumes, as a result of the tax, will not affectthe world price - the country represents such a small share of world supply that it cannot influence international
prices.  In this case, domestic producers of the taxed export must bear the full burden of the tax since they are
unable to pass the it to foreign consumers through higher world prices.
On the other hand, if the world demand for the export is highly inelastic, the country may be able to influence its
terms of trade as a price setter on the world market.  If it is a sufficiently dominant supplier in world terms,
reducing its export volume by taxation could raise world prices so much that export receipts increase.  In this
case, the domestic producers of the taxed export do not be ar the full incidence of th e tax since they are able to
pass a share of the tax on to foreign consumers through higher world prices.
Although essentially an empirical question, the experience of other countries that have tried export taxes
indicates that such terms of trade gains are difficult to capture.  This is  especially so in the longer term, when the
world demand for exports is likely to be elastic due to greater product and country substitution.  Thus, efforts to
extract greater export returns through taxing exports often fail and run the risk, in practice, of severely
penalizing the export industry, as well as the economy in general, by encouraging inefficient domestic processingof the taxed commodity (see Box V.1).
Source:  WTO Secretariat.
(3) PETROLEUM AND GAS
31. Indonesia, an OPEC Member, is a major producer of crude oil and natural gas.  The
contribution of the oil and gas sectors, although declining as a result of the diversification of the
economy, remains significant, at 8% of GDP (1996).28  In 1997, exports of oil and gas, at
US$12.7 billion, accounted for about a quarter of total exports.  About 56% of the sector's exports are
of crude petroleum and 44% of natural gas.  In recent months, Indonesia maintained its production of
crude oil around 1.5 million barrels a day (550 million barrels a year).  Given the rapid rise ofdomestic consumption in the years of high economic growth (about 8% a year), it was forecast that
Indonesia would be a net importer of crude oil by 2010;  in the current context of recession, this
forecast might be reviewed.  Indonesia also became one of the main producers, and, as little is used
                                                                                                                                                                                    
Government Decree abolishing the export cartel.  A new fee, of Rp 50,000 per cubic metre, was imposed on
members' plywood exports to "defray costs of gathering statistical data".  Analysts reported that Apkindo
continued to have access to the key export documents that it used in the past to set prices and quotas. There were
also indications that Apkindo continued its overseas operations.  Previously, Apkindo exported its productsthrough trading affiliates in Singapore, Hong Kong and Ja pan, which were owned either by Apkindo itself, or by
individual members on behalf of the cartel.  Members were also required to ship exports on vessels hired from apool of "approved" shippers, in which certain members' companies figured (based on "Indonesian wood cartellives despite IMF deal", Wall Street Journal of 11 February 1998).  These practices were terminated by the
Minister of Industry and Trade in March 1998 ("Indonesia dissolve plywood cartel", Kyoto News of
31 March 1998).
28The contribution of the sector to the state's domestic revenue remains important.  Although it has
fallen from 60% in 1985 to 20% in 1997, oil and gas revenue is, at present, one of the few stable domesticsources of Government revenue.Indonesia WT/TPR/S/51
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domestically, the world's largest exporter of liquified gas.  Natural gas production is expected to
develop rapidly, as known reserves are estimat ed at around 160 trillion cubic feet, representing
43 years of production at the current pace.
32. Trade and production of oil and gas are tightly controlled by the State.  Pertamina, the state-
owned company, has "exclusive authority to mine mineral oil and natural gas throughout the statutory
mining territory of Indonesia" (Law 8/71 on Pertamina).  However, a large number of foreigncompanies are allowed to participate to the exploration and exploitation of oil and gas fields in
Indonesia, under production-sharing contracts (PSCs) with Pertamina.  Following a period of
under-investment, Indonesia has gradually improved the terms of such arrangements by increasing the
contractors' net profit shares (Chapter II(4)(i)(a)).  The latest generation of PSC was introduced in
early 1994, and described in the previous Review;  since then, there have been no changes.  The morefavourable conditions offered to foreign companies have, during the review period, resulted in an
increase in the number of PSCs signed (29 for natural gas in 1997).
33. The import and export of petroleum and gas remains under the monopoly of Pertamina.
Contractors may import a limited number of products, subject to Pertamina's control and licencing
(Chapter III(2)(iii)(b)).  The importing companies pay fees on the value of imported products(generally 5%).  Exports of oil and gas are also strictly regulated, and can only be made by approved
exporters.  Since 1997, a Presidential Instruction has allowed foreign contractors to import crude oil
for private refining, in order to encourage this activity in Indonesia.  However, foreign firms are still
prevented from directly marketing downstream oil products in the domestic market.  Pertamina has
the monopoly on the pricing and distribution of oil and gas products across Indonesia.  Further
deregulation of Indonesia's oil and gas markets is currently being studied by the Ministry of Mines
and Energy and Pertamina.
(4) 
MANUFACTURING
(i) Overview
34. Manufacturing had been the most dynamic sector of the economy until late 1997.  Between
1994 and 1996, real manufacturing output grew on average by 12% per annum, outpacing real GDP
growth (7.8% per year, on average).  As a result, the share of manufacturing in total GDP increasedfrom 22.3% in 1993 to 25.6% in 1997 (Table I.1).
29  Exports, which increased at a pace of 12% per
year during the review period, and a growing domes tic market for manufactures, contributed to the
sector's expansion.  Textiles/apparel and wood products remained the main exports in value (with
US$6.4 and US$5.7 billion in 1996, respectively), but footwear and electrical apparatus have been the
fastest growing exports.  Since the second half of  1997, however, the large depreciation of the rupiah,
together with falling domestic demand, brought a downturn in manufacturing activity.  Given the high
import content of exports (one third overall, with peaks up to 70% in the garment and footwear
industries), the large increase in the cost of inputs and capital goods in recent months has deeply
disrupted production and exports.
35. The trade and investment liberalization policies followed by the Government in the last two
decades were extremely beneficial to the manufacturing sector.  FDI reform conducted between 1993
and 1995, particularly the removal of foreign ownership restrictions and the opening up of nearly all
industries (Chapter II(4)(i)), helped attract large amounts of investment during the review period.30
                                                          
29The contribution of manufacturing to GDP exceeded th at of agriculture in 1991. Since then, the gap
has widened (Table I.1).
30With US$88 billion of investment  approved between 1994 and 1997, the manufacturing sector
accounted for more than two thirds of all FDI approvals during this period.WT/TPR/S/51 Trade Policy Review
Page 108
Applied MFN tariffs on manufactures continued to fall, to a simple average of 9.7% in 1998
(Chart III.2).  The average collected duty is even lower, given that a high proportion of production
and trade in electronics, footwear and garments is taking place in the industrial bonded/duty-free
zones.  By 2003, most industrial imports will be subject to a maximum tariff of 10%.
36. Despite such reforms, parts of the manufacturing sector continued to be assisted by
interventionist industrial policies, based on high and escalating tariffs (automobiles, textiles andgarments), restrictive licensing (certain petro-ch emicals, automobiles), administratively determined
local-content requirements (transport equipment), restrictive marketing arrangements (cement, paper)
and export taxes (wood products, waste aluminium products).  While these policies have encouraged
the shift of production towards higher-value-added products, by driving prices and costs above
import-competing levels, they also threaten the long-term competitiveness of the industries concerned.In the context of IMF programme, the Government took bold steps to remove trade restrictions in
these industries.  Measures, since the end of 1997, include:  the integration of the steel and chemicals
sectors in the general programme of tariff reductions;  the termination of marketing arrangements in
the cement and paper industries;  the abolition of export taxes on waste aluminium products;  the
reduction of export taxes on wood;  and the removal of the special customs and tax privileges grantedto the National Car.  Further liberalization is expected in the near future, particularly the removal of
all remaining licensing requirements on imports not justified on health, safety, environmental or
security grounds.
(ii) Performance in export-oriented sectors
(a) Textiles, clothing and leather
37. Shifting away in the mid-1980s from protect ionist inward-looking policies, trade and
investment reforms have contributed to the turnaround in the performance of the textiles and clothingindustry which, in two decades, has became the second largest of all manufacturing industries (after
food processing).
31  It currently employs a third of the non-oil manufacturing workforce and accounts
for 8% of GDP.  Until the currency crisis, the industry continued to achieve high growth rates (12% a
year in real terms and 20% in value between 1993 and 1996, i.e. similar to the average of
manufacturing);  the share of textile and clothing in total manufacturing output remained stable, at19%.  However, since late 1997, production and trade have suffered from the increase in the costs of
imported inputs, on which the textiles and clothing industries are heavily dependant, and the problems
of import/export financing.
38. While, in the past, the Indonesian textile indust ry specialized in weaving, the spinning/fibres
segments have expanded much faster in recent years.  Although the industry is still heavily based onthe manufacture of (mainly imported) cotton products, polyester fibre production (including polyester
staple fibre, polyester filament, and nylon filame nt) has emerged on a large scale in the last decade.
32
                                                          
31As noted in the GATT (1994), the removal of NTMs (including import licences) and the reduction of
tariffs played an important role in the sector's growth. Paramount was:  the  removal in the mid-1980s of importrestrictions (licences and local-content plans) on co tton, which allowed access to higher-quality imported cotton
at world prices;  and the availability of duty drawback and exemption schemes enabling producers to import rawproducts duty free.
32The high reliance of the textiles industry on imported cotton (about US$1 billion a year, meeting 90%
of the industry's needs) remains a concern for the Government, which decided to intensify the implementation of
its Cotton Development Programme, to stimulate local production of cotton.  However, as noted in the GATT(1994) (p.105), the removal of import restrictions and local-content requirements on cotton in the mid-1980sgreatly benefited the textiles industry:  obtaining high quality cotton at world prices, enabled Indonesianproducers to be competitive in world markets.Indonesia WT/TPR/S/51
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Indonesia has succeeded over the years in developing a competitive, export-based clothing industry,
with exports accounting for more than half of output, a performance explained by efficiency gains in
the textiles industry, low labour costs, and rising demand in world markets.  New market
opportunities have also emerged in the domestic market as a result of rising living standards and a
growing middle-class.
39. Foreign direct investment in the sector is relatively modest in comparison with more capital-
intensive industries such as chemicals and metal products (Chapter II(4)(i)), but it helped to upgrade
production techniques, increase labour productivity and develop exports.  Investment originates
mainly from other South-East Asian countries (notably Singapore;  Hong Kong, China;  and Chinese
Taipei), which, in establishing new mills and clothing factories, are seeking to take advantage of
Indonesia's abundant, easy to train, and relatively cheap labour.
40. While the textiles and clothing industry remains the largest non-oil export earner, the value of
exports grew only moderately until the currency crisis (from US$6.1 billion in 1992 to US$6.4 billion
in 1996), as a result of a decline in world prices.  Hence, the share of textiles and clothing exports in
total non-oil manufacturing exports fell from 26%  in 1992 to 17% in 1996, and in total
manufacturing exports (including oil) from 18 to 13% over the same period.  By contrast, in quantityterms, exports continued to show impressive gr owth, 18% per annum for weaving yarns and textiles
and 8% per annum for garments, between 1992 and 1996.  Preliminary figures for 1997 indicate that
textiles and clothing exports have remained relatively dynamic, at US$7.3 billion (a 14% increase
compared to 1996).
Export quota and measures
41. Indonesia's exports to its major markets such the European Union, the United States, Canada
and Norway are subject to MFA quotas or bilateral restraints.  Export quotas are allocated by the
Ministry of Industry and Trade to approved exporter s on the basis of past performance (80%);  to new
exporters (10%);  and to economically weak firms (10%).  MIT may revoke export quotas for non-
performing exporters;  in that case, quotas may be auctioned for re-allocation.  Quota utilization rates
vary by product and over time, but in recent years generally exceeded 80%.
33
42. Nevertheless, quotas remain a serious restraint on exports, particularly in areas where
Indonesia had become internationally competitive, as in the case of lower-price garments.  As a result,
Indonesian producers have been relatively successful in penetrating non-quota markets such as Japan
(Indonesia's largest single export market), other ASEAN partners34 and Saudi Arabia.  At the same
time, Indonesia, as a low-wage producer, was subj ect to fiercer competition on export markets from
even lower cost producers such as China, India, Pakistan, Bangladesh and Viet Nam.
43. Several of its trading partners have taken anti-dumping and countervailing actions against
Indonesian textiles and clothing exports.  The largest number of anti-dumping measures have been
taken by the European Union (1997 TPR).
                                                          
33The World Bank recently argued that, unless export quotas are transparently auctioned and made
more transferable, utilization rates are unlikely to co me close to 100%.  Until this change is made, exports
would not be produced as efficiently as possible, because the producers are the firms that happen to receiveexport quotas rather than the most efficient firms.  World Bank (1998).
34Before the crisis, the ASEAN area was the biggest non-quota market.WT/TPR/S/51 Trade Policy Review
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Import measures
44. Imports of textiles and clothing represent a small but growing share of the Indonesian market.
Despite a significant reduction in the past decade, average tariffs on textiles and clothing remain high.
Tariffs on textiles (ISIC 321) average 13.2%, while on clothing (ISIC 322) the average is 19.1%.  In
both industries, tariffs range from duty free to a maximum of 30%.  The tariff structure continues to
show a high, albeit declining, degree of tariff es calation between textiles and clothing (Chart III.3).
Unilateral tariff reform, as well as the phasing-in of AFTA preferences, is likely to continue to reduce
escalation in the future.
(b) Electronics
45. The electronics sector provides an example of successful conversion of a highly protected
import-substitution industry, previously assembling essentially low-price consumer electronics withthe assistance of local-content/deletion programme, into a competitive exported-oriented industry.
The shift was achieved by dismantling deletion programmes, and liberalizing imports of completely
build-up consumer products (television sets and radi os) and foreign direct investment in the early
1990s.  In the newly liberalized environment, FDI soar ed, in particular from South-East Asia and the
United States, from negligible levels in 1990 to US$3.5 billion in 1996.  Export growth in electronicsoutpaced all other sectors, with an increase of 60% per annum between 1992 and 1996 (from
US$1 billion in 1992 to US$3.3 billion).  In less than a decade electronics has become Indonesia's
third largest export earner.
46. While in the early 1990s consumer electronics accounted for over half of the sector's
production and two thirds of exports, electronics used for business purposes (particularly
telecommunications equipment) and electronic components have recently grown in importance.
These two industries are designated as "strategic industries", falling under the supervision of BPIS.The consumer electronics industry produces goods e ssentially for export, except TVs.  The world's
leading producers are present through joint-ventures arrangements;  production facilities are often
located in bonded zones.  Components used in local production are mainly imported and enter
Indonesia duty free or at very low rates.  While the import bans on built-up consumer electronics were
abolished in the mid-1980s, the local television industry continues to receive high tariff protectionagainst imports.
35  A telecommunications equipment industry has also developed in Indonesia,
specializing in the production of switching equipment and telephone exchanges.  The main producers
are state-owned enterprises (among which PT INDI), which operate under technical agreements with
the world's leading manufacturers.  An electron ics component industry has emerged more recently
with the Government's encouragement.  Inputs necessary for the production of components can beimported free of duty.  PT Len Industry, a "strategic" state-owned enterprise, is a main player in the
industry.
47. Indonesia's desire to develop technology-based industries by facilitating trade and FDI in
these sectors is reflected in its active participation in the WTO Information Technology Agreement.
While most tariffs are already between zero and 5%  for electronics components, higher rates apply to
telecommunications equipment (rates on telephones and telecommunications components range
between 10-15%).
                                                          
35Indonesia's 1998 MFN applied tariff on television receivers, including video monitors and video
projectors is 20%.Indonesia WT/TPR/S/51
Page 111
(iii) Recent developments in strategic industries
(a) Intermediate industries (steel, chemicals, cement)
48. Iron and steel is a designated strategic industry, thus falling under the supervision of BPIS.
The market is dominated by PT Krakatau Steel, the state-owned company, which accounts for two
thirds of the country's output.  The industry specializes in the production of hot rolled coil
(HRC)/plate and billets (Table IV.3).  While the industry has long relied on government intervention,notably high protection against imports, the removal of most restrictive licensing and import
surcharges in the period 1990-93 already greatly liberalized the Indonesian market.  At the time of the
1994 Trade Policy Review,  the main instrument of protection against imports remained tariffs, which
ranged from 0 to 40%, and averaged 11%.  There was little further liberalization in this industry until
late 1997;  with iron and steel (as well as metals) being among the few categories of products beyondthe scope of the (1995) medium-term tariff reduction programme.  However, the current economic
crisis, as well as the high dependance of the industry on imported inputs, has prompted further
reforms, with the Government  committing itself under the IMF-programme to integrate iron, steel
and metals into its general programme of tariff reduction, implying a reduction of all tariffs to the
0-10% range by 2003.
36  In addition, the Government announced that PT Krakatau Steel was among
the first seven state-owned firms designated for early privatization.
Table IV.3
Indonesia's main iron and steel production, 1994-97
('000 tonnes)
Type de steel 1994 1995 1996 1997a
Slab 1,251 1,589 1,234 813
HRC/Plate 1,923 2,117 2,193 1,160
CRC 652 163 779 363
Straight/Spiral welded pipe 858 547 913 283
GI sheet 196 435 414 194
Billet/Ingot 1,941 2,609 2,547 1,108
Concrete steel 1,293 2,256 2,267 1,101
Wire rod 672 693 713 336
a January-June.
Source: Ministry of Industry and Trade/Data Consult.
49. After a period of expansion, and relatively little policy change, other intermediate industries
such as plywood, paper and paper products, chemicals and cement have also been affected by
structural and trade reforms implemented in the context of the IMF programme. As described earlier,prohibitive export taxes on logs and sawn timber, by depressing the domestic prices of such
commodities and hence providing cheap inputs to th e user industries, have in the past largely
benefited the plywood and paper industries.  The sharp reduction of these taxes in the spring of 1998
is expected to result in some rationalization and modernization of these industries as well as to
promote other (higher value-added) uses such as furniture making.  The integration of chemicals inthe overall programme of tariff reductions will erode the tariffs peaks (over 40%) that protected
                                                          
36Indonesia's 1998 MFN applied tariffs on iron and steel (ISIC 371) range from 0 to 30% and average
9.3% (a reduction of 1.7% on average, since the 1994 Review, compared to a reduction of 11.5% of the overalltariff).Indonesia WT/TPR/S/51
Page 113
to achieve the desired level of local-content.  However, while the production of home-made
components and parts increased, local-content ratios remained by far below targets, and plans for the
construction of a 100% Indonesian-made vehicle had to be postponed several times.  At the same
time, automakers, who were sheltered from market realities by import protection and government
assistance, underestimated the impact of high domestic prices on demand and over-invested.
The 1993 package52. The Government sought to correct such drawbacks, without abandoning the goal of
developing industrial capacities for complete vehicle manufacturing.  In its 1993 deregulatory
package, it replaced:  the ban on CBU vehicles with a system of high tariffs and surcharges;  and
deletion plans with local-content schemes linked to tariff incentives.  In addition, it adopted
differential tax treatment in favour of locally produced passenger vehicles.
53. On the tariff side, Indonesia imposed base duty rates of 200% on all passenger cars, 100% on
jeeps, and from 0 to 100% rates on other commercial vehicles.  On top of the tariff, a surcharge was
imposed on built-up vehicles, not assembled in Indonesia (100% for passenger cars and 40% for most
other vehicles).  As a result, imported built-up cars and jeeps were dutiable at a total of 300% and
jeeps at 140%.  Subsequently, the surcharges were incorporated into the tariffs (1996), and, whileremaining very high, the resulting tariffs were reduced.  The 1998 MFN tariff on imported built-up
passenger cars is 200%, while the average tariff for commercial vehicles is 80% (70% for commercial
vehicles exceeding 5 tonnes).
54. In order to further encourage local production, the 1993 local-content scheme provided for
incentives in the form of concessional tariffs for imports of parts and components used to produce
motor vehicles in Indonesia.  As described in Chapter III(2)(iii)(e), tariffs on parts and components
vary inversely with the level of local-content, depending on the category of vehicles (Table IV.4).  In1995, import tariffs on parts and components linked to the local-content levels were reviewed and
reduced.
38  Duty-free treatment is still offered for the same local-content level.
Table IV.4
Local-content and import duty rates under the 1993 Programme
Import duty rates for:
Local-content rates Passenger car parts Light commercial vehicle parts
Less than 20% 100% 40%
20% to 30% 80% 30%
30% to 40% 60% 20%
40% to 60% 40% 0%
More than 60% 0% n.a.
n.a. Not applicable.
Source: Government of Indonesia.
55. Tariff and local-content incentives for local production were complemented by favourable
sales tax treatment of locally produced passenger vehicles (contingent on minimum local-content rate)
(Chapter III(4)(ii)(a)).
                                                          
38For passenger cars and jeeps, the highest tariff for parts (that is, for cars with local content of less
than 20%), was reduced from 100% to 65%.  For commercial vehicles, the maximum rate was reduced from40% to 25%.WT/TPR/S/51 Trade Policy Review
Page 114
The 1996 package
56. Measures introduced in 1996 complemented the 1993 reforms.  Tariffs on imports of built-up
motor vehicles were further adjusted.  The repeal of the ban on CBU was confirmed for existing car
brands and extended to all new brands.  But the main measure in the package was the introduction of
the National Car Programme, aimed at producing a 100% Indonesian-made car.  The project was
consistent with the Government's long-standing indust rialization objectives.  The main features of the
National Car Programme are presented in Box IV.4.  Further details can be found in WTO documents
WT/DS54, 55, 59 and 64/R of 2 July 1998.
Box IV.4:  The National Car Programme of 1996
The 1996 National Car Programme consists of two main sets of measures (Presidential Instruction 2/96 and
Decree 31/96).
The first set (Presidential Decree 42/96) provides for the attribution of National Car company status (so-called
"pioneer" status) to Indonesian-owned car makers that:
- produce cars in Indonesia in facilities 100% owned by national industrial companies or
Indonesian statutory companies with all shares belonging to Indonesian citizens, and
- use trade marks created by them and owned by Indonesian companies/citizens, and
- develop the cars with increasing Indonesian t echnology, designs and e ngineering on the basis
of national capacity, to be realized in phases.
To maintain pioneer status, the company's cars must meet the following local-content requirements: 20% at the
end of the first year, 40% at the end of the second year, and 60% at the end of the third year.  Under theseconditions, National Cars are granted two kinds of benefits:
- full exemption from sales tax on all sales (Government Regulation 20/96), while, as indicated
above, purchasers of imported sedans or other domestic sedans with 60% or less local content
pay up to 35% tax, and domestic sedans with local content greater than 60% are subject to20%,
- full exemption from import duties on parts and components (Presidential Decree 82/96) while
parts and components are normally subject to up to 65% import duty.
The second set of measures (Presidential Decree 42/96 and Ministerial Decree 142/96) provide that National
Cars manufactured in a foreign count ry by Indonesian nationals, which fu lfil the local-content requirements
prescribed by the Ministry of Industry and Trade, shall be treated the same as National Cars manufactured inIndonesia, i.e. free of import duties and exempted from sales tax.  In accordance with Decree 142/96, importedNational Cars are deemed to comply with the 20% local-content requirement for the end of the first production
year if the producer manufacturing the National Cars "counter-purchases" Indonesian parts and components
that account for at least 25% of the c.i.f. value of the imported cars.
Source: WTO Secretariat.
57. Only one company (PT TPN) was granted "pioneer" status.  The decision was taken by the
then Government only a few days after the adoption of the National Car Programme, on
19 February 1996.  PT TPN is associated with Kia Motors, a Korean-owned firm, to manufacture thenew brand ("Timor" car).  It has been alleged that, in order to carry out the National Car project, at the
direction of the Government, PT TPN received a series of loans on advantageous terms totallingIndonesia WT/TPR/S/51
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US$690 million, with a maturity of ten years, from a consortium of state-owned and private banks.39
The National Car programme was effectively implemented in October 1996.  In the first year of the
programme, however, PT TPN imported Timor vehicl es manufactured by Kia Motors in the Republic
of Korea, as well as components for the assembly of the Timor in Indonesia, under the terms of
Presidential Decree 42/96 and Ministerial Decree 142/96 (Box IV.4), i.e. benefiting from the same
exemptions from customs duties and sales tax as if the car was locally assembled.  At the same time,as noted above, other imported automobiles and components were subject to substantial tariffs.  The
National Car is currently priced 50% below any other car brand sold in Indonesia.
40
58. As mentioned in Chapter II(3)(i), Japan, the United States and the European Union contested
the conformity of certain measures of the 1993 package and the 1996 National Car Programme with
WTO rules.  Separate requests for consultations were made in October 1996.  In June 1997, a Panelwas established at the request of the European Union and Japan.  Following the request for a Panel by
the United States one month later, it was decided that a single Panel would examine all claims.  The
Panel Report, circulated to WTO members on 2 July 1998, found several aspects of the 1993 and
1996 car programmes to be inconsistent with certain provisions of the WTO Agreements.
41
Recent developments
59. The Government committed itself in the second Letter of Intent (January 1998) to
"discontinue immediately any special tax, customs and credit privileges granted to the National Car".
Shortly after, two Decrees of the Ministry of Industry and Trade (19/MPP/Kep/1/1998 and
20/MPP/Kep/1/1998) and a Decree of the Ministry of Finance were issued with this aim.  In effect,
these Decrees nullify all regulations according specific benefits to the National Car (particularly
Government Regulation 20/96, Ministerial Decree 142/96, and Presidential Decrees 42/96 and
82/96).42  However, the question of whether to mainta in such privileges for the remaining stock of
unsold cars, estimated at 14,000, has been raised publicly.
60. The second Letter of Intent also contains a commitment by the Government that, "consistent
with its WTO commitments, the local-content programme for motor vehicles, which gives preferential
tariff rates to manufacturers using a high percentage of local parts, will be phased out by year 2000".
(5) SERVICES
(i) Overview
61. Services, including construction and utilities, comprise the single most important activity in
Indonesia, accounting for about half of value added in 1997 (and 38% of employment).  The share of
services in GDP has remained stable since the 1994 Review.  The expansion of services was driven by
the overall development of the economy, which generated needs for improved telecommunications
                                                          
39WTO document WT/DS54, 55, 59 and 64/R of 2 July 1998 (p.9).
40Although the domestic price for the Timor is lower than any other brand of the same category, it is
higher than the international price of a similar car.  Over-ambitious sales targets have been missed. While PTTPN expected to sell about 4,000 vehicles per month, sales rarely exceeded 2,000 per month. In May 1997, PTTPN reduced its monthly targets to 3,000 units.  Government departments have been officially instructed to buythe Timor when new vehicles are needed. (Bulletin of Indonesian Economic Studies, the Australian NationalUniversity, Vol. 33 (2), August 1997.)
41See in particular the conclusions and recommendations  of the Panel in WTO document WT/DS54,
55, 59, 64/R of 2 July 1998, p.397 and 398.
42Presidential Instruction 2/96, establishing the National Car Programme, remains in force, but the
removal of most implementing regulations, including those conferring benefits to the Programme, has renderedthe Instruction obsolete.WT/TPR/S/51 Trade Policy Review
Page 116
and financial services, a growing demand for transport, trade and business services (by industry), and,
with rising living standards, new demands for travel and tourism.
62. The expansion of services also benefited from a change in policy focus.  In areas such as
telecommunications, aviation and financial services, Indonesia gradually abandoned its traditional
reliance on government control and public monopolies.  Growing concerns about poor infrastructure
and technical deficiencies encouraged a process of deregulation and privatization.  As a result,infrastructural services (telecommunications, water supply, electricity) were largely opened to foreign
direct investment in 1994-1995;  financial services were deregulated in the late 1980s and early
1990s;  and in the period under review, competition was introduced in certain segments of the
telecommunications and air transport market.
63. Foreign access to the Indonesian services markets has improved, reflecting the domestic
reform process and external deregulation in accordance with WTO Agreements.  Under the GATS,
Indonesia made specific commitments in telecommunications, industrial, transport, tourism and
financial services (Table AIV.1).  Indonesia upgraded its initial GATS commitments in the recent
WTO negotiations on telecommunications (1996) a nd financial services (1997), thereby contributing
to a positive outcome.  Services are already largely open to foreign direct investment.  In 1994, basicinfrastructure was opened to foreign investors, provided that a minimum of Indonesian equity of 5%
was maintained.   This encouraged foreign firms to invest in telecommunications and power
generation, where they have become major operators.  In 1998, the (main) remaining restriction on
FDI in services, i.e. that on domestic (wholesale and retail) trade, was removed.  As part of its efforts
to restructure the financial sector, the Government  is currently considering relaxing the remaining
limits on foreign ownership in banking.
(ii) Financial services
(a) Banking
Background
64. The extensive deregulation of banking activities and relatively low capital requirements in the
period 1988-92 greatly stimulated the expansion of the banking sector in Indonesia.  New, mainly
private-owned, establishments flourished in the aftermath of the 1988, 1989, 1990 and 1991deregulatory packages;  between 1988 and 1993, the number of banks approximately doubled while
the number of branches tripled, enabling banking services to reach the country's most remote areas;  at
the end of 1996, about 240 banks were registered in Indonesia, with total assets of US$165 billion.
43
At the lower end of the market, small and medium-size commercial banks engaged in fiercecompetition for loans, particularly in the retail sect or.  In order to obtain easy funding for their own
operations, often from abroad, large, private corporate groups also created banking establishments.
The long-entrenched state-owned banks therefore faced a new competitive environment, while at the
same time being required to fulfil the government's development policy objectives (such as the
funding of government-sponsored projects).
65. Concerns about the soundness and safety of the banking system arose in the early 1990s,
when the share of under or non-performing loans in total lending increased (up until 1993),
particularly for state-owned banks.  Bank Indonesia reacted by introducing new prudential rules,
strengthening the monitoring of bank lending, re -capitalizing certain banks, and limiting the number
of new licences.  These steps helped to reduce the share of non-performing loans to more sustainable
                                                          
43This number does not take into account the dense network of (about 9,300) small, rural credit banks
or cooperatives.Indonesia WT/TPR/S/51
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levels (Chart IV.2).  However, as a result of declining profitability, over-exposure to the real estate
sector and increased borrowing in foreign currency, the financial position of banks remained fragile44,
and plans for rationalization and concentration in the sector were slow to materialize.45
Chart IV.2
Bad and doubtful debts at Indonesian banks and loan to deposit ratios, as at June 1997
Bad and doubtful debts at Indonesian banks Loan to deposit ratios
Source : Financial Times, Schroeders.104.7%136.7%97.6%105.4%
0% 50% 100% 150%Sector averageSmallMidsizeLarge
0510152025
1993 1994 1995State-owned banks
Private sector banks
All banksPer cent of total lending Banks
66. Thus, when Indonesia was hit by the 1997-98 currency crisis the banking sector was highly
vulnerable.  As a result, it was deeply affected by the depreciation of the rupiah, the liquidity squeeze,
and the rise in interest rates.  As a first step to restore the health of the banking system, in the autumn
of 1997 the Government announced the closure of 16 banks, placed under strict surveillance severalother establishments, and undertook to merge several state-owned banks.
46  As the crisis worsened
and many banks were found to be insolvent, Indonesia agreed to implement a far-reaching bank
restructuring programme (second Letter of Intent).  The main objectives of this programme and
measures taken to date are summarized in Box IV.5.
                                                          
44In the absence of exchange controls, borrowing in  foreign currency was encouraged mainly by the
large interest rate differentials between international and the domestic markets
45Surveys found that about 40 of the 240 banks had performed poorly in 1996 and were at risk of
bankruptcy (Infobank XX (210), June 1997). While Bank Indonesia encouraged private banks to merge, onlythree mergers took place in 1995 and 1996. As a result, the number of banking establishments had fallen onlyslightly (from 240 to 237) when the currency crisis broke.  Shortly before this, the Government had announcedsignificant restructuring of state-owned banks, with the planned merger of Bank Negara Indonesia 1946 BNI,Bank Pembangunan Indonesia (Bapindo), Bank Bumi Daya (BBD), Bank Dagang Negara (BDN) and Bank
Import Export Import (Exim) into one bank.  According to Infobank's ratings, BBD and Bapindo were unhealthy
("Government Plan to Merge State Bank", Image of Indonesia, July 1997).
46In December 1997, the Government announced the merger of four state-owned banking
establishments, Bapindo, BDN, Bank Bumi Daya and Bank Exim.  It also announced the take-over of BTN byBNI.WT/TPR/S/51 Trade Policy Review
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Box IV.5:  Bank restructuring in Indonesia
Policy Objectives
In cooperation with inte rnational financial instituti ons, the Government of Indonesia is implementing a
comprehensive programme of bank restructuring, aimed at restoring confidence in, and the soundness of, the
banking system.  A first aspect of this programme is to create a level playing field that would enhance the
competitiveness of Indonesia's banking.   This involves the encouragement  of mergers among state-owned and
private-owned banks, the strengthening of the banks' capital base and a relaxation of geographical and
branching restrictions for foreign banks and joint ventures.  The Government's objective is, at the end of the
process, to have reduced the number of private and stat e-owned banks by half compared with pre-crisis levels
Another aspect of the Government's policy in the sector is to restore the confidence of depositors and creditors
in the banking system.  The Government has already announced that it would provide a full guarantee to all
depositors and creditors of locally incor porated commercial banks.  In addition, it has created the Indonesian
Bank Restructuring Agency (IBRA), an institution respons ible for the supervision and the restructuring of
ailing banks.  The Agency also exercises a preventive role in detecting bank failures.
Finally, the Government committed itself to revise the legal framework fo r banking, after a review of the
Central Bank, bank and company laws, and liquidation regulations.  The reviews are focusing on areas such
as contract enforcement, bankruptcy, banking disclosure, taking and realizing collateral and regulation of
financial instruments.
Concrete measures taken to date
While the review and restructuring of the banking system is a medium-term task, emergency measures had to
be taken.  The main measures implemented to date are:
- the closure of 16 ailing banks, and the replacement of existing management by liquidation teams.  In this
context, the process of recovery of assets in the closed banks has already started and the depositors have
been indemnified;
- the suspension, by IBRA, of seven banks, and the placing of seven othe r banks under its direct
management.  In addition, IBRA put 40 banks under its s upervision.  Portfolio audits of these banks are
being conducted and bad loans are being transferred to a special Asset Management Unit.  Teams of
foreign bankers are being used to strengthen the management of banks that are under the control of
IBRA;
- the injection of private capital into large state-ow ned banks (public ownership of BNI, one of the largest
state-owned banks, was already reduced to 25% of the capital);
- the establishment and implementation of new, uniform, transparent and equitable rules for reviewing and
dealing with the liquidity and solvency problems of private banks;
- the enforcement of existing prudential rules was st rengthened through a graduated  system of penalties for
non-enforcement, culminating in the withdrawal of banking licences.  The Government has also
introduced higher paid-up capital requirements, whereby all banks must have a minimum capital of
Rp 1 trillion by the end of 1998, Rp 2 trillion by the end of 1999 and Rp 3 trillion by the end of 2000;  at
the same time, all banks are also to achieve minimum c apital adequacy ratios of 4% of risk by the end of
1998, rising to 8% by end of 1999 and 10% by end of 2000.
Many other measures are in preparation, and will be announced in the coming months.
Source: WTO Secretariat, based on information provided by the Government.Indonesia WT/TPR/S/51
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67. By improving its 1994 and 1995 GATS commitments in financial services (see below),
Indonesia contributed to the successful outcome of the WTO negotiations on financial services in
December 1997.  Indonesia nevertheless reiterated that liberalization needed to be gradual and had to
be undertaken in the timing most appropriate to the reality of each country.47  Despite the currency
turmoil and banking crisis, however, Indonesia's commitment to liberalization in financial services did
not waver.  On the contrary, Indonesia made additional commitments under the IMF programme,thereby further improving those it had just made in  the WTO.  These commitments are to be applied
on an MFN basis.
Regulatory framework
68. Pursuant to the Banking Law, the Ministry of Finance is responsible for the general policy
framework governing banks, including  the rules and regulations on the conditions of establishment ofbanks.  International negotiations in respect of market access is carried  out jointly by the Ministry of
Finance and Bank Indonesia.  Bank Indonesia is responsible for the daily supervision of banks and
prudential control.  Under the Law, the Ministry of  Finance has prime responsibility for the licensing
of banks (or the withdrawal of licences), but decisions must be taken on the basis of letters of
recommendation issued by Bank Indonesia.  In  addition, Bank Indonesia has a more specific
responsibility for the licensing of foreign exchange banks.
69. The licensing of new banks takes place in two stages.  The authorities issue an approval "in
principle", which allows the applicant to start the necessary preparations for the establishment of a
commercial bank;  once such preparations are completed, an operational licence authorizes the bank
to start its commercial operations.  Under the Law, a commercial bank may take deposits, extend
credit, issue notes,  undertake placement of funds, and be involved in other traditional commercial
banking activities.  While banks cannot engage dire ctly in stockbroking or insurance, they may
operate in these markets through a subsidiary.  When created, locally owned banks are generally not
granted permission to conduct foreign exchange operations, but may be upgraded over time
depending on good economic and prudential performance.  Joint-venture banks, involving Indonesian
banks with a foreign bank partner, are automatically granted foreign exchange status.
70. The 1988 deregulation package opened banking to foreign investors.  Foreign banks were
allowed to operate in the form of joint ventures, with minimum Indonesian equity of 15%, or through
the acquisition in the stockmarket of a maximum equity share of 49% in an existing listed local bank.
Joint-venture banks were initially subject to higher capital requirements than locally owned foreign
exchange banks, but this was changed in 1995.
48  Once established, joint ventures were granted
national treatment, i.e. they could engage in the same commercial operations as locally owned banks(deposits, lending, participation in the local money market and foreign exchange operations).  The
main restrictions, however, concerned the number and location of branches, which were initially set at
one per large city, and the presence of natural persons (expatriates), which was subject to an economic
needs test.  These limitations were reflected in Indonesia's GATS 1994 and 1995 Schedules.
71. Indonesia improved these commitments under the WTO Agreement on Financial Services
(the fifth Protocol to the GATS) concluded in December 1997;  a few weeks later (January 1998), it
took supplementary commitments in the context of the IMF programme.  While Indonesia does not
                                                          
47WTO document S/FIN/M/18 of 21 November 1997.
48In 1995, a new regulation on capital requirement harmonized the capital requirement imposed on
foreign exchange banks and joint-venture banks.WT/TPR/S/51 Trade Policy Review
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intend at this stage to revise its WTO Schedule to incorporate the new IMF-sponsored commitments,
it will apply them on an MFN basis.49  Indonesia's new WTO and IMF commitments stand as follows:
- under the fifth Protocol to the GATS, to:  grandfather foreign participation in existing
joint-venture banks; to increase by one the number of branches that can be operated
by foreign-owned banks and joint-venture banks in Indonesia's main cities50;  to
eliminate the economic needs test applying to the presence of natural persons; and toremove the limitation on national treatment for capital requirements of foreign joint
ventures
51;
- under the second Letter of Intent, to:  eliminate restrictions on foreign ownership in
listed banks by June 1998, which would allow foreign investors to increase
substantially (up to 100%) its ownership of a listed local bank;  and to removeremaining restrictions on branching, so that foreign banks and joint-venture banks
will be allowed to operate nationwide, with an unlimited number of offices and
branches.
72. These improvements are to be reflected in the new draft banking law, which is expected to
enter into force in the second half of 1998.  Under the new law, Indonesia is also expected to lowerthe ownership limit in joint-venture banks.  If implemented, this provision would imply that foreign
investors are allowed to have a substantial ownership in any bank in Indonesia whether listed or not.
(b) Insurance
73. While the insurance industry has been indirectly affected by the economic crisis, with an
increase in claims and a fall in premiums, its exposure to the currency crisis was less immediately
than for banks and securities firms.  No major failures have yet been observed.  In recent years, the
sector has experienced high growth, with a regular increase in premiums (17% in 1996 for example).
As at mid-1997, there were 103 general insurance companies, including 18 joint ventures with foreign
participation, and 58 life insurance companies, including 17 joint ventures.
74. The Ministry of Finance is responsible for the general policy framework, supervision,
regulation and licensing of new companies in the insurance sector.  Commercial presence is required
to offer insurance in Indonesia.  All insurance products must be supplied through alocally-incorporated insurance company, either Indone sian or foreign owned, except for products that
are not available on the Indonesian market.  Foreign presence in Indonesia must take the form of a
joint-venture with an Indonesian firm or participation in the capital of a listed company.  Prior to the
fifth Protocol to the GATS, foreign ownership in a joint venture was limited to 80% and to 40% in a
listed company.  Other restrictions concerned intra-corporate movement of personnel anddiscriminatory capital requirements.
                                                          
49Indonesia indicated in the context of this review that: "the lifting of any restriction on commercial
presence will certainly apply on an MFN basis.  The (WTO) negotiation on financial services has been
completed on 12 December 1997, and, in this respect, Indonesia's offer is final.  There is no need for theGovernment of Indonesia to revise its schedule due to th e progressive character of liberalization in services.  In
the year 2000, when another round of negotiations will take place, Indonesia will certainly improve its offer inthe WTO".
50According to Indonesia's GATS Schedule, branching is also subject to geographical limitation, i.e. to
eight cities or regions in Indonesia (Jakarta, Bandung, Semarang, Ujung Pandang, Surabaya, Bali, Medan and
Batam Island).
51As described above, the limitation on national treatment for capital requirements was rendered
ineffective by the October 1995 Government Regulation aligning the capital requirement of domestic foreignexchange banks and joint-venture banks.Indonesia WT/TPR/S/51
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75. Under the Fifth Protocol to the GATS, Indonesia is committed to the removal of the
ownership limits on foreign insurance companies and to the binding of up to 100% foreign ownership
in domestic companies.  In addition, it committed itself to promote greater flexibility in the movement
of intra-corporate personnel for insurance companies, and to remove discriminatory capital
requirements by the end of 1998.
(c) Capital markets
76. Like many emerging capital markets, Indonesia has experienced rapid growth but also wide
fluctuations.  Average daily trading on the Jaka rta Stock Exchange (JSE) grew from roughly 27,700 in
1988 to 311 million shares in 1997, before the recent crash.  The number of listed companies
increased from 24 to 341 over the same period.  Performance and returns have been uneven in recent
years, with an increase in the price index of 100% in 1993, a fall of 20% in 1994, and increases of10% in 1995 and 24% in 1996.  While market expansion was greatly stimulated by foreign capital
inflows, it also became highly vulnerable to any pos sible shift in market sentiment.  As a result, the
stock market has been deeply affected by the withdrawal of foreign investors since mid-1997.  From
mid-1997 to mid-1998, the JSEs price index lost more than 30% of its value.
77. The JSE was opened to foreign investors in 1987.  For a decade, foreign-owned stockbrokers
and securities firms have greatly contributed to the internationalization of Indonesia's capital markets
by attracting funds from abroad.  Indonesian owned stockbrokers have gradually gained strength,
however, and account now for 70% of the market.  The Ministry of Finance is responsible for the
granting of licences to new operators, which are th en placed under the supervision of BAPEPAM, the
Indonesian securities and exchange commission.  As in banking and insurance, Indonesia initially
allowed foreigners to operate in the form of a joint venture, with a maximum ownership of 49%.
Foreign joint ventures were also subject to higher capital requirements than domestic firms.  Indonesiaapplied relatively stringent restrictions on the presence of foreign expatriates.
78. As in banking and insurance, the Fifth Protocol to the GATS provided for significant
improvements by binding up to 100% foreign-ownership of non-bank financial institutions (as against
85% earlier), including stockbrokers and securities firms, by introducing greater flexibility in the
movement of intra-corporate personnel (expatriates' contracts could be extended over three-years),and by applying full national treatment in capital requirements for non-bank financial institutions
(once again including stockbrokers and securities dealers).
(iii) Telecommunications services
(a) Background
79. Given Indonesia's wide territory (13,600 island s) and large population (200 million), its
telecommunications market is one of the world's largest in terms of potential for development.  In
1996, the number of lines in service was only about 4 million, and mainline penetration, at about
2.1 per 100 inhabitants, was one the lowest in the region.52  Since the beginning of the 1990s,
however, the market has experienced rapid growth, with an annual increase of 28.2% in the number of
lines installed between 1992 and 1996;  despite the current economic situation, the Government isconfident that its target of installing 1 million new lines per year can still be achieved (Table IV.5).
                                                          
52Telecommunications infrastructure is essentially co ncentrated in the large urban areas of Jakarta,
Surabaya, Semarang, Bandung, Medan and Denpasar, which together account for 60% of all lines in service.Mainline penetration in such urban areas is around 10%, compared to less than 1% in the rest of Indonesia.  In
Jakarta and Surabaya, the two main economic centres of Indonesia, mainline penetration reaches a peak of 16%.(PT Telkom, Annual Report 1996.)WT/TPR/S/51 Trade Policy Review
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Table IV.5
Development of the domestic telecommunications network
(a) Developments, 1992-96
1992 1993 1994 1995 1996 Compound
annual growth
rate (%) 1992-96
Lines in services 1,548,927 1,863,947 2,462,831 3,290,854 4,186,030 28.2
Population (million)a186.0 189.1 192.2 194.7 198.3 1.6
Lines in service per 100 inhabitants 0.83 0.99 1.28 1.69 2.11 26.3
Call completion rate (%)b
  Local 40.5 44.7 52.7 55.2 57.9 9.3
  Domestic long-distance 26.0 36.3 42.7 47.6 53.2 19.6
Fault ratec3.5 2.7 1.9 1.64 1.55 ..
Digitalization (%)d
  Switching
    Local exchanges 68 81 88 93 96 9.0
    Trunk exchanges 75 99 100 100 100 9.5
  Transmission 53.8 64.9 70.0 76.0 85.0 10.5
Number of public telephones 46,002 58,001 81,162 108,257 134,542 30.8
Domestic call volume (pulses, billion) 13.2 17.9 23.4 28.3 35.3 27.9
Number of mobile cellular subscribers 35,546 53,438 78,024 210,643 562,517 99.5
Mobile cellular subscribers per 1,000
inhabitants0.19 0.28 0.41 1.12 2.84 96.6
.. Not available.
a Data supplied by the Indonesian Central Bureau of Statistics.
b As measured by ASR.c Faults per 100 lines in service per month.
d Expressed as a percentage of switching or transmission capacity, as applicable.
Source: PT Telkom Annual Report 1996
.
(b) Development targets, 1999-2019
Repelita (year ended 31 March)
VI VII VIII IX X
1999 2004 2009 2014 2019
Local exchange capacity (million lines) 10.5 19.0 29.0 42.0 60.7
Local exchange capacity per 100 inhabitantsa5.1 8.7 12.4 17.1 23.6
Call completion rate (%)b
  Local 65 70 75 80 90
  Domestic long-distance 45 50 55 60 80
a Referred to in the Repelita as line penetration.
b Repelitas use the terminology "successful call ratio", Telkom has interpreted this to mean ASR and, with the MTPT's consent, h as
reported only ASR data to the MTPT since 1991.
Source: PT Telkom, Annual Report 1996 .
80. Until 1989, the development of telecommunications infrastructure and the provision of
services relied exclusively on government funding and state-owned monopolies (PT Telkom in basic
local and long-distance telecommunications, and PT Telkom Indosat for international services).  Inview of the immense need for investment and technical expertise, however, the sector was opened to
private participation in the early 1990s.  Non-basic telecommunications were completely deregulated.
In the basic telecommunications market, several private (international) consortia were granted
concessions to develop infrastructure and operate telephone services, in association with PT Telecom.Indonesia WT/TPR/S/51
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One new operator of international telephone services was licensed.  Several other operators were
licensed to provide mobile cellular telephone services, data transmission, and satellite systems.  To
prepare for a new, more competitive market environment, the government divested minority assets of
PT Telkom and PT Indosat in 1996.  Further divestiture is expected in the coming months.
81. The deregulatory stance of Indonesia's telecommunications policy was reflected in its
commitments under the WTO Agreement on Basic Telecommunications.  Indonesia essentially boundits existing telecommunications regime, but also committed itself to review its current policy and
consider the entry of new suppliers at the end of the exclusivity period, in 2005 for international
telecommunications services, 2006 for long-distance services, and 2011 for local services.  In most
segments of the telecommunications market, foreign eq uity participation in local companies is limited
to 35%.
(b) Regulatory framework
82. While the sector was kept under the strict control of the Government for three decades, a new
Telecommunications Law (1989) provided for partial deregulation and limited participation of private
firms.  The Law drew a clear distinction between basic and non-basic services.  In the basic (and
main) segment, private firms are allowed to supply services provided that they do so in direct or
indirect cooperation with PT Telkom and PT Indosat.  Such cooperation may take the form of a joint
venture, a joint-operating scheme or a management contract.  At the same time, the Law designated
PT Telkom and PT Indosat as "organizing bodies", with responsibility for providing, as well as
managing, infrastructure and services in their respective market segments;  as a result, no entity can
provide basic services in Indonesia without the active or passive involvement of one of the two state-
owned companies.  Other services, including mobile telephony, data transmission, paging and internet
services, and satellite systems, were liberalized, implying that new operators in these areas are notrequired to operate in association with any of the "organizing bodies".
83. The Government further confirmed the prerogatives and leading role of PT Telkom and PT
Indosat in 1991 and 1995.
53  In addition, in 1995 PT Telkom was granted exclusivity in the provision
of local and long-distance fixed wireline and wireless telecommunications, including services
provided for and on behalf of PT Telkom by joint operating companies (Decree 60/95).54  Exclusive
rights are granted for a minimum of 15 years as rega rds local services, and a minimum of ten years for
long-distance services.55
84. The formulation of Indonesia's telecommunications policy rests with the Government,
through the Ministry of Tourism, Posts and Telecommunications (MTPT).  Implementation,
frequency management, and standardization are the responsibility of the Directorate General of Postsand Telecommunications (DGPT).  There is no in dependent regulatory agency.  All regulatory
functions are pursued directly by the Government through MTPT, which has the authority to issue
decrees and regulations.  MTPT's powers are broad in  scope:  it regulates competition in the industry,
                                                          
53Government Regulation 77/91 confirmed PT Indosat as the organizing body for international
telecommunications services;  Decree 61/95 did the same for PT Telkom in the area of domestic services.
54In effect, the Decree precludes the Ministry of Tourism, Posts and Telecommunications from granting
organizing body status to any other entity for the supply of basic domestic services.
55The Government is considering introducing a new telecommunications law in the coming year, which
would revise the 1989 legislation and further open up the sector to competition.  The Government is studyingcarefully the possibility of abolishing the legal distinction between basic and non-basic telecommunications andthe question of foreign ownership.WT/TPR/S/51 Trade Policy Review
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grants new licenses56, sets or controls tariffs for all services (both basic and non-basic), and regulates
technical requirements as well as tariffs for interconnection to the network.
85. Companies with organizing body status, and companies providing services under operating
schemes with PT Telkom are not required to hold licences to supply basic telecommunications
services in the domestic market, other than licences allocating frequency bands.  By contrast, joint
venture companies in which PT Telkom has a direct or indirect stake need a licence from MTPT tooperate, conditional upon the fulfilment of certain criteria.
57  Private companies engaging in the
provision of non-basic services, while not required to cooperate with PT Telkom, also need a licence
from MTPT under the same criteria.
86. MTPT determines tariffs for all basic telecommunications services (local, long-distance and
international, provided either through fixed-line or cellular telephony), based on the pricing principlesset by the Government and upon the recommendation of operators.  MTPT also sets tariffs for other
services (including low and high-speed leased lines, telex, telegram and packet switched data
networks) as well as interconnection charges.  In  determining tariff adjustments for local and
long-distance telecommunications services, MTPT uses a price cap formula.
87. The availability of a universal service is a focal policy objective in Indonesia.  All service
providers except PT Indosat are required to reserve a share of their investments in developing
infrastructure and services for unserved or underserved areas.
58  The universal service obligation
(USO) is also reflected in MTPT tariff policy.  The traditional instrument in this context has been the
fixing by PT Telkom of lower tariffs in the less economically advanced rural regions, implying
significant cross-subsidization between customers in such areas and those in the more affluent, urban
areas.59  In addition, a USO charge of about Rp 750 per international telephone call is levied by the
Government.  Non-basic service operators are not subject to universal service obligations.
(c) Market developments
88. Building on the 1989 Law, the Government opened up the domestic telephone market in 1995
to new operators.  It licensed five international consortia60 to expand network facilities and supply
telephone services in specified areas outside Jakarta and Surabaya. In conformity with the Law, they
                                                          
56MTPT issues licences for public telecommunicati ons services;  DGPT issues radio licences and
licences for private telecommunications network services  providers.  The Directorate of Frequency allocates
radio frequency to mobile telephone operators.
57Decree 39/93 provides for economic need tests for th e attribution of such licences.  MTPT is required
to assess the need for new telephone lines within the specified area over the next ten years and evaluate the callcompletion ratio within that region.  When applying for a licence, private partners of the joint venture must also
provide MTPT with evidence of its operational and financial capabilities.  MTPT issues the licence in two
stages:  a licence "in principle" allowing the joint-venture company to prepare its operations; and, conditional
upon MTPT's confirmation that this company is ready to offer its services to the public, a second, "definitive"licence to operate. MTPT has sole authority to licence a joint venture and PT Telkom's consent is not required.
58Under the joint-operation scheme, PT Telkom and its partners are required to allocate 20% of their
annual investment on installations in unserved or und erserved areas regardless of commercial considerations.
59For tariff purposes, PT Telkom defined five groups of customers, depending on density and level of
income in their region of residence.  It applies different tariffs to each population group.  Group 1 is the group of
subscribers living in the areas with the highest density and highest income and Group 5 the group of subscribersliving in the areas with the lowest density and incomes.  Installation charges are on average four times moreexpensive for Group 1 than for Group 5.  The difference is about 50% for communications.
60Each of the five consortia includes at least one foreign telecommunications company.Indonesia WT/TPR/S/51
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operate under joint-operating agreements with PT Telkom.61  The granting of concessions as well as
the process of selection were generally described as competitive and transparent.62  The entry of new
companies increased markedly the number of lines installed and services offered.  By mid-1997,
regions managed by the joint-operation scheme operators accounted for a little less than half of total
lines in service in Indonesia.  The larger part (55%) was under the control of PT Telkom (notably the
region of Jakarta).  By 1999, private consortia are expected to install another two million lines.63
When awarding the concessions, the Government nevertheless indicated that for future private-sector
involvement in the telephone market priority should be given to small and medium-size enterprises,
instead of large consortia.
89. In addition, the Government sought to grant PT Telkom and PT Indosat greater management
autonomy and private participation.  PT Telkom was partially privatized (20%) in 1995 throughlistings on the New York, Jakarta and Surabaya stock markets.  An additional 4.15% was sold through
private placement in late 1996.  PT Indosat also went public in 1995, divesting 25% of Government
equity on the New York Stock Exchange and raising an additional 10% of capital in the local market.
90. In 1993, the Government licensed a second operator for basic international
telecommunications services, PT Satelindo, a joint-venture company between PT Telkom, PT Indosat,Deutsche Telecom and other Indonesian privat e partners.  The company started commercial
operations in 1994.  Pursuant to a Ministerial Decree, MTPT has granted a duopoly to PT Indosat and
PT Satelindo for the exclusive provision of international telecommunications services until
31 December 2004.  As a result, all overseas telecommunications pass through Indosat and Satelindo's
networks.  Bypass and call-back services are not permitted.
91. Recognizing the great potential for developing mobile cellular systems
64, the Government
also licensed seven operators, in which PT Telkom, PT Indosat, private Indonesian investors andwell-established foreign telecommunications operators are associated in a joint venture.  More than
30 licences have been issued for internet services  providers. Even more operators are supplying
paging services (10 nationwide and 70 at the local level).  Data communications and satellite systems
have also been opened to competition.
92. Overall, Indonesia's deregulation has opened up the market to a number of Indonesian and
foreign private operators, allowing for the development of modern, high technology
telecommunications services.  The expansion of the market was driven by growing demand from the
business sector, including the banking and finance industries, retail, oil and gas, as well as from the
Government.  While joint ventures and joint-operating schemes alleviated PT Telkom and PT
Indosat's burden to finance the construction of new systems and the installation of telephone lines, thetwo-state-owned companies continue to play a dominant role in the basic telecommunications
                                                          
61The latest development of joint-operating arrangements is the build-operate-own (BOO) scheme,
under which a private sector operator enters into a joint-venture with PT Telkom to develop and operate
telephone services in a designated area.  One recent example is PT Ratelindo, a joint venture owned by PTTelkom (45%) and PT Bakrie Telecommunications (55%).
62The World Bank reported that the selection process, including pre-qualification criteria, scope and
contents of the rights to the concessions, common denominators bidding variables, due diligence procedures andawards, was conducted in full accordance with clearly defined rules and in respect of transparency principles.
World Bank (1996).
63As a condition for granting a new concession, the Government requires that the selected companies
contribute to the development of telephone services in rural areas and direct up to 20% of their investment tothis aim.
64The Government forecasts up to one million subscribers in the cellular market by 2000.WT/TPR/S/51 Trade Policy Review
Page 126
segment and have taken stakes in most new market segments.65  Chart IV.3 provides an overview of
the domestic competitive situation in 1997, as assessed by MTPT.
Chart IV.3
Competitive situation in individual telecommunications markets, 1997 
Source : WTO Secretariat.SEGMENT STRUCTURE
CABLE
LOCAL
RADIO
LONG  DISTANCED
O
M
E
S
T
I
C
INTERNATIONAL
MOBILE CELLULARB
A
S
I
CS
E
R
V
I
C
E
N
O
N
 B
A
S
I
CVALUE ADDED
SERVICESPAGING
PRIVATE NETWORKMONOPOLY
OLIGOPOLY
MONOPOLY
DUOPOLY
OLIGOPOLY
OLIGOPOLY
COMPETITION
NO RESALEOPERATORS
PT. TELKOM
PT. TELKOM
PT. RATELINDO
PT. TELKOM
PT. INDOSAT
PT. SATELINDO
PT. TELKOM/INDOSAT
PT. SATELINDO
PRIVATE OPERATORS
PT. TELKOM
PRIVATE OPERATORS
VARIOUS
PROVIDERS
VARIOUS
PROVIDERS
(d) External developments
93. Building on significant internal deregulation, Indonesia actively participated in the recent
WTO-GATS negotiations on basic telecommunications .  It bound its existing regime, as described in
the above sections.  In respect of market access, it placed no limitation on the cross-border supply and
the consumption abroad of local and long-distance telephone services.  The main limitations concern
commercial presence.  For most services, Indonesia requires that foreign presence be in the form of ajoint venture, joint-operation scheme or management contract as described above (joint venture only
for cellular telephony).
                                                          
65According to analysts, the law granting PT Telkom the right to own a stake in all companies offering
telecommunications services in Indonesia, and PT Indosat a minority stake in its direct competitor, PTSatelindo, may potentially result in conflict of interest as competition between Indonesia's varioustelecommunications services intensifies.  (M. Saragosa, "Indonesian Telecommunications: upwardly mobile", inThe Financial Times, 25 June 1996.)Indonesia WT/TPR/S/51
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94. In the local telephony market, Indonesia confirmed the exclusive rights of PT Telkom and
five regional joint-operation schemes (the five cortorsia) until 2011, but is committed to a review of
its policy in respect of new entrants by that date.  In the long-distance market, PT Telkom's
exclusivity is bound until 2006, when Indonesia will review current policies.  In the international
segment, Indonesia confirmed Indosat and Satelindo's duopoly until 2005.  For other services,
including mobile cellular services, packed switched data, internet access, and paging services, noexclusive rights have been granted or a priori limitations set on the number of suppliers.  Association
with a state-owned company is not required, exce pt in personal mobile cellular communications
services.
95. For all services, foreign equity participation is limited to 35%.  The number of foreign
management and technical staff in telecommunications companies is generally limited at 20 persons.
(iv) Air transport
96. Indonesia is the world's largest archipelago, with 13,600 islands and a territory stretching
5,110 km. from east to west and 1,888 km. from north to south.  As a result, air transport plays an
essential role in regional and economic development.  Like in many other countries, the Government
has encouraged the expansion and modernization of infrastructure and services in the last twodecades.  In the 1980s, it initiated the construction of Indonesia's main international gateway, Jakarta
Soekarno-Hatta airport, and upgraded regional airports.
66  It also recapitalized Garuda Indonesia, the
national flag carrier, to allow for the purchase and leasing of new aircraft.  High levels of public
investment were necessary as a consequence of the rapid expansion of both domestic and international
traffic in the 1990s, stimulated by economic expansion, growing regional links, and rising income
levels.67  The growth of the Indonesian air transport ma rket was, however, dramatically interrupted at
the end of 1997 by the effects of the currency crisis.  Statistics confirm a reduction of 50% in airtraffic in the first half of 1998.
97. Before the crisis, the Government had taken major steps to liberalize the domestic air
transport market, which accounts for three quarters of domestic airlines' total traffic.  It licensed four
new privately owned companies (Sempati Air, Bouraq Airlines, Mandala Airlines and Dirgantara Air
Service) to operate scheduled flights.
68  All domestic routes, without restriction, were opened up,
resulting in effective competition between new airlines and the two state-owned carriers, Garuda
Indonesia and its domestic subsidiary, Merpari Nusantara, notably on the busiest destinations (for
example on the Jakarta-Surabaya route).  In 1994, the Government revised the Negative List of
Investment to allow, in principle, for foreign ownership of up to 95% in an Indonesian airline.69
98. The current economic crisis is threatening to cause irreversible damage to the industry and to
jeopardize the benefits of liberalization.  Falling demand and rising costs linked to the recent
depreciation of the rupiah, have forced all airlines, including Garuda Indonesia, to cut routes and
                                                          
66Of the country's 400 airstrips, 26 can currently accommodate jet aircraft.  Before the currency crisis,
the Government was considering the expansion of seven airports and the creation of a further nine internationalgateway airports.
67At the end of 1996, both domestic and international passenger traffic exceed 18 million (as against
12 million in 1992).  Reflecting rapid growth in trade flows, cargo traffic experienced even higher rates ofgrowth (18% per annum between 1992 and 1996).
68While these companies operated essentially on domestic routes, most of them have also developed
overseas (mainly regional) operations.
69Nevertheless, Indonesia is of the opinion that "national airlines are to be substantially owned and
effectively controlled by their own nationals.  The substantial ownership and effective control clause isprevalent in most bilateral air services agreements." (Statement made in the context of this review.)WT/TPR/S/51 Trade Policy Review
Page 128
frequencies and return leased aircraft.70  Indonesia's five remaining commercial airlines are now
studying the possibility of pooling their resources and combining domestic routes to survive.  The
idea of forming a consortium, sharing resources, revenue and markets, is currently being considered;
they are already conducting common maintenance operations.
99. International air transport is governed by a network of bilateral agreements.  Indonesia has
signed 61 such agreements to date, and, in April 1998, 32 foreign airlines operated in the country.  Ingeneral, bilateral agreements provide for the exchange, on a reciprocity basis, of "third and fourth
freedom" traffic rights, but do not allow for cabotage operations.  Commercial cargo services are
conducted exclusively by Indonesian legal entities, and therefore not liberalized under the agreements.
Other issues dealt with in these agreements are capacity, frequency and the type of aircraft to be used.
Garuda Indonesia has in recent years developed its international operations, using in particularmarketing and code-sharing arrangements (for example, with Malaysian Airlines, China Airlines and
Lauda Air).
100. The regulatory body is the Directorate-General for Air Communications (Ministry of
Communications).  It formulates Indonesia's policy in the sector, conducts negotiations on bilateral
agreements, licenses new domestic airlines, regulates and monitors domestic fares, and ensures therespect of safety and technical regulations.  It also regulates the allocation of time slots in
coordination with airlines, although, in the current context of over-capacity and falling traffic, the
allocation of prime-time slots does not seem to pose major problems.
(v) Tourism
101. Until the 1990s, tourism was a relatively marginal activity in Indonesia.  However, a
combination of factors, including the 1991 gove rnment-sponsored promotion campaign for tourism
(the "Year of Indonesia"), the expansion of business travel, and the relaxation of foreign investmentrules, contributed to the rapid expansion of the sector.  At the end of 1996, the hotel and restaurant
sector accounted for about 3.5% of GDP.  Indonesia attracted US$6.6 billion of foreign direct
investment between 1991 and 1996, about a third of to tal investment in the sector during the period.
As a result of diversification and modernization of tourism infrastructure and services (in particular in
the islands of Java and Bali), balance-of-payments receipts more than doubled, from US$2.6 billion in1991 to US$6.2 billion in 1996, to become Indonesia's second source of foreign exchange earnings
after oil and gas (all goods and services included).  Since the beginning of 1998, however, Indonesia
has recorded a sharp reduction both in tourists and business visitors, as a result of political and
economic uncertainty.
102. Foreign participation benefited from the relaxation of foreign investment rules in the sector.
Since 1994, Indonesian equity requirement is limited to
 49%.  In the least tourism-developed areas of
Indonesia, including eastern islands, Kalimantan, Bengkulu, Jambi and Sulawasi, foreign investors
can hold up to 100% of equity.   However, a number of limitations on foreign business remain:
foreign investment is confined to higher category hotels (3, 4 and 5 stars);  for hotels and hotel resorts
(including marinas and other sport and resort facilities), foreign investors may be subject to highercapital requirements than Indonesia investors;  as another limitation to national treatment in its GATS
                                                          
70Sempati Airlines has already stopped operating due to financial problems.  The devaluation by over
70% of Indonesia's currency caused a sharp increase in airl ines costs, which are essentially paid in U.S.dollars.
In March 1998, the Indonesian Air Carriers Association (INACA), which includes all the scheduled-airline
companies, has officially proposed to creditors the rescheduling of leasing payments. The Chairman of INACAsaid that Indonesian airlines were too weak to pay more than 10 or 20% of current leases.  Leasing costs mayreach up to US$100,000 per aircraft per month. (Jakarta Post and Reuters
 of 19 March 1998).  Garuda is
planning to return all its leased aircraft (half of its fl eet), and has already cut significantly its European routes.Indonesia WT/TPR/S/51
Page 129
schedule, Indonesia restricted foreigner investors to the higher category hotel segments
(3, 4 and 5 stars);  the employment of expatriate staff is limited to certain tasks;  and, although
Indonesia allowed for the entry of many foreign travel agents and tourist operators in its markets, it
limited the number of such service supplier to 30.71
                                                          
71Indonesia's GATS Schedule, document GATS/SC/43 of 15 April 1994.WT/TPR/S/51 Trade Policy Review
Page 130
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Fane, G. and T. Condon (1996), "Trade Reform in Indonesia", Bulletin of Economic Studies, 32(2),
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Feridhanusetyawan, T. (1997), Survey of recent developments, (Bulletin of Indonesia in Economic
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GATT (1990), Trade Policy Review – Indonesia, Geneva.
GATT (1994), Trade Policy Review – Indonesia, Geneva.
Nasution, A. (1998), "Trade and Industrial Politics in Indonesia since the 1980s, Economic
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