[Marinir] Indonesia Digest: No.17.07 ; 17 -06 -'07

[Yap Hong Gie]

INDONESIA DIGEST
Indonesia's complex Issues in a Nutshell
By: Ms. Wuryastuti Sunario
Published by: TBSC-Strategic Communication
No.: 17.07 - Dated: 17 June 2007
In this issue:

MAIN FEATURE:

PRESIDENTIAL INSTRUCTIONS: POLICY PACKAGE TO PUSH ECONOMIC GROWTH, 
INVESTMENTS AND EMPLOYMENT, AIMED TO REDUCE POVERTY

NEWS AND BACKGROUND:

1.      Tourism and Transportation:
Visa on Arrival now extended to 63 countries
Bali Airport rated Indonesia's Best in Security and Safety
Garuda Indonesia gains 8.3% better yield on Japan traffic
Rp. 41 billion subsidy for pioneering flights serving Papua's interior

2.      The Environment, Health and Culture:
Indonesia's Rainforests disappear 30% Faster than anticipated

3.      The Economy, Trade and Industry:
The Real sector is seen lagging
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MAIN FEATURE:

PRESIDENTIAL INSTRUCTIONS:  POLICY PACKAGE TO PUSH ECONOMIC GROWTH, 
INVESTMENTS AND EMPLOYMENT, AIMED TO REDUCE POVERTY

On Tuesday, 12 June, Minister Boediono, Coordinating Minister for Economic 
Affairs, announced the issue of Presidential Instructions (Inpres) No. 6 of 
2007 on Policies to Accelerate Real Sector Development, Investments and 
Infrastructure, and Empower Micro, Small and Medium Enterprises (MSME's).

The Release from the Office of the Coordinating Minister said that 
Presidential Instructions no. 6 of 2007 is aimed to increase transparency in 
Government's work plan in accelerating the country's economic growth, which 
has as its ultimate goal reduction of unemployment and alleviation of 
poverty. For this reason, policies attached to the Instructions provide 
detailed programs, actions, and expected output with clear measurable 
targets, along with time-scales for their accomplishment, as well as the 
appointment of the Minister or Head of Agency responsible for each of its 
implementation.

Inpres no 6 of 2007 encompasses 4 components, explained Minister Boediono, 
these are: 1) Improvement of the Investment Climate, 2) Financial Sector 
Reform, 3) Acceleration of Infrastructure Development, and 4) the 
Empowerment of MSMEs. The first three policies are a continuation on similar 
policies  issued last year, while the package on the Empowerment of MSMEs 
serves as an expansion of a number of programs that had earlier been 
accommodated in the Investment Climate Improvement Policy.

Based on previous experiences with the implementation of policies, the 
President underscored the importance in implementation of stipulations, and 
effective monitoring of implementations. For this purpose, the President 
assigned the Coordinating Minister for the Economy to monitor the 
implementation of Inpres no.6 of 2007, so that it will be effective. In 
addition to the appointment of a government team, the Coordinating Minister 
has also invited an independent external team to monitor the implementation 
of the Presidential Instruction.

During the past three quarterly periods, Indonesia's economy had grown 
approximately 6%. Considering this momentum, the Government and Parliament 
raised the 2007 economic growth to 6.3%, and up again to between 6.6%-6.9% 
in 2008, explained Minister Boediono.

The open unemployment rate that had  reached 10.44% or 11.1 million in  2006 
, had decreased  9.76% or down to 10.5 million in early 2007, while, the 
Government has targeted to cut it further to around 8.0% - 9.0% in 2008. 
Commensurately, the acceleration in economic growth and expected decrease in 
the unemployment rate, should in due course, be able to reduce the rate of 
Indonesia's poor population from 17.75% in 2006 to around
15% to 16.8% in 2008.


A brief background, achievements accomplished under last year's policy 
packages and an outline of each policy in the newly released Presidential 
Instructions reads as follows:

A.       Improving  the Investment Climate

Following a slowdown in economic growth during the last quarter of 2005 and 
early 2006, which came as a direct result of the hefty increase in the price 
of fuel at the pumps, the government last year issued a policy on Improving 
the Investment Climate, which was intended to accelerate economic growth 
driven by investments. Meanwhile, at the international regional level, 
competition among Asian countries including China, India, and Thailand was 
increasing, while the entry of newcomers such as Vietnam had sharpened even 
further international competition in attracting foreign investments.

Under these circumstances, it was deemed necessary to improve Indonesia's 
Investment Climate so that the country could reemerge as an attractive 
investment destination for both domestic as well as foreign investors. The 
chief target of the package was to boost economic growth to above 6 % by 
making investments as one of the major moving forces of the economy.

As a result, in the implementation of last year's policy package which was 
aimed to improve the investment climate, over 80% of the 85 stipulated 
actions that were drawn were successfully concluded.   Significant progress 
made included the enactment of a new legislation on Capital Investments, 
simplified procedures in obtaining investment approvals and endorsements in 
establishing a limited company; the number of licensing procedures in the 
trade sector were simplified; as were procedures to extend the validity 
period for an Expatriate Employment Permit (IMTA) and the extension of the 
validity period for a limited stay permit (KITAS). Furthermore, over 100 
regional bylaws that had caused a high cost economy were revoked; a fiscal 
incentive scheme for priority investment activities was put in place, as 
well as the status of value added tax on agriculture products to become 
non-taxable goods was revised; custom examination procedures were 
simplified, and automation installed of activities within the Bonded 
Hoarding Zone (TPB), and cost and time reduced in the handling of cargo at 
the ports.

During the last three quarter periods, economic conditions had improved with 
an average growth of 6 percent, which has been supported by strengthening 
exports and investments from domestic as well as overseas sources. To 
further enhance the momentum in economic recovery, the government deemed it 
necessary to continue with further measures to improve the investment 
climate, which is part of the Presidential Instruction concerned.


B.        Financial Sector Reform

The Policy on the Financial Sector Reform as mentioned in this Inpres forms 
a continuation of the Financial Sector Policy issued in mid 2006. In the 
previous Financial Sector Policy issued, a number of policies were 
implemented that were aimed to stabilize and strengthen the financial 
sector, in order to improve public and market confidence, as well as to 
minimize the risk of a recurrence of the 1998's economic crisis. The 
programs that were successfully concluded were, among others, those related 
to the settlement of non-performing loans of state owned banks and the 
treatment of ailing insurance companies. In addition, the strengthening of 
the capacity of the Deposit Insurance Corporation in dealing with troubled 
banks which would bring systemic impact, had been stipulated.

The previous Financial Sector Policy Package also included policies aimed to 
support diversification of funding sources that could be used by the 
business sector in banking, through the capital market as well as other 
financial institutions. In this policy group, the government supported the 
implementation of bond repo market development and Sharia based capital 
market development, government's retail bonds issuance, and the drafting of 
regulations on the Sukuk instrument.

The policy package was also aimed to develop competition among banks, 
non-banking financial institutions, and the capital market, in order to 
enhance the efficiency of the financial sector. A number of ongoing programs 
in line with these aims are the merger of the Jakarta Stock Exchange with 
the Surabaya Stock Exchange, implementation of e-reporting, e-licensing, 
e-registration, and e-monitoring systems, as well as the implementation of 
remote trading in the capital market.

The framework of the newly -issued Financial Sector Reform Policy Package is 
similar to the previous policy package, and comprises five groups of 
policies namely the Financial System Stability, Banking , Non-Bank Financial 
Institutions, Capital Market, and others.


C.     Accelerating Infrastructure Development

Last year's policy package on Infrastructure Development was the 
consolidation of coordinated strategic measures to realize a policy 
framework reform, regulatory reform, and institutional reform in managing 
infrastructure. It included cross-sector strategic policy reform, corporate 
& sector policy reform, aimed to promote healthy competition in the 
infrastructure provision; regulations to eliminate the manipulation of a 
natural monopoly right as well as to protect the public and investors in 
infrastructure provisions; there was also the clear separation of roles 
between Ministers/ Head of Institutions/ Head of Regions who act as policy 
makers vis-a-vis State-Owned Enterprises/Regional Owned Enterprises who are 
business players (operators).

A number of outputs that were successfully completed were the foundation and 
policy framework, regulations and institutions of public and private 
partnership in infrastructure development, including regulations such as the 
enactment of the Railway Bill , Maritime Bill, Land Transportation Traffic 
Bill, and the Bill on Aviation in the Transportation sector, as well as the 
Bill on Electricity.

In cross-sector policy, the government issued regulations concerning the 
Secretariat to the Policy Committee for the Acceleration of Infrastructure 
Development (KPPI), as well as Procedures and Criteria for such projects 
that need the collaboration of the private sector.  In addition, directives 
for the implementation of projects involving partnership between the 
government and private sector were completed. Concerning infrastructure 
financing, the government issued regulations by the Minister of Finance as 
stipulated in Permenkeu No. 38/2006 on directives for the control of the 
implementation and risk management of infrastructure provisions.

In 2006, the Government of Indonesia successfully conducted the Indonesia 
Infrastructure Conference Exhibition (IICE 2006) which was attended by more 
than 1000 participants.


D.    Empowerment of Micro, Small, Medium Enterprises (MSME's)

This policy serves as an expansion of several programs which were 
accommodated in the Investment Climate Improvement Policy Package. The 
development of this policy was designed in accordance with the survey on 
business climate in rural areas and active consultation with Indonesia's 
Chamber of Commerce, KADIN as well as other businessmen.

The main objective of the MSMES Empowerment policy is to enhance 
productivity of MSMEs, to promote improvements in making the program and 
activities related to the empowerment of MSMEs more effective. This policy 
also aimed to give a more positive signal on the importance of joint 
commitment to support the empowerment of MSMEs.
The MSMES Empowerment Policy Package covers 4 major aspects, these are 
namely
(i) Enhancement of MSMEs access to financing sources,
(ii) Development of entrepreneurship and Human Resources,
(iii) Enlargement of possible markets for MSMEs products, and
(iv) Regulatory Reform. Overall the MSMEs Empowerment Policy Package within 
those four areas cover 11 policies, 20 programs, and 28 actions.

With the policy package on the empowerment of MSMEs, the government expects 
that better business climate and conditions can facilitate Micro Small 
Medium Enterprises (MSMEs) to overcome the problems faced.
In addition, it is expected that funds available in the banking sector, in 
the government, SOEs as well as with the public may be utilized in a more 
optimal way to support the empowerment of MSMEs. It is further hoped that 
MSMEs entrepreneurship will be able to develop more professionally through 
utilization of innovation and technological development, so that MSMEs can 
become more competitive in the globally competitive marketplace.

Indonesia's Main Weakness lies in the Implementation of Policies
So far, the response given by economists to the Package has been lukewarm. 
While many positive points are mentioned, most regret the omission of the 
agricultural sector reform, where most of Indonesia's poor make their living 
(or lack of it). Other economists take a wait- and-see attitude, since - so 
they say - Indonesia's main weakness lies in the implementation of sometimes 
brilliant policies.
Economist Faisal Basri, in his article in Kompas daily, encapsulates salient 
policies in Presidential Instructions no. 6 of 2007 as follows:

To improve the Investment Climate, the time taken to process and establish a 
company has been set not to exceed 25 days. Secondly, procedures at the Tax 
Office are to be accelerated and their numbers minimized.
Furthermore, Customs procedures through the green lane must take no more 
than an average 30 minutes, and an average three days for customs through 
the red lane.
In the Financial  Sector Reform, main emphasis is given to mobilizing all 
potential resources for domestic funding by improving efficiency, strengthen 
good management, and put in place a safety network for the financial sector.
With a stronger foundation and diversification of financial resources, the 
government expects that in the long term the structure of the financial 
sector will become more resilient.
Similar to the Financial Sector Reform, the Policies on Infrastructure 
emphasize institutional strengthening.
Whereas, to Empower MSMEs, the new regulations are, unfortunately, still 
concerned with funding sources, credit guarantees, market access, improved 
human resources, and regulatory framework, says Faisal Basri.
In this regard, Faisal Basri is of the opinion that the essential problem 
faced by small businessmen is their weak bargaining position vis-à-vis 
strong companies. Therefore, MSME's need to be protected from unfair 
business practices, especially by large corporations.
While another measure made by the government is to issue land certificates 
to MSME's targeted at 23,240 in 2007.
Although commendable, nonetheless, this number is still too few, as they 
will most probably be issued to those in towns and cities, whereas those who 
need this most are active in rural areas, and they will most likely not be 
able to benefit from this policy, says Faisal Basri.
(Sources: Press Release of the Office of the Coordinating Ministry for the 
Economy, Kompas)
 (Tuti Sunario)
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NEWS AND BACKGROUND:

1.      Tourism and Transportation:
 Visa on Arrival now extended to 63 countries

Starting 28 May 2007, the government through Ministerial Decree by the 
Minister of Law and Human Rights, has extended Visa on Arrival (VoA) 
facilities to another 11 countries, bringing to a total of 63 countries, 
whose nationals may enter Indonesia by taking Visa on Arrival, reports 
Bisnis Indonesia.

The additional 11 countries are : (1) Algeria, (2)Czechoslovakia, (3) Fiji, 
(4) Latvia, (5) Libya,(6) Lithuania, (7) Panama. (8) Romania, (9) Slovakia, 
(10) Slovenia, and (11) Tunisia.

(To check the complete list of countries provided with VoA, please open 
www.budpar.go.id and click "Regulations" on right hand side of the page). 
Purpose of visit may be for tourism, social visit, business purposes, or 
government duties.

Visa on Arrival costs US$ 15 for a visit of between 1 to 7 days, and US$ 30 
for a stay of between 8 to 30 days. These are non-extendable, and may not be 
changed into any other immigration permit.

While, according to the Department of Culture and Tourism,  Free Visas for 
Short Visits (BVKS) apply to nationals from (1) Brunei Darussalam; (2) 
Chile. (3) Hong Kong SAR, (4) Macao SAR; (5) Malaysia, (6) Morocco; (7) 
Peru; (8) The Philippines, (9) Thailand; and (11) Vietnam.

Bali Airport rated Indonesia's Best in Security and Safety

The Department of Transportation has audited Indonesia's 5 largest 
international airports, namely those of Jakarta, Bali, Surabaya, Medan and 
Makassar, and has rated Bali's Ngurah Rai airport the top in Security and 
Safety, and Services, complying 89% to requirements with 11% non-compliant 
points, wrote detik.com

Second comes Jakarta's Soekarno-Hatta airport with 87% compliant and 13% 
non-compliant points. Third is Surabaya's Juanda Airport with 78% compliance 
and 22% non-compliance. Fourth is Medan's Polonia Airport with 74% 
compliance and 26% non-compliance, and last comes Makassar's Hasanuddin 
Airport, with 68% compliance and 30% non-compliant points.

However, Surabaya's Juanda airport is rated best in services among the five 
audited.

The Department of Transportation plans to hold periodical audits, ordering 
airports to improve and make necessary corrections within three months to 
such points where these fail in compliance rating.  Audit on other airports 
will follow suit. Meanwhile, the public and operators are urged to submit 
official complaints to further improve safety, security and service 
standards of Indonesia's airports, due to the fact that the public as well 
as airlines pay airport taxes and service fees.

Garuda Indonesia gains 8.3% better yield on Japan traffic

Garuda Indonesia's Regional Manager for Japan, South Korea, China and the 
United States, M Arif Wibowo, expects yield from the Japan service this year 
to reach US$ 130 million, or up 8.3% compared to last year, reports Bisnis 
Indonesia.

In Q1, traffic from Japan yielded US$ 40 million, or US$ 10 million more 
than earlier anticipated. Garuda's load factor from Tokyo and Japan has also 
reached an average 75%, more than the earlier expected 70%, while traffic 
from Osaka has recovered significantly.

>From Japan, Garuda encourages tourists to visit Indonesia for eco-tours, 
weddings and honeymoons to Bali, and increase corporate traffic as well as 
incentive groups.

Garuda flies to Tokyo 8 times weekly, and 7 times weekly to Osaka using 
B747-400 and Airbus A330-300 aircrafts.

In the latest development, the Department of Culture and Tourism signed an 
MoU with Garuda Indonesia to jointly promote Indonesia through Garuda's 21 
overseas offices in 10 countries, provide space for brochures, assist in 
inviting agents and journalists on fam tours, and promote Indonesia's many 
and varied destinations and attractions through Garuda's in-flight magazine.

On the occasion, Garuda Indonesia's CEO, Emirsyah Satar said that in 2006, 
the airline carried 2.8 million international passengers from and to 
Australia, Japan, South Korea and the Middle East.

Rp. 41 billion subsidy for pioneering flights serving Papua's interior

To support transportation and logistics on the Indonesian side of the island 
of Papua, the government has allocated the amount of Rp. 41 billion in 
subsidies to support help flights serving Papua's widespread and remote 
villages, which are accessible by air only, said Head of Air Transportation 
for Papua, Bambang Siswanto as quoted by Bisnis Indonesia.

Subsidies are given to flights operating from five airports. These are 
flights from Sentani airport to Batom, Dabra, Oksibil, and Pagay, which are 
provided with Rp. 7.8 billion in subsidies; flights from Merauke airport to 
Okaba, Kimaam, Bomakiya, Kamur and Mindiptana with Rp. 8.8 billion; flights 
from Nabire airport to Sinak,  Ilaga, Ilu, Fawi, Sugapa, and from Biak to 
Numfor, the amount of Rp. 11.2 billion in susibidies, while flights from 
Wamena to Mulia, Karubaga, Bokondini, Tiom, Dekay, Elelim, Apalaopsili and 
Seradara are supported with Rp 6.6 billion; from Timika airport to Bioga, 
Kokonao, Agimuga, Hila, Potoayaburu, Kaimana, Bilogai, Jla, Ily and Dekay 
with Rp. 7 billion.

In general these pioneer flights use small Twin Otter aircrafts to access 
remote areas.


2.      The Environment, Health and Culture:
 ·    Indonesia's rainforests disappear 30% faster than anticipated

Indonesia's rainforests have disappeared at a rate 30% faster than earlier 
anticipated, stated a UN Environment Program report recently.
Illegal loggers have cut down some 5.2 million acres (1 acre=4,046.86 sq.m.) 
or equal to US$ 4 million per year in national parks, thereby endangering 
the habitat and existence of the orangutan great apes.
 The report was released in the Hague, Holland, at the Convention on 
International Trade in Endangered Species, held once in three years, and 
attended by 171 countries, reported the Associated Press.
It was earlier estimated that Indonesia's low land rainforests would be 
seriously degraded by 2032, however, satellite surveillance has shown that 
at the present rate of destruction, an estimated 98% of Indonesia's forests 
will already be degraded by 2022, some 10 years earlier, or fifteen years 
hence, continued the report

At the moment, only some 7,000 of Sumatra orangutan and 50,000 of Kalimantan 
orangutans live in the wild. Ian Redmond of UNEP's Great Apes Survival 
Project, who had studied these apes in the wild, said that in the past 
century, the number of Sumatra orangutans had dropped by 91%.
The orang-utan population has been destroyed dramatically, said Melanie 
Virtue, who was also involved in this project.

The report further estimates that 88% of all logs in Indonesia are illegally 
logged, where poachers operate in 37 of 41 of Indonesia's national parks. 
Further pressure for the orangutans comes from conversion of forests to make 
room for palm oil plantations, especially with world increased demand for 
biofuel.

On the other hand, the report also praised the Indonesian government for 
thwarting shipments of illegal logs amounting to 2.4 million cu. ft. (equal 
to 3,000 truck-loads) and arrested the perpetrators.
Earlier, Bisnis Indonesia wrote that representatives from Europe and the USA 
had reported at the G-8 Conference on Illegal Logging in Berlin,
that a number of Malaysian businessmen were involved in illegal logging in 
Kalimantan and Papua, while these logs are being re-exported to China.

Most vocal was Ana Maria Gomes, EU parliamentarian and former Portuguese 
Ambassador to Indonesia, who said that when in Indonesia she herself had 
witnessed illegal loggers from Malaysia operating in Indonesian Kalimantan.
 The International Investigation Agency, EIA, had also reported that 300,000 
cu. meters of merbau timber had been cut illegally in Papua to be exported 
to China. The Agency estimates that some 10 million cu.m. had been imported 
by China in the past years, making a total loss of Rp. 20 trillion to 
Indonesia.
In this regard, the EU had provided a grant of 16.74 million Euros to 
Indonesia while the Indonesian government had provided 1.76 million Euros in 
kind to curb illegal logging and its trade.


3.    The Economy, Trade and Industry:
·      The Real Sector is seen lagging

Indonesia's real sector is still hampered by poor infrastructure and access 
to financing, resulting in continued slow growth despite stable 
macroeconomic conditions.
These problems, that had been increasing in severity since the 1997-1998 
Asian financial crisis, could not be simply resolved by the central bank's 
rate cuts and easing of lending rules alone, Bank Indonesia Senior Deputy 
Governor Miranda S. Goeltom said, as reported by Urip Hudiono in the Jakarta 
Post.

She urged all concerned -- the government, legislature and the business 
community -- to join hands in putting the right policies in place to resolve 
the problems, and to roll up their sleeves in actually implementing them.
"What we need is a 'total football' strategy," Miranda said during a panel 
discussion.
"The complexity and gravity of the problems require broader and more 
integrated structural economic reforms in the infrastructure, labour, legal 
and institutional sectors so as to improve competitiveness."

Miranda said that the recent macroeconomic stability had not been 
accompanied by significant growth in the real sector as the economy's 
supply-side -- made up of the output of businesses and industries -- was 
being constrained by structural rigidities that hampered its ability to 
respond to the demand-side, in the form of consumption, exports and 
investments.
This was shown by BI's latest study comparing the real sector's output with 
consumer prices.

While before the crisis an output increase would translate into relatively 
flat rises in prices, Miranda said that the relational curve had since 
become steeper.
This reflected a growing inability among businesses and industries to 
increase output, while keeping production costs down, so as to keep pace 
with the demand. This inflexibility led to higher prices, she said.

The lack of infrastructure and access to financing was further exacerbated 
by a shift in the post-crisis economy to more technology-intensive industry, 
rather than labor-intensive industry.
This had resulted in the so-called "paradox" of jobless growth.

"Our study shows that labor force employment in the formal sector has 
decreased from 81 percent during the pre-crisis period to 11 percent in the 
post-crisis period," Miranda said.
Indonesian Employers Association (Apindo) chairman Sofyan Wanandi argued 
that the main problem was the failure to implement existing policies.
"All of these positive macroeconomic figures will be incapable of being 
sustained if nothing is done. We are sometimes too busy tending to 
non-economic policies, as well," he said.
Sofyan admitted that the country's manufacturing sector had in the past 
enjoyed generous government support in the form of fuel and power subsidies, 
and tariff protection, but times had since changed in the global competition 
arena.

What the government needed now to do, he said, was to eliminate all 
remaining structural problems in the economy that resulted in high costs for 
industry, reports Jakarta Post.

For your comments or further inquiries, please e-mail to: 
tbsc-strategy at indo.net.id.