Indonesia can be considered one of the richest countries on Earth in terms of its biological diversity. The country is located between Asia and Australia, and comprises more than 17,000 islands that stretch 5,000 km from east to west. Because of its complex geographical make‐up and unique biogeographical position, Indonesia has enormous ecosystem diversity as well as a fascinating history and heritage.
In terms of human diversity, with more than 210 million inhabitants, the country ranks as the fourth most populous nation in the world and the third largest democracy. It is also the world’s largest Islamic nation, where a constitutional freedom to practice other religions sees major groups of Christians, Buddhists, Hindus and other faiths existing side by side. There are approximately 336 distinct recognised cultures that share more than 250 spoken languages. The lingua franca, Bahasa Indonesia, was adopted only 77 years ago and is now widely used throughout this vast land, serving as a means of communication and as a unifying factor.
Indonesia is diverse and is among the most culturally rich countries on Earth. Add to this its enormous mineral, marine and natural resources and it is evident that it ranks as a major economic force in the region.
Following the economic and financial crisis that hit the country in 1997, the Indonesian government recognised the important role that foreign investment needed to play in the reconstruction of the Indonesian economy. During following years, successive governments enacted legal and regulatory reforms designed to make Indonesia a competitive destination for foreign direct investment.
Acceleration of Economic Growth and Trade
The Central Statistic Agency (BPS) announced that Indonesia’s GDP grew 6.30% in 2007. Per capita income rose to IDR 17.6 million from IDR 15 million in 2007. Investment has increased from 35 % in 2007 to 41 % in first quarter of 2008. Meanwhile, net export increased by 14 % in 2008 from 8 % in 2007.
Batam Free Trade Zone (FTZ)
The government decided against a proposal to turn the entire Batam Islands area into a single FTZ. Instead, it will specify bonded zones into which businesses can import goods duty free. The government also noted that export businesses outside the bonded zones could still make use of bonded warehouses, as the status of the neighbouring Rempang and Galang Islands (the islands closest to Batam) has been decided by the government.
The Batam Authority, which governs Batam and has overseen its rapid economic development, argued that the bonded zone scheme would confuse investors and lead to local government workload. However, local authorities claimed that bonded zones would enable them to better govern Batam as mandated under Indonesia’s decentralisation laws.
The court system does not provide effective recourse for resolving commercial disputes. The judiciary is nominally independent under the law, however legal practitioners fear that irregular payments and other collusive practices often influence case preparation and the judicial ruling.
The government recognises the need for judicial reform but has not yet taken any action. In several instances the local courts accepted jurisdiction over commercial disputes despite contractual arbitration clauses calling for adjudication in foreign venues.
Indonesia is a signatory to the Convention on the Settlement of Investment
Disputes between States and Nationals of Other States (ICSID)
So far only one American investment company has brought a case to the ICSID, which ruled in its favour. Indonesia’s Arbitration Law recognises the right of parties to apply any rules of arbitration that they may mutually agree upon and provides default procedural rules if no other rules have been designated.
An Indonesian commercial arbitration board, BANI, is available if both parties agree. Companies have resorted to ad hoc arbitrations in Indonesia using the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules, as well as others. Other companies in Indonesia have used International Criminal Court (ICC) arbitrations.
On 12th August 1999, Indonesia’s Parliament passed Arbitration Law Number 30, endowing the District Court of Central Jakarta with the power to enforce international arbitration awards. Before passage of the new arbitration law in 1999, enforcement lay with the Supreme Court, which was slow to act on decisions. Since 1999, Indonesian courts have swiftly enforced international arbitration awards– some have been executed within a month of the request for enforcement. The new law greatly reduces instances where district courts fail to apply the law, and legal practitioners predict that the process should improve as more judges educate themselves about arbitration.
Since 1981, when Indonesia joined the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York), fewer than two dozen foreign awards have registered with Indonesian courts (most of which have been enforced). The domestic and international press have widely publicised recent cases where those awards have not been enforced.
Right to Private Ownership and Establishment
Indonesia recognises the right to private ownership and establishment and relies on the private sector (albeit often heavily protected) as the principal engine of economic growth. At the same time State‐owned Enterprises (SOEs) play a dominant role in many sectors, including oil and gas retail and distribution, electric power generation and transmission, civil aviation, banking, and fertiliser production and wholesale distribution. In the past three years Indonesia has promoted competition in some sectors and has decreased the privileges awarded to SOEs. The Parliament formed the State Ministry for SOEs in 1998; privatisation is an important part of its mandate but political opposition has effectively hindered such attempts. Some provincial governments have improved the management and transparency of provincially owned firms (BUMDs) in order to stem losses and prepare them for privatisation.
Protection of Property Rights
Foreign entities have no freehold rights to land ownership in Indonesia. Foreign investorsʹ land holdings are usually obtained through long‐ term lease agreements (normally for 30 years) with the government or private parties. These lease holdings can be used as collateral. Government regulations allow mortgages to be registered against real property and seagoing vessels in their appropriate registries, as well as security interests in chattel, equipment, accounts receivable, and insurance proceeds. A search facility currently exists only for mortgages. The lack of transparency in Indonesiaʹs courts means uncertainty whether security interests will be recognized and enforced. Foreign companies may also establish a limited company under Indonesian law that can legally obtain rights to land.
The court system does not provide effective recourse for settling property disputes. The new era government and Indonesiaʹs decentralization process unleashed a flurry of new land claims by local residents against companies, often operating on government‐granted concessions located in their communities. The problem of incomplete or inaccurate record keeping is compounded by an ineffective and corrupt enforcement system.
The US government in May 2003 again placed Indonesia on the Special 301 Priority Watch List for inadequate protection of Intellectual Property Rights (IPR), where Indonesia has been since the 1980s. The Indonesian government has steadily improved the regulatory and legal framework for the protection of IPR; however, enforcement continues to fall short. US businesses reported that Indonesia ranks as the third largest producer of pirated products. They maintain that 90 percent of all CDs (audio, video, and software) sold in Indonesia are pirated and estimate that industry suffered losses in 2002 of USD 253 million, a 33 percent increase over prior year.
Indonesiaʹs new copyright law (Law 19/2002) takes effect on July 29, 2003. The new law increases fines up to Rp 500 million (USD 62,000) and provides for prison terms of up to five years for dealers of pirated materials. The law directs cases of alleged copyright violations to be tried in commercial courts, and for the rendering of judgments within
90 days. As part of the lawʹs implementation, the Ministry of Industry and Trade plans to issue optical disc regulations that would enhance the governmentʹs ability to identify and prosecute producers of pirated products. In an effort to enhance interagency coordination on enforcement, Indonesiaʹs Ministry of Justice recently formed an IPR task force made up of the national police, customs, attorney general, judiciary, and members of the computer software and entertainment industries. The task force has already conducted a few high profile raids.
Indonesia is a member of the World Intellectual Property Organization, but has not yet ratified the related WIPO Performances and Phonograms Treaty (WPPT). The Ministry of Justice prepared a Presidential decree ratifying WPPT last year, and Justice officials expect the President to sign the decree sometime in 2003. Indonesia acceded to numerous international conventions on intellectual property rights, including the Paris Convention for the Protection of Intellectual Property; the Berne Convention for the Protection of Literary and Artistic Works (with a reservation on Article 33); the Patent Cooperation Treaty; Trademark Law Treaty; the Nice Agreement for the International Classification of Unclassified Goods and Services.
Patents: The current patent law dates from 2001, which amended and consolidated in a single text all previous legislation. In 1997, Indonesian law extended the term of patent protection to 20 years from 14 years, and maintained the provision for a two‐year patent extension. The amendment allows for the patenting of plant and animals. However, some of the weaknesses of the old law persist. Chief among these flaws is the requirement that an inventor must produce a product or utilize a value‐added process in Indonesia in order to obtain patent protection for the product or process. Inventions that are contrary to Indonesian laws and regulations are excluded from patent ability, and the standard for excluding inventions without domestic content appears to be inconsistent with TRIPS requirements.
Trademarks: Indonesia enacted its new trademark law on August 1, 2001. Like the new patent law, the latest version consolidated into one text a series of trademark laws enacted over the past 20 years. The new law raised the maximum fine for trademark violations to Rp 1 billion (USD 95,000) and slightly reduced the maximum possible prison term. The government justified this move by claiming that financial penalties were a greater deterrent to IPR violators than imprisonment. Foreign rights holders, arguing that most IPR cases never result in the maximum sentence, had pushed for minimum sentencing guidelines rather than higher fines.
The trademark law provides for the determination of trademark rights by priority of registration, rather than by priority of commercial use. The law also provides for the protection of well‐known marks, but offers no administrative procedures or legal ground under which legitimate owners of well‐known marks can cancel pre‐existing registrations. Currently, the only avenue for challenging existing trademark registrations in Indonesia is through the commercial courts, which generally have issued decisions within three months upholding legitimate trademarks.