Economic indo

Economic 360 for Indonesia: Growth

Prospects and Emerging Opportunities in the

ICT Industry

4736-90

April 2012

Indonesia’s ICT Industry Decoded: Hardware, Software, and Telecom

to Propel Growth

2 4736-90

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3 4736-90

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4 4736-90

Political Analysis 13

Economic Analysis 30

Social Analysis 38

Technology Factors 43

Legal Factors 48

Environmental Factors 55

ICT Industry 62

Telecommunication Market 78

Information Technology 90

Executive Summary 8

About Frost & Sullivan 98

Contents

5 4736-90

Economic 360 Perspective: Budget Allocation to Ministries (Indonesia), 2009-2010 22

Economic 360 Perspective: Foreign Direct Investments (Indonesia), 2004-2010 26

Economic 360 Perspective: Economic Indicators (Indonesia), 2004 and 2010 32

Economic 360 Perspective: Demographic Statistics (Indonesia), 2010 39

Economic 360 Perspective: Employment Indicators (Indonesia), 2007-2010 40

Economic 360 Perspective: Sectorwise Foreign Capital Ownership Limit (Indonesia), 2010 51

Economic 360 Perspective: Negative Investment List (Indonesia), 2010 52

Economic 360 Perspective: Business Taxes and Specific Taxes on Corporations (Indonesia), 2010 53

Economic 360 Perspective: Personal Tax Rates (Indonesia), 2010 54

Economic 360 Perspective: Environmental Issues and Government Initiatives (Indonesia), 2010 57

Economic 360 Perspective: Key Environmental Agreements (Indonesia), 1958-1998 58

Economic 360 Perspective: Key Environmental Indicators (Indonesia), 2010 59

ICT Industry: Investment Criteria (Indonesia), 2010 65

ICT Industry: Sector Deployment (Indonesia), 2011-2025 70

ICT Industry: Palapa Ring Project Description (Indonesia), 2005-2012 71

ICT Industry: Universal Service Obligation (Indonesia), 2011 73

ICT Industry: Initiatives (Indonesia), 2009-2020 76

ICT Industry: IT Competitiveness Index (Major ASEAN Members), 2011 77

ICT Industry: Key Features of Telecommunication Market (Indonesia), 2010 80

ICT Industry: Telecommunication Market Regulations (Indonesia), 2001-2010 81

ICT Industry: Major Telecommunication Companies (Indonesia), 2010 82

ICT Industry: Major Telecommunication Services Providers (Indonesia), 2010 83

ICT Industry: Company-wise Mobile Subscription Rate Increases in the Telecommunication Market (Indonesia), 2007-2010 83

ICT Industry: Number of Fixed Telephone Line Providers in the Telecommunication Market (Indonesia), 2008-2010 86

ICT Industry: Number of Mobile Network Providers in the Telecommunication Market (Indonesia), 2008-2010 88

ICT Industry: Key Features of IT Market (Indonesia), 2011 92

ICT Industry: Business Opportunities (Indonesia), 2011-2014 97

List of Figures

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Economic 360 Perspective: Political Transition (Indonesia), 1999, 2002, 2004 and 2010 14

Economic 360 Perspective: Timeline of Election Trends (Indonesia), 1967-2010 16

Economic 360 Perspective: Budget Deficit (Indonesia), 2004-2014 21

Economic 360 Perspective: Fiscal Policy (Indonesia), 2008-2010 23

Economic 360 Perspective: Bank Indonesia Rates and Inflation Rates (Indonesia), 2005-2010 25

Economic 360 Perspective: Exports, Imports and Trade Surplus (Indonesia), 2004-2014 28

Economic 360 Perspective: Membership in Various Organizations (Indonesia), 2010 29

Economic 360 Perspective: Industry Growth Rate (Indonesia), 2004-2010 33

Economic 360 Perspective: Exchange Rate (Indonesia), 2004-2010 35

Economic 360 Perspective: Current Account Balance (Indonesia), 2004-2010 36

Economic 360 Perspective: Economic Growth Trends (Indonesia), 2004-2014 37

Economic 360 Perspective: Health Expenses by Category (Indonesia), 2010 42

Economic 360 Perspective: Labor Laws (Indonesia), 2010 50

Economic 360 Perspective: Key Environment Issues (Indonesia), 2010 56

Economic 360 Perspective: Strategies Set by the Green Paper for Various Sectors (Indonesia), 2010 61

ICT Industry: Structure (Indonesia), 2010 63

ICT Industry: Institutions and Government Bodies (Indonesia), 2010 64

ICT Industry: e-initiatives (Indonesia), 2010 66

ICT Industry: e-governance Planning Process (Indonesia), 2010 67

ICT Industry: e-governance Initiatives (Indonesia), 2001-2010 67

ICT Industry: Principal Sectors Covered Under National Connectivity (Indonesia), 2011-2025 68

List of Charts

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ICT Industry: Major Projects (Indonesia), 2011-2025 69

ICT Industry: USO Program (Indonesia), 2009-2025 72

ICT Industry: Telecommunications Market Segmentation (Indonesia), 2010 79

ICT Industry: Market Share of Fixed Line Service Providers in the Telecommunication Market (Indonesia), 2010 79

ICT Industry: Market Share of Mobile Service Providers in the Telecommunication Market (Indonesia), 2010 79

ICT Industry: Foreign Investments in Telecommunication (Indonesia), 2010 84

ICT Industry: Telecommunication Projects (Indonesia), 2011-2015 85

ICT Industry: Fixed Telephone Lines in the Telecommunication Market (Indonesia), 2004-2014 86

ICT Industry: Mobile Subscriptions in the Telecommunication Market (Indonesia), 2004-2014 88

ICT Industry: Telecommunications Equipment Trade (Indonesia), 2004-2014 89

ICT Industry: IT Market Segmentation (Indonesia), 2010 91

ICT Industry: Sector-wise IT Spending (Indonesia), 2010 93

ICT Industry: Internet Usage in the IT Market (Indonesia), 2004-2011 94

ICT Industry: Fixed Broadband Subscriptions in the IT Market (Indonesia), 2004-2014 95

ICT Industry: Fixed Broadband Subscription Penetration Rate in the IT Market (Indonesia), 2004-2014 95

ICT Industry: Personal Computers in Use in the IT Market (Indonesia), 2004-2011 96

List of Charts (continued)

8

Executive Summary

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Political Analysis

• Indonesia is the best example of political transition from autocracy to democracy. The country has achieved significant political stability

after the re-election of President Susilo Bambang Yudhoyono in July 2009.

• Reforms post 2008 were mainly focused at improving investment climate, macroeconomic and financial policy, energy security, and

natural resources. These reforms were also aimed at enhancing environment and agriculture, infrastructure, and labor laws.

• High bureaucracy and restrictive laws are deterring investment prospects in Indonesia. However, the new political regime stresses on

removing bottlenecks in infrastructure and capacity.

Economic Analysis

• The Indonesian economy is driven by domestic consumption, which has saved the country from being significantly impacted by the

global economic downturn. Indonesia is a part of the G-20 community and is the third in the world in terms of GDP growth rate.

• The highest contributor to GDP in Indonesia is the manufacturing sector, while that to GDP growth is the services sector.

• To reduce the impact of the financial crisis, which the economy felt toward the end of 2008, the Government had pumped in liquidity,

secured alternative financing to fund an expansionary budget, and secured passage of a fiscal stimulus program. The economy has

shown resilience and growth is expected to attain pre-crisis levels by 2011.

• The Government has identified ten priority industries that are expected to drive the manufacturing industry and enhance Industrial

competitiveness.

• Emerging industries with business opportunities include infrastructures, oil and gas, ICT, and the mining sectors.

• Strengthening rupiah, new economic zones, manageable inflation levels, and improving investment climate indicate the prospective

Indonesian economy for the next five years.

Social Analysis

• Indonesia has emerged as an attractive market due to increasing population with high potential for consumer and industrial goods.

The country has a huge domestic market with population of 240.3 million in 2009, of which 50.0 percent was aged below 30 years.

High unemployment levels, poverty, and low qualifications of work force are some of factors affecting consumption in Indonesia.

Executive Summary – PESTLE

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Legal Factors

• The legal system in Indonesia is not very transparent and is prone to inconsistencies. This has a negative impact on the investment

climate.

• Activities listed in the negative investment list completely restrict foreign involvement. The negative list is being revised and is likely to

open up more sectors to foreign direct investment.

Environmental Factors

• Indonesia is currently the world’s largest emitter of greenhouse gases (GHGs) but has pledged to reduce emissions by 26.0 percent by

2020.

• To achieve its emission targets, the Government is taking measures to lower deforestation rates, reduce use of peat lands, and

increase the proportion of renewable energy in energy mix.

Technology Factors

• R&D is still in the nascent stage of development in Indonesia and most companies do not have an R&D base in the country. However,

in light of Science and Technology Vision 2025, significant achievements are being made in these two fields.

• The Ministry of Research and Technology (KRT) is meant to encourage organizations, especially research institutions, to conduct

research in priority areas, namely technology, food, energy, defense and security, transportation and medicine and health.

Executive Summary – PESTLE (continued)

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Information and Communications Technologies (ICT)

• ICT Overview: ICT industry in Indonesia is regulated by Ministry of Telecommunication and Information Technology. ICT spending

crossed $17.00 billion in 2010 and the industry contributes approximately 2.0 percent to the country’s GDP. The industry is a

priority industry as a part of the Government Infrastructure Development Program.

• Government initiatives to improve ICT sector includes the following:

o National Master Plan: The Indonesian government has framed the Master Plan for Acceleration and Expansion for

Indonesia Economic Development (MP3EI) in order to achieve the status of a developed nation by 2025. Improvement of

connectivity between the islands of the country is one of the priority areas. The industry is a part of the seven priority

industries of the Java economic corridor.

o USO: National Universal Service Obligation (USO) program aims to bridge the gap between urban and rural ICT access

by developing ICT infrastructure in remote areas. Asian Development Bank (ADB) and the Government of Indonesia are

involved in the development of ICT in rural areas. The USO program objective is to ensure that telecommunication

services, including Internet and broadband, are provided in remote parts of rural areas of the country.

o E-initiatives: E-governance in Indonesia was introduced by using telematics technology. This was introduced in order to

support the democratic governance practice, to assist communication between the central and local governments, and to

move towards an era which is centered around an informed society. Facilities such as the National Information System of

Standardization (SISTANAS) and Indonesia Standardization Information Network (INSTANET) are used to promote

e-governance.

o Palapa Ring Project: The Palapa Ring Project is the most important ongoing infrastructure development initiative to

support e-governance in Indonesia. The objective of the project is to set up a domestic fibre optic network that would

connect 440 districts and 33 provinces across the country, construct a high-capacity (320 Gbps) support network, and

improve the Wi-Fi infrastructure in east Indonesia.

Executive Summary – ICT

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Information Technology (IT)

• IT Sector: The IT market in Indonesia is dominated by the hardware segment and it accounts for more than 70.0 percent of

Indonesian IT spending. The software market is relatively smaller compared to the hardware market and is still nascent. The IT

services market is witnessing robust growth and is mainly supported by demand from the manufacturing, telecom, and banking

sectors.

• Hardware segment is to benefit as the duty elimination on PC auxiliaries is most likely to increase international trade. The

government is strengthening IT training in educational institutions which could drive the demand for PCs in the forecast period.

• Increasing demand for cloud computing technology will have a positive impact on the software sector.

• Automation of major corporate activities is expected to facilitate growth of the market.

Telecommunications

• Telecommunications (telecom) Sector: The telecom sector includes both public sector and private sector companies. Current

policy liberalization was key in attracting foreign investment to the sector. The domestic companies, which currently serve the

telecommunication market in Indonesia, include Telkomsel, Indosat, and Excelcomindo. Other prominent foreign participants and

new entrants include Saudi Telecom, Smart Telecom, and PT Barkie Telecom.

• Indonesia has the third-largest number of mobile operators in a country in the Asia Pacific region, behind India and Bangladesh.

There are over 200.0 million mobile subscribers in Indonesia and the number of mobile subscribers increased by 38.0 percent in

2010 compared to 2009.

• Introduction of WiMAX and 3.5G technology can significantly boost investment in the coming years.

• Network upgrade and development, which are part of government initiatives, could create investment opportunities through private

public partnership. In addition, the Government of Indonesia may liberalize policies related to investment in telecom tower

infrastructure.

Executive Summary

13

Political Analysis

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1999 2002

• Amendments made included:

President cannot serve

beyond two terms

• Highest state institution

People’s Consultative

Assembly (MPR)

• Political institutions witness

change from authoritative

structure

• First liberally elected

national, provincial, and

regional parliament since

1955

• Initial stages of

democratic transition

after the fall of long-

serving dictator Suharto

in 1998

2004

• Stable political

condition with the

re-election of the

first

democratically

elected president

in 2009

• First direct presidential

elections

• Prohibition of societal group

representation in MPR

• Establishment of Regional

Representative council

• MPR evolved as a bicameral

legislature

2010

Economic 360 Perspective: Political Transition (Indonesia), 1999, 2002, 2004 and 2010

• Indonesia is a republic based on the constitution that came into effect in 1945.

• ‘Trias Politica’ constitutes of distinguishing legislative, executive, and judicial bodies.

Prominent Political Parties

• Democrat Party

• Golongan Karya (Golkar)

• Indonesian Democratic Party-Struggle (PDIP)

• Justice and Prosperity Party (PKS)

• National Mandate Party (PAN)

• National Awakening Party (PKB)

• United Development Party (PPP)

• Greater Indonesia Movement (Gerindra)

• People’s Conscience Party (Hanura)

Source: Frost & Sullivan research

Political Structure and Trends

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Legislative Branch

• MPR

People’s Representatives Council (DPR)

is the lower house of the Indonesian

parliament.

Regional Representatives Council (DPD):

Upper house: It houses four

representatives from each province of

Indonesia.

• Currently, the MPR has 560 members from DPR

and 132 members from the DPD.

• The DPR and the DPD members are elected

every five years.

Executive Branch

• The Judicial Branch includes Supreme Court, Constitutional Court, and Judicial Commission.

• Supreme Court is the most prominent institution in the judicial branch and the President appoints its judges.

• Constitutional Court is concerned with constitutional and political issues.

• Judicial Commission supervises the judges.

• The Executive Branch comprises of the

President, Vice President, and the Cabinet of

Ministers.

• The President is the Head of State and the

Commander-in-Chief of armed forces. He is also

accountable for domestic governance, policy-

making, and foreign affairs. He also elects the

cabinet.

• Ministers report to the President and do not

represent any specific political party, in the

cabinet.

Judicial Branch

Political Framework

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Economic 360 Perspective: Timeline of Election Trends (Indonesia), 1967-2010

1967-1999 Prior 2004 2004

Suharto era (1967-98)

Suharto became the

President in 1967.

During his rule, the

Executive Branch exercised

unrestricted power. There

were inept legislative and

Judicial branches.

Fall of Suharto and the end

of dictatorship came in

1998.

First democratic election in

Indonesia was held in 1999.

MPR, which was the highest-

level governing body and

consisted of the parliament

members and group

representatives, elected the

President.

Presidential system had a

clear distinction of powers

between the legislature and

executive government.

The members of General

Election Committee (KPU),

conducting parliamentary as

well as presidential elections,

could be members of political

parties.

First direct

presidential

election in

Indonesia was

held in 2004.

Golkar party won

the 2004

election.

Susilo Bambang

Yudhoyono was

elected as the

President.

President and Vice

President are elected

hereafter, on vote of the

citizens.

Separate elections were

conducted for the

Parliament and the

President.

MPR is bi-cameral and is

composed of People’s

Representatives Council

(DPR) and the Regional

Representatives Council

(DPD).

KPU is made strictly non-

partisan.

Post 2004

Susilo Bambang

Yudhoyono was re-

elected as the

President on July

8, 2009.

Partai Demokrat

(PD) (Democratic

Party) emerged as

the single-largest

party in the DPR.

2010


Indonesia: Path Ahead (2011-2014)

• Political environment is likely to remain stable at least till the next election in 2014.

• The democratic nature and transparency of the elections are likely to continue.

Elections

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Separatist Movements

• Separatist movements in Aceh and Papua are among the prominent challenges faced by

the Government of Indonesia.

• The Government entered into the Helsinki Agreement with Aceh in 2005. The Agreement

provided certain special economic and political privileges to the province and was able to

subside separatist movements in the region. However, such movements still persist in

Papua.

De-centralization

• The Indonesian Government started decentralization of political and economic power,

empowering district level authorities in January 2001.

• Sub-national governments were given more powers on local public services and had the

permission to implement about 33.3 percent of the national budget.

• Approximately 2.6 million central government employees were transferred under the sub-

national government.

• Direct elections were organized for both local executive and legislative branches to increase the

reliability and transparency of the local governments.

• Approximately 90.0 percent of the Indonesian population live in the provinces of Java and

Sumatra alone, causing high economic concentration in these places. The fiscal de-

centralization is expected to address these inequalities.

• The Indonesian inter-government transfers had increased to approximately five times in 2009

than its value in 2000.

• The quality of spending and enabling the poor regions to optimize their resources continue to be

the challenges for the Indonesian Government.

Key Political Issues

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Reforms

• Post 1998, a new reform process called ‘Reformasi’ was introduced in Indonesia. Its main

objectives were to enhance revenue mobilization by increasing the powers of state, combat

corruption and nepotism, and bring about fiscal decentralization, revenue sharing, and expansion of

privatization schemes.

• With the aim of reducing and abolishing corruption from the society, the Corruption Eradication

Commission (KPK) was established in 2004.

• Between 1998 and 2008, the Indonesian Government took up several agricultural liberalization

measures, such as removal of import restrictions, elimination of export bans on wheat, soybeans,

sugar, and palm oil products, privatization, suspension of VAT on essential products, such as rice,

and allowing private traders to import rice.

• There was also liberalization of market access for five service sectors, namely telecommunications,

industrial services, tourism, financial services, and banking.

• The Indonesian Government also took to financial restructuring and termination of insolvent banks.

• Investment and foreign trade liberalization were also undertaken by the Indonesian Government.

• The Government also stressed upon the elimination of cartels.

• P.T. Pertamina (Persero), the state-owned oil and gas company, had a monopoly on upstream oil

development and the distribution of petroleum products in Indonesia. This monopoly ended in 2005.

1998-2008

• The reforms by the Indonesian Government during this period were mainly focused on improving

investment climate, macroeconomic and financial policy, energy security, natural resources,

environment and agriculture, infrastructure and labor laws in Indonesia.

Post 2008

Key Political Issues (continued)

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• The Government focuses on public-private partnerships to achieve infrastructure development.

• Budget allocation for infrastructure was approximately 6.3 percent of GDP in 2010. However, this is

likely to triple public expenditure on ports and airports to optimize the opportunities in the country’s

export sector in 2010.

Highlights of Government Agenda

• The exit strategy from expansionary fiscal and monetary policies are intended to be done in a

coordinated way, so as to uphold market confidence.

• Structural reforms and improvement of the investment climate should be undertaken to sustain

private investment-driven growth.

• Medium-term issues, such as reforms of the financial sector and international regulations, are also

expected to be addressed.

• The Parliament passed the Special Economic Zone law in September 2009, which is going to allow

the Government to develop zones and clusters of economic activity.

• Key areas of focus of the Government in terms of energy security are development of renewable

sources of energy and revival of the agriculture sector.

• Measures were taken to pass the Power Sector Bill by 2010, which opened up the energy sector to

private sector investment in power generation, its transmission and distribution.

• Focus of the Government in terms of services is likely be on accelerating the development of the

service sectors, such as tourism and others.

Infrastructure

Energy Security

Services

Government Agenda 2008-2010

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• Japan is the largest export partner of Indonesia and the

biggest foreign investor in the country.

• Both countries are members of the G20 major economies

and Asia Pacific Economic Cooperation (APEC).

• In 2010, Japan is likely to invest in Indonesia, mainly in

infrastructure.

• The United States works toward maintaining peace,

security, and stability in Indonesia.

• The U.S. Agency for International Development Assistance

programs focus on basic and higher education, democratic

and decentralized governance, economic growth, health,

water, sanitation, and the environment in Indonesia.

• In 2010, the focus is likely to be on energy.

• Relations between Indonesia and Malaysia were ameliorated

under President Suharto.

• However, territorial dispute over the oil-rich islands of

Ambalat and also over cultural claims still exist.

• Both nations are founding members of ASEAN and APEC

and are also members of the Non-aligned Movement.

Malaysia

• Indonesia and Singapore established a Joint Steering

Committee to implement a bilateral Framework Agreement

to create Special Economic Zones (SEZ) in Indonesia’s

islands.

• Both the nations are founding members of the Association

of South East Asian Nations (ASEAN) Indonesia conducts

its foreign relationships with Israel through Singapore.

Australia

• The UK Department for International Development (DFID)

works closely with the GOI and other donors to provide

effective development assistance to poor people in

Indonesia.

• The United Kingdom also provides humanitarian and

reconstruction assistance in response to emergencies.

The United States

The United Kingdom

Singapore

Japan

• Indonesia received an aid of $414.9 million from Australia in

2008-2009.

• The Australia-Indonesia Development Area (AIDA) has been

founded to enhance the economic relations between the two

countries.

Key Foreign Relations of Indonesia

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Economic 360 Perspective: Budget Deficit (Indonesia), 2004-2014

Note: All figures are rounded; the base year is 2010. Source: Frost & Sullivan analysis

Low budget deficit: Robust

revenue collection and

increase in tax revenue

Post 2008,

stimulus

packages

increased

budget deficit

Fiscal Policy Overview

• Deficit financing is generally adopted for the

Indonesian budget.

• Budget management has been scrupulous over

years. This enabled a decrease in debt to GDP ratio

to as much as 26.0 percent by the end of 2009.

• The fiscal policy aims at reducing tax rates and

increasing tax revenues post 2007.

Budget Reforms (2009)

• The budget reforms of 2009 paved the way for the establishment of

the central monitoring committee.

• The Committee monitored budget execution in local treasury offices.

Thus, enhancing the scope for reallocation of funds among various

budget groups and the appointment of more budget officials, to deal

with continued delays in capital project execution.

• Other reforms included the establishment of a consolidated Treasury

Single Account (TSA), remuneration of government deposits at Bank

Indonesia, and the strengthening of cash management.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2004 2005 2006 2007 2008 2009 2010 2010 2011 2012 2013 2014

Bu

dg

et

Defi

cit

(%

of

GD

P)

Year

Budget Deficit

Fiscal Policy

22 4736-90

Ministries Revised APBNP*2009 ($ Billion) RAPBN** 2010 ($ Billion)

Education 6.51 5.60

Defense 3.54 4.40

Public Works 4.22 3.71

Religious Affairs 2.71 2.81

State Police 2.66 2.79

Health Ministry 2.04 2.25

Transport Ministry 2.01 1.73

Note: * APBNP - Planned Central Government Budget, ** RAPBN - Draft State Budget, Exchange Rate Used - 1 IDR = 0.000108 USD.

2010 Highlights

• Budget proposal for 2010 targets a growth of 5.0 to 5.5 percent for Indonesia. Additional spending is expected to be on infrastructure

areas, such as transportation and ports and also for strengthening the social safety.

• The spending of the Central Government and State Ministries of Indonesia were set at $75.57 billion and $35.38 billion, respectively, in

2010.

• Prominence is also given to allocation for personnel payroll, subsidies, debt interest payment, and goods expenses.

• Government administration, education, and infrastructure were allotted 15.0 percent, 11.0 percent, and 6.3 percent of the budget,

respectively.

• Budget allocation for the agricultural sector was $0.86 billion in 2010; it decreased by 2.5 percent from 2009, due to a reallocation of

resources to the other sectors.

• Infrastructure spending was valued at $9.48 billion for 2010, approximately an 8.6 percent decrease from 2009 but is likely to be

complemented by an influx of FDI in the sector.

Fiscal Policy (continued)

Source: RAPBN 2010 and Frost & Sullivan analysis

Economic 360 Perspective: Budget Allocation to Ministries (Indonesia), 2009-2010

23 4736-90

• Stimulus package of 1.5 percent of

GDP to support declining demand.

• Increase in direct subsidy.

• Capital spending increased and

expenditure on goods reduced.

• Re-allocation of budget toward

productive spending.

• About $6.20 billion to be spent

as fiscal stimulus.

• Stimulus mainly to strengthen

the agriculture, infrastructure,

and energy sectors.

• Stimulus package of $7.10 billion to

support the declining demand.

• About $5.65 billion unused

government expenditure from 2008

budget spent to enhance growth

amidst global crisis.

• The Indonesian budget for 2010

amounted to 16.7 percent of the total

GDP.

• An amount of $3.05 billion was

provided to support bureaucratic

reforms and to enhance the quality of

public services in 2010.

• About 20.0 percent of the budget was

allocated for educational spending in

2010.

2009 2010 2008

• Total budget, government

consumption, and capital

expenditure amounted to 16.2

percent, 4.1 percent, and 1.2

percent of GDP, respectively, in

2009.

• An amount of $400.0 million was

allocated to energy-saving in

2009

Subsidies Decrease

• Fiscal management enabled a planned deficit

expansion to 2.1 per cent of GDP.

• Fuel, LPG, and electrical subsidies amounted to

$5.04 billion, $0.26 billion, and $3.00 billion,

respectively, in 2008.

• The education sector received 10.9 percent of

the Central Government’s total spending.

• The health sector received $1.81 billion from

the budget in 2008; it marked an increase of 4.3

percent over the amount allotted in 2007.

Economic 360 Perspective: Fiscal Policy (Indonesia), 2008-2010


Stimulus Measures (2008-2010)

24 4736-90

Key Monetary Policy Objectives

• The policy aims at controlling excessive exchange rate volatility, instead of pegging it to a pre-determined level.

• The main focus of the Indonesian Government is likely to be on making monetary policy transmission more effective, avoiding

excess banking liquidity and exchange rate volatility.

Monetary Policy 2009-2010

• In 2004, Bank Indonesia (BI) had set its goal of maintaining the stability of rupiah. Consequently, monetary policy since 2005 has

extensively focused on inflation targeting. BI executes the monetary policy through set monetary targets, such as interest rates,

to achieve the inflation level the government decides.

• Banks have tightened their credit standards in an attempt to secure their capital against expectations of weaker economic

conditions in 2009.

• BI pegged the interest rate at 6.5 percent to attain inflation target of 5.0 ± 1.0 percent set for 2010. The policy is favoring the

economic recovery process and banking intermediation.

• The bank anticipates economic growth of 5.0 - 5.5 percent for Indonesia in 2010.

Bank Indonesia (BI) rate is the policy rate reflecting the monetary policy stance adopted by Bank Indonesia

and announced to the public whenever there are changes in policy stance. The rate is used by BI in executing

monetary operations in the market through liquidity management, so as to achieve the operational targets of

the monetary policy. Typically, Bank Indonesia increases its rate if inflation is above targeted level and

decreases it if the level is below target.

Bank

Rate

Monetary Policy

25 4736-90

Economic 360 Perspective: Bank Indonesia Rates and Inflation Rates (Indonesia), 2005-2010

Note: All figures are rounded; the base year is 2010.

Source: Bank Indonesia and Frost & Sullivan analysis

BI increased policy rate to

9.3 percent in 2008 from

a previous 8.0 percent, in

response to increasing

inflationary pressures.

BI reduced policy rates to

compensate the

decreasing demand.

The rise in fuel prices in 2005-2006

aggravated the inflation levels in the

Indonesian economy. They

exacerbated beyond the targeted

range of 4.0 percent to 6.0 percent in

2008, mainly due to soaring food and

energy prices.

The stance to reduce fuel prices at the

start of 2009, lower inflation in trading

partners, and exchange rate

appreciation have enabled the

Indonesian Government to lower

inflationary pressure in 2009.

12.7

9.7

8.0

9.3

6.5

6.5

17.1

6.6

6.5

10.6

4.8

5.8

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

2005

2006

2007

2008

2009

2010

Rate (%)

Ye

ar

Inflation Rate BI Rate

BI Rate and Inflation Rate

26 4736-90

Note: All figures are rounded; the base year is 2010. Source: Bank Indonesia,

UNCTAD and Frost & Sullivan analysis

Year

Foreign Direct Investment

($ Billion)

2004 4.60

2005 8.91

2006 5.99

2007 10.34

2008 14.87

2009 10.70

2010 13.26

Economic 360 Perspective: Foreign Direct Investments (Indonesia), 2004-2010

• Sectors such as ports, advanced engineering, power, environment, oil and gas, financial services, ICT, retail, healthcare, agribusiness, and

infrastructure are expected to provide opportunities for foreign direct investments in Indonesia post 2009.

• In 2008, foreign direct investments were mainly into telecommunication, plantation, electronic, and food industry.

• Foreign gas and oil companies can operate in Indonesia with licensing as a trading company. They can also explore and exploit oil and gas

sources by means of production sharing contracts (PSCs). Additional incentives are provided for investment in oil refineries in 2009, as

Indonesia plans to build new refineries in order to reduce its dependence on imported oil.

• Of the total investments in 2009, about 76.0 percent were from foreign direct investment and the remaining 24.0 percent from domestic

investment in 2009. FDI increased by 22.0 percent in 2010 as compared to the previous year to reach $13.26 billion.

Foreign Investment Policy

• Enactment of the investment law to bolster foreign

investments in 2007 brought transparency to the

investment regime. This law also inspired equal

treatment of foreign and domestic investments. In

contrast to the new tariff policies, a new liberal

investment policy was announced by the GOI in 2009.

• Investment growth in Indonesia was nearly 10.0 percent

in 2009 over the previous year. The Investment

Coordinating Board (BKPM) targeted 15.0 percent

investment growth by 2010.

• Interest dividend has enabled the authorities to

reallocate scarce resources toward productive

investments, such as social and infrastructure

development.

Foreign Direct Investment

Investment Policy

27 4736-90

Imports (2010)

Exports (2010)

• Main Exports: Minerals, electronics and machinery, fat, oil, waxes, textiles, electrical appliances,

plywood and rubber.

• Key Trading Partners: Japan - 20.2 percent, The United States - 9.5 percent, Singapore - 9.4 percent,

China - 8.5 percent, South Korea - 6.7 percent, India - 5.2 percent, and Malaysia - 4.7 percent.

• Main Imports: Machinery and equipment, fuels, oil and gas, vehicles and transport equipment, base

metals, and chemical products.

• Key Imports Sources: Singapore - 16.9 percent, China - 11.8 percent, Japan - 11.7 percent, Malaysia -

6.9 percent, the United States - 6.1 percent, South Korea - 5.4 percent, and Thailand - 4.9 percent.

Trade Policy

Developments

• 2004-2007: Protectionist nature of the trade policy, such as an increase in trade barriers to overcome

supply-side inefficiencies increased till 2004. Post 2004, significant changes took place in the policy.

They included bilateral trade agreements proliferated, which sought to lower tariffs and bring them in line

with ASEAN Tariff Harmonization Program.

• 2008: The GOI depicted protectionist tendencies through restricted imports by introducing new import

licensing requirements, in response to the global recession that begun toward the end of 2008.

• 2009: Export-Import Bank, amongst several other trade financing policies, was established by GOI to

address the issue of scarce credit available due the financial crisis in 2009. They also received a $5.50

billion contingency package from the World Bank, the Asian Development Bank, Japan, and Australia.

• General Trends: Industrial policy aimed at fostering cluster groups, with selective use of incentives to

support diversification of industrial production. Indonesia entered into swap agreements with Asian

central banks to further trade, through easing exchange rate pressures. GOI also initiated several anti-

dumping investigations.

Trade in Indonesia

28 4736-90

• The CAGR of exports between 2004 and 2010 reached 11.2 per cent, while the CAGR for the same time period was 17.7 percent.

The exports and imports were valued at $72.52 billion and $62.89 billion, respectively, in the first two quarters of 2010.

• As the commodity prices and external demand recovered due to improving economic conditions in the Asian region, exports to China

and South Korea assumed pre-crisis values.

• International reserves amounted to $66.00 billion by the end of 2009 and trade surplus for the same year was $29.00 billion.

• In 2010, the recovery in imports is anticipated to be more pronounced than that in exports due to the faster expected recovery of

Indonesia than most of its trading partners.

Economic 360 Perspective: Exports, Imports and Trade Surplus (Indonesia), 2004-2014

Note: All figures are rounded; the base year is 2010. Source: Asian Development Bank and Frost & Sullivan analysis

Trade Performance

Trade

surplus

diminished

during

recession in

2008 0.00

50.00

100.00

150.00

200.00

250.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Valu

e (

$ B

illi

on

)

Year

Exports Imports Surplus

Exports and Imports

29 4736-90

• ASEAN-South Korea FTA in 2005 and Japan-Indonesia FTA in 2007.

• ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) February 2009.

• Economic Partnership Agreement (EPA) with Japan in 2008 (Indonesia's first bilateral free trade agreement).

• Association of Southeast Asian Nations Free Trade Agreement (AFTA): Under AFTA, the six original ASEAN members (Indonesia,

Malaysia, Singapore, Thailand, the Philippines and Brunei) agreed to reduce import duties to 5.0 percent or less by 2010, and by 2015

for the four newer members (Vietnam, Laos, Burma and Cambodia).

• Indonesia signed a trade agreement with China and South Korea in 2010. ASEAN is negotiating FTAs with the European Union, India,

Australia, and New Zealand. ASEAN-China free trade agreement in 2010 provided Indonesia a tariff waiver on 90.0 percent of goods

traded with China.

• China-ASEAN Free Trade Area (CAFTA), in effect from January 2010, waived import duties on 90.0 percent of goods.

• Indonesia is also negotiating FTAs with Australia, Pakistan, India, and the United States.

Economic 360 Perspective: Membership in Various Organizations (Indonesia), 2010

Asia Pacific Economic

Cooperation (APEC) Organization of Islamic

Conference (OIC)

World Trade Organization (WTO)

Non-aligned Movement

(NAM)

Association of South East

Asian Nations (ASEAN)

Indonesia is a Member of..

Source: Frost & Sullivan research Some Major Trade Agreements are:

• Indonesia is also exploring the feasibility of having a trade agreement with the European Free Trade Association (EFTA), which consists

of Switzerland, Liechtenstein, Norway, and Iceland.

Anticipated Trade Agreements:

Free Trade Agreements

30

Economic Analysis

31 4736-90

• In Indonesia, domestic agricultural production contributes

significantly to GDP and is the major food source to most

Indonesians.

• Key agriculture products of the country include rice, cassava

(tapioca), peanuts, rubber, cocoa, coffee, palm oil, tea, copra,

poultry, beef, pork, egg, and so on.

• Opportunities for this sector include increasing demand from

population growth and increased affluence in emerging

markets. It also encompasses the rising use of agricultural raw

materials for producing energy.

• As of 2010, the agriculture, livestock, fishery, and forestry

contributed $96.12 billion to GDP.

• Programs, such as arable land expansion program (for outside

Java island), non-land input expansion program (for Java),

irrigation improvement program and agricultural R&D were

introduced by the government to increase productivity.

• As of 2010, the food crops and plantation sector leads the

domestic investment with $50.00 billion in 76 projects.

• Export value from the sector was $5.79 billion in 2008 and

$4.37 billion in 2009, respectively. Key exports include palm oil,

rubber, cocoa, spices, vanilla, and potatoes.

• As the sector is faced with the challenge of limited capital to

finance agricultural credit, there has been a continual

increment in the agricultural budget, reaching an

agricultural spending of $0.88 billion by 2009.

• This sector had a lesser impact of the financial crisis in

comparison to other sectors and the targeted growth for the

sector was 4.5 percent in 2009.

• Due to weakening demand from the United States and

Japan, the sector is likely to seek overseas expansion to

African and eastern European countries and the Middle

East. Besides, it is also likely to expand in growing markets

such as China and India.

Main Agricultural Products

• Palm oil

• Rubber

• Rice

• Cassava (tapioca)

• Peanuts

• Cocoa

• Coffee and tea

• Poultry, beef, pork, egg

Agricultural Sector

32 4736-90

Economic Overview

• Indonesia’s GDP was $514.90 billion in 2009. It is expected to

reach $700.00 billion in 2010 and $1.000 trillion by 2014.

• In terms of the rate of recovery from the economic recession,

Indonesia was ranked third among the G-2 countries, after

China and India.

• Indonesia is a market-based economy with significant

government intervention. As of 2010, there are 139 state-

owned enterprises and 122 commercial banks, including ten

foreign-owned and 28 foreign joint venture banks in the

country.

• Higher reliance of the economy on domestic consumption,

vigilant policy response, and structural reforms subsequent to

the Asian crisis enabled Indonesia to be relatively less

impacted by the global economic recession of 2008-2009.

Indicators 2004 2010

Structure of Output (Percent of GDP)

Agriculture 14.3 15.5

Industry 44.6 48.3

Services 41.0 36.3

Structure of Demand (Percent of GDP)

Private Consumption 66.8 57.1

Government Consumption 8.3 9.9

Gross Domestic Capital Formation 24.1 32.6

Exports of Goods and Services 32.2 29.5

Imports of Goods and Services 27.5 22.8

Government Finance ($ Billion)

Total Revenue 44.91 113.06

Total Expenditure 47.60 132.22

Note: All figures are rounded; the base year is 2010. Source: Asian Development

Bank and Frost & Sullivan research

Economic 360 Perspective: Economic Indicators (Indonesia),

2004 and 2010

Structure of Demand

• The Indonesian economy is dependent predominantly on

domestic consumption than exports. This factor is responsible

for resilient trade of the country even after the economic

recession.

• The Indonesian economy depends heavily on commodity

exports including energy exports. Insufficient infrastructure and

capacity bottlenecks are the major challenges undermining the

potential growth of the economy.

Indonesian Economy

33 4736-90

Priority Industries

• Food and beverage

• Seafood processing

• Textiles and textile products

• Footwear

• Palm oil

• Wood-based industry

• Rubber and rubber goods

• Pulp and paper

• Electrical machinery and equipment

• Petrochemicals

• National Industrial Development Policy, which has been implemented in Indonesia, has its focus on strengthening the National S&T

Strategic Policy 2005-2009 and the industrialized economy by 2025. The policy has identified ten priority industries that are expected to

drive manufacturing base and improve the industrial competitiveness

• From 2003 to 2009, the growth target for the sector was 8.6 percent annually. Between 2003 and 2008, exports of industrial products grew

at an average rate of 16.7 percent per year. Exports from the sector were valued at $88.93 billion in 2008 and $73.42 billion in 2009,

respectively. The industrial export increased by 36.6 per cent in the first quarter of 2010 as compared to the same period in the previous

year.

• The transportation industry, machinery and equipment, including the electronics and components industry, have played a vital role in driving

industrial growth, between 2003 and 2008. The targeted industrial growth rate from 2010 to 2025 is expected to be 10.0 percent and above

per year.


Source: Asian Development Bank and Frost & Sullivan research

Economic 360 Perspective: Industry Growth Rate (Indonesia), 2004-2010

(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2004 2005 2006 2007 2008 2009 2010

Ind

us

try G

row

th R

ate

(%

)

Year

Industry Sectors

34 4736-90

Services

• Since 2003, the contribution of the Indonesian services sector has

been increasing and has grown on an average of 8.0 percent

between 2003 and 2009. This growth was driven, in turn, by a high

growth in the transportation and the communication sectors.

• The Indonesian services sector contributed 36.3 per cent of GDP

in 2010. The sector principally includes electricity, construction,

transportation and communications, financial services,

infrastructure, and related services, among others.

• Construction and infrastructure and financial services are the other

emerging high-growth services sectors in Indonesia.

Tourism

• The travel and tourism sector in Indonesia has been increasingly contributing to the country’s GDP and is likely to be 7.7

percent of GDP, that is, approximately $51.00 billion in 2010. It also contributes significantly to foreign exchange earnings and

is likely to provide 6.3 percent of total employment in 2010.

• This sector is extremely resilient and maintained growth even amidst the global economic crisis. Indonesia had 6.45 million

foreign tourists visiting in 2009. Their arrivals are likely to grow to 7.0 million in 2010. The Indonesian tourism sector is expected

to grow by 6.0 percent between 2010 and 2020.

• Export earnings from international visitors and tourism goods have reached $7.50 billion in 2010, which is 5.0 percent of total

exports. Investment in travel and tourism is estimated to reach $20.7 million or 10.1 percent of total investment in the same

year.

Key Services Sectors

• Transportation

• Telecommunication services

• Tourism

• Outsourcing and IT services

• Financial services

• Construction and infrastructure services

Services Sector

35 4736-90

Note: All figures are rounded; the base year is 2010. Source: Bank of Indonesia

and Frost & Sullivan research

Economic 360 Perspective: Exchange Rate (Indonesia), 2004-2010

• Indonesia follows a floating exchange rate regime. The exchange system in the country is free of restrictions on the making

as well as transfer of payments for current international transactions.

• BI strives to establish and sustain exchange rate stability against other foreign currencies. This is also reflected in the

performance of rupiah against other foreign currencies.

• Rupiah was impacted by the global economic recession and became volatile since the fourth quarter of 2008. It depreciated

by 20.0 percent against the US dollar in 2008. However, huge fund flowing into Indonesian financial assets bolstered rupiah’s

appreciation against the weakening US dollar post 2009.

• The exchange rate of rupiah against US dollar in 2010 was more competitive than other regional currencies.

Exchange Rates

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

01/01/04 01/01/05 01/01/06 01/01/07 01/01/08 01/01/09 01/01/10

Ex

ch

an

ge

Rate

(

IDR

pe

r U

S $

)

Year

Selling Rate Buying Rate

Note: Exchange Rates on Bank Notes

Exchange Rate

36 4736-90

• Current account surplus toward the end of 2007 was due to higher growth in non-oil/gas exports. However, capital and financial

account deteriorated from the fourth quarter of 2007 compared to the same period in 2006. This was due to the significant portfolio

capital outflows in November 2007, consequent to the U.S. sub-prime mortgage crisis from August 2007. Continual escalation in

international oil prices prevented the current account balance from further deterioration.

• The global financial crisis in 2008 reduced the current account surplus, principally due to a decline in export demand. However, by

2009, the surplus was recovered by capitalizing on high commodity prices.

Economic 360 Perspective: Current Account Balance (Indonesia), 2004-2010

Note: All figures are rounded; the base year is 2010. Source: International Monetary Fund and

Frost & Sullivan analysis

(0.50) (2.95)

10.86 10.49

0.13

13.58

5.64

(4.00)

(2.00)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

2004 2005 2006 2007 2008 2009 2010

Cu

rren

t A

cco

un

t B

ala

nce (

$ B

illio

n)

Year

Current Account Balance

37 4736-90

Economic 360 Perspective: Economic Growth Trends (Indonesia), 2004-2014

• The major economic trend observed in Indonesia has been the increasing investments in the country. The investment growth and

its contribution to the Indonesian GDP was low in 2009, but is likely to improve from 2010. Indonesia is becoming increasingly

attractive for foreign direct investments. Investments postponed due to the global economic crisis are expected to be made from

2010.

• The Indonesian infrastructure sector is expected to be strengthened in near future as the President pledges to double spending

on roads, seaports, and airports to $140.00 billion over the next five years, to attain the targeted economic growth of 6.6 percent

by 2014. The National Development Planning Board of Indonesia predicts that, given the issues with the infrastructure sector are

resolved by enhancing roads, ports, and power plants, the economic growth rate of Indonesia can reach even 9.0 percent during

the forecast period.

Note: All figures are rounded; the base year is 2010. Source: Frost & Sullivan analysis

4.9

5.6

5.5

6.3

6.1

4.5

5.1

6.0

6.2 6.7

6.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Gro

wth

Rate

(%

)

Year

Increased consumer spending, encouraged by lower interest

rates and stimulus packages boosted Indonesian economic

growth in 2009

Economic Growth Trends

38

Social Analysis

39 4736-90

Demographic Factors Value as of 2010

Population Size 242.9 million

Age Distribution

0-14 years 28.0%

15-64 years 66.0%

65 years and over 6.0%

Birth Rate 18.84 per thousand

Mortality Rate 6.25 per thousand



Economic 360 Perspective: Demographic Statistics (Indonesia), 2010

• Population in Indonesia is confined to only 3,000 islands

of the total 13,000 present. Only Java and Sumatra

accommodate about 80.0 percent of the total Indonesian

population. This shows high disparity in population

distribution among the regions.

• Population growth is estimated at 1.3 percent between

2003 and 2009. In 2010, about 50.0 percent of the

population was below the age group of 30.

Indonesia Population

Urbanization

• Urban population amounted to 52.0 percent of total

Indonesian population in 2009. The rate of urbanization in

the country was 3.3 percent between 2005 and 2010.

• Increasing urbanization in Indonesia has brought changes

to consumer food choices to a large extent. Hence,

Indonesia is no longer expected to be self-sufficient in

cereals in future.

• Urbanization is also attracting new domestic investments

through increase in consumer demand. About 70.0

percent of the population is likely to be living in cities by

2030.

Migration

• Large population shifted away from Indonesia with migration rate

from (0.2) to (4.0) per thousand population between 2000 and 2005.

• Net migration rate in 2010 was (1.23) migrants per thousand

population.

• Migration occurs mainly because Indonesians seek job

opportunities in foreign countries. This has led to a considerable

increase in internal remittances.

Demographic Factors

40 4736-90

Year

Unemployment Rate

(%)

Total Employment

(Million)

Employment to Population Ratio

(%)

2007 9.1 108.1 46.1

2008 8.4 111.5 46.9

2009 7.7 113.7 47.3

2010 7.4 116.0 48.3

Economic 360 Perspective: Employment Indicators (Indonesia), 2007-2010

Note: All figures are rounded; the base year is 2010. Source: OECD , BPS- Statistics Indonesia and Frost & Sullivan research

• Indonesia is a middle-income country, with two-thirds of the working population in informal employment. The country also has a

high proportion of workers with low level of education and low income.

• Child labour constituted about 3.5 percent of the total Indonesian working population in 2009. About 30.4 percent of total child

labourers in the country were employed in difficult and hazardous work in 2009.

• Qualified labor is scarce in Indonesia; however, relatively low labor costs and huge population make the country an attractive

destination for foreign direct investments. Labor costs amount to nearly 5.0 to 6.0 percent of production in Indonesia and are the

lowest among the ASEAN countries.

• Unemployment rates in Indonesia have been consistently declining and the trend is likely to continue. Employment is bolstered by

increasing domestic consumption, which, in turn, is creating a lot of job opportunities domestically. However, growth of

employment has been slower than that of population in Indonesia.

Indonesia Working Population

Employment Trends

41 4736-90

• Economic stimulus package (ESP) and job creation were among the prominent measures taken by the Indonesian Government

after the global financial crisis to reduce unemployment and poverty.

• Investments in infrastructure and public works are part of the measures for diminishing poverty and controlling unemployment in

the country. Besides, the Indonesian Government also plans to address these issues through infrastructure development.

• Apart from the budget allocated for infrastructural spending, an additional amount of $703.0 million was disbursed exclusively for

labor-intensive infrastructure projects in 2009.

• Coordinating Ministry of Economic Affairs and International Labor Organization have been working together to enhance the

implementation of more labor-intensive projects.

• The Indonesian Government is inviting more foreign investments into healthcare and education to improve the services and

quality of Indonesian human resources.

• The Indonesian Government announced a poverty alleviation fund of $7.10 billion in 2009, which was a 50.0 percent increase

over the budget of 2008.

Measures by the Government Post Crisis to Reduce Unemployment and Poverty

• Indonesia has already met its primary educational targets with 94.0 percent of children enrolled in primary schools with little

gender disparity. Approximately 65.0 percent of the student population study at the undergraduate level.

• Approximately 6.7 million workers in Indonesia are with just primary or secondary levels of education. There are only 0.6 million

workers who have graduated from a university.

• About 20.0 percent of the Indonesian budget for 2010 has been allocated for educational funds, including salaries and other

educational costs.

Education Factors

Government Measures and Education Factors

42 4736-90

Health Issues

Health Indicators: Health awareness has been increasing in Indonesia.

Majority of the population in the country have very low per-capita

consumption of medicine, which is lesser than $10.0 a year. The total health

expenditure of Indonesia was about 2.0 percent of GDP in 2010.

Key Health Care Issues: Indonesia is likely to implement National Social

Security System Law of 2004 by the end of 2010. This delay in

implementation is due to lack of proper regulations in place. The policy

assures that every citizen is insured through a social or commercial health

insurance. This enhances the spending on medication, brightening the future

prospects of the pharmaceutical companies.

Health Spending: Above $2.21 billion has been allotted for health spending

from the state budget of 2010. The amount denotes a 19.4 percent increase

over the allocated budget of 2009.

• PT Jamsostek, the employee social security scheme, promises a right of living to its citizens. Existing social security programs cater

to less than 20.0 percent of the total Indonesian population.

• Social protection in Indonesia is not merely for worker benefits. It also caters to several other issues, such as food price control, cash

transfer, and conditional cash transfer to avoid the impact of fuel price rise, health and education budget allocation, open labor

opportunity, poverty reduction program, National Program on Community Empowerment (PNPM), and so on.

• Social security for older population covers aspects of pension, old age security, health, work injury, and death benefit.

• Social welfare is in the priority list of 2010 state budget proposal of Indonesia. Approximately $4.03 billion is expected to be spent on

social welfare and security programs in 2010.

Social Security



Economic 360 Perspective: Health

Expenses by Category (Indonesia), 2010

70.0%

15.0%

15.0%

Health Expensesborne by Patients

Health Expensesborne by Insurance

Health Expensesborne by ASKESIN orJamkesmas Program

Health and Social Security

43

Technology Factors

44 4736-90

• Science and Technology Vision 2025, with the National S&T Strategic Policy from 2005 to 2009, stressed on bolstering the nexus

between R&D institutions, universities, and the industry. The industrial development policy is also in sync with this approach.

• The Indonesian Government founded the Innovation Center for Micro and Small Medium Enterprises (PI UMKM) in 2009. PI

UMKM is a body under the Coordinating Minister for Economics, represented by all departments in economic affairs, including the

Departments of Finance, Industry, Trade, Cooperatives, and SMEs, as well as Research and Technology.

• The Ministry of Research and Technology (KRT) is meant to encourage people, specially research institutions in Indonesia, to

conduct research for the progress of science and technology.

• Five priority areas identified by KRT are technology, food, energy, defense, and security. Other focus areas that the KRT is

stressing upon include transportation, medicine, and health.

• For fiscal year 2010, 403 program proposals were approved for funding by the KRT. Incentive Program was implemented for

researchers and engineers for research funding. This is usually based on proposals submitted mainly to conduct research-related

to KRT 6 focus areas.

• Indonesia and the United States entered into a cooperation agreement in the science and technology field in March 2010. This

was done to enable the scientists of both the countries to share information, ideas, knowledge, and skill. The cooperation

agreement covers 23 sectors including science and technology, agriculture and biotechnology, medical and biomedical sciences,

food security, marine research, energy, information and communication technology, aerospace, environment, and forestry and

biodiversity, and so on.

• In 2009, only $10.0 million of the total Indonesian budget was allocated for all scientific research.

Government Technology Initiatives

Science and Technology Strategic Policy

Government Spending on Research

45 4736-90

• AIBI was not very active for the past ten years and hence, a joint national meeting was held in October 2009 to revitalize it. The

meeting was hosted by the Incubator for Agribusiness and Agroindustry IPB, Bogor and was attended by above 26 incubators from all

over Indonesia.

• Motivated by the national policy development initiated by the government, the incubators gathered enthusiasm in developing a solid

new program for AIBI along with new organizational structure and personnel.

• With this new program, the business and technology incubators in Indonesia are likely to continue progressing together with a more

pre-dominant role in the development of SMEs.

Incubators

Development

in Indonesia

Overview of Indonesia’s Incubators

Indonesian Association of Business and Technology (AIBI)

• Department of Cooperatives and SME’s Development in

Indonesia initiated the development of incubators in 1994.

Thereafter, post 1997, the Department of Education and Culture

played a significant role in incubator’s development in the

universities.

• The Government bolstered the establishment of incubators;

however, majority of them had to grow individually.

• Current developments in incubators have a tendency toward

international cooperation.

Information

Technology

Agri-Business

Agro-Industry

Common Business Manufacturing

Specific

Areas of

Incubators

• PUSPIPTEK – Serpong, IPB - Bogor, UNS-Solo, ITS - Surabaya, and Freeport-Tembagapura are the first five incubators established

in Indonesia. Most of them were founded in universities and polytechnic colleges and handle more number of outside tenants than in-

house ones because of limited spaces.

• Incubators have limited specific links to industrial estates with the exception of the private incubators. The number of private

incubators is low and they are associated with huge budgets.

• The regional government did not contribute to incubator development until the city of Solo, Central Java, developed the technology

park in 2007.

Business and Technology Incubators

46 4736-90

Space Technology

• Indonesia’s Institute of Aviation and Space

Agency (LAPAN) aims to launch two satellites

Lapan-A2 and Lapan-Orari by 2011.

• In 2010, the Parliament approved an increase

of $5.0 million in LAPAN’s funds for R&S in

space technology and aerospace.

Nano Technology

• Indonesian Society of Nanotechnology (MNI) was established in 2005, but

was not adequately supported by the Government.

• Indonesia is currently a consumer of nanotechnology. However, the country

has both the human and natural resources to be a potential producer and

developer of this form of technology.

• Indonesia is also in immediate need of a regulation to govern the R&D,

manufacturing, and commercialization of nanotechnology.

• To achieve institutional strengthening of science and technology to ameliorate efficiency and R&D productivity in Indonesia.

• To bolster science and technology resources in terms of increasing the number, improving the education, and enhancing the

competence of researchers, augmenting the availability of facilities and research infrastructure to enhance research activity.

• To support science and technology networks by increasing integration between technology providers and users by enhancing the

user-friendly aspects.

• To enhance national capacity in development, mastery, and application of science and technology through publications in scientific

journals, patents, prototypes and technology services for users.

• Increasing national engineering capability, ensuring growth of entrepreneurs knowledge-based innovation and technology To

increase the relevance of research activities with real problems and needs, together with rising public awareness of science,

which, in turn, is likely to enhance public appreciation of R&D activities.

Future Technologies

Science and Technology Strategic Policy Objectives (2010-2014)

Development Goals

47 4736-90

• R&D spending in Indonesia is, by large, financed by the Government. It allocates these funds to the state universities, the R&D

departments of various government organizations, and to the non-departmental government institutes, including the Indonesian

Institute of Sciences (LIPI) and the Agency for the Assessment and Application of Technology (BPPT).

• The Indonesian Government has allocated $205.0 million of state expenditure to R&D in 2010. It considers the increase in funds

allocated for R&D is likely to improve the competency of Indonesia in the field of science, especially in innovation. The allocation

amounts to 0.07 per cent of the total budget.

• In 2010, the President also revealed plans of establishing a National Innovation Committee to boost R&D in various fields. Indonesia

ranks highly in the world in terms of the presence of the number of researchers at 42,722 in 2010.

• Indonesia has huge fossil fuel reserves and high potential natural gas industry; the public and private sectors of Indonesia are

investing in Carbon Capture and Storage (CCS) and R&D. CCS is a technology for de-carbonizing power generation and industry

emissions. The CCS technology has great potential for coal and gas–fired steam power plants and also a few activities in the oil and

gas sector.

• Indonesia is a good base for public-private partnerships. LIPI provides intellectual property courses for its researchers. Besides,

another unit run by the same organization is devoted to IP issues; it has also issued several research licenses. The specialized unit

has helped LIPI to form alliances with research institutions overseas, such as Germany’s Max Planck Institute, in which all IP

generated is together owned by both research partners.

• Industrial development in Indonesia is still largely dependent on foreign direct investments and foreign R&D. Though private sector

investment in R&D was low in 2010, with Government initiatives, it is poised for growth over the forecast period.

• Only a few domestic technology-based companies in Indonesia have their own R&D facilities, while only a minimal number of the

foreign companies have their R&D based in Indonesia.

• Indonesian Chamber of Commerce (KADIN) has recently been an active participant in technology cooperation and promotion.

R&D

Characteristics of Indonesia as an R&D Base

Research & Development (R&D)

48

Legal Factors

49 4736-90

General Legal Framework

• Three forms of law prevail in Indonesia. The general legal system is derived from the Dutch legal system. The Islamic law is

applicable to Muslims in the country. There is also the customary law, which is applied essentially to local disputes.

• Indonesia has not incorporated International Court of Justice jurisdiction.

• The enforcement of law in Indonesia is weak with most of the concerned persons being corrupt. The administrative

decentralization based on Law No. 32 of 2004 is still not clear and causes misinterpretation of law and regulation.

• Deregulation has created more transparent trade and investment regimes, but the bureaucracy needs to be addressed more

effectively to sustain the transparency.

• Dispute settlement mechanisms are not very developed in Indonesia. According to various local and foreign business

organizations, the main reasons behind this are the corruption and ineffective courts present in the country.

• Business and regulatory disputes are regarded as criminal cases in Indonesia and not as administrative or civil issues.

• The Indonesian tax administration is accused of being non-transparent and arbitrary. More than the actual tax rates, the tax system

in the country is perceived as a restraint to investment.

• Overall, the legal system is not very transparent and is prone to inconsistencies. This has a negative impact, particularly on the

investment climate.

Tax System

• The Director General of Taxation is the concerned authority for the tax system in Indonesia.

• The Indonesian tax year is the calendar year in general. Tax collection in the country is based on self-assessment system.

• Three quarters of the stimulus package in 2008 was in the form of tax cuts. The one March 2009 included reduced tax tariffs,

government-borne value-added tax, import duties, and incentives related to income tax.

• Indonesia has signed almost 60 tax treaties. A double tax treaty exists between the country and the United States.

• Many imports to Indonesia are routed through Singapore, because of relatively low import duties in the country.

Legal System in Indonesia

50 4736-90

• Pursuant to the labor law reform post 1998, three labor laws inclusive of Law No. 21 of 2000 regarding Labor Unions, Law No. 1 of

2003 regarding Manpower, and Law No. 2 of 2004 regarding Industrial Relations Dispute Settlement were passed.

• An Industrial Relations Court was established in Indonesia to facilitate the implementation of Law No. 2 of 2004.

• Two-third of the workers in Indonesia are employed in the informal sector, which undermines legal protection on them.

Minimum Wage Rate

Severance Fees

Minimum wage rates are established by province and district authorities and hence, vary by

province, district, and sector. This difference in minimum wage rates is causing factories to shift

to smaller towns from regions, such as Jakarta, where the minimum monthly wage rate was

about $80.0 in 2008 and increased to $85.6 in 2010. The minimum wage in rural areas ranges

from as low as $41.0 to $58.0.

Severance fees should be paid to terminated workers. These fees include the worker’s one

month’s salary in addition to one month’s salary for each full year worked. Workers with above

three years of experience are entitled to an additional month’s salary for each three-year period

as service pay. Hence, it is very expensive to dismiss workers in Indonesia. The severance pay

requirement acts as a restraint to investment in Indonesia.

In general, laborers in Indonesia have to work 40 hours per week. Overtime cannot be longer

than 14 hours a week and should be paid 1.5 times the hourly wage rate for the first day and

two times wages per hour for the following days.

Working Hours

Expatriate Workers

The Indonesian law deems fixed-term employee as permanent. Expatriates can engage on

fixed-term contracts. However, these contracts can only be renewed once in a maximum

combined period of three years.

Source: The World Law Guide, Indonesia Ministry Websites and Frost & Sullivan research

Economic 360 Perspective: Labor Laws (Indonesia), 2010

Labor Laws

51 4736-90

Business Sector Foreign Capital Ownership Maximum Limit (%)

Banking, oil and gas, power and electricity, nuclear power plant, toll-roads,

plantation companies, water and agricultural sectors

95.0

Transportation, fixed-line telecommunications, agriculture: rice 49.0

Mobile telecommunications, health services, hospitals 67.0

Pharmaceuticals 75.0

Insurance 80.0

Construction, real estate 67.0

Broadcasting companies 20.0

Travel agencies 50.0

• The industry sectors, which were previously closed to FDI, were opened up and legislation was reformed to make mergers, consumer

rights, antitrust and bankruptcy efficient and transparent post the Asian Crisis.

• The Basic Investment Law of 2007 acknowledges that FDI plays a crucial role in national growth and development of Indonesia.

• Most private foreign investments are through the establishment of foreign investment companies, known as Perusahaan Terbatas

Penanaman Modal Asing (PMA).

• Some sectors in Indonesia are partially restricted for foreign investment and the activities listed under the Negative Investment List

completely limit foreign involvement. The PMA companies cannot operate in the areas of business mentioned in the negative list. The

negative list is being drafted, opening more sectors to foreign investment and increasing the number of business areas where a local

shareholding is required.

• Presidential decree to be passed in 2010 is likely to remove ambiguity of the laws governing foreign investment and open up the health,

education, and logistics sectors.

Note: All figures are rounded; the base year is 2010. Source: Frost & Sullivan research

Economic 360 Perspective: Sectorwise Foreign Capital Ownership Limit (Indonesia), 2010

Laws Pertaining to Foreign Investment

52 4736-90

Sector Description

Agriculture • Cultivation and processing of marijuana and the like

Marine and

Fishery

• Collection/utilization of sponge

Industrial and

Trading

• Industries producing chemicals harmful to the

environment

• Industries producing chemicals defined in Schedule-

1 of the Chemical Weapon Convention

• Industries producing weapons and related

components

• Industries producing cyclamate and saccharine

• Industries producing alcoholic drinks (liquor, wine,

and drinks containing malt)

• Casino and gambling facilities

Communication • Air Traffic System (ATS) providers ship certification,

and classification inspections

• Management and operation of Radio Frequency

Spectrum and Satellite Orbit Monitoring Stations

Mining and

Energy • Mining of radioactive minerals

Economic 360 Perspective: Negative Investment List (Indonesia), 2010

Source: Indonesia Ministry Websites and Frost & Sullivan research

Draft of Revised Negative Investment List

• A draft list stating the revised foreign investment

restrictions made is likely to be implemented in 2010.

• Telecommunication towers shall remain closed for

foreign investment.

• Earlier foreign ownership in hospitals was restricted

to a few cities such as Surabaya, East Java, Medan,

and North Sumatra. The new draft allows foreign

investors to own up to 67.0 percent in hospitals

across Indonesia.

• A maximum ownership of up to 49.0 percent in

plantations producing staple foods such as rice,

cargo services, and film businesses shall be

permitted by the revised law.

• The legal system permits 49.0 percent foreign

ownership in educational institutions. However, the

Indonesian law requires these institutions to be non-

profit entities. Hence, foreigners are likely to find it

difficult to set up educational institutions in

Indonesia.

• Overall 23 sectors, including radio, television, and

alcoholic beverages, are expected to remain closed

to overseas investors.

Sectors Under Negative Investment List

53 4736-90

Laws Governing Taxation in Indonesia

• Income Tax Law 17/2000 as amended by Law 36/2008, VAT Law 18/2000 as amended by Law 42/2009 and General Rules

and Procedures of Taxation Law 16/2000 as amended by Law 28/2007.

Tax Description

Corporate Tax Effective corporate tax rate was 22.3 percent in 2009. It was fixed at 25.0 percent in 2010; thereafter, companies

need to pay tax at a flat rate of 25.0 percent.

Capital Gains Tax Capital gains from the sale of Indonesian assets held by foreigner are levied at 5.0 percent of gross proceeds in

the absence of tax treaties.

Tax on Dividends

and Interests

Taxes on dividends paid by domestic tax payer to a resident is 15.0 percent. When the dividend is paid to a

nonresident, tax rate applicable is 20.0 percent. Interest paid to non residents in Indonesia was levied at 20.0

percent withholding tax in 2010, while that from banks in the country was 15.0 percent for the same year.

VAT VAT is at a standard rate of 10.0 percent on supply of goods and provision of services.

Payroll Tax Payroll tax is levied on employers on employment income of their employees.

Real Property Tax Land and building tax rate is, in general, not more than 0.5 percent, except for high-value mortgages, and

is annually payable.

Social Security This is the contribution employers are obliged to make to the social security system. The employers’ contribution

rate is about 3.7 percent for old-age compensation.

Transfer Tax A land and building transfer tax of about 5.0 percent is applicable to obtain rights to a land or building worth

more than $6,651.0 (IDR 60.0 million).

Economic 360 Perspective: Business Taxes and Specific Taxes on Corporations (Indonesia), 2010


Taxation

54 4736-90

• Resident taxpayers are taxed on their worldwide gross income, less allowable deductions and non-taxable income. Personal taxation

is levied only at the national level.

• An individual is considered a resident if he or she stays in Indonesia for more than 183 days or has stayed for a fiscal year and

intends to stay there.

• Non-residents are taxed only on income derived from Indonesia. Non-resident employees in the oil and gas sector are taxed as per

job designations and salaries.

• There is no distinguished tax regime for expatriates and also no capital tax except those for land and buildings.

• The tax reform legislation in 2008 increased the threshold of taxable income for individuals. The maximum personal income tax was

reduced from 35.0 to 30.0 percent and marginal personal income tax rates across four income categories were also lowered.

Income Category (Million IDR) Tax Rate (%)

1-50.0 5.0

50.0-250.0 15.0

250.0-500.0 25.0

Above 500.0 30.0


Economic 360 Perspective: Personal Tax Rates (Indonesia), 2010

*Note: 1IDR = $0.000111

Personal Taxation

55

Environmental Factors

56 4736-90

Indonesia Environment

The President‘s office is the next in power to the Communist party

serving as head of state and commander of armed forces

Article 4 defines the Vietnamese Communist Party as the

controlling institution

Policy is set by a Politburo of fourteen members and

implementation is overseen by an eight member Party

Secretariat

The Prime Minister heads a cabinet and twenty six ministries

National Assembly elections are held once in five years in the

form of a Party Congress

Economic 360 Perspective: Key Environment Issues (Indonesia), 2010












Secretariat







Secretariat







Secretariat





The President‘s office is the next in power to the Communist party

serving as head of state and commander of armed forces



Secretariat





Deforestation

Smoke and haze caused by forest fires

Sewage

Water pollution from industrial wastes

Air and water pollution due to population concentration,

especially in Java

Natural Hazards

Severe droughts, tsunami,

earthquakes, volcanoes,

forest fires, floods

Increasing GHG emissions (third-largest emitter of GHGs)

Weak enforcement of environment law

Environment Overview

57 4736-90

Environmental Issues Government Initiatives

• There has been a considerable increase in the

primary energy consumption due to the usage of fossil

fuels, which are the main source of energy supply.

This usage has negative tradeoffs with the

environment.

• The Government is launching a program to develop 10,000 megawatts

(MW) of generation capacity, mostly of renewable energy and with a

special focus on geothermal, by 2014. This is also likely to diversify the

fuel mix and curb the effects of fossil fuel price volatility.

• Deforestation and peat contribute to about 80.0

percent of GHG emissions in Indonesia. Given they

are not reduced, GHGs of Indonesia are predicted to

reach 3.6 giga tons by 2030.

• In 2008, Indonesia was the first country to design a legal framework for

Reducing Emissions from Deforestation and Forest Degradation (REDD).

• The Indonesian Government had allocated $212.7 million in 2010 for

financing reforestation efforts.

• The energy sector, especially the industry, power

and transport ones was the second-largest contributor

to CO2 emissions in 2009.

• The Indonesian Government has proposed a new environmental law that

imposes restrictive licensing to industries with high CO2 emissions.

However, this law is yet to be implemented.

• Peat and forest fires in Indonesia's Sumatra and

Borneo islands lead to a choking haze, which affects

human health. It has adverse impacts on the tourism

and airline sectors of the country.

• Measures are being taken to develop effective and efficient forest carbon

measurement systems. Indonesia entered into the Indonesia - Australia

Forest Carbon Partnership in June 2008. This partnership incorporated

$30.0 million for the carbon measurements of the Kalimantan Forests and

Climate Partnership and a $10.0 million bilateral package of support for

Indonesia on the same issues.


Economic 360 Perspective: Environmental Issues and Government Initiatives (Indonesia), 2010

Environment Issues

58 4736-90

Name of Agreement Year Name of Agreement Year

Convention on Fishing and Conservation of Living

Resources of the High Seas 1958

Montreal Protocol on Substances that Deplete the Ozone

Layer 1987

Treaty Banning Nuclear Weapon Tests in the

Atmosphere, in Outer Space, and Under Water 1963

Basel Convention on the Control of Transboundary

Movements of Hazardous Wastes and Their Disposal 1989

Convention on Wetlands of International

Importance Especially as Waterfowl Habitat

(Ramsar)

1971 Convention on Biological Diversity 1992

Convention on the International Trade in

Endangered Species of Wild Flora and Fauna

(CITES)

1973 International Tropical Timber Agreement 1994

Protocol Relating to the International Convention for

the Prevention of Pollution From Ships, 1973

(MARPOL)

1978

United Nations Convention to Combat Desertification in

those Countries Experiencing Serious Drought and/or

Desertification, Particularly in Africa

1994

United Nations Convention on the Law of the Sea

(LOS) 1982

Kyoto Protocol to the United Nations Framework

Convention on Climate Change 1998


Economic 360 Perspective: Key Environmental Agreements (Indonesia), 1958-1998

Environmental Agreements

59 4736-90

Economic 360 Perspective: Key Environmental Indicators (Indonesia), 2010

Note: All figures are rounded; the base year is 2010. Source: World Bank, Indonesia Ministry Websites and Frost & Sullivan research

Indicator Value

Forest area (percent of land area) 46.8

Deforestation rate 1.1 million hectares per year

Nationally protected area (percent of land area) 15.7

Magnitude of CO2 equivalents per capita (metric tonnes) 1.7

Contribution to global emissions (percent) 8.0

Internal freshwater resources per capita (cu. m) 12,632.0

Access to improved sanitation (percent of total population) 67.0 percent in urban areas

37.0 percent in rural areas

Access to improves water source (percent of total population) 89.0 percent in urban areas

71.0 percent in rural areas

Expenditure on environmental protection (as a percent of GDP) 0.5 percent in 2005 to increase to 1.0 percent in 2010

Energy depletion (percent of GNI*) 12.6

Mineral depletion (percent of GNI*) 1.4

CO2 damage (percent of GNI*) 0.6

Particulate emission damage (percent of GNI*) 0.5

*Note: Gross National Income (GNI) per capita $1,650.0.

Environment Indicators

60 4736-90

Government Initiatives for Environmental Protection

• In a G-20 meeting in 2009, Indonesia announced that to mitigate climate change, it is likely to reduce GHG emissions by 26.0

percent by 2020. For this reduction, the country is expected to need finance of at least $9.00 billion.

• Indonesia is developing a strategic, multi-year policy and investment program for low-carbon growth, as outlined in the National

Action Plan for Climate Change (NAP 2007) and the Development Planning Response to Climate Change (2008).

• National Council on Climate Change (NCCC) was established by the Indonesian Government, with representatives from 15

Ministries, to coordinate Indonesia’s climate change policies and international positions.

• The Indonesian Government is establishing a climate change trust fund and has developed a Green Paper and prepared its

Second National Communication to the United Nations Framework Convention on Climate Change (UNFCCC) in 2009.

Environmental Law and Regulations

• The Environmental Management Act No.23 of 1997 (EMA 1997) is the basic environmental law that monitors related activities.

Despite the considerable rigor of the law, industrial pollution persists because of weak enforcement.

• A new environmental law with protective regulations to preserve natural resources and the environment is likely to be

implemented in 2010.

• This law imposes restrictive licensing mechanism on business activities that have tradeoffs with the environment. Moreover,

environment permits shall be made a requisite for companies that generate air/water pollution, hazardous waste, and

greenhouse gas emissions. It has also been made mandatory for companies that dump their extracts.

Environmental Taxes

• The Green Paper recommends a carbon tax of $8.5 per ton of CO2. The Finance Ministry of Indonesia is considering enhancing

the tax by 5.0 percent per year till 2020.

• Indonesia is likely to introduce a carbon tax on industry by 2014. The environment tax is likely to be targeted on fossil fuel

combustions to reduce GHG emissions and on the palm oil industry to decrease deforestation.

Environment Related Government Initiatives, Laws, and

Taxes

61 4736-90

A Green Paper was developed in 2009 to provide a sound framework for Indonesia’s climate policy design. This paper gives a

number of concrete strategies for domestic fiscal and economic policies for climate change mitigation and sets out international

financing strategy considerations that are advantageous to Indonesia.

Strategies Developed by the Green Paper for Various Sectors to Guide Long-term Reforms for Climate Change

Mitigation

Economic 360 Perspective: Strategies Set by the Green Paper for Various Sectors (Indonesia), 2010

Source: Indonesia Ministry of Finance and Frost & Sullivan research

Strategy for the Land-use

Change and the Forestry

Sector

Strategy for International

Carbon Finance

Strategy for Institutional

Development Strategies for the Energy

Sector

• Strengthen capacity for

climate policy analysis.

• Support policy

coordination and advocate

a review of the broader

regulatory framework that

relates to the climate

change policy.

• Support the creation of

broad-based carbon

market mechanisms, such

as sectoral targets and

crediting.

• Support additional sources

of international public

financing.

• Ensure adequate returns

for Indonesia’s emissions

reductions.

• To create a regional

incentive mechanism (RIM)

for climate change.

• To alienate existing fiscal

policy settings and carbon

reduction objectives.

• To incorporate a carbon

tax/levy on fossil fuel

combustion after

eliminating energy

subsidies.

• To incentivize energy

efficiency and deploy low-

emission technology

through a specific

geothermal policy

strategy.

Green Paper

62

ICT Industry

63 4736-90

ICT Industry

Telecommunication

Information Technology

Fixed Line

Mobile Phone

Hardware

Software

Services

Source: Frost & Sullivan analysis

ICT Industry: Structure (Indonesia), 2010

• The Indonesian Information and Communication Technology (ICT) industry is regulated by the Ministry of Telecommunication and

Information Technology. The ICT industry is a part of the Government Infrastructure Development Program, identified as a priority

industry assisting economic growth.

• The telecommunication (telecom) market plays an important role in ICT, as it attracts foreign investments into the country. Indonesia

has the fastest-growing mobile phone market in the Asia Pacific region.

• Hardware sector has major share in the Information Technology (IT) market in Indonesia. The software market is relatively smaller

and at a nascent stage facing challenges such as piracy.

• IT services are witnessing robust growth and are mostly applied in the manufacturing, telecom and banking sectors.

ICT Industry – Overview

64 4736-90

ICT Industry: Institutions and Government Bodies (Indonesia), 2010

Telecommunication Regulatory Body of

Indonesia (BRTI)

Ministry of Communication and

Information Technology (MCIT)

Institution for Provision and Controlling

Financing of Telecommunication and

Information Technology (BP3TI)

The Indonesia Security Incident

Response Team on Internet

Infrastructure (ID-SIRTII)

Industry Associations and Other

Institutions

BRTI is an independent regulatory body responsible for framing regulations for

the telecommunication market. BRTI was established in 2003.

MCIT is responsible for national policy formulation and implementation in the

field of communication and informatics, including postal telecommunications,

broadcasting, information technology and communications, multimedia services,

and the dissemination of information.

BP3TI is part of MCIT and is responsible for rural ICT development.

It is responsible for Internet traffic control management system in Indonesia. Its

concern areas include removal of wrong application and prevent misuse of

Internet infrastructure (such as hacking and cyber terrorism). It is actively

involved in traffic system analysis, Internet log ISP collection, and information

security protection.

The State Ministry of Research and Technology (Ristek) is involved in ICT

infrastructure improvement through the development of Internet and

telecommunication.

Indonesia Infokom Society (MASTEL) is a cluster of seven ICT industry groups.

The groups include taxation, ICT roadmap, broadcasting, policy development,

dispute resolution, ICT for rural areas, and telecommunication blueprint.


National ICT Council

National ICT Council was formed in 2006 to support government in formulation of

ICT policies and to monitor progress of ICT programs across various

departments.

Government Bodies and Major ICT Institutions

65 4736-90

Fields of Business Investment Criteria

Radio and television Community

Broadcasting Agency

• Investment in this zone is strictly reserved for Micro, Small and Medium Enterprises (MSME) and

co-operatives.

Telecommunication Service

(Internet/telecom kiosk, Cable

Installation )

• Investment in this zone is strictly reserved for Micro, Small and Medium Enterprises (MSME) and

co-operatives.

Telecommunication network

provider

• Foreign capital ownership for fixed network is restricted to 49.0 percent.

• Foreign capital ownership for closed fixed network is restricted to 65.0 percent.

• Foreign capital ownership for mobile network (cellular, satellite) is restricted to 65.0 percent.

Multimedia Services • Foreign capital ownership for data communication system service is restricted to 95.0 percent.

• Foreign capital ownership for telephone Internet service is restricted to 49.0 percent.

• Foreign capital ownership for Internet connection service is restricted to 65.0 percent.

• Foreign capital ownership for other multimedia services is restricted to 49.0 percent.

Public Broadcasting Agency

(PBA)

• PBA is not open to direct foreign investment. However, any foreign company can apply for a

special license to invest in PBA. The relevant authority will provide a special license depending on

the merit of investment.

Mail Provider • Foreign capital ownership is restricted to 49.0 percent.

ICT Industry: Investment Criteria (Indonesia), 2010

Investment Criteria in Different Areas of ICT

Source: Frost & Sullivan

66 4736-90

ICT Industry: e-initiatives (Indonesia), 2010

e-governance e-education e-commerce

Indonesia Standardization

Information Network

(INSTANET) and National

Information System of

Standardization

(SISTANAS*) are

responsible for time

reduction of electronic

data communication.

INSTANET is a network

of 18 members (Badan

Standardisasi Nasional is

the main body), which

share information and

resources imperative to

the improvement of

e-governance initiatives.

Telematika was established

as per the Presidential

decree number 50/ 2000.

Telematika includes

National Education Ministry

and is responsible for

implementation of ICT

across different verticals.

Introduction of e-textbook

took place according to

Minister of Education decree

No. 46/2007 in 2007.

Publication of e-textbook

runs under Minister of

Education decree No.

41/2008.

Cyber law (2008) to

provide legal

assurance and

security for online

business

transactions and e-

commerce.

e-health e-environment

There is no specific policy

related to e-health in

Indonesia. However,

e-learning is applied in

professions including

medical, public health,

nursing, pharmacy, and

dentistry.

Mobile health (mHealth)

application, which is a part

of healthcare practices, is

expected to benefit

healthcare services.

However, use of mobile

devices in this regard is still

at a nascent stage.

There is no specific

policy related to

e-environment in

Indonesia. According to

the United Nations

Environment Program

(UNEP), due to the

absence of any specific

policy related to

recycling, electronic

waste (e-waste)

accumulation may

damage the

environment of the

country.

* SISTANAS is an information system supporting the processes involved in making the National Standards of Indonesia. It also facilitates e-balloting.

e-initiatives


67 4736-90

e-governance

development

planning process

Objectives of e-governance

• Ensuring efficiency, effectiveness, and transparency in e-governance applications in government departments.

• Establishment of a support system to effectively conduct government policy and other development strategies formulation.

`

Sketching and

proper planning

methodology

Budget

allocation Strategy

Development

Co-ordination

among

necessary

affiliated bodies

Implementation

and output

verification

ICT Industry: e-governance Planning Process (Indonesia), 2010

e-governance Initiatives

2001

• Launch of Nusantara-

21 ICT framework

• Establishment of

Batam e-Government

project

• Formation of Ministry

of Communication and

Information (MCI)

• Introduction of

SISFONAS

framework (Yet

to be

implemented)

• Introduction of

National

Telematics

Coordination

Team (TKTI)

(An effort by

MCI)

• Implementation

of e-Indonesia

program by MCI

2002 2003 2005 2008 2010

• Initiation of

e-governance

task force

• Enforcement

of cyber law • Inception of

Sumatra-

online project

by provincial

Government

of Sumatra

ICT Industry: e-governance Initiatives (Indonesia), 2001-2010

e-governance


Source: Frost & Sullivan

68 4736-90

• Through the Master Plan,

the government is

expected to support the

following ICT sectors:

Ecosystem Development-

based Services sector

Ecosystems Research and

Innovation sector

Device Manufacturing

sector

Content and Applications

sector

• Java Economic corridor is

considered as the most

awaited destination related

to ICT infrastructure

projects.

• ICT is included in one of the

22 priority industries.

• PT Telekomunikasi

Indonesia Tbk (Telkom)

is likely to invest up to

$2.47 billion between

2011 and 2015.

Investments are likely to

be used for building

broadband access

infrastructure as part of

network infrastructure

objective under ICT

Master Plan.

• ICT is one of the seven

most important

industries that have

operations along the

Java economic corridor.

National Policy Elements

National Logistic System

National Transportation

System

Information and Communication

Technology

Regional Development

ICT Industry: Principal Sectors Covered Under National Connectivity (Indonesia), 2011-2025

The Indonesian government framed the Master Plan for Acceleration and Expansion of Indonesia Economic Development

(MP3EI) in order to achieve the status of a developed nation by 2025. Improvement of connectivity between the islands of

the country is one of the priority areas.

Indonesia Master Plan (2011-2025)


69 4736-90

Source: Master Plan for Acceleration and Expansion of

Indonesia Economic Development and Frost & Sullivan

ICT Industry: Major Projects (Indonesia), 2011-2025

Sulawesi

Bali

Papua

Devices*: Devices imply ICT devices; Backbone*: Support infrastructure; End users*: ICT users or

consumers.

• Development of devices* for the end user*

Consumers (2012-2014). Investment: $1.138 trillion.

• Palapa Ring Project (2012-2014) Investment:

$0.865 trillion.

• Palapa Ring Project rehabilitation (2012-2014)

Investment: $ 0.260 trillion.

• Development of backhaul network and management

(2012-2014) Investment: $1.741 trillion.

• Rehabilitation of backhaul network and

management (2012-2014) Investment: $0.627

trillion.

Fiber Optic Coverage

and Base Transceiver

Station Project (2011-

2015). Investment:

$2.151 trillion.

• Development of devices* for the end-user*

consumers (2012-2014) Investment: $2.203

trillion.

• National Network development according to

active network sharing, either terrestrial or

undersea Network (2012-2014).

Investment: $0.443 trillion.

• Establishment of Access, Backhaul,

Service Center, Ecosystem Development,

Infrastructure (2012-2014) Investment:

$1.219 trillion.

Improvement of backbone*

capacity for Java up to 810

Gbps (2011-2015)


Improvement of backbone*

and fiber optic coverage in

the metro region and the

distribution of base stations

(2011-2015)


• Development of devices* for end

users* (2012-2014) Investment:

$1.098 trillion.

• Palapa Ring based on core network

(2012-2014). Investment: $0.875

trillion.

• Network up gradation (2012-2014).


Master Plan (2011-2025) – Major ICT Projects

70 4736-90

The entire ICT industry is deployed in eight layers (layer

zero to seven) which are as follows:

Layer 0 Content industry

Layer 1 ICT application industry (e-health, e-

government)

Layer 2 Access services industry

Layer 3 Infrastructure services industry (network

provider)

Layer 4 Integration, installation, and maintenance

system industry of ICT device

Layer 5 ICT device manufacturing industry

Layer 6 ICT device component industry

Layer 7 ICT device component material industry

Regulation and policy alignment:

• Local content level calculation and support to domestic industries.

• Tax incentives for ICT components produced outside Indonesia.

• Cooperation among government agencies, research institutes, and

private bodies.

Infrastructure connectivity support :

• Broadband capacity accretion with backup facility to support

business.

• Developing safe and integrated government communication and

information system.

Science and technology and human resources development:

• Data recovery centre and data centre establishment.

• Manufacturing of digital content and domestic applications.

• Enhancing the scope of laboratory testing in order to verify the

technical specifications of other nations.

• Developing Smart and Techno parks.

Objectives of the Indonesia Master Plan related to ICT ICT Industry: Sector Deployment (Indonesia), 2011-2025

Source: Master Plan for Acceleration and Expansion of Indonesia

Economic Development, and Frost & Sullivan

Indonesia Master Plan (2011-2025) (continued)

71 4736-90

Category Description

Project Objectives • Setting up of domestic fibre optic network to connect 440 districts and 33 provinces across

the country

• Construction of high capacity (320 Gbps) support network

• Setting up Wi-Fi infrastructure in east Indonesia

Year of inception 2005

Year of completion 2012

Coverage area Seven zones with eight network connections

Project constituent (cable length) 4,458.2 km of inland cable and submarine cable (Initially, 11,202 km)

Project value $350.0 million (The initial project was worth $700.0 million, which reduced to $350.0 million

due to lack of funds)

Project Consortium Partners PT Indosat, PT Telekomunikasi, PT Bakrie Telecom, PT Infokom Elektrindo, PT Powertek

Utama Internusa

The Palapa Ring Project is the most important ongoing infrastructure development initiative to support e-governance in

Indonesia. After the completion of the main project in 2012, additional investments will be made on the project as part of

the Master Plan (2011-2025). The details related to actual project are as follows:

ICT Industry: Palapa Ring Project Description (Indonesia), 2005-2012

Palapa Ring Project (2005-2012)


72 4736-90

USO program to implement ICT in rural areas of Indonesia

Rural population in Indonesia accounts for more than 80.0 percent of the total population. As rural population is spread out

across 70,600 villages located in 17500 islands, ICT penetration is very low (below 1.0 percent) and communication is

restricted mainly to the postal system. National Universal Service Obligation (USO) program was launched in 2008 to bridge

the gap between urban and rural ICT access by developing ICT infrastructure in remote areas. Asian Development Bank

(ADB) and the Government of Indonesia are involved in the development of ICT in rural areas. Balai Telekomunikasi dan

Informatika Perdesaan (BTIP) is the managing authority of the USO program. The major initiatives to develop ICT in the rural

areas of Indonesia include providing Internet access (through a program called “Desa Berdering”) and provision for telephone

services (through a program called “Desa Pinter”).

2009-2014 2015-2024 2025

Short Term:

To provide telephone

access to 31,824 villages

across Indonesia

Mid Term:

Development of villages

with Internet access (these

are called “smart villages”)

in all the districts of

Indonesia.

Long Term:

Information society

development includes

television broadcast and

focused training.

Source: Asian Development Bank and Frost & Sullivan research

ICT Industry: USO Program (Indonesia), 2009-2025

Universal Service Obligation (USO) Program

73 4736-90

ICT Infrastructure Progress Made

Non-commercial Telecommunications

Access

• Nearly 91.0 percent of 72,800 villages have been covered until 2011 against a

proposed target of 100.0 percent by 2014

Non-commercial Internet Access • 131 villages and 5330 districts are covered

Fibre Optic Network of Provincial Capitals • 65.0 percent out of total 323 cities/districts coverage

Broadband Connection of Districts Capitals • 323 districts are covered comprising 65.0 percent of the target 497 districts

National and International Internet

Exchange • Internet exchange for the provincial capitals

Key Features USO

• Telecommunications: Improving telecommunications access to remote parts of rural areas in stages.

• Internet Access: Setting up of infrastructure for enabling Internet access across all districts and villages by 2015.

• Broadband Access: Developing broadband connectivity in the eastern region of the country.

• Coverage: 10 provinces in eastern Indonesian region including Sulawesi, Maluku, and Papua.

ICT Industry: Universal Service Obligation (Indonesia), 2011

Source: Ministry of Information and Communications and Frost & Sullivan research

Status of USO Program

74 4736-90

A Korea-Indonesia Initiative: ICT Training Centre (2009)

Both the countries entered into a joint venture during 2007-2009 to establish the Korea-Indonesia ICT training center. The principal objective

of this joint program was to develop human resources and ensure capacity improvement of the ICT industry in Indonesia. The partner

bodies for conducting the mission were the Ministry of Communication and Information Technology (representative of Indonesian

government) and Korea’s International Co-operation Agency (KOICA) Indonesia (representative of Korean government).

Nusantara Project: Phase 1 (2011/12)

A France-Indonesia joint endeavor with a holistic approach toward the development of technological and scientific co-operation in the ICT

domain. Co-operation includes the involvement of both public and private sectors. Phase I is estimated to continue from 2011 to 2012.

Mobility Indo-German Program: Phase 2 (2011/12)

A Germany-Indonesia shared initiative to reinforce an ICT research association between the countries and to develop technological and

scientific co-operation. The partner bodies of the program are Ministry of Research and Technology, Republic of Indonesia, and the

International Bureau of the Federal Ministry of Education and Research (representative of the German government). Phase 2 is estimated to

continue from 2011 to 2012.

EU-Asia Information Society Technology (IST) Co-operation

Events related to Information Society Technology (IST) are coonducted among Thailand, the Philippines, Malaysia, and Indonesia in

association with European Union (EU) countries to improve EU-Asia IST relationship.

Euro Southeast Asia Cooperation (SEACOOP) (2010)

An initiative to strengthen the ICT research cooperation among EU and Southeast Asian countries under the ‘Seventh Framework Program’

(FP7).

Information Network among the Association of Southeast Asian Nations (ASEAN) Members

Some of the objectives include:

Development of high-speed network connectivity among all national information infrastructure(NII). Promotion of Mutual Recognition

Arrangement (MRA) for telecommunications equipment. Increase of ICT application in sectors including logistics, transport, content and

customs.

International Cooperation

75 4736-90

Energy consumption by the ICT industry is very high (approximately 40.0 percent of global energy consumption). The

importance of green ICT or necessity of using of eco-friendly technology to manufacture ICT products is gradually

increasing. The MCI is committed to creating an environmental-friendly ICT industry in the country. In view of this, it is

preparing a set of reforms that would be applicable to software, hardware, as well as manufacturing.

Challenges

• Internet users account for only

approximately 16.0 percent of

the population. Therefore, any

technical measure taken to

implement green ICT may

become costly.

• Electricity consumption is high in the

country. It can be reduced through

application of green technologies,

such as automatic switch-off of

electronic devices (lights, computers,

and so on), and use of environment-

friendly equipment.

• e-waste in Indonesia is expected to have increased by nearly 25.0 percent in 2011 compared to 2010. Increasing use of second hand

PCs is considered to be the primary reason for high level of e-waste in the country. In spite of having a high percent of e-waste, the

country does not have a factory for recycling the waste. Therefore, in order to lower the level of e-waste in the country, it is imperative

that the government restricts imports of second-hand PCs into the country.

Green ICT

76 4736-90

ICT Initiatives Focus Areas and Future Development

Telephone Access

(2009-2010)

Focus Areas: Preparation of National ICT Strategy during 2010-2014, tele contact in most of the villages,

development of e-governance master plan, and building of National Information Security coordination

team.

Future Development: Telecommunication connection is improving in the rural areas of Indonesia, as a

result of which the telecommunication market is most likely to expand in the future. Implementation of

e-governance is expected to accelerate communication among government departments.

Internet Access and

Connectivity (2010-11)

Focus Areas: Infrastructure for ICT training institutes, Internet facility provision for almost all sub-districts,

and human resource development commensurate with industry requirement.

Future Development: Employment opportunities in the ICT sector are expected to increase. Workforce

with adequate technical knowledge is also expected to increase. Moreover, Indonesia might become a

lucrative destination for outsourcing.

Access to Information

(2012-13)

Focus Areas: Reinforcement of e-governance at all levels of public utilities such as education, health

centers, and others, and providing broadband accessibility to all districts and cities.

Future Development: An online communication system between government departments and the people

is expected to make public services smooth, hassle free, and less time consuming. Broadband

accessibility is expected to make Internet an important mode of communication for people.

Knowledge Society

(2015-2020)

Focus Areas: Digital broadcasting in entire Indonesia.

Future Development: Use of the analog system will be allowed till 2014. However, from 2015 onwards,

digital televisions will replace current televisions, and by 2018, all television broadcasting is expected to be

digital. Quality of television broadcasting is also expected to improve. Moreover, major broadcasting

companies are expected to start operations in Indonesia.

ICT Industry: Initiatives (Indonesia), 2009-2020


ICT Initiatives (2009-2020)

77 4736-90

Singapore

• The ICT industry is steadily growing with broadband penetration of

over 80.0 per cent. Mobile penetration rates are high and 3G mobile

services (currently accounting for 47.0 per cent of the total mobile

subscriber base) are gaining momentum.

Malaysia

• The IT industry is expected to witness steady growth at

4.5 percent over a five-year period. Government

initiatives to develop IT are rampant and the government

is targeting broadband penetration of 75.0 percent by

2014. IT outsourcing is expected to drive growth in the

market.

Indonesia

• The local ICT industry is dominated by hardware and characterized by small enterprises. Moreover, markets for 3.5 G and 4G

technologies, cloud computing, and telecom services are growing. Indonesia lags due to infrastructural challenges. However, it has

gained 2 ranks since 2010.

ICT Industry: IT Competitiveness Index (Major ASEAN Members), 2011

Country Singapore Malaysia Thailand Vietnam Indonesia

IT Competitiveness Rank 3 31 50 53 57

IT Infrastructure Score* 91 27.4 16.1 23.5 7.2

Support for IT

Development Score* 82.3 58.2 54.2 43.5 48

Note: * Score is out of 100. The index compares 66 countries based on the performance and support to the IT industry.

Vietnam

• Vietnam has the second-fastest growing ICT industry among

ASEAN members, with an estimated annual growth of 25.0 percent.

The software industry is growing at a pace of 30.0 percent,

annually, as is the telecom industry with 111 million mobile

subscribers and 21 million Internet users as of 2010.

Thailand

• Thailand has the largest IT industry among ASEAN

members. The ICT industry, as a whole, is slated to grow

at an annual average of 6.5 per cent.

• 3G and WiMax technologies are poised for growth.

ICT Industry Competitiveness: Indonesia and ASEAN

Sources: BSA and Frost & Sullivan

78

Telecommunication Market

79 4736-90

ICT Industry: Telecommunication Market Segmentation (Indonesia),

2010

Fixed Line

Mobile


The telecom sector in Indonesia is experiencing steep growth, mainly due to increasing mobile and Internet access penetration in the

country. In addition, projects such as WiMax and National IT Flagship development, are also contributing significantly towards the growth

of this sector in the country.

• Indonesia has the third-largest number of

mobile operators in a country in the Asia

Pacific region, behind India and

Bangladesh. This segment of the

telecommunication sector is dominated by

PT Telkomsel, PT Indostat, and XL Axiata.

The market is showing signs of saturation,

as mobile penetration level is high in the

country. Intense competition in this sector is

resulting in steep fall in the call rates.

• There were approximately 36.0 million

subscribers in the fixed line segment at the

end of 2010. The subscriber base for fixed

wireline segment is gradually declining,

while that of the wireless segment had a

steep rise between 2006 and 2010.

• The fixed wireline segment is a monopoly,

where PT Telkom has more than 99.0

percent of the total subscribers in the

country.

ICT Industry: Market Share of Mobile Service Providers

in the Telecommunication Market (Indonesia), 2010

ICT Industry: Market Share of Fixed Line Service

Providers in the Telecommunication Market (Indonesia),

2010

50.0%

22.0%

18.0%

10.0%

Telkomsel

Indostat

XL Axiata

Others

68.0%

30.0%

2.0%

Telkom

Bakrie

Others

Note: Others include Mobile 8, Hutchison, and so on.

Note: Others include Indostat and so on.

Overview of Telecommunication Market

Sources: DJPT and Frost & Sullivan

Sources: DJPT and Frost & Sullivan

80 4736-90

ICT Industry: Key Features of Telecommunication Market (Indonesia), 2010

Indicators Description

Structure • The market is served by both the public sector and private sector. Current policy liberalization has helped to

attract foreign investment to the sector and has provided strong growth opportunities to domestic enterprises

through strategic collaborations.

Competition • The domestic companies, which currently serve the telecommunication market in Indonesia, include

Telkomsel, Indosat, and Excelcomindo. Other prominent foreign participants and new entrants include Saudi

Telecom, Smart Telecom, and PT Barkie Telecom.

Government Plans

and Initiatives

• Four concurrent regulations were introduced in 2009 regarding use of radio frequencies for wireless

broadband services.

• Guidelines for the collaborative development and operation of telecom towers were also developed in 2009.

• Rules and regulations related to digital television, Internet Protocol Television (IPTV) services, Internet access

services, and telecommunication traffic clearing system were also enforced in the same year.

• Development of the National Broadband Network (NBN) for the period 2011-2015.

Challenges • Lack of proper policy implementation that can provide equal opportunity to small and medium size enterprises

enabling them to compete with major companies.

• Adequate skilled human resource creation through training and vocational camps is required to match the

growing demand for manpower in the sector.

Overview of Telecommunication Market (continued)


81 4736-90

Law Description

MoC Decree No. KM 21/2001

and MoCI Regulation

No.31/PER/M.KOMINFO/09/2008

• Implements telecom laws regarding the new categories of telecom services and network

operations.

MoC Decree No.KM 4/2001 • Authorizes usage of three digit access codes (‘01X’) for DLD services. Consumers can choose

their long-distance carrier using ‘01X’ access code.

Decree No. 33/2004 • Enforces measures to prohibit monopoly and unfair competitive practices in telecom. Any undue

advantage taken by dominant service and network providers is considered illegal. Dominant

positions include factors such as services area coverage, scope of business, and market

controlling power . The decree prohibits engagement in malpractices such as selling a product at

a very low price, dumping, obstructing compulsory interconnection, forcing consumers to use

specific services, and cross-subsidies by a dominant provider.

Regulation

No.8/Per/M.KOMINFO/02 /2006

• Implemented an interconnection tariff scheme (charge is determined by a cost-based formula) for

telecom network and services operators.

Law No. 11 of 2008 • The law was enacted in 2008 and regulates information and electronic transactions (including

e-payment) by telecom network and services providers.

Decree

No.30/PER/M/KOMINFO/8/2009

• Regulates measures related to delivery of Internet Protocol-based TV (IPTV), Web-based TV,

and Net TV to wire line services.

KPPU Regulation No. 1/2009 • Implemented guidelines on Pre-Notification of Consolidations, and mergers and acquisitions

(M&A). The regulation adds legal certainty to entities entering into M&A activities.

MoCI Regulation No.

01/PER/M.KOMINFO/01/2010

• Regulates telecom network operation in Indonesia.

Source: Annual report Telkom 2009 and Frost & Sullivan research

ICT Industry: Telecommunication Market Regulations (Indonesia), 2001-2010

Major Telecommunication Market Regulations

82 4736-90

Major Domestic Companies in the Telecommunications Market

Telkom • Telkom is the largest telecom company in Indonesia. It is a state owned enterprise (SOE). The information and

communication services portfolio of the company includes fixed wireless and fixed wire line telephone, mobile,

Internet and data, interconnection, and network services.

• It operates directly or through subsidiaries. In 2010, the total number of subscribers of different services of the

company was 120.5 million (a growth of 14.6 percent from 2009). Of this total, 94.0 million were mobile subscribers,

18.2 million were fixed wireless customers, and 8.3 million were fixed wire line customers.

Indostat • Indosat was established in 1967 by the Government of Indonesia and started operating from 1969. The services

portfolio of the company includes fixed line telephone, code division multiple access (CDMA) and global system for

mobile communication (GSM) mobile services, voice over internet protocol (VoIP), and others.

• In 2010, the company increased its operating revenue by 5.2 percent from 2009. Mobile phones and services

segment operating revenue increased by 12.1 percent. However, rest of the services aggregately recorded negative

growth of operating revenue by 16.7 percent.

XL Axiata • XL Axiata is a mobile services provider in Indonesia. Axiata Group Berhad, a Malaysia-based telecom company,

owns 66.6 percent of the company’s share.

• In 2010, the company recorded a 27.0 percent revenue growth from 2009.

Barkie

Telecom

• Barkie Telecom is an Indonesia-based telecom company. The company provides fixed wireless and fixed wire line

telephone, mobile, and VoIP services.

• In 2010, the total number of mobile subscribers was 13.0 million (a growth of 22.8 percent from 2009). 99.5 percent

were pre-paid mobile subscribers and 0.5 percent were post-paid mobile subscribers.

ICT Industry: Major Telecommunication Companies (Indonesia), 2010


Major Telecommunication Companies

83 4736-90

Category Name of Operators

Cable Fixed

Telephone

PT Telecom, PT Indosat, PT. Batam Bintan

Telekomunikasi

Wireless Fixed

Telephone

PT Telecom, PT Indosat, PT Barkie Telecom,

PT Mobile-8

Mobile

Telephone

PT Telcomsel, PT Indosat, PT XL-Axiata, PT

Mobile-8, PT. Sampoerna Telekomunikasi

Indonesia, PT. Natrindo Telepon Seluler, PT.

Hutchison CP Telecommunication, Smart

Telecom

Company 2007 (%) 2008 (%) 2009 (%) 2010 (%)

Telekomsel 34.5 36.4 25.0 15.1

Indosat 46.9 48.7 (9.2) 33.4

XL-Axiata 62.4 68.2 20.8 28.3

Mobile-8 65.0 (10.3) 3.8 (20.2)

STI 130.5 152.6 (18.8) (45.3)

ICT Industry: Company-wise Mobile Subscription Rate

Increases in the Telecommunication Market (Indonesia),

2007-2010

• Telkomsel, Indosat, and XL-Axiata collectively had a market share of 85.0 percent in 2010. The other five mobile

service providers served only 15.0 percent of the market.

• In 2010, Telkomsel had the largest mobile subscribers market share of 45.0 percent, followed by Indosat (20.9

percent) and XL-Axiata (19.1 percent).

• Recent trends are showing a shift in customer preference from cable to wireless telephone mainly due to the following

reasons:

Technology to support mobility

Co-branding strategy (offering telephone sets and services combined as a package)

ICT Industry: Major Telecommunication Services Providers

(Indonesia), 2010

Source: Frost & Sullivan research Source: Frost & Sullivan research

Major Telecommunication Companies (continued)

84 4736-90

SingTel (Singapore) Telkomsel

Foreign Companies Indonesian Companies

Qatar Telecom (Qatar)

Axiata (Malaysia)

Etilsalat (United Arab Emirates)

Hutchison (Hong Kong)

Indosat

XL Axiata

XL Axiata

PT Hutchinson CP Telecommunication (PT HPCT)

SingTel paid $1.00 billion to acquire 35.0 percent share of Tekomsel in 2001.

Maxis (Malaysia) Natrindo Telepon Seluler (NTS)

Maxis acquired 95.0 percent of NTS in 2007.

Qatar Telecom acquired Telemedia’s stake in Indosat worth $1.80 billion in 2008.

Hutchison acquired 60.0 percent of PT HPCT in 2005.

Telekom Malaysia owns 67.9 percent share of Excelcom (Indonesia) after acquiring 15.9 percent of Etisalat (UAE), 16.8 percent of

Khazanah National Bhd, and 7.3 percent of Asian Infrastructure Fund (AIF).

Business Alliance

2009

2009

ICT Industry: Foreign Investments in Telecommunication (Indonesia), 2010

Foreign Investment in Telecommunication


85 4736-90

Saudi Telecom investment in

Indonesia (2011)

Saudi Telecom Company (STC)

invested approximately $450.0 million in

Indonesia, primarily for debt financing.

The company is also aiming to increase

its presence in the broadband wireless

network sector, as Indonesia offers

tremendous growth potential for this

market.

New technology training centre by

Huawei (2011)

China-based Huawei opened a

technology training centre as part of its

collaborative venture with Bandung

Institute of Technology.

Mobile network upgrade by

Telkomsel (2011)

Telkomsel, an Indonesia-based

mobile networking company,

allocated a fund of $1.10 billion for

network expansion in the domestic

market. The investment was made to

change the mode of operation from

data service provider to cellular

phone service provider.


Indonesian subsidiary by Research in

Motion (2012)

Research in Motion (RIM), manufacturer

of Blackberry, to open a new subsidiary

in order to promote usage of smart

phones in Indonesia. According to RIM,

there were approximately 1.5 million

Blackberry users in the country.

Wireless Fidelity (Wi-Fi) and

Worldwide Interoperability for

Microwave Access (WiMAX) roaming

facility (2011)

ID-WiBB activated roaming between

Wi-Fi and WiMAX. In future, Long Term

Evolution (LTE) operators may be

connected with the roaming service too.

ID-WiBB selected Aptilo Networks to

develop roaming network.

Telecommunication Infrastructure

Improvement (2011-2015)

Establishment of Information &

Telecommunication Network Systems

in the Copper Industrial Park, Timika.

ICT Industry: Telecommunication Projects (Indonesia), 2011-2015

Telecommunication Projects (2011-2015)

86 4736-90

• Increasing number of fixed line network providers in the country is resulting in competitive pricing in this sector. The number of fixed line

network providers increased from 86 companies in 2009 to 91 companies in 2010.

• Fixed line network is classified into two categories, namely, closed fixed network and local fixed network. In 2010, closed fixed network

providers increased by 6.9 percent, whereas, local fixed network providers increased by 4.3 percent.

• The Government of Indonesia is increasing fixed line penetration specifically in the rural areas. The USO program in the rural areas of

Indonesia is currently active to implement different services of ICT. Increase of connections between the islands through fixed telephone

lines is one of the objectives of the program.

• Low cost of Fixed Wireless Access (FWA) as compared to mobile phones can cause an increase in number of subscribers. Currently,

fixed line telephone connections are widely used by non-governmental organizations, business entities, and government agencies.

ICT Industry: Fixed Telephone Lines in the

Telecommunication Market (Indonesia), 2004-2014

Note: All figures are rounded; the base year is 2010. Sources: International

Telecommunication Union (ITU) and Frost & Sullivan analysis

Categories

2008 2009 2010

Total Number of Companies

Long-distance fixed network 2 2 2

International fixed network 2 3 3

Closed fixed network 44 58 62


ICT Industry: Number of Fixed Telephone Line Providers in the


0.0

10.0

20.0

30.0

40.0

50.0

60.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Nu

mb

er

of

Fix

ed

Te

lep

ho

ne

L

ine

s (

Mil

lio

n)

Year

Fixed Telephone Lines

87 4736-90

Mobile broadband sector in Indonesia has significant growth potential and is likely to contribute 1.7 percent of the total gross domestic

product (GDP) by 2015. Mobile broadband prices in Indonesia are inexpensive compared to other countries in the region. Increasing

number of mobile broadband service providers is resulting in competitive pricing of the products in the country.

In order to develop the mobile broadband services in the country, the authorities have decided to develop infrastructure facilities and

allow foreign participants to enter the domestic market.

Telkomsel invested approximately $1.10 billion to upgrade mobile broadband infrastructure in 2011.

Key Industry Issues

• 3G market in the country is not well developed. Number of 3G subscribers

in Indonesia represent approximately 7.0 percent of the total mobile

subscribers.

• A large section of population of the country is based in rural areas.

Communication in the rural areas is still at a nascent stage. Therefore,

mobile use is restricted mainly to urban areas.

• Digital Subscriber Line (DSL) is the dominant broadband platform in the

country and accounts for approximately 95.0 percent of the broadband

subscriptions. Therefore, broadband subscriptions in the country are

heavily dependent on DSL service, which is based on limited copper wire

infrastructure.

Recent Developments

• Government WiMAX licenses in 2.3 GHZ

and 3.3 GHZ band are expected to increase

mobile broadband subscription rates.

• New models of smart phones are available

in the Indonesian market, and this can ease

mobile broadband access.

• Popularity of social networking is increasing

in the country, which is likely to accelerate

the subscription rate for mobile broadband

services.

Mobile Broadband Subscriptions

88 4736-90

• The mobile phone sector has been witnessing strong growth since 2004. Three major domestic companies are present in the market,

namely, Telkomsel, Indosat, and Excelcomindo. Telkom holds a major market share. Due to non-restrictive telecom policy implementation,

foreign multinationals have also entered the market. Currently, there exists tough competition among the existing mobile network providers

in the country, and as a result, there is low scope for new entrants. There have been no new entrants since 2008, and this reflects the

competitive scenario in the country.

• The number of mobile subscribers increased by 38.0 percent in 2010 as compared to 2009. In 2011, subscription rate has been higher in

urban areas as compared to rural areas.

Mobile services in Indonesia are principally of three types, namely,

Analog cellular services

GSM cellular services

Personal Communication Network (PCN) cellular services

ICT Industry: Mobile Subscriptions in the Telecommunication

Market (Indonesia), 2004-2014

Note: All figures are rounded; the base year is 2010. Source: International

Telecommunication Union (ITU) and Frost & Sullivan analysis

Categories 2008 2009 2010

Providers of Mobile Network Number of Companies

1. Terrestrial mobile

network 6 8 8

2. Cellular mobile network 8 8 8

3. Satellite mobile network 1 1 1


ICT Industry: Number of Mobile Network Providers in the


0.0

50.0

100.0

150.0

200.0

250.0

300.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Nu

mb

er

of

Mo

bil

e S

ub

sc

rip

tio

ns

(M

illi

on

)

Year

Mobile Subscriptions

89 4736-90

• According to the Ministry of Trade decree 19/2009, six service centers are mandatory for telecommunications equipment producers.

This condition created a barrier for foreign multinationals to invest in the sector. Indonesia is implementing latest telecommunication

technologies, which are developed by different countries, to modernize the sector.

• Sweden is an important telecommunications equipment trading partner to Indonesia. Indonesia imports a large amount of

telecommunication equipment from Sweden every year.

• In 2006, a new regulation was passed by the Government of Indonesia, (applicable to government agencies and state-owned

enterprises) according to which telecom operators in Indonesia are required to use only domestic products. They should give

preferences to products containing a minimum of 40.0 percent domestic content. This regulation affected interests of the U.S.

telecommunications equipment suppliers, as most of their products depend on globally-sourced materials. Besides this, Indonesia

does not have appropriate infrastructure to manufacture different types of telecommunications equipment. This scenario has been

affecting domestic consumers and commercial users.

ICT Industry: Telecommunications Equipment Trade (Indonesia), 2004-2014

Source: World Trade Organization and Frost & Sullivan analysis

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Te

lec

om

mu

nic

ati

on

Eq

uip

me

nt

Tra

de

($

Mil

lio

n)

Year

Telecommunications Equipment Export Telecommunications Equipment Import

Telecommunications Equipment Trade

90


91 4736-90

The Indonesian information technology (IT) market is one of the fastest growing IT markets in the Asian region, and is expected to grow at

a CAGR of 15.0 percent during the forecast period 2011-2014. Total IT spending amounted to $4.50 billion in 2010, which increased by

$0.99 billion over 2009. Manufacturing, banking, and telecom sectors collectively contribute approximately 50.0 percent of the total IT

spending of the country.

ICT Industry: IT Market Segmentation (Indonesia), 2010

Hardware Sector

Software Sector

IT Services Sector

• The IT market in Indonesia is hardware dominated, as hardware accounts for more than 70.0

percent of Indonesian IT spending.

• Increasing affordability of people and availability of credit payment options accelerated PC sales in

the country. However, PC penetration rate is very low in the country (approximately five PCs per

100 households only). The rate is significantly low, especially in the rural areas.

• The software market is relatively smaller and at a nascent stage facing challenges such as piracy, ,

causing software companies to lose approximately $100.0 million annually.

• Developments such as e-governance- the mandate to use open source software (OSS) in local

governments - and e-learning initiatives are expected to lend to the growth of the sector during the

forecast period. Enterprise Resource Planning (ERP) software continues to be adopted by SMEs.

• Software sales were up by $65.0 million in 2010 (year on year).

• The IT services market is witnessing robust growth and was valued at $769.0 million in 2010, up

by $168.0 million over 2009.

• IT services in Indonesia are mostly applied in manufacturing, telecom, and banking sectors.


Overview of Information Technology (IT) Market

92 4736-90

ICT Industry: Key Features of IT Market (Indonesia), 2011

Indicators Description

Market Structure The information technology market is divided into computer hardware, computer software, and services. The market

is mainly hardware dominated. The software market is further divided into application, system infrastructure, and

application development and deployment. IT services market includes support, maintenance, planning, education,

operation, and implementation.

Key Government

Policies and Plans

• e-passport introduction (2010).

• Announcement of import duty elimination on personal computer (PC) accessories (2010).

• Development of IT usage in education centers to raise the number of skilled human resources.

Challenges Lack of adequate infrastructure and technology dependence on foreign countries are the major constraints to IT

industry’s growth. Domestic companies are still not exposed to advanced technologies and rely on foreign

multinationals. Scarcity of skilled human resources is also a concern. Software piracy is also a challenge for the

sector to overcome, as it causes huge losses to software manufacturing companies.

Competition Competition is very low in this market, as domestic companies are dependent on their foreign counterparts on

technology-related matters. Approximately 60.0 percent of the domestic IT market is served by the top 30 software

development companies (mostly foreign multinationals).

Emerging Trends

• Cloud computing and ERP software adoption are gaining momentum

• Increasing ease of access to the Internet is likely to ensure growth of Internet and broadband facilities.

• Increase of e-learning (IT and education sector linkage) in the country.

• Increased application of IT in the banking and manufacturing sectors.

Overview of Information Technology Market (continued)


93 4736-90

ICT Industry: Sector-wise IT Spending (Indonesia), 2010

Computer Hardware

72.5%

Computer Software 11.2%

Computer Services 16.3%

Note: All figures are rounded; the base year is 2010. Sources: ITU and Frost & Sullivan analysis

IT Market Segments

Hardware Market: Acer, a global PC manufacturer, increased its market share in the Indonesian PC market in 2010. Lenovo, the biggest

computer vendor in Asia, will set up a new subsidiary in the country.

Software Market: Cloud Computing (CC) is an emerging technology. As of 2010, cloud computing accounted for approximately 20.0

percent of software market revenues. In 2010, Microsoft and Telekom entered into a collaborative relationship to introduce cloud computing

services with an objective to provide tax and finance applications to small and medium scale enterprises (SME).

IT Services Market: Oracle, in collaboration with PT Sigma Cipta Caraka, a local IT vendor, provides outsourcing services. IT services are

applied largely in e-governance. Tata Consultancy Services (TCS), is a prominent IT services provider in financial services, media, banking,

and telecom.

Hardware accounts for 72.5 percent of

the total IT spending. Government

efforts to improve ICT infrastructure has

contributed to the growth of the

hardware market.

IT Market Spending and Landscape

94 4736-90

ICT Industry: Internet Usage in the IT Market (Indonesia), 2004-2011

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2004 2005 2006 2007 2008 2009 2010 2011

Us

ers

pe

r 1

00

In

ha

bit

an

ts

(Pe

rso

ns

)

Year Note: All figures are rounded; the base year is 2010.

Sources: ITU and Frost & Sullivan analysis

In 2009, accessing the Internet from

Internet cafés and mobile phones was

popular, followed by access from the

workplace.

In 2010, Internet access trends changed

as access from mobile phones increased,

as did Internet access from home.

Internet Infrastructure

Indonesia lacks adequate infrastructure to provide

Internet services. Such services are generally

based on telecom infrastructure, which in

Indonesia is not strong enough to support high-

quality Internet services. In addition, computer

literacy in the country is very poor.

Internet Usage

The number of Internet users is gradually

increasing. As of 2010, the penetration rate stood

at 16.0 per cent with 39.6 million users.

Internet Kiosks (Warnets)

ISPs provide Internet services to retail customers directly. To increase

consumer reach and to provide better consumer support, ISPs have opened

Warnets in different regions. Warnet density is high in three cities, namely,

Jakarta, Yogya, and Bali.

Internet Service Providers (ISP)

Since its establishment in 1997, Indonesian Internet Exchange (IIX) has

been enabling ISPs to begin operations. Moreover, IIX also facilitates a cut

in the operational costs of ISPs. To become an ISP in Indonesia, a license

from the government is required. The Internet services market is

oligopolistic, as a large market share is divided among a few top ISPs, such

as LinkNet, Indosatnet, M-Web, CentrinOnline, and Uninet.

Internet

95 4736-90

ICT Industry: Fixed Broadband Subscriptions in the IT Market (Indonesia),

2004-2014


Telecommunication Union and Frost & Sullivan analysis

• Fixed broadband technology in Indonesia is mainly

cable modem or Direct Subscriber Line (DSL) based.

• The two way cable broadband technology in the

country maintains Data Over Cable Service Interface

Specification (DOCSIS) standards. Currently, DSL

accounts for 85.5 percent of broadband lines and cable

broadband accounts for 14.0 percent.

• Apart from this, the other categories of fixed broadband

technologies include ethernet, fixed-wireless access,

and broadband leased lines.

0.0

1.0

2.0

3.0

4.0

5.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Bro

ad

ban

d P

en

etr

ati

on

R

ate

(%

of

Po

pu

lati

on

)

Year


Telecommunication Union and Frost & Sullivan analysis

ICT Industry: Fixed Broadband Subscription Penetration Rate in the

IT Market (Indonesia), 2004-2014 • In 2010, fixed broadband subscription rates were low in

Indonesia, compared to other Southeast Asian countries,

such as Malaysia and Thailand.

• Penetration rates are expected to increase from

0.8 percent in 2010 to about 4.5 per cent by 2014,

though the Master Plan 2025 has set a target of 30.0

per cent by 2025.

• One of the main challenges includes the higher pricing

of broadband packages compared to other countries. A

2-Mbps package would cost $20.0 more in Indonesia

than in Malaysia.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Fix

ed

Bro

ad

ban

d

Co

nn

ecti

on

s (

Millio

n)

Year

Fixed Broadband Subscriptions

96 4736-90

• In 2010, the Government of Indonesia decided to curb duties and tariffs on personal computer (PC) accessories. Elimination of import

duties on PC components such as graphic cards and motherboards will support domestic manufacturers. Local production remains

low and the market is import dependent.

• Promotion of e-learning will also generate PC sales in Indonesia, as PCs to students ratio will increase. This initiative will increase PC

to student ratio approximately to 1:20 from the PC to student ratio of 1:3200 in 2010.

• In 2011, ZTE Indonesia, a subsidiary of ZTE Corp. of China, launched ZTE Light Tab (tablet personal computer). Indonesia is the

fourth country where the company introduced the product after Malaysia and Japan, and also Europe. Tablet computer sales are also

expected to grow as the trend of using the i- pad is growing.

• PC sales will continue to witness strong growth in 2012. However it may face competition from the growing mobile market. Vendors

such as Lenovo are increasing their operations in Indonesia, as they expect robust growth of over 20.0 percent in 2012.

ICT Industry: Personal Computers in Use in the IT Market (Indonesia), 2004-2011

Note: All figures are rounded; the base year is 2010. Sources: ITU and Frost & Sullivan analysis

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2004 2005 2006 2007 2008 2009 2010 2011

Pers

on

al

Co

mp

ute

rs i

n U

se

(Millio

n)

Year

PC penetration rate is low at

about 5.7 per cent as of

2010, in urban areas. In rural

areas, it is even lower at 0.6

per cent

Personal Computers

97 4736-90

Market Opportunities

Telecommunication

Fixed line

Market

• Increased network coverage and persistent demand by the household sector will lend to growth of fixed line

phones market.

• Telephone infrastructure equipment and networking equipment markets have growth potential due to infrastructure

revamping initiatives being undertaken by the government.

Mobile Phone

Market

• Mobile phone market has a very good prospect of growth due to increased demand. The service providers are

likely to benefit out of it.

• Introduction of WiMAX and 3.5G technology can provide a good thrust to investment.

• Network upgrade and development are also part of government initiatives. Therefore, there lies investment

opportunity through private public partnership.

• The Government of Indonesia may liberalize policies related to investment in telecom tower infrastructure.


Hardware

Market

• Duty elimination on PC auxiliaries will increase international trade in hardware.

• Demand for PCs will increase, as the government is strengthening IT training in educational institutions.

Software

Market

• Outsourcing services and e-governance are growing in Indonesia and will drive the market.

• Growing demand for cloud computing technology will further strengthen the software market.

IT Services

Market

• Growing e-learning awareness and government initiatives are expected to boost IT education in the country

significantly. International co-operation also creates room for open investment. Moreover, automation of major

corporate activities is expected to facilitate growth of the market.

• Operations and implementation would be lucrative for investment by both foreign multinationals and domestic

companies.

ICT Industry: Business Opportunities (Indonesia), 2011-2014

Business Opportunities


98

About Frost & Sullivan

99 4736-90

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About Frost & Sullivan

100 4736-90

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101 4736-90

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102 4736-90

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