WORLD TRADE ORGANIZATION Committee on Trade-Related Investment Measures G/TRIMS/W/100 6 July 2012 (12-3629) Original: English INDONESIA: CERTAIN LOCAL CONTENT PROVISIONS IN THE ENERGY SECTOR (MINING, OIL AND GAS) Replies to Questions from the United States 1 The following communication, dated 3 July 2012, is being circulated at the request of the Delegation of Indonesia. Questions The United States appreciates the responses Indonesia has provided in document G/TRIMS/W/79 in answer to questions posed by the United States and the European Union in document G/TRIMS/W/70. However, the United States has ongoing concerns regarding Indonesia's existing law, and its draft implementing regulations, applicable to investment activities in Indonesia's mineral and coal mining sector. In particular, we have questions related to the disciplines in the Agreement on Trade-Related Investment Measures (TRIMs Agreement) and the General Agreement on Tariffs and Trade (GATT) 1994, as well as the General Agreement on Trade in Services (GATS). The United States previously submitted questions to Indonesia about the 2009 Mining Law and its implementing regulations. The law states that operators must "prioritize" the utilization of local manpower and domestic goods and services: Article 106 states operators "must prioritize the utilization of local manpower and domestic goods and services in accordance with laws and regulations." Article 102 states that "an operator must increase the value added of mineral and/or coal resources in carrying out mining, processing, and refining and utilization of the materials and coal." Article 103.1 states that "a production operation must carry out processing and refining of the mining process inside the country." In document G/TRIMS/W/74, Indonesia explained the operation of Article 106: "Based on Government Regulation No. 23 Year 2010, the [operator] must prioritize the use of domestic goods, equipment, and/or supporting materials, as well as imported products being sold in Indonesia used for mineral and coal mining activities that a) meet the quality and post-sales service standards, and b) guarantee the sustainability of supply and timely distribution. The objective is 1 G/TRIMS/W/88.
Page 2 to support the growth of domestic industry through the mining sector This implies that when domestic goods, equipment, and/or supporting materials do not fulfil the above-mentioned requirements, the [operator] will allow the imports of such products. Plans to import must be reported to the Minister in charge of mineral and coal mining and must comply with relevant rules and regulations." In G/TRIMS/W/74, Indonesia confirmed the requirement for operators to conduct processing, refining, and smelting activities locally, per Articles 102 and 103. In G/TRIMS/W/79, Indonesia elaborated on the meaning of the requirement to "prioritize" local content: "As long as the goods, equipment and/or supporting materials used for mineral and coal mining activities are not available in the Indonesian market, the Mining Permit Holder or Special Mining Permit Holder may import it, so it does not prohibit investors to use any new technologies developed outside Indonesia." Based on the responses provided to our questions, the laws and regulations themselves, and other materials, it is clear that the policy intent of these measures is to promote domestic production and employment by favouring Indonesian products and suppliers. In light of the information that has been provided, we would like to get a better understanding of the implementation of these measures. 1. How does Indonesia define the term "prioritize?" Who determines whether local goods and services are available, and whether a foreign investor has "prioritized" use of those goods and service? "Prioritize" in the context of Government Regulation No. 23/2010 encourages companies to give preference to domestic goods and services provided that they are available in the Indonesia market and meet the quality and post-sales service standards, as well as having their sustainability of supply and timely distribution warranted. Investors are considered to have prioritized the use of those goods and services when they have given preference to domestic goods, equipments, services, raw materials and/or components as well as imported products sold in Indonesia. 2. If domestic goods and imports are both available and roughly equivalent in quality, price, and other factors must domestic products be selected? Article 87 of Regulation No. 23/2010 stipulates that investors shall prioritize the use of domestic as well as imported goods locally available, given that they meet the requirements stated therein. In this context both types of products shall be accorded equal priority. 3. In practice, what is the difference between an imported product and an imported product already being sold in Indonesia?
Page 3 "Imported products" are products directly imported by investors from outside Indonesia and "imported products being sold in Indonesia" are those imported products that are already available for sale in Indonesia. 4. Are all mining products covered by these measures? Law No. 4/2009 and Regulation No. 23/2010 only cover mining products in mineral and coal. 5. The information provided indicates that operators are not permitted to export unprocessed or unrefined minerals. Does this requirement constitute an export ban on raw materials? If not, why not? Indonesia does not apply import ban on raw materials. The implementing regulations of Law No. 4/2009, namely Minister of Energy and Mineral Resources Decree No. 34/2009 require a minimum percentage of mining and coal production be prioritized for domestic needs at a benchmark price in accordance with the generally effective price in the international market. The regulation is intended to prevent the possible occurrence of shortage of raw mineral and coal supply in the domestic market. 6. If a mining company wishes to hire a civil engineering firm for construction work pertaining to a mining project, it would appear to have to favor local firms over foreign joint ventures. If that is the case, please explain how the law is consistent with Indonesia's national treatment commitment for civil engineering under GATS? Indonesian national treatment commitment for civil engineering under GATS states that any foreign civil engineering firms which are to do business in Indonesia shall establish joint venture with local companies. Elucidation of Government Regulation No. 20/1994 further stipulates that any joint venture is considered as Indonesian legal entity and equal before the law with any local firm. Therefore, Law No. 4/2009 is not inconsistent with Indonesia's commitment under GATS. 7. Please explain how the ban on exportation of raw materials is consistent with GATT Article XI, which generally prohibits quantitative restrictions. In G/TRIMS/W/74, Indonesia refers to Article XI.2 (a) saying that export prohibition or restrictions may be undertaken when aimed at preventing or relieving critical shortages of essential products. Where in Regulation 23/2010 are authorities required to assess product scarcity or critical shortages? How can this be reconciled with statements in the KEN master plan about Indonesia's abundance of natural resources? Statements in the KEN Master Plan about Indonesia's abundance of natural resources should be perceived as a political statement to promote and maintain national pride. It should also be noted with regard to the need for the country to consider the sustainablity of such resources. Without proper and careful utilization or exploitation, there are risks of such natural resources becoming scarce or even depleted. However, Regulation No. 23/2010 does not contain a provision on export ban. On the contrary, it allows exportation.
Page 4 Article 84 of Regulation No. 23/2010 stipulates that the Minister for Energy and Mineral Resources will determine the domestic need for mineral and coal which includes processing industries and direct domestic use. Further to this provision, the Minister for Energy and Mineral Resources establishes an annual decision on the domestic need and the minimum sale requirement percentage for mineral and coal. Questions Presidential Regulation 35/2004 We note that Indonesia has similar regulations in the oil and gas sector. Article 79 of Presidential Regulation No. 35/2004, which regulates contractor activities in the upstream oil and gas sector, says "contractors must prioritize the use of domestic goods, services, technologies, and engineering and design capabilities" and this prioritization "shall be carried out if the necessary goods, services, technologies, and engineering and design capabilities have been made or are available domestically and satisfy the quality/grade, delivery date, and price requirements in goods and services procurement." 8. Are there any differences between implementation of this requirement in the oil and gas sector and implementation of the requirement in the mining sector, discussed above? Government (not Presidential) Regulation No. 35/2004 does not differentiate between the implementation of preference to domestic goods/services in the mineral and coal mining sector and that in the oil and gas sector. 9. Please explain how these local preferences are administered in BPMIGAS Regulation PTK-007, the Work Procedure Manual for Contractors with Production Sharing Contracts. The Work Procedure Guideline No. 007/2011 issued by the Executive Agency for Upstream Oil and Gas Business Activities (BPMigas) stipulate that investor must prioritize the use of domestic goods/services/labor. Investors are required to submit a procurement, human resource and budget plan which contain a work plan for procurement of domestic goods/services, and personnel management activities which form the basis for preparation of the overall Work Program and Budget. The Work Plan is subject to approval by BPMigas. Every procurement of goods/services should refer to the APDN Book (Appreciation of the Domestic Production) which contains a list of goods/services provided by national oil and gas companies. 10. Under what circumstances are imported goods permitted? Services? Goods which are not contained in the list of APDN Book can be imported through RIB (Rencana Import Barang Plan to import goods). In the case of services, import is permitted if the service is not available in Indonesia and the import is conducted in accordance with Indonesia's commitment under the GATS.
Page 5 11. Do these requirements apply to all companies that have been awarded upstream oil and gas projects in Indonesia? These requirements apply to all companies that have been awarded upstream oil and gas projects in Indonesia. 12. How are these requirements consistent with GATT Article III.4, which provides that imported products are to be treated no less favorably than like products of national origin? The requirements are intended for the management of procurement and use of goods/services to support investors' activities, which must be conducted in an effective and efficient manner and in accordance with the ethical principles of supply chains. In this regard, effective and efficient use of goods/services is translated as using or prioritizing the use of domestic goods/services, the procurement of which is considered more economical. Questions General Observations At a time when the Government of Indonesia is prominently trying to attract foreign direct investment to Indonesia, and the KEN master plan pursues a laudable goal of transforming Indonesia's development, these types of restrictions appear to be multiplying. These restrictions are both discriminatory, harmful to Indonesia's efforts to improve its competitiveness as an investment destination. 13. Is there high-level guidance from the government encouraging or requiring ministries to implement these kinds of regulations? The KEN Master Plan is intended to advance Indonesia's development plans, among others by attracting more direct investments. Inevitably, development plans involve use and exploitation of natural resources. The measures that govern the use of such natural resources should not be perceived as restrictive, rather they are in place to secure the availability and sustainability of those natural resources. Indonesia also consists of a large population with a large share of needs in those natural resources. It is the government's task and responsibility to work as one and ensure that their needs are fulfilled and attended to for many years and generations to come, as any country would do. 14. We note that Presidential instruction 2/2009 regarding the Use of Domestic Products in Government Procurement of Goods/Services, as implemented by Ministry of Industry Regulation 15/2011, requires the use of domestic products in state activities including 1) ministries and regional working units, 2) state-owned or regional-owned enterprises, and 3) cooperation contracts between the government and a business entity. Are the measures relating to mining and to oil and gas examples of implementation of this or similar instructions?
Page 6 The provision to use domestic products in state activities as implemented by Presidential Instruction No. 2/2009 and Minister of Industry Regulation No. 15/2011, is not similar to the implementation of Law No. 4/2009 on mining, and oil and gas. 15. To what extent are these kinds of local content preferences being introduced in other sectors? Please identify all such measures, including the criteria and the authority responsible for implementing the measure. Are these requirements mandatory or voluntary in nature? Preference to use domestic goods/services for state activities is also introduced in the telecommunication sector through the issuance of Minister of Telecommunication Decree No. 7/2009. Minister of Telecommunication and Information is responsible for its implementation. The requirement is mandatory for government projects.