Reference ID: 07JAKARTA2470    

Created: 2007-09-06 11:08       

Released: 2011-08-30 01:44    

Classification: UNCLASSIFIED//FOR OFFICIAL USE ONLY    

Origin:  Embassy Jakarta

              


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P 061108Z SEP 07 ZDK

FM AMEMBASSY JAKARTA

TO RUEHC/SECSTATE WASHDC PRIORITY 6115

INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS PRIORITY

RUEHBJ/AMEMBASSY BEIJING PRIORITY 4284

RUEHBY/AMEMBASSY CANBERRA PRIORITY 1129

RUEHKO/AMEMBASSY TOKYO PRIORITY 0757

RUEAIIA/CIA WASHDC PRIORITY

RHEHNSC/NSC WASHDC PRIORITY

RUEKJCS/SECDEF WASHDC PRIORITY

RHHJJPI/PACOM IDHS HONOLULU HI PRIORITY


UNCLAS SECTION 01 OF 02 JAKARTA 002470

 

SIPDIS

 

SENSITIVE

SIPDIS

 

DEPT FOR EAP/MTS, EAP/RSP, EEB/IFD/OIA

 

E.O. 12958: N/A

TAGS: ECON EINV EFIN ENRG PGOV KGHG ID

SUBJECT: DAS MARCIEL MEETINGS ON INDONESIA'S ECONOMY,

INVESTMENT CLIMATE

 

REF: A. A) JAKARTA 2069 (NIKE CASE)

     ¶B. B) JAKARTA 2097 (COUNTERFEIT PHARMACEUTICALS)

 

JAKARTA 00002470  001.2 OF 002

 

 

 Â¶1. (SBU) Summary.  EAP Deputy Assistant Secretary Scot

Marciel, during his August 27-28 visit to Jakarta, heard

complaints that Indonesia is not attracting as much

investment as neighbor Vietnam.  Reasons include the

Indonesian government and Parliament's ambivalence towards

foreign companies and punitive actions such as threatening or

jailing foreign business executives during contract disputes.

 Domestic and international companies are often frustrated by

regulations issued without a consultative process.  While

growth is good, a better business climate could improve

investment and infrastructure.  End Summary.

 

Investment Still Sluggish

-------------------------

 

¶2. (SBU) At a working dinner on economic issues, a prominent

businesswoman noted that media stories about Indonesia are

all negative.  The media was suppressed under Soeharto, but

now it publishes bad news, so that is what readers see.

Investors want a sense of security for their potential

investments and read these reports with concern.  One GOI

official believed that growth is fast enough, stating "growth

is already at 6%.  If we grow at 8% we will overheat."  A

member of Parliament (DPR) noted that plenty of short-term

portfolio investment is coming in, but not long-term.

 

¶3. (SBU) On infrastructure projects, Marsillam Simanjuntak, a

Presidential advisor, said that the GOI's policies on

infrastructure are flawed. He asked, "Why do 10,000 MW

electricity projects need a government guarantee?  China,

Japan and EU companies all participated in the tender, but

after China won, it requested a guarantee.  This creates a

discrepancy of trust."  He concluded the GOI has not yet

found a way to balance its legitimate need for power with

"vested interests."  The Commissioner from a state-owned

enterprise said that Indonesia's state-owned sector should be

in the hands of the public, not the government.  Conflicts of

interest cannot be resolved under the current system.

 

¶4. (SBU) DAS Marciel and the Ambassador noted that bad media

stories about Indonesia are discouraging to investors, who

are "waiting to see."  A certain momentum of good news

stories is necessary to attract attention.  The lack of legal

certainty has a chilling effect, such as the GOI appeal of

the Newmont verdict in the Buyat Bay case.  Ongoing IPR

problems also dampen enthusiasm for Indonesia, such as the

GOI's rampant use of pirated Microsoft software and the large

percentage (20-25%) of counterfeit pharmaceuticals.  The

Ambassador said that U.S. company executives here are afraid

of incarceration if they have a contract dispute such as Nike

recently experienced (ref A).  Actions like these could cause

wider harm as investors may consider shutting down all

operations in Indonesia.

 

Business Wants More Consultation with GOI

-----------------------------------------

 

¶5. (SBU) American Chamber of Commerce (AmCham) members are

optimistic about expanding their businesses but still

frustrated at the lack of regulatory consultation. Laws and

regulations are largely being written with no connection to

the reality of the sectors they impact.  Many GOI regulations

are "neither implementable nor enforceable," one

representative of a pharmaceutical company noted.  Several

DPR members also have a streak of economic nationalism with

an attitude towards foreign investors of, "We want your

money, but we don't want you."  "We are expanding, but we

could do more if the environment was easier," the AmCham

President noted.  AmCham said that domestic companies are

equally concerned about the business climate, with legal

uncertainty high on the list.  IPR issues are still a huge

concern.  The biggest raid in history of counterfeit

pharmaceuticals (ref B) is "just the tip of the iceberg."  In

the telecommunications sector, options for U.S. companies are

now only in services not in infrastructure.

 

Economic Advisor - Getting Enough Growth

----------------------------------------

 

JAKARTA 00002470  002.2 OF 002

 

 

 

¶5. (SBU) The Director of the Institute for Social and

Economic Research at the University of Indonesia, Dr. Chatib

Basri, also serves as an advisor to the Economic Cabinet

Ministers and to President Yudhoyono.  Dr. Basri said the

biggest concern to the GOI's economic leaders is whether

growth will be strong enough to create jobs.  There is

conflict between the Ministry of Industry, which seeks

protections, and the Ministry of Trade, which wants a more

open trading policy.  Domestic companies fear competition.

The problem is not the demand side: exports are doing well

and will continue to do so as long as China maintains growth.

 The supply side constraints include transportation and

energy infrastructure: a lack of good roads and adequate

electricity, for example.  Foreign direct investment from the

U.S. is also problematic.  Embassy Econ officers raised the

problems we've had with exploratory discussions on a

Bilateral Investment Treaty and with an updated Overseas

Private Investment Corporation (OPIC) agreement.  Dr. Basri

said that, "Many in the GOI view it as politically negative

to be seen doing deals with the U.S.  Major political players

such as Amien Rais say that everything related to the U.S. is

bad."

 

¶6. (SBU) Dr. Basri said that labor conditions are also

problematic.  After Bolivia and Portugal, Indonesia has the

highest severance rates in the world.  This acts as a kind of

"tax on business" and companies thus prefer to hire temporary

workers.  Labor reform is too politically sensitive to

tackle, however.  Unemployment in the formal sector and

underemployment is still high, but because there is no social

security, "only the rich can afford to be unemployed."  To

alleviate rural poverty, Basri suggested to the President a

kind of employment scheme for rural infrastructure at below

minimum wages in order to attract those truly below the

poverty line into wage-paying jobs.

 

¶7. (SBU) Corruption still contributes to the cost of doing

business but has reduced dramatically: bribes added about

12% to the cost of production in 2001 but fell to 6% in 2005.

 There is not yet a good incentive system for Indonesian

civil service officials to improve their performance, Dr.

Basri noted.  Under Soeharto, the incentive system to

implement the President's priorities was clear: promotion or

jail.  Streamlining government is starting to reduce extra,

corrupt sources of income.  The GOI needs to find a way to

bring in "sweeteners" for motivation, Dr. Basri believes.  In

terms of good civil service internal controls and budget

practices, "We're still with the dinosaurs," Dr. Basri noted.

 Local governments are producing bad regulations because

there is no consultation process or regulatory impact

assessment.  Some are trying to make improvements, however.

One way to promote change may be to support reform-minded

local officials who are moving fastest to improve the

business climate.

 

Biofuels and Climate Change

---------------------------

 

¶8. (SBU) On biofuels, Dr. Basri said that he was, "skeptical

from the Qtset," since the President wanted to use this

program mainly for employment generation.  Dr. Basri believes

an alternative fuel program will not work until the

administered prices for fuel subsidies are fully removed.  In

his view, the program will neither produce an economically

sound product nor will it create jobs in the way the

President originally conceived it.  Dr. Basri was tasked by

the Ministry Finance to draft a paper on climate change for

the UN Framework Conference on Climate Change 13th Conference

of Parties (UNFCCC COP-13) conference in Bali December 3-14.

Embassy will follow up with Dr. Basri to get an advance copy.

 

HUME