US-ASEAN BUSINESS COUNCIL DELEGATION VISITS JAKARTA

UNCLAS SECTION 01 OF 07 JAKARTA 012555

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SUBJECT: US-ASEAN BUSINESS COUNCIL DELEGATION VISITS JAKARTA


1. (SBU) Summary. President Susilo Bambang Yudhoyono (SBY)
told a visiting U.S. ASEAN Business Council (USABC)
delegation on October 12 that he remains optimistic about
Indonesia's economic outlook and committed to economic
reforms and the process of democratization. Vice President
Jusuf Kalla told the group in a separate meeting that the
GOI places a high priority on macroeconomic stability and
security to encourage investment. Coordinating Minister for
Economic Affairs Boediono said the Government's resolve to
improve the investment climate "remains intact and has even
grown stronger" and that "tangible progress" is likely by
the end of 2006 in several areas including the passage of
new customs and investment laws. Minister of Trade Mari
Pangestu said the Government of Indonesia (GOI) is focused
on improving its customs procedures and is working with
Singapore on a Free Trade Zone pilot project in Batam.
Investment Coordinating Board (BKPM) Chairman Mohamed Lutfi
claimed poor regulation of the non-bank financial sector is
holding back Indonesia's economic development. Minister of
Energy and Mineral Resources Purnomo Yusgiantoro described
the GOI's biofuel development initiative, and said the GOI
seeks to develop operational nuclear power plants by 2015.
Coordinating Minister for Political, Legal and Security
Affairs Widodo A.S. said the GOI continues to undertake
judicial reforms and pursue its anti-corruption campaign in
an effort to provide greater legal certainty and contract
sanctity. Minister of State Owned Enterprises Sugiharto
said the GOI wants to consolidate and streamline the current
139 State-Owned Enterprises (SOE) to 85 by 2009, but
acknowledged this task would be politically difficult.
Paragraph 21 reprises the key issues Mission members raised
during their various meetings with the GOI. End Summary.


2. (U) A 41-member USABC delegation visited Jakarta October
9-12 to hold meetings with SBY, Vice President Kalla, and a
number of GOI Ministers and senior officials. In addition
to the ministers cited above, the delegation also met
Finance Minister Sri Mulyani Indrawati, State Minister of
Research and Technology Dr. Kusmayanto Kadiman, and State
Minister for National Development Planning Paskah Suzetta.
At the conclusion of the mission, BKPM Chairman Mohamed
Lutfi and USABC President Matthew Daley signed a Memorandum
of Understanding to promote greater U.S. investment in
Indonesia and closer links between the U.S. and Indonesian
business sectors. A list of companies with representatives
who participated in the mission is in paragraph 22.

President Susilo Bambang Yudhoyono
--------------


3. (SBU) SBY began the October 12 meeting by noting that
many companies represented in the delegation had long
histories in Indonesia and that, in general, U.S. investors
had not abandoned Indonesia during the worst moments of the
Asian Financial Crisis. SBY stressed that he remains
optimistic and committed to economic reform and Indonesia's
democratization. In spite of all the challenges Indonesia
and his government have faced -- such as the tsunami,
earthquakes, terrorist attacks, avian influenza, haze, oil
price increases, and high interest rates -- Indonesia's
macroeconomic indicators continue to improve: exports grew
by 17% in 2005, GDP growth is expected to top 6% in 2007,
the debt-to-GDP ratio could drop to 40% in 2007, and
interest rates and inflation continue to decline. Further,
Indonesia advanced in September 2006 from 69 to 50 on the
World Economic Forum's Global Competitiveness Index rankings
for 2006-7 and the Jakarta Stock Exchange is one of the top
three performers in Asia.


4. (SBU) SBY noted that to encourage greater investment, the
GOI is undertaking major reforms, focusing on infrastructure
development, combating corruption, and creating a special
economic zone on Batam, Bintan and Kariman Islands. He said
the Government's anti-corruption drive has investigated 90
mid-to-high-level officials, including seven governors, 50
regents and vice regents, 10 mayors, and 13 members of the
National Parliament. As a consequence, a "fear factor" is
deterring corrupt practices among many GOI officials. He

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added that democracy, good governance, transparency and
accountability are inextricably linked to economic growth,
job creation and poverty alleviation.


5. (SBU) On energy policy, SBY noted that Indonesia hopes to
add 10,000 megawatts of power generation in the next few
years. He opined that the days of oil prices below $40 per
barrel are likely over, and that as a result, it is
important for Indonesia to explore alternative energy
sources such as biofuels. He felt Indonesia would be
particularly competitive in this area given its wealth of
arable land.

Vice President Kalla
--------------


6. (U) In his October 10 meeting with the group, Vice
President Jusuf Kalla noted that the GOI places a high
priority on macroeconomic stability and security to
encourage investment. He said he hopes that foreign direct
investment (FDI) will bring a multiplier effect to Indonesia
and create more jobs. "We need a lot of growth and
investment to help our 240 million people," he stated.
Indonesia needs more value-added industry in manufacturing,
energy and technology. USABC President Matt Daley said that
some U.S. companies have been taking a fresh look at
Indonesia, along with those which already have a long-term
relationship.

Coordinating Minister for the Economy Boediono
-------------- -


7. (U) Boediono admitted in his October 9 meeting with the
group that the GOI's progress in improving the investment
climate has been mixed since SBY signed Presidential
Instruction 3/2006 in February 2006. Nonetheless, Boediono
said the Government's resolve to improve the investment
climate "remains intact and has even grown stronger" over
the last few months. Boediono said he expects "tangible
progress" by the end of 2006 in several areas including the
passage of a new Customs and Excise Law and a new Investment
Law. However, the passage of the three tax amendments now
before Parliament is much less sure, and Boediono said he
could not even offer "90% assurance" that the three would
pass. Of the three amendments, the draft amendment to the
Law on Tax Administration is the most important because it
would establish a new relationship between tax officials and
taxpayers, including the business community. Boediono said
he hoped at least one of the three tax bills would pass in
2006 and be operational in 2007.


8. (U) Improving Indonesia's labor regime is the most
difficult investment climate issue the GOI faces, Boediono
acknowledged. The issue is politically sensitive, and after
consultations with stakeholders, the GOI has decided not to
seek changes to Indonesia's labor law "this year or even
next year." Rather, the GOI will look into the possibility
of improving the labor climate through changes in
regulations. "There are a number of areas where we could
adjust regulations," Boediono said. The GOI is also
committed to cutting processing times for investors at the
national and local level. A number of regency or city
governments in Central Java, Kalimantan, Bali, and other
areas have established "one-roof" or integrated service
centers for investors, and the Government's Special Economic
Zone (SEZ) strategy is also aimed at simplifying approvals
in designated areas. Batam serves as the pilot project for
the GOI's SEZ strategy, and Singapore is helping Indonesia
in three areas: improving the regulatory climate through
feedback from investors and identifying on-the-ground
problems; raising Indonesia's capacity to manage SEZs; and
raising the level of vocational training.


9. (SBU) Boediono also offered some details on the GOI's
efforts to reform the bureaucracy. He told the group SBY
has appointed a small team or "Presidential Delivery Unit"
to be attached to the Office of the Presidency. The team
will help the President monitor and accelerate reforms in a

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number of important policy areas, including the investment
climate, bureaucratic reform, state-owned enterprises, and
legal reform. The team is "good for Ministers like us",
Boediono noted because it will increase the GOI's capacity
to develop and implement reform measures. Boediono
concluded by thanking the delegates for the support of U.S.
business in Indonesia. "Democracy requires patience," he
noted, and "quick, decisive, radical change is not possible.
We can't push laws through like we could 10 or 20 years
ago," but rather need to go through lengthy consultations
with Parliament. But the Government is persistent, patient,
and committed to reform.

Trade Minister Mari Pangestu
--------------


10. (SBU) Minister of Trade Mari Pangestu told the USABC
delegation on October 9 that she was hopeful that Indonesia
would be removed from the IPR Special 301 Priority Watch
List during the current Out of Cycle Review. The newly
formed ministerial-level National IPR Task Force is
developing a national plan of action. The greatest
challenges will be sustaining enforcement and creating
greater public awareness about the importance of IPR.
Pangestu welcomed the USABC's decision to conduct a study of
non-tariff barriers in Indonesia and noted that Indonesian
businesses and exporters, particularly in the agricultural
sector, need capacity building and support to better
understand and meet U.S. import standards. She added that
Indonesia was currently Chair of the ASEAN Auto Sector
Committee and that the GOI should prioritize the sector
since it was one of the few vertically integrated sectors in
Indonesia.


11. (SBU) Pangestu noted that the GOI continues to have
Economic Partnership Agreement talks with Japan in which the
two countries are addressing many issues similar to those
that arise in the GOI's trade discussions with the U.S.
Although Pangestu said she did not expect Indonesia and the
U.S. to pursue a free trade agreement anytime soon, regular
Trade and Investment Framework Agreement (TIFA) talks are
gradually addressing issues that could be roadblocks to a
future FTA. She noted Indonesia is actively pursuing a
bilateral trade agreement with Australia and that both
countries are currently working on a joint study of the
costs and benefits of free trade.

BKPM Chairman Mohammad Lutfi
--------------


12. (SBU) During their October 10 meeting, Investment
Coordinating Board (BKPM) Chairman Mohamed Lutfi informed
the delegation that U.S. investments in Indonesia amounted
to $7 billion between January 1990 and June 2006 and
included 342 projects. In the first half of 2006, however,
U.S. investors started only 22 new projects worth $28
million, compared to 27 projects worth $58 million for the
same period in 2005. Lutfi noted that U.S. investors have
traditionally found the mining sector attractive, but that
interest in that sector has diminished significantly due to
regulatory and legal uncertainties.


13. (SBU) Lutfi said he remains very optimistic about
Indonesia's ability, for three reasons:

--the Government's emphasis on infrastructure development,
including plans to add 13,000 megawatts of power generation
with investments of $6 billion;

--the country's large population of 220 million, with some
18 million members of a rapidly expanding middle class; and

--remarkable natural resources.


14. (SBU) Lutfi admitted that Indonesia needs to learn to
rely less on exporting raw resources while making a gradual
transition to a knowledge-based economy. In the short term,
though, it should take great advantage of its wealth of

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natural resources and unusually high commodity prices.
Lutfi claimed that Indonesia's weak economy is largely due
to poor financial market regulation in the aftermath of the
Asian Financial Crisis. He specifically decried GOI
decisions to leave the regulation of non-bank financial
institutions to the Ministry of Finance. Lutfi noted that
Indonesia's loan-to-deposit ratio was only 53% in 2005,
compared to 136% for Malaysia, 102% for Singapore, and 109%
for Hong Kong. He lamented that out of Indonesia's 18
million strong middle class, only 300,000 invest in the
country's stock markets. With proper regulatory
supervision, Lutfi felt Indonesian markets could triple
their current capitalization.

Energy Minister Purnomo Yusgiantoro
--------------


15. (SBU) Minister of Energy and Mineral Resources Purnomo
said the Government hopes Parliament will finish new laws on
energy, mining and mineral resources in the next two years.
"We have 86.9 billion barrels equivalent of oil and gas
resources we wish to convert to reserves," he noted. Most
of Indonesia's coal reserves are in Kalimantan where there
is little infrastructure, but Chinese investment is helping
build railways to transport coal. The GOI also seeks to
develop operational nuclear power plants for electricity
production by 2015, and seeks cooperation on nuclear energy
with France, Japan, South Korea and the U.S. Purnomo noted
that only 55% of Indonesia is electrified, leaving millions
without power. The GOI plans to take on the challenge of
rural electrification with a small, $400 million budget,
leaving larger, more attractive projects for public-private
partnerships.


16. (U) Purnomo said the GOI hopes to send a team to the
U.S. to discuss energy issues with private industry as well
as the U.S. Department of Energy, and the USABC offered to
help set up meetings. With regard to the electricity law,
Purnomo noted that the GOI seeks to avoid the errors of
places such as California, learning from others to create a
suitable set of energy policies for all sectors. On
biofuels, the GOI would like to develop biodiesel and
ethanol from palm oil, cassava, and sugar cane. Indonesia
already has 180 gas stations which can distribute biofuels,
but not enough stock to meet the demand. Purnomo said the
GOI wants this program on the fast track to start in 2007.

Coordinating Minister Widodo
--------------


17. (SBU) Coordinating Minister for Political, Legal and
Security Affairs Widodo told the delegation on October 12
that political, legal and security stability have a direct
influence on investment and economic development. He noted
that the process of democratization in Indonesia is "noisy,"
but that it is leading to a more responsible, transparent,
and accountable government. Widodo said the GOI continues
to undertake judicial reforms and pursue its anti-corruption
campaign in an effort to provide greater legal certainty and
contract sanctity. He also highlighted recent positive
developments in Aceh and Papua, and the GOI's "undeterred"
efforts to combat terrorism.

State Minister for State-Owned Enterprises Sugiharto
-------------- --------------


18. (U) In his October 9 session with the group, Sugiharto
stressed the importance of consolidating and streamlining
the current 139 State-Owned Enterprises (SOE) to 85 by 2009.
The two factors driving this reform are the public demand
for transparency, and the need to raise standards of
efficiency and good corporate governance in the SOE sector.
Sugiharto noted candidly that his task is more challenging
because of the political sensitivities attached to most
SOEs. In addition, SOEs have a mandate to perform public
service obligations (PSO) in various sectors, such as postal
service, and to do so at a profit. He acknowledged that
from a purely business standpoint, decisions on reform and

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privatization would be 'very simple', because the top 10% of
SOEs produce 90% of overall profits, while the bottom 10%
are responsible for 90% of all losses. He commented that
the Government's decision to repay Indonesia's IMF debt
early demonstrates its commitment to enhancing the country's
credit rating. Sugiharto also noted that state electricity
company PLN's recent $1 billion dollar bond sale played a
key role in raising funds to boost infrastructure and power
generation capacity.


19. (U) Sugiharto also commented on financially beleaguered
national airline Garuda Indonesia. He said the GOI would
"politically salvage" Garuda in 2006 with injections of up
to Rp 500 billion (US $55 million). As a market policy, the
GOI "could privatize Garuda." However, the preferred,
politically acceptable alternative would be to find a
strategic partner to purchase a minority equity share,
coupled with a management agreement.

National Planning Ministry (BAPPENAS)
--------------


20. (U) In a meeting with the State Ministry for National
Development Planning (BAPPENAS),Ministry officials noted
Indonesia's need to expand its infrastructure capacity,
especially for transportation and telecommunications. A top
priority is to create a rail link from Jakarta's main
commercial airport, Soekarno-Hatta, to the city. The GOI
prefers soft loans with interest rates of 3.5% or less from
foreign investors to assist with these projects. BAPPENAS
also has a plan to increase Indonesia's information
communication technology (ICT) capacity. The plan includes
policy and regulatory reform, building capacity in rural
areas, and restructuring of the Ministry of Information
itself.

Ministry of Health
--------------


21. (SBU) Director General for Pharmaceutical and Medical
Equipment Dr. Richard Pandjaitan described on October 10 the
international concern over the possibility of an avian
influenza (AI) pandemic. Dr. Santosos Soeroso, Director of
Sulianti Saroso Infectious Hospital (an AI referral
hospital) then reported on the GOI's national AI control
strategies and on the formation of the National Committee on
Avian Influenza Management and Pandemic Alert. Soeroso
noted that Indonesia's mortality rate from avian influenza
is the highest in the world (75%) because most patients do
not seek medical attention until they are in advanced stages
of pneumonia and respiratory distress. Soeroso reported
that the GOI will expand avian influenza referral hospitals
from 44 to 100. (Note: Despite Soeroso's claim, MOH has
rejected requests from the Mission's NQal Medical Research
Unit (NAMRU-2) to expand its AI surveillance referral
hospital network.)

Key Issues Raised
-------------- Q --------------


22. (SBU) USABC delegation members raised a number of
economic policy issues or doing-business problems in the
group's meetings:

--Auto Luxury Taxes: A Ford Motor Company representative
noted that Indonesia has exceptional potential as an auto
producer. However, the country's luxury tax system remains
a serious obstacle because it distorts the market. Ford
would like to see the elimination of luxury tax distinctions
based on body type (sedan vs. non-sedan) and fuel (diesel
vs. gas),with overall lower luxury tax rates. The longer
term vision would be to move to a system based on the
purchase price of cars. VP Kalla noted that the luxury tax
system was set up for historical reasons to encourage public
transportation and create an incentive for commercial
vehicles, but now there is improved engine efficiency and
less difference between the price of diesel and gas.
Boediono said it is very important to develop Indonesia as

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an auto export base, and said he would ask the Ministry of
Finance to look into the issue. He noted that Ford's
presentation "seems to make sense," and that some of the
distinctions in luxury tax rates have been in place for
decades and are "no longer quite relevant."

--Biotech Crops: A Monsanto representative encouraged a
change in regulations to facilitate the use of biotech crops
to improve farm productivity and overall growth, noting the
success of these in India, China, Australia and Philippines.
Kalla said he appreciated the help of companies such as
Monsanto in increasing yields and reducing poverty.

--Health Care as an Economic Driver: A representative of
Johnson and Johnson inquired about the potential for health
care as a business driver in Indonesia, noting Singapore and
Thailand's success with medical tourism. VP Kalla said
there are now more private than public hospitals in
Indonesia, though the overall density is still low. There
is an insufficient number of doctors and those available are
working too hard and too long. This sector needs to grow,
Kalla concluded.

--Caps on Media/Entertainment Investment: A Time Warner
representative noted that "good content drives growth" in
the information technology sector, and that media and
entertainment companies are interested in Indonesia,
however, they are restricted by the 20% cap on foreign
participation and are not allowed to establish fully owned
distributors of video products. An effective, arms-length
broadcasting regulator is also important, the representative
stated, the representative noted, and encouraged the GOI to
establish a level playing field between international and
domestic companies. VP Kalla responded that this issue is
complex, and requires a longer discussion. Boediono said
the issue is sensitive politically, and that the GOI wants
to benchmark Indonesia's policies to international
developments.

--Sugar Import Tariffs: A Coca Cola representative said his
company wants to see the Minister of Finance extend her
decree reducing import duties on sugar since the domestic
sugar industry does not need tariff protection. VP Kalla
said the objective is to create harmony between producer and
consumer. Boediono said the Ministries of Agriculture and
Industry have staked out opposing positions on the issue
that the GOI is trying to resolve.

--Health Care Issues: In response to a question about
Indonesia's priority training needs in the health care
sector, Dr. Hardiman from the Health Ministry noted that
Indonesia only has one cardiac care center located in
Jakarta and needs additional centers on Sumatra and
Kalimantan. Hardiman noted training in pediatric cardiology
is also an urgent priority. Another USABC delegate noted
Indonesia has a large number of hospitals and local health
clinics, and suggested that the GOI consider developing
expertise in the manufacturing of medical devices and
medical equipment.

--Express Delivery Services: A UPS representative
encouraged Indonesia to "level the playing field" by
permitting 100 percent foreign ownership and ending the
postal service monopoly on express delivery services. She
also raised concerns about a new draft postal law currently
circulating inside the GOI and the effects it might have on
the flow of goods in and out of Indonesia. In response,
Pangestu said that the GOI is making improvements to the
country's logistics a priority. As part of this effort, the
GOI is cooperating with Singapore in launching an ASEAN
green-line program and establishing a customs single window
pilot project in Batam. Sugiharto said the postal service
has a public service obligation, and must work within the
constraints of that mandate. At the same time, the postal
service must become profitable while still servicing remote
parts of Indonesia.

--Locomotives Upgrade: A General Electric (GE)

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representative noted that rail is a vital transport option
in Indonesia, and stated his company's interest in replacing
the aging locomotives of Java's train system with newer,
more efficient models. About 20-30% of the contact could be
produced in Indonesia, creating jobs. VP Kalla said he
appreciates GE's production facilities in Java and said the
Ministry of Transportation is also studying how to increase
rail capacity in Sumatra and Kalimantan as well as in Java.
Sugiharto agreed that the Indonesian fleet of locomotives
needs immediate upgrade.

--Automobile Fuel Standards: A Ford representative asked
that Indonesia move more rapidly toward nationwide mandated
sale of high quality diesel and unleaded fuels. Such
nationwide availability of cleaner high quality fuels would
lead to cleaner air and address the concerns of consumers
owning cars with emission controls. The Ford representative
also urged standardization of biodiesel and bioethanol so
that vehicle suppliers could supply compatible engines. A
MEMR official noted that the GOI has already created a
standard for biodiesel and is now preparing one for
bioethanol.

--IPP Project in Sumatra: A representative of Virginia-based
AES discussed his company's proposal to develop a 1200
megawatt coal-fired power facility in South Sumatra, in
consortium with Japanese and Indonesian companies. AES
asked for the GOI's support in fast-tracking the project.
The largest constraint is the lack of transmission lines to
bring power from the generating site to West Java. Boediono
noted that Indonesia's need for power is huge, and that the
country is already feeling the early signs of shortages.
Moving forward with Independent Power Producer (IPP)
projects remains the GOI's preferred means for generating
more power, but the urgency of the situation requires PLN to
fill the gap between 2007 and 2010 with its 10,000 megawatt
"crash program." The Government had a bad experience with
IPPs in the past, and wants to replicate successful models.
Sugiharto agreed the AES project must be completed within
three years to meet growing power demands in Java, and that
the government was committed to "quick action" to encourage
IPPs.

Delegation Members
--------------


23. (U) Representatives from the following companies
participated in the USABC mission:

- Exxon Mobil
- Freeport McMoRan Copper & Gold, Inc.
- AES Transpower
- Cargill, Inc.
- Chevron
- PT Coca-Cola Indonesia
- Conoco-Phillips
- Ford Motor Company
- General Electric Company
- JHPIEGO (An international health organization affiliated
with Johns Hopkins University)
- Johnson and Johnson
- Marathon Oil
- McDermott
- Microsoft Corporation
- Monsanto Company
- Oracle Corporation
- PT HM Sampoerna Tbk
- Star TV (News Corporation)
- Time Warner, Inc.
- United Parcel Service

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