Identifier
Created
Classification
Origin
06JAKARTA3563
2006-03-20 09:29:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Jakarta
Cable title:  

INDONESIA - GOI UNVEILS INVESTMENT CLIMATE PACKAGE

Tags:  EINV ECON EFIN ID 
pdf how-to read a cable
VZCZCXRO4703
PP RUEHCHI RUEHDT RUEHHM
DE RUEHJA #3563/01 0790929
ZNR UUUUU ZZH
P 200929Z MAR 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1353
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHKO/AMEMBASSY TOKYO 9704
RUEHBJ/AMEMBASSY BEIJING 3338
RUEHBY/AMEMBASSY CANBERRA 9235
RUEHUL/AMEMBASSY SEOUL 3628
UNCLAS SECTION 01 OF 05 JAKARTA 003563 

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR EAP/MTS AND EB/IFD/OIA
TREASURY FOR OASIA-JEWELL
USDOC FOR WGOLIKE/4430 AND JBENDER
DEPT PASS TO USTR DKATZ AND WEISEL

E.O. 12598: N/A
TAGS: EINV ECON EFIN ID
SUBJECT: INDONESIA - GOI UNVEILS INVESTMENT CLIMATE PACKAGE

REF A) Jakarta 2315 (GOI Readies Investment Package)
B) 05 Jakarta 8877 (June 2005 CGI Meeting)
C) Jakarta 2984 (Infrastructure Plan)
D) 05 Jakarta 13579 (September 2005 CGI Meeting)

UNCLAS SECTION 01 OF 05 JAKARTA 003563

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR EAP/MTS AND EB/IFD/OIA
TREASURY FOR OASIA-JEWELL
USDOC FOR WGOLIKE/4430 AND JBENDER
DEPT PASS TO USTR DKATZ AND WEISEL

E.O. 12598: N/A
TAGS: EINV ECON EFIN ID
SUBJECT: INDONESIA - GOI UNVEILS INVESTMENT CLIMATE PACKAGE

REF A) Jakarta 2315 (GOI Readies Investment Package)
B) 05 Jakarta 8877 (June 2005 CGI Meeting)
C) Jakarta 2984 (Infrastructure Plan)
D) 05 Jakarta 13579 (September 2005 CGI Meeting)


1. (U) Summary: Coordinating Minister for Economic Affairs
Boediono and Trade Minister Mari Pangestu outlined the GOI's
February 27 investment climate policy package at a March 10
meeting of the Consultative Group on Indonesia's (CGI)
Investment Climate Working Group (ICWG). ICWG members
welcomed the regulatory and institutional reforms and target
dates, and commended the GOI for consulting closely with the
business community and other stakeholders. They also noted
that continuing a dialogue with business and monitoring the
content of planned reforms would provide the key to
implementing the package. Pangestu said the GOI would create
its own internal implementation monitoring team led by the
Coordinating Ministry of the Economy, as well as an external
team with representatives from various business chambers.
She outlined reforms underway to the Ministry of Justice's
company registration process to reduce the number of days it
takes to start a business. Pangestu reaffirmed that as part
of the regulations implementing a new Investment Law, the
GOI would move to a registration system for investments in
those sectors open without conditions. Researchers from the
University of Indonesia's Institute for Economic and Social
Research (LPEM) presented results from its second business
climate survey showing a gradual improvement in the
investment climate, although taxes, customs, labor and
macroeconomic instability remain significant challenges.
Although the survey resulted largely positive, BKPM Chair
Lutfi chided the LPEM researchers for failing to "hear both
sides." Boediono listed the seven "marquee" power plant and
toll road projects it hopes to fast-track in 2006. End
Summary.

Economic Team Discusses Investment Policy Package
-------------- --------------


2. (U) On March 10, Coordinating Minister for Economic
Affairs Boediono, Trade Minister Mari Pangestu, Finance

Minister Sri Mulyani, Minister of Public Works Djoko
Kirmanto, and Investment Coordinating Board (BKPM) Chairman
Muhammad Lutfi briefed the ICWG on the GOI's March 2
investment climate policy package and infrastructure
development plans. The investment climate package sets out
an 85-item matrix of regulatory and institutional reforms
the GOI plans to take in 2006, along with a target date for
completion of each measure and the responsible ministry. The
package focuses on five areas: general investment policies;
customs, excise and duties policies; taxation; labor; and
small and medium sized enterprises. Over the past 18
months, the ICWG and international business community have
consistently identified the first four of these areas as
major obstacles for attracting greater investment. The
package includes measures of significant interest to the
business community and investors, including:

-- Submission of a draft investment law to Parliament by the
end of March 2006 that would unify Indonesia's separate laws
for foreign and domestic investors and provide traditional
investment protections including national treatment, the
right to repatriation of profits, and a guarantee against
nationalization.

--Implementing Regulations for Investment Law: The GOI will
prepare revisions to several implementing regulations that
it will issue no later than the date Parliament approves the
new investment law. These will include a revised Government
Regulation that will set out "clear, simple, and
transparent" criteria for the negative list; revisions to
Government Regulation 25 on the responsibilities of local
governments in the area of investment; and regulations
reducing the number of days needed to establish a business
(Ministry of Trade).

-- Submission to Parliament of revisions to Manpower Law
(No. 12/2003) by the end of April 2006 addressing business
community concerns about the cost of dismissing workers,
outsourcing and expatriate work permits (Ministry of

JAKARTA 00003563 002 OF 005


Manpower and Transmigration).

-- Revitalization of a National Team for the Enhancement of
Exports and Investment (PEPI) by the end of March 2006 to
better coordinate investment policies and help solve high
profile investment disputes (Coordinating Ministry for the
Economy).

-- Acceleration of customs processing by June 2006 to 30
minutes for the green lane and 3 days for the red lane, and
reduction of the use of the red lane to just 10 percent by
December (Ministry of Finance).

-- A decision by the end of March 2006 on whether to
withdraw amendments to three tax laws submitted to
Parliament last year (Ministry of Finance).

-- Establishment of tax facilities for certain business
sectors by the end of June 2006, and revisions to rules and
regulations on value added taxes (VAT) to coincide with
passage of a package of amended tax laws (Ministry of
Finance).


3. (U) Trade Minister Marie Pangestu said that the new
investment policy package demonstrated the GOI's commitment
to a steady process of reform. Although the package
contains a number of reforms promised since last year,
Pangestu said that it remained a significant step because it
establishes clearly which ministry has responsibility for
which reforms and by what date. She said the package had
three broad thrusts: creating a new investment
infrastructure, improving tax and labor laws and
regulations, and reinvigorating PEPI to better coordinate
policy and resolve critical issues as they arise. Pangestu
said the GOI knows of the business community's growing
concern that the Government continues to say all the right
things, but fails to execute.

ICWG Members Praise the Package
--------------


4. (SBU) A number of ICWG members praised the
comprehensiveness of the package, and complemented the GOI
for consulting closely with the business community and other
stakeholders as it developed the package. They encouraged
the GOI to focus on implementation. In his remarks, the
Ambassador emphasized that with so many reforms planned over
the next year, the GOI will face a major challenge
monitoring the content of proposed measures, including
establishing a mechanism to seek comments on draft
regulations from stakeholders. He urged the GOI to continue
close cooperation with the business community and other
stakeholders. The Ambassador welcomed the GOI's focus on
reducing the number of days needed to start a business from
151 to 30 days, which he noted has become a symbol of
Indonesia's determination to improve the investment climate.
He added that President Yudhoyono's pledge to move from an
investment approval to an investment registration system
provides another important symbol for investors; he asked
Pangestu how the GOI planned to move forward on this issue.
(Note: The package does not refer explicitly to this
issue.)


5. (SBU) World Bank Country Representative Andrew Steer
described the GOI's February investment and infrastructure
policy packages as comprehensive documents and major
milestones, especially in light of real political
challenges. Steer said he saw the GOI leadership as serious
about pursuing the investment climate reforms and remained
optimistic that implementation of the package will prove
successful. Steer expressed less confidence about the GOI's
ability to meet the broad commitments in its recent
infrastructure package. Steer agreed with Ambassador
Pascoe's emphasis on implementation, and recommended that
the GOI provide monthly progress reports.


6. (SBU) American Chamber of Commerce (AmCham) President
James Castle described as unprecedented the level of
cooperation between the Indonesian Chamber of Commerce and
Industry (KADIN) and international chambers, with support

JAKARTA 00003563 003 OF 005


from embassies. He said the Yudhoyono Administration
differs from its predecessors in that, despite some
criticism, it has avoided becoming defensive and remained
open to input and frank discussion. The Japanese, EU,
Netherlands and Korean Ambassador's also urged close GOI
consultation with the business community and other
stakeholders throughout the implementation process. The UK
Ambassador asked about GOI risk sharing and guarantees for
infrastructure.

GOI to Establish Two Monitoring Teams
--------------


7. (U) Pangestu explained that the Presidential Instruction
3/2006 directs the Coordinating Ministry for Economic
Affairs to establish two teams to monitor implementation of
the investment and infrastructure policy packages. Jannes
Hutagalung, Staff Expert at the Coordinating Ministry for
the Economy will head an internal GOI team under the
framework of the PEPI to report whether responsible
Ministries implement measures on time, and produce a monthly
report that Pangestu said could go outside the GOI. Pangestu
noted the GOI currently still sought a credible chairman for
the second team, which would monitor the content of reforms
as well as their effectiveness, and would consist of
officials from the GOI, KADIN and representatives from other
professional associations. .

GOI Eyes Cuts in Days to Start a Business
--------------


8. (U) Pangestu said the GOI has finalized its draft of the
new investment law, which the State Secretariat has begun
processing prior to delivery to Parliament before the end of
March. The new law and its accompanying regulations will
establish new investment procedures and reduce the time
needed to establish a business. In response to the
Ambassador's question about the planned shift to an
investment registration system, Pangestu said that under the
new rules, an investor in a sector not closed or subject to
certain conditions could begin working immediately to
establish a legal business entity through the Ministry of
Justice and Human Rights (MOJ) and to obtain technical,
location and other licenses.


9. (U) Pangestu explained that the MOJ business
establishment process currently consumes about half (75
days) of the 151 days required to start a business in
Indonesia. A recent survey, however, showed that the MOJ
already has reduced the time needed for business
establishment to 30 days. The GOI expects to reduce this to
five days by moving the process online and delegating more
authority to district level MOJ offices. After the MOJ
issues required establishment papers to new businesses, the
state gazette would record and publish a list of established
companies.


10. (U) Depending on the project, Pangestu noted that
investors might yet need some central government technical
licenses or approvals. All other licenses and approvals
would fall to district governments. Pangestu said 15
districts have integrated service centers offering all types
of licenses and permits to establish a business. She
reaffirmed the GOI's goal of reducing the time to start a
business from 151 to "around 30 days." Pangestu and BKPM
Chair Lutfi said the BKPM has reduced the time needed for
businesses to obtain initial BKPM approval to five days.

Business Climate Survey Shows Some Progress
--------------


11. (U) Dr. Ari Kuncoro of the University of Indonesia's
LPEM presented the LPEM's second World Bank-funded
investment climate business survey (LPEM presented the first
survey to the June 2005 ICWG meeting). The survey of 500
manufacturing firms in five cities showed improvements in
the overall investment climate, but with persistent problems
in taxes, customs and labor. Key results include:

-- Firms' perceptions of the investment climate improved

JAKARTA 00003563 004 OF 005


from 2003 to the end of 2005.

-- Businesses must file seven types of tax returns and
devote 41 worker days each month to this, down from 44 days
in mid-2005. "Harassment visits" by local authorities and
informal payments demanded dropped significantly between the
first and second survey, but firms still receive an average
of 15 visits by local officials every 6 months.

-- Public Utilities improved slightly, with a small decline
in brownouts and water utility problems, but no decline in
blackouts or telephone failures.

-- Strikes declined, demonstrations remained the same, and
few firms reported labor disputes.

-- No significant improvement in the number of days to clear
imported goods through customs since a 2004 survey by the
Japan International Cooperation Agency (JICA). Some 85
percent of respondents said they must make informal payments
to get customs clearance, up from 81 percent in mid-2005.
These payments average one percent of the import value of
goods, with half paid to customs officials.

-- Fifty-seven percent of respondents reported making
unofficial payments to tax officials to obtain value added
tax (VAT) refunds, the same percent as in the first round of
the survey. Respondents reported the time it took to obtain
a VAT refund increased from 5.2 months in mid-2005 to 6.1
months now. On average, 84 percent of VAT claims get
refunded, down from 88 percent in mid-2005.

-- Road quality remains the biggest infrastructure problem,
with 22 percent of respondents claiming that travel time has
increased, and 10 percent claiming it has decreased.

-- Thirty-one percent of respondents said current labor
regulations reduce competitiveness, with severance pay and
lay-off procedures cited as the biggest obstacles. Although
wage disputes increased between the first and second half of
2005, strikes and labor disputes declined.

-- BKPM approval time improved from 36 days in first survey
to 20 days in the second. This figure does not include the
time needed to correct and resubmit forms the BKPM deems
incomplete. Respondents indicated that on average the BKPM
rejects applications twice before it deems them acceptable.
The survey also noted that BKPM often requests changes to
information, such as increasing the amount of capital
invested or changing the shareholding structure, and that
many rules or policies remain unclear, including the minimal
capital investment.

BKPM Head Lutfi Reacts Strongly to Survey
--------------


12. (U) Minister of Finance Sri Mulyani complimented LPEM's
efforts and noted that the survey results helped the GOI
identify real underlying problems. The Minister agreed that
the customs and tax offices, both under her Ministry, had
the biggest problem areas and should remain a focus of
reform efforts. On VAT, she noted that when Minister
Boediono had served as Finance Minister the GOI reduced the
time it took to obtain VAT refunds from twelve to two
months. This came with a cost, however, as the number of
fraudulent claims increased dramatically. To address VAT
problems, Sri Mulyani said the Director Generals of Tax and
Customs will seek to establish better information sharing
with the business community and a customs single window
system. She asked that the business community support these
efforts and maintain realistic expectations. Lastly, she
noted that the LPEM data provided her ammunition to push the
Director Generals to do more.


13. (U) BKPM Chairman Lutfi reacted defensively. He denied
an LPEM finding that the BKPM, without notifying the public,
had discontinued processing applications for foreign
investments below USD 250,000, and cited several examples of
BKPM approvals below this amount. He defended delays caused
when investors have to correct and resubmit their

JAKARTA 00003563 005 OF 005


applications, noting that a "driver's license application is
not complete without an attached photo." He said mistakes
remain common because some companies use inexperienced
attorneys, couriers or even office boys to submit
applications. Lutfi, however, acknowledged the existence of
room for improvement, and vowed that the BKPM would try
harder. Speaking immediately after Lutfi, Coordinating
Minister Boediono welcomed Lutfi's remarks as "well taken,
especially the promise to try harder."

Boediono Gives New Details on Infrastructure Package
-------------- --------------


14. (U) Boediono provided details on the GOI's February 17
infrastructure policy package. He said that Vice President
Kalla would have a major role in its implementation, since
the Vice President has a "passion for getting things done."
He presented a power point slide listing one power plant and
six toll road "marquee" projects that the GOI would
accelerate to show investors its determination to move
forward. Boediono declined to offer details on plans for
risk sharing on infrastructure projects, noting only that
the GOI favored setting aside a portion of the budget to
serve as a contingency fund to back up GOI guarantees or
contingent liabilities.

Comment:
--------------


15. (SBU) With the announcement of these policy packages,
Boediono has laid out a detailed and ambitious work plan for

2006. The basic hope behind the time-bound, matrix-based
approach remains public and business pressure to encourage
line ministries to deliver promised reforms. In contrast to
the Megawati Administration's 2003 "White Paper," this time
the GOI plans a more robust monitoring effort including
consultation with the private sector and other stakeholders.
We anticipate difficult battles, and the GOI will need help
from the business community to keep its investment climate
reforms on track. PASCOE