A/S HILL DISCUSSES REFORM WITH FINANCE MINISTER AND

UNCLAS SECTION 01 OF 02 JAKARTA 004136

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EAP/MTS AND EB/IFD/OIA
TREASURY FOR IA--AJEWELL

E.O. 12598: N/A
TAGS: EINV EFIN PGOV ID
SUBJECT: A/S HILL DISCUSSES REFORM WITH FINANCE MINISTER AND
AMCHAM



1. (SBU) Summary: Minister of Finance Sri Mulyani told
Assistant Secretary Christopher Hill on March 3 that people
are expecting more results from President Susilo Bambang
Yudhoyono's (SBY) Administration in its second year,
particularly in making the bureaucracy more responsible and
efficient. She expressed concern that some provincial
governments are holding on to central government budget
allocations instead of spending them on improved social
services. Mulyani also noted that Indonesia's legacy of
corruption presents major obstacles, particularly in the
area of tax reform. In a separate meeting, AmCham members
told A/S Hill that SBY has set out a good economic reform
program and is making progress, albeit at a slow pace. They
claimed that the political inexperience of SBY's economic
team, and strong nationalistic interests within Parliament,
require the President to take a cautious approach to reform.
AmCham members said that existing American investments are
not leaving Indonesia, but labor and judicial concerns
remain a constant worry and deter new investment. At the
same time, Chinese companies continue to expand investments
in Indonesia's oil, gas and power sectors. End Summary.

Sri Mulyani: The People Want Results Now
--------------


2. (SBU) Mulyani said that now that SBY has been in office
for more than a year, people are very keen to see results.
She noted that growth has slowed due to higher inflation
from last year's fuel price hikes, but remains strong. The
economy has stabilized, but now the GOI needs to go deeper
into structural reforms to make the bureaucracy more
responsive and efficient. "We are living with the painful
legacy of past corruption," she said. Mulyani noted she has
taken strong steps against abuse by tax officials, telling
them they will be opened up to monitoring and scrutiny. "No
more forgiveness, no more godfather protection," she said.


3. (SBU) A/S Hill praised the GOI for setting out a solid
economic policy framework and taking several bold decisions
over the past year, including the October 2005 fuel subsidy
cuts. However, he added that the U.S. business community
remains concerned about investment climate issues, including
uncertainty about tax, labor and judicial reforms. A/S Hill
commented that outlining "known consequences" to officials
engaged in corrupt activities can be a powerful tool.


4. (SBU) Ambassador Pascoe noted that one of Mulyani's early
successes was getting budget allocations sent to provicial
governments on time (January 2),after multi-month delays
last year. Mulyani said that despite the allocations, she
is watching spending because some localities are holding
onto their money instead of using it for improved social
services. On the labor issue, Mulyani said that
manufacturing could no longer be a growth engine for
Indonesia since it is now competing with China and Vietnam.
Rather than focusing on manufacturing, the GOI is looking
for new ideas to promote the underdeveloped services sector,
as well as agribusiness. Former President Suharto handled
mining and mineral policy poorly, she added, so the sector
is suffering from tensions. There is an urgent need for a
new strategy for responsible natural resources development.


5. (SBU) A/S Hill noted that despite the considerable press
attention to India, Secretary Rice's visit would help
highlight Indonesia. Mulyani said that her two basic
messages for the Secretary would be that on internal
matters, Indonesia "is on the right path to reform." But
pushing reforms forward can be fatiguing, and sometimes it
seems that "corruption" is the only label in town. On
external issues Mulyani said Indonesia needs support.
"Though we are not yet achieving strong results, we'd like a
pat on the back that we are maintaining momentum on change
in the right direction. We need support, not criticism. If
Dr. Rice can make supportive statements, that would be
great," she said.

AmCham Governors: Reforms on the Right Track
--------------


6. (SBU) American Chamber of Commerce Board of Governors
members told A/S Hill that President Yudhoyono is a savvy
but cautious leader, who is moving in the right direction

JAKARTA 00004136 002 OF 002


with a solid economic reform program. However, his economic
ministers, while technically competent, tend to lack
"political maturity." Nationalistic interests with their
supporters in politics often undermine reform efforts.
Within this dynamic, SBY prefers to postpone difficult
policy decisions until the Indonesian public expects a
change and perceives SBY has no other choice, and SBY has an
opportunity to reach accommodation with his political
opponents. On the whole, Board members felt the President's
approach is producing good results, albeit at a pace slower
than most investors would like. They noted that SBY's
success in raising fuel prices 126 percent in October 2005
was emblematic of this approach, and it stood in stark
contrast to former President Megawati's failed attempt to
raise fuel prices in early 2003 by a much smaller amount.
Some Board members did wonder, though, whether SBY could
maintain forward momentum.


7. (SBU) AmCham Board members said that most American
companies maintained their investments in Indonesia during
and after the financial crisis, and those that stayed put
have typically earned good profits over the past four years.
But persistent business and investment climate issues
continue to worry existing investors and deter significant
new investment, with labor and judicial concerns posing the
greatest risks to foreign investors. Under Indonesia's
labor law, foreign firms must maintain bank deposits to
cover the possible cost of severance payments for all their
employees, and it is almost impossible to dismiss employees
unless they have committed a crime and police bring criminal
charges against them. Furthermore, Indonesia's weak
judicial system provides little guarantee of sanctity of
contract. Frivolous cases remain a real threat, including
those resulting in criminal charges against heads of foreign
companies (i.e.: Newmont Mining and Manulife Insurance).


8. (SBU) The Ambassador commented that the SBY
Administration inherited the Newmont case and had
miscalculated by entrusting the courts to quickly dismiss
it. Amcham Board members said they continue to work closely
with the Embassy and other business associations, such as
the influential Indonesian Chamber of Commerce, to assist
and push the government on further reform.


9. (SBU) Several AmCham members said that SBY and some of
his ministers are very concerned that Indonesia is losing
out in the regional competition for investment. As multi-
nationals pursue a "China plus one" strategy in Asia, it
appears most are viewing Malaysia, Thailand and Vietnam as
more business friendly than Indonesia. The Ambassador noted
there is a sense within the GOI economic team that Indonesia
had lost 10 years of development while its ASEAN rivals had
developed niches in sectors such as automotives and
electronics. AmCham members expressed concern that Chinese
investors, with support from the Chinese government and the
ethnic Chinese Indonesian community, are rapidly expanding
their investments in Indonesia's oil, gas and power sectors.
A/S Hill agreed that China's regional and cultural links, as
well as often shady business practices, provide Chinese
companies with a leg up in winning contacts in Indonesia.
However, he assured the group that senior USG officials,
including President Bush, remain committed to advocating for
U.S. companies overseas.

AMSELEM