TAX, CUSTOMS CHIEFS REPLACED IN REFORM EFFORT

C O N F I D E N T I A L SECTION 01 OF 04 JAKARTA 005420

SIPDIS

AIDAC
SIPDIS

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-ANNA JEWELL
COMMERCE FOR GOLICKE/4430
DEPARTMENT PASS AID
DEPARTMENT PASS FEDERAL RESERVE SAN FRANSCISCO
DEPARTMENT PASS EXIM, OPIC, TDA

E.O. 12958: DECL: 04/28/2016
TAGS: EFIN PINR KCOR KMCA PGOV ID
SUBJECT: TAX, CUSTOMS CHIEFS REPLACED IN REFORM EFFORT

REF: A. JAKARTA 610


B. JAKARTA 4964

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Classified By: Economic Counselor William A. Heidt, Reasons 1.4 b,d.


1. (C) Summary. President Susilo Bambang Yudhoyono (SBY)
replaced the long-serving, corrupt, and powerful Directors
General of Taxation and Customs on April 21. The decision
shows SBY's strong support for Finance Minister Sri Mulyani
Indrawati's efforts to reform the Ministry of Finance (MOF)
bureaucracy to reduce corruption, enhance effectiveness,
remove obstacles to pending tax and investment reform
legislation, and respond to investor complaints. The
incoming Director General (DG) for Tax while no champion of
reform, appears close to Mulyani and should help bring the
historically independent Directorate General of Taxation
(DGT) under more effective MOF supervision. The new DG for
Customs remains a relative unknown. All in all, the changes
cheered the business community. Paragraphs 12-14 include bio
data. End Summary.

Tax, Customs Chiefs Replaced
--------------


2. (SBU) Just three days after Minister of Finance Sri
Mulyani Indrawati told donors of the appointment of two
prominent Indonesians to help steer its tax and customs
reform efforts (Ref B),the MOF announced a major reshuffle
of its Directors General. The changes came via Presidential
Decree No. 45/M/2006 of April 20, 2006, and include,

--Darmin Nasution, previously Director General for Financial
Insitutions, replaced the notorious Hadi Purnomo as Director
General for Taxation.

-- Anwar Suprijadi, previously Chairman of the State
Administrative Agency, replaced Eddy Abdurachman as Director
General for Customs and Excise.

--Dr. Fuad Rachmany, previously Deputy of the Department of
Finance and Funding at the Reconstruction and Rehabilitation
Agency for Aceh and Nias (BRR),replaced Nasution as Director
General for Financial Institutions.


3. (C) The April 21 announcement came during Minister
Mulyani's visit to Washington D.C. for the annual spring
meetings of the World Bank and International Monetary Fund
(IMF). Due to GOI failure to implement recommendations from
past donor assistance programs, especially in tax
administration, the donor community had urged her to "make a
big gesture" (i.e. fire Purnomo) that would reassure capitals
and leverage greater support.


4. (SBU) Mulyani swore in the new DGs April 26, the day after
her return to Jakarta. Anggito Abimanyu, the Acting Head of
the policy planning arm of the MOF (BAPEKI) and a trusted
advisor to Minister Mulyani told us April 27 that replacing
the three DGs comprised "the first step." In her speech,
Mulyani thanked the outgoing DGs for their service, and
outlined her vision of the dual roles of enforcement and
public service in Tax and Customs. "There has been
disappointment and a lack of trust on the public service
side," she noted. The new DGs should help her implement
systematically, effectively and quickly the following,

-- Separate policy formulation from administration.

-- Improve and modernize tax and customs offices to improve
customer service.

-- Maximize the use of information technology to minimize
contact between tax and customs officials and the public.

Outgoing DGs: Good Riddance
--------------


JAKARTA 00005420 002.2 OF 004



5. (SBU) The Directorate General for Taxation (DGT),
responsible for tax policy, administration and revenue
collection, sits in a separate compound from the main MOF
complex and has an independent, often arrogant mindset.
Outgoing DG Hadi Purnomo, while smart and capable in many
respects, had a poor reputation in the business community;
corruption in tax administration became one of the top
business complaints. Purnomo proved notorious for strong arm
tactics such as imposing travel bans on managers of companies
under audit or showing wealthy individuals involved in tax
cases that he had satellite photos of their property
overseas. During his watch, discipline among DGT officers
eroded noticeably, and inflated tax assessments became the
norm, forcing businesses to negotiate (i.e., pay bribes) to
obtain a more reasonable decision.


6. (C) In office since 2002, former DG for Customs Eddy
Abdurachman, while not as notorious as Purnomo, allowed
corruption and poor service in the DG of Customs and Excise
(DGCE) to increase and become a major business complaint.
Exporters and importers alike note that Customs officials
routinely shake them down through a variety of ploys:
arbitrary check prices, expedition fees, delays in
processing, or outright demands for bribes. Companies that
import or export time sensitive products (i.e., fresh and
frozen foods, seasonal garments, etc.) or high value goods,
remain the most vulnerable. The Indonesian media often has
blamed customs officials for facilitating large quantities of
smuggled goods that enter and exit Indonesia unchecked.


New DGs: Not Perfect, But an Improvement
--------------


7. (C) The newly named DG for Taxation, Darmin Nasution,
seems as much of an insider as Purnomo or Abdurachman, having
served since January 2000 as DG for Financial Institutions,
the MOF division that supervises pension and mutual funds,
insurance companies, and publicly listed companies.
Nasution, although smart and tenacious, comes across as slow
and deliberative and not particularly business-friendly.
Despite six years in office, he has no reform record -- the
MOF's regulation of the sectors under his control, as well as
restructuring efforts in them, have lagged noticeably
compared to the more dynamic banking sector. U.S. insurance
companies have described weak regulation and corruption among
MOF insurance inspectors under Nasution as major factors
behind the slow growth of the sector. Nasution, however,
knows how to get things done: a western insurance executive
told us Nasution personally solicited insurance companies
(including his own) and delivered to the DPR Commission XI a
USD 100,000 payment in 2004 to ensure passage of amendments
to the bankruptcy law that would protect insurance companies
from fraudulent bankruptcy suits. Despite his flaws,
Nasution has the important advantage of enjoying a close
relationship with Mulyani--he preceded her as Chairman of the
Institute for Economic and Social Research (LPEM) at the
University of Indonesia in the early 1990s.


8. (C) Rachmany, Nasution's replacement as Director General
for Financial Insitutions, also brings some baggage to his
new position; seen as very cautious, and with questionable
probity. A U.S. Treasury Advisor who worked under Rachmany
at the Directorate of Government Securities Management
(DPSUN) in 2001-03 uncovered documentary evidence that
Rachmany or one of his close associates rigged bid/ask prices
on GOI bond buybacks in 2003, presumably to gain kickbacks
from bond sellers. (GOI threw the advisor out of Indonesia
for his efforts.) Rachmany has proven helpful to the Embassy
in previous roles in the MOF and in the Agency for
Rehabilitation and Reconstruction of Aceh and Nias (BRR),
although other Aceh donors complain about the BRR's slowness
in getting financial systems up and running. Suprijadi, the
new DG for Customs, although not well known, apparently,
according to an Embassy contact, has the trust of
Coordinating Minister for Economic Affairs Boediono.

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Reaction from Business Community
--------------


9. (SBU) One long-time expatriate consultant to the MOF
described Purnomo as "the most corrupt in a long line of
corrupt tax DGs." After Nasution received his appointment as
the new DG, another expatriate consultant noted that "Mr.
Untouchable was finally toppled. Quite amazing." The
Chairman of the Indonesian Chamber of Commerce (KADIN) Mr.
Hidayat told the press that the new team seems "capable and
honest. The changes will support improvement of the
investment climate. KADIN will continue to intensify its
dialogue with the government." The Chairman of the
Indonesian Employers' Association and respected businessman
Sofyan Wanandi told the media, "I have new hope there can be
trust between the government and businessmen, a change from
the past."


10. (C) The Vice President of a major infrastructure firm
expressed delight at Abdurachman's replacement. "Imagine for
a USD 3 million contract, you had to pay USD 300,000-500,000
to Customs to release your equipment off the docks. Delays
were very lengthy and storage fees would pile up. Let's hope
things will get cleaned up now." Others, however, remain
cautious. Manufacturers and traders at medium-sized Sumatran
firms said problems exist in local tax offices and did not
expect miracles from changes at the top. The head of a large
hardware retailer in Surabaya expressed like sentiments,
"Changing the leader is not enough, corruption in DGT is
everywhere, but it's a start."

Comment: The Mighty Have Fallen
--------------


11. (C) Our Indonesian contacts unanimously view the Director
General for Taxation as one of the "wettest" positions (i.e.
greatest opportunities for graft) in the GOI, and Purnomo
used it to maximum personal advantage. He outlasted two
Presidents and four finance Ministers, and SBY's failure to
replace him through the first 18 months of his administration
showed that SBY had failed to gain full control over the
bureaucracy. Mulyani's ability to remove Purnomo after just
five months in office confirms our impression that among the
GOI economic technocrats, she has the strongest relationship
with SBY and appears the most willing to take risks. The new
Directors General do not come across as great reformers or
leaders, but do seem clear upgrades from the old crew, and
should help bring the historically independent DGT under
firmer MOF control.

Bio Data for New MOF Directors General
--------------


12. (U) Dr. Darmin Nasution, born in December 21, 1949 in
Tapanuli, North Sumatra, received his Bachelor Degree in
Economics from the University of Indonesia in 1976 and serves
as a lecturer there. In 1986, Darmin obtained his doctorate
in economics from University Paris 1 Pantheon Sorbonne,
France. From 1993-95 he served as Assistant to the
Coordinating Minister for Industry and Trade and from
1998-2000 Assistant to the Coordinating Minister for the
Economy. He became Chairman of the Capital Markets
Supervisory Agency (BAPEPAM) in March 2005 while also serving
as Acting Director General for Financial Institutions (DGFI,
since January 2000),both in the Ministry of Finance.
Married, Nasution has two children.


13. (U) Dr. Ahmad Fuad Rahmany (51),an economist who
recently served as Deputy of the Department of Finance and
Funding at the Agency for the Rehabilitation and
Reconstruction of Aceh and Nias (BRR),has experience as an
economist, lecturer, researcher, and academician. He
obtained his PhD in economics from Vanderbilt University. He
teaches at several universities, including the University of
Indonesia (UI) and the State Accountancy College (STAN),

JAKARTA 00005420 004.2 OF 004


where he has lectured for over 20 years. Rachmany held
several senior positions at the Ministry of Finance after
joining in 1981. He worked as a researcher in the Economics
and Financial Bureau (1997-1998); Chairman of the Debt
Management Unit Team (2002); Head of State Obligation
Management (2001-2004); and Director of Government Securities
Management, a position he still holds. He sits on the
advisory board of commissioners of PT Danareksa (a
state-owned investment enterprise) and PT Bank International
Indonesia (BII).


14. (U) Anwar Suprijadi, born in December 23, 1948 in
Semarang, Central Java, received his Bachelor Degree in
Economics from Diponegoro University, in Semarang, Central
Java in 1972. In 1983, Suprijadi obtained his Masters degree
in transportation from the Bandung Institute of Technology.
He worked in various positions in Perusahaan Kerata Api, a
national railway company, under the Ministry of
Transportation from 1984-1988, becoming its President
Director from 1991 to 1995. He moved to the Ministry of
Cooperative and Small and Medium Enterprises in 1995 and
served as DG for Small Enterprises Supervision. He returned
to the Ministry of Transportation in 1998 as Secretary
General (a deputy Minister function). He became State
Minister for State Administrative Reform under former
President Megawati Soekarnoputri in 2001, and Chairman of the
State Administrative Agency in 2003.
PASCOE