DOC DEPUTY SECRETARY SAMPSON'S APRIL 27-28 VISIT TO

UNCLAS SECTION 01 OF 04 JAKARTA 005581

SIPDIS

SIPDIS
SENSITIVE

STATE FOR EAP/MTS; EB/TRA/OTP; EB/TPP/BTA; EB/OMA
COMMERCE FOR BGOLIKE/4430
TREASURY FOR IA-JEWELL
DOE FOR CUTLER/PI-32 AND NAKANO/PI-42

E.O. 12598: N/A
TAGS: BEXP EINV ETRD ECON PGOV KCOR ID
SUBJECT: DOC DEPUTY SECRETARY SAMPSON'S APRIL 27-28 VISIT TO
JAKARTA--MEETINGS WITH GOVERNMENT OFFICIALS


1. (SBU) Summary. Vice President Jusuf Kalla told visiting
Department of Commerce Deputy Secretary David A. Sampson on
April 27 that under Indonesia's new openness, small interest
groups are capable of sensationalizing issues and causing
significant damage to Indonesia's reputation and investment
climate. Kalla suggested that American companies engage in
more community activities and better public relations as a
way of counteracting negative publicity campaigns targeted
at them. Finance Minister Sri Mulyani Indrawati noted on
the same day that growth and reform are not moving fast
enough to reduce poverty and unemployment. She was
appreciative of donor support for tax and customs reform,
which she hopes will also improve the investment climate.
State Minister of Research and Technology Dr. Kusmayanto
Kadiman welcomed Deputy Secretary Sampson's offer of closer
science and technology cooperation between Indonesia and the
U.S., particularly with respect to tsunami early warning
systems, where the National Oceanic and Atmospheric
Administration (NOAA) has great expertise. Minister of
Industry Fahmi Idris praised the U.S. textile safeguard
agreement with China as a great benefit for Indonesian
textile manufacturers. Idris encouraged Ford to select
Indonesia as the site of a new auto plant and agreed with
Sampson on the importance of stepped-up enforcement of
intellectual property rights (IPR). End Summary.


2. (U) Department of Commerce Deputy Secretary David A.
Sampson visited Jakarta April 27-28. In addition to meeting
Vice President Kalla and the ministers mentioned above,
Sampson met a delegation from the Indonesian Chamber of
Commerce and Industry, addressed an American Chamber of
Commerce (AmCham) luncheon event and met the AmCham board,
met U.S. companies involved in tsunami relief, held a
roundtable with representatives of international financial
institutions and Indonesian think tanks, officiated at the
opening of a Citibank Call Center, and visited Caterpillar
and Sarah Lee company facilities. This cable reports on Dr.
Sampson's government meetings.

VP Kalla Says Misperceptions Hurting Investment
-------------- --


3. (SBU) In their April 27 meeting, Deputy Secretary Sampson
congratulated Vice President Kalla for Indonesia's efforts
to combat corruption, improve transparency, and reform laws
to improve its overall investment climate. He also noted
that the completion of the ExxonMobil Cepu deal sent a very
positive signal to investors. Kalla said Indonesia is
struggling to find a balance between greater democratic
freedoms and maintaining political and economic stability.
Indonesia's new openness means that any group can stage a
protest, no matter how small its interests. Unfortunately,
sensational activities of some small groups are negatively
impacting Indonesia's international reputation. As a
consequence, many foreign investors have shifted their
attention to China where, ironically, democracy does not
exist. The Ambassador added that the head of one major U.S.
company recently said the greatest deterrent to U.S. and
European investment is the growing perception that radical
groups in Indonesia are growing in influence.


4. (SBU) Kalla said most U.S. investors are interested in
capital-intensive investments in the energy and mining
sectors, and less in the manufacturing sector, which creates
more jobs. However, Kalla admitted that U.S. capital
intensive investments generate important revenues for the
Government of Indonesia. In response to Sampson's concerns
about recent protests against U.S. mining companies, Kalla
said the actions were politically motivated, and suggested
that U.S. companies pay more attention to community service
and public relations. The Vice President told Sampson that
the U.S. could help Indonesia's economy by providing three
things: more long-term capital investment, technology and
finance, and greater access to U.S. markets.


5. (SBU) On market access, Kalla said that since the
expiration of the Multi-Fiber Agreement, Indonesia crucial
textiles and garments exports have faced tougher
international competition. While this may seem like a small
issue for the U.S., it is important to Indonesia, perhaps
just as important as chicken parts are to the U.S.
Ambassador Pascoe responded that poor regulation and police
enforcement was likely a greater hindrance to trade than any

JAKARTA 00005581 002 OF 004


U.S. market access restrictions. He noted that shrimp
transshipments, illegal logging and IPR violations threaten
Indonesia's current access, deter potential investors, and
ultimately hurt poor Indonesians while a few people get
rich. Sampson added that the U.S. appreciates Indonesia's
recent IPR enforcement efforts and hopes the Government of
Indonesia (GOI) would sustain them by handing out
appropriate sentences to violators. Kalla agreed the GOI
needs to improve IPR enforcement, and said Microsoft
officials had recently told him that the company could not
invest in the local software industry, because they would
incur large costs to develop products only to have them
immediately pirated.

Finance Minister Emphasizes Reforms
--------------


6. (SBU) Finance Minister Sri Mulyani Indrawati told Sampson
that economic growth in Indonesia is not moving as fast as
she would like to reduce poverty and unemployment. She also
expressed concern that anti-corruption efforts, while
crucial for reform, have led to a slowdown in decision
making and GOI spending. She said she had told World Bank
President Wolfowitz last week that "zero tolerance for
corruption may lead to zero development activity." Mulyani
noted that changing the GOI's pay and incentive structure is
important but hard to do on a large scale for both budget
and bureaucratic reasons. The Agency for Rehabilitation and
Reconstruction of Aceh (BRR) was small enough that a
different salary structure was possible: implementing this
all over the Indonesian civil service would be another
matter. "I'm starting small," she said, "looking at ways to
change the salary system at the Directorates General for Tax
and Customs." Sampson asked whether Parliament would have
to approve further changes in tax and customs
administration. Mulyani replied that the Ministry of
Finance has a lot of power and discretion, but
implementation is key. "We're just starting this battle,"
she said. "Changing personnel is one thing, changing
behavior throughout the bureaucracy is another."


7. (SBU) Mulyani said the World Bank and International
Monetary Fund (IMF) are offering assistance to the MOF"s
reform program, and added that she is grateful for U.S. help
as well. She noted that President Yudhoyono had said
recently "it seems like when Indonesia solves one issue, ten
more pop up." Mulyani emphasized that Indonesia "can't do
this alone" and needs international assistance. Sampson
noted the high degree of optimism about the direction of
Indonesia and its importance in the ASEAN region. More
foreign direct investment is needed to bring improvements
and U.S. companies provide both capital and expertise. On
energy, Mulyani said that Indonesia's fuel price mechanism
is not flexible enough. High oil prices could still hurt
despite subsidy cuts last year. She was surprised during
her recent visit to the U.S. that gas was over USD 3 per
gallon. (Note: Premium gasoline currently sells for USD
1.90 per gallon in Indonesia.) "There is a lot we need to
do to make fiscal policy more efficient, she said, but
everyone advises me I have to take one step at a time." In
closing, Mulyani stressed the importance of high-level
visits, such as Secretary Rice and Dr. Sampson, since they
increase attention paid to Indonesia.

Minister for Research and Technology
--------------


8. (SBU) Deputy Secretary Sampson conveyed greetings to
State Minister of Research and Technology Dr. Kusmayanto
Kadiman from Commerce Secretary Gutierrez, whom Kadiman had
met at the Earth Observation Summit in Brussels last year.
Sampson noted that the National Oceanic and Atmospheric
Administration (NOAA) is making a lot of progress with the
Global Earth Observation System of Systems (GEOSS) and
tsunami early warning systems (EWS),including in the Indian

SIPDIS
Ocean. He said the tsunami early warning centers in Hawaii
and Alaska are very engaged in EWS activities and that
robust EWS activities worldwide represent a positive
development in light of the tsunami tragedy. Minister
Kadiman expressed gratitude and praise for U.S. scientific
help, noting that Indonesian scientists had visited the
Hawaii center and that the tsunami disaster had taught
Indonesia a lot.

JAKARTA 00005581 003 OF 004




9. (SBU) In response to the Deputy Secretary's query about
his Ministry's priorities, Minister Kadiman listed six focus
areas:

a) Food resilience (e.g., rice self sufficiency);
b) New and renewable energy resources;
c) Information Technology (IT);
d) Transportation;
e) Prescription drugs; and
f) Defense Security Technology.

Kadiman praised U.S. soybean productivity and hoped
Indonesian scientific collaboration with U.S. universities
would enhance its own productivity and thus reduce its
dependence on rice. He also expressed admiration for
President Bush's speeches on the various uses of soybean
(e.g. for medicine and bio-ethanol) and noted that Indonesia
focuses on crude palm oil (CPO). He touted Indonesia's
geothermal potential as the world's largest, but admitted
investors need the right incentives to undertake viable
projects.


10. (SBU) Kadiman said the GOI must stop IPR piracy to
attract investment and noted his Ministry is working to
address this problem. He also expressed hope of promoting
multimodal transportation (rail, sea and air),technology
transfer in exploiting Indonesia's biodiversity to develop
prescription drugs, and better cooperation with the global
defense industry. On the latter point, the Ambassador
encouraged him to connect with the Defense Department as
well as well as with Boeing and Lockheed Martin. Kadiman
also said his ministry was very active on avian influenza
(AI) research. In response to Kadiman's query about the
recent decline in educational opportunities for Indonesian
scientists at U.S. universities, the Ambassador noted that
U.S. shift from higher to basic education was probably to
blame. He noted, however, that the Embassy is doing all it
can to reverse the trend, such as promoting the Fulbright
Program. The Ambassador also noted that strong interest in
Indonesia about the U.S. argued for closer cooperation in
science and technology. Kadiman agreed, describing ongoing
cooperation with IBM, Hewlett Packard and Sun Microsystems.
In closing, Kadiman expressed his interest in visiting the
U.S. and Washington, DC in June and the Deputy Secretary and
the Ambassador promised to facilitate his trip.

Minister of Industry Fahmi Idris
--------------


11. (SBU) Minister of Industry Fahmi Idris praised
Indonesia's growing trade relationship with the U.S., noting
that the U.S. is currently the sixth largest foreign
investor in Indonesia. He repeatedly expressed appreciation
for the recent U.S.- China memorandum of understanding (MOU)
on textile quota safeguards, which "now helps the market for
Indonesia for textiles and especially footwear export."
Idris noted that China is a "big competitor" but that
Indonesia does not view China as a threat. China is an
investor and partner, especially in areas such as
infrastructure, textile manufacturing technology, and steel
production. He mentioned that Vice President Kalla would
soon report on proposed agreements with China on
construction of new power plants, which along with road
construction are the two greatest needs in infrastructure
development. Idris mentioned agricultural processing as
having "huge capacity," highlighting both palm oil and cocoa
production, but said that Indonesia needs to better tailor
products through improved technological techniques to the
U.S. and global market. Idris also underscored the need to
control illegal logging, which would improve the competitive
advantage of the Indonesian furniture industry.


12. (SBU) Idris discussed the ongoing discussions between
the GOI and Ford over the possible construction of a new
plant in Indonesia that would employ up to 6000 people.
Idris eagerly mentioned an existing and vacant plant that if
suitable for Ford might be operational within six months,
rather than projected two-year process to construct a new
plant from the ground up. Idris also mentioned that
Jakarta's Tanjung Priok port is constructing an automobile
export facility. The GOI is considering designating the
area as a free trade zone to encourage auto manufacturing

JAKARTA 00005581 004 OF 004


and export, part of a broader proposal for developing
special economic zones (SEZs) for manufacturing in
Indonesia. Idris also noted a "big change" in the foreign
investment law reducing the approval period from 151 days to
30 days.


13. (SBU) Deputy Secretary Sampson offered U.S. support for
continued GOI efforts in anti-corruption and judicial
reform. Idris described the stepped-up efforts of the KPK
(anti-corruption agency),as well as the GOI's expanded
focus on anti-corruption within the Attorney General's
office. Sampson encouraged Indonesia to improve enforcement
of intellectual property rights, a critical issue for many
potential U.S. investors and exporters. Idris agreed that
Indonesia must "be serious about enforcing the IPR laws",
increasing steps to punish violators, and frequent raids on
places marketing illegal products, "some imported from
China". Idris requested more support from U.S. Customs to
detect false certificates of origin on goods entering the
U.S., especially textiles originating in China. Sampson
suggested that new technologies may help in this process,
and agreed to investigate this for Idris. Idris closed by
underscoring that Indonesia is "committed to honoring
contracts internationally, especially now that doors are
wide open to investors."


14. (U) Deputy Secretary Sampson's party reviewed this
message.

PASCOE