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

UNCLAS SECTION 01 OF 03 JAKARTA 005582

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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-NON-GOVERNMENT MEETINGS



1. (SBU) Summary. During his April 27-28 visit to Jakarta,
Department of Commerce Deputy Secretary David A. Sampson
discussed Indonesia's economic reform efforts and U.S.
interests in Indonesia and region with business leaders,
academics and opinion leaders. American Chamber of Commerce
(Amcham) members lauded USAID and USG tsunami relief
efforts, but noted that overall reconstruction efforts
continue to face many challenges. Amcham Board of Governors
members said that significant changes are taking place in
Indonesia and that the Yudhoyono Administration is working
closely with the private sector on reforms. Still, without
more long-term capital investment, they said Indonesia faces
the risk of another crisis in the near term. Economists
from Indonesian think tanks and international financial
institutions noted that the macroeconomic picture is stable,
but said reform is moving slowly. More investment is needed
to help Indonesia grow. A delegation from the Indonesia
Chamber of Commerce and Industry (KADIN) called for stronger
U.S. - Indonesia business ties, particularly between smaller
companies. End Summary.


2. (U) Department of Commerce Deputy Secretary David A.
Sampson visited Jakarta April 27-28. In addition to meeting
Vice President Jusuf Kalla and the ministers of Finance,
Science and Technology, and Industry, Dr. 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 Mr. Sampson's non-
governmental meetings.

Amcham Assesses Tsunamis Relief and Reconstruction
-------------- --------------


3. (SBU) A group of Amcham company representatives lauded
USAID's response to the December 26, 2004 Aceh tsunami and
earthquake. They said USAID responded quickly to the
disaster by identifying immediate needs, providing emergency
relief and assisting the American business community in
identifying reliable NGO partners. U.S. private and public
sector contributions, particularly the USS Abraham Lincoln's
emergency relief mission, had instilled in the Achenese
people, and Indonesians in general, a much more positive
view of America.


4. (SBU) While the emergency relief effort had been a
success, the AmCham representatives said reconstruction is
proving more difficult because it involves greater strategic
planning, closer donor coordination, and the resolution of
difficult issues such as land titling, job creation, and
community development. Amcham members said that Aceh
Reconstruction and Rehabilitation Agency (BRR) Head Kuntoro
remains the right person for the job, but is dealing with a
monumentally difficult task. The government bureaucracy
continues to delay progress. Amcham members suggested that
in response to future disasters, USAID should create and
lead a task force made up of private sector donors and
reputable NGOs to improve coordination. This task force
could then help the private sector match its resources more
effectively with actual needs.

Amcham Board Briefs on Business Environment
--------------


5. (SBU) Members of the Amcham Board of Governor's informed
Deputy Secretary Sampson that the Yudhoyono Administration
continues to consult closely with the private sector on
proposed policy reforms, a remarkable and new development
for Indonesia. They noted significant positive change is
taking place, including in the area of corruption, but said
the emergence of Chinese and other Asian countries had led
to more "back room" business deals and caused transparency
to slip, particularly in projects involving large state-
owned enterprises (SOEs).


6. (SBU) Several board members warned that international
pension and hedge fund "hot money" is currently propping up
Indonesia's currency and stock market. However, they warned
that Indonesia's first quarter investment figures were

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disappointing, and said the GOI risks another financial
crisis unless it can begin to attract new long-term fixed
capital investments. A new crisis would be an opportunity
for Yudhoyono opponents and political extremists to
undermine Yudhoyono Administration and its reform efforts.


7. (SBU) Board members asked about the future presence of
the Foreign Commercial Service (FCS) in Indonesia and noted
the FCS has been vital in helping to level the playing field
for U.S. companies. They noted that, if given a choice,
Indonesians generally preferred to work with U.S. companies
since they offered opportunities for training and
professional development. With the right support and
policies in place, American companies can provide the
capital that Indonesia needs to create growth, jobs and
economic stability. Deputy Secretary Sampson said that the
Department of Commerce (DOC) is currently performing a
worldwide assessment of where the DOC should place FCS
assets in the future. Some factors that the DOC will
consider include the maturity of markets, the difficulty of
doing business in them, current levels of deals taking
place, and U.S. private sector interest. Finally, the Board
members also stressed the critical need for increase Export-
Import Bank involvement in Indonesia.

Economists: Indonesia Stable but Reform Slow
--------------


8. (U) In a meeting with the World Bank, International
Monetary Fund (IMF) and think tanks, Sampson noted the
importance of the ASEAN region for U.S. trade and
investment. He said the U.S. hopes anti-corruption efforts
will continue in Indonesia, as well as steps to improve IPR
enforcement. A think tank representative said that
Indonesia's macro-economy is stable and its financial sector
is vibrant, but unemployment is too high at about 11
percent. He suggested the U.S. could support Indonesia's
efforts to create more special economic zones (SEZs). A
World Bank expert on investment climate noted that
Indonesia's rigid labor regulations are holding back growth.
The status of amendments to the labor law is unclear given
labor union demonstrations against them--a very large labor
demonstration (10-30,000) is scheduled for May 1 in Jakarta.
The IMF representative noted that two thirds of the
Parliament is fairly new, making consensus building on
economic policy more of a challenge. He said Indonesia's
economy is still processing the fuel subsidy cuts from last
year, but growth should pick up in the second half.


9. (U) All participants agreed that Indonesia's oft-cited
challenges remain issues of concern: lack of legal
certainty, tax and customs problems, inflexible labor
regulations, and infrastructure constraints. The IMF
representative noted that patience and persistence are
needed for those who work on Indonesia, but said the new
economic team is a strong positive. The President, Vice
President and Cabinet have also done a better job at
marketing Indonesia overseas and generating interest in the
country than in the past. All participants also agreed that
credible, sustainable investment reforms would be essential.
The Government's Investment Climate Improvement Package
package is good, but implementation will be key. Sampson
asked whether changes would happen fast enough to support
President Yudhoyono's political agenda. A think tank
representative responded that Yudhoyono would probably win a
second term because he is popular enough and has no strong
opposition.

Indonesia Chamber of Commerce and Industry (KADIN)
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10. (U) A five person delegation from KADIN's United States'
Committee (KIKAS) briefed Deputy Secretary Sampson over
lunch on the state of Indonesian economy and prospects for
increasing U.S. - Indonesia trade and investment. KIKAS
Advisory Board member Didie Soewondho noted that although
Indonesia's macroeconomic indictors are strong, the real
economy has slowed noticeably since the October 1, 2005 fuel
price hikes. KADIN has very close relations with the GOI,
Soewondho noted, and President Yudhoyono and his economic
ministers consult frequently with the group. Boosting
investment is Indonesia's core challenge, he continued, and
the January 2005 "Infrastructure Summit" and February 2006

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infrastructure policy package have fixed about 40 percent of
the 22 laws and regulations holding back investment in the
infrastructure sector.


11. (SBU) Deputy Secretary Sampson asked the KIKAS group
whether there are particular sectors where American firms
could be most helpful. Soehondho responded that oil, gas,
and petrochemicals are particularly strong sectors for U.S.
companies, but added that Dow Chemicals and Dupont have kept
a very low profile in Indonesia. Andru Subowo of the
private equity firm Bramadi Capital noted that the U.S. has
very efficient distribution systems for goods and people,
and that Indonesia could benefit from U.S. investment in
these areas. In contrast, Airlangga Hartarto of the
Indonesian Association of Publicly Listed Companies noted
that public sentiment has turned against U.S. companies in
Indonesia because of the Freeport and Newmont controversies.
However, when pressed by Deputy Secretary Sampson, Hartarto
agreed that multi-national NGOs and political "free riders"
were using foreign companies as targets in order to whip up
public discontent. The solution is to find a way to
demonstrate that investment projects generate benefits for
surrounding communities.


12. (U) Several KIKAS participants commented on the
importance of building business links between small and
medium enterprises (SMEs) in the U.S. and Indonesia. Large
U.S. companies can implement projects on their own, Hartarto
observed, but U.S. SMEs would need to partner with
Indonesian SMEs, benefiting both sides. KIKAS Advisory
Board Member Daniel Iskandar noted that Indonesian SMEs have
a hard time competing with Singapore, and suggested
modifying U.S. trade agreements to provide concessions
targeted at SMEs. Deputy Secretary Sampson agreed with the
importance of boosting SME cooperation, noting that one of
Secretary Gutierrez's top policy goals is to increase the

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number of U.S. SMEs involved in export markets. William
Zarit, Regional Director for East Asia and the Pacific at
the Department of Commerce, briefed the KIKAS group on
Foreign Commercial Service (FCS) programs targeting SMEs and
encouraged them to contact the Jakarta FCS office.


13. (U) Deputy Secretary Sampson asked the KIKAS delegation
whether, as Indonesian businessmen, they are satisfied with
the pace of economic reform. Hartarto, who also serves as a
Golkar member of parliament, was pessimistic, saying the GOI
is "not in charge", has no direction, and always wants to
wait around for Parliament to act. Rather than submitting
numerous draft laws to Parliament, each of which will take
at least a year to pass, the GOI should enact a package of
tax incentives. Foreign companies need legal certainty,
Hartarto said, but Indonesian companies need financing help
now, not when the new tax law finally passes. Another major
problem is Indonesia's lack of an energy policy, which has
hurt investment in the sector. When questioned by Deputy
Secretary Sampson, the KIKAS group agreed that China poses

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the toughest regional competition for Indonesia, with India
and Vietnam in second place. Soehondo added, however, that
Vietnam offers a very attractive package for investors and
is moving up fast.


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

PASCOE