COORDINATING MINISTER BOEDIONO ON THE INVESTMENT

UNCLAS SECTION 01 OF 03 JAKARTA 007014 SIPDIS SENSITIVE SIPDIS DEPT FOR EAP/MTS AND EB/IFD DEPT PASS OPIC, EXIM, TDA COMMERCE FOR USDOC 4430 E.O. 12958: N/A TAGS: ECON EINV EFIN PREL KFLU ID SUBJECT: COORDINATING MINISTER BOEDIONO ON THE INVESTMENT CLIMATE AND CIVIL SERVICE REFORM ¶1. (SBU) Summary. Coordinating Minister for Economic Affairs Boediono told the Ambassador May 24 that the Government of Indonesia (GOI) would "step back" from the labor reform process to give unions and employers time to work out a compromise on severance pay and other issues. He provided details on an "implementation unit" planned for the Office of the President that would employ non-GOI professionals to monitor the implementation of reforms in the bureaucracy, and expressed optimism the unit would help advance reforms. Boediono admitted that the GOI does not have a unified policy on privatization, a situation he attributed to political differences in the cabinet. The Ambassador reiterated that the U.S. remains optimistic about Indonesia and wants to assist Indonesia's economy as much as possible through our trade and investment relationship and aid program. He also stated his concerns about the GOI's flagging efforts to control the avian influenza (AI) virus, particularly in the Ministry of Agriculture. End Summary. "Boediono Effect" Working -------------- ¶2. (SBU) The Ambassador began by noting that the relatively subdued response in Indonesia to the recent volatility in emerging markets shows the "Boediono effect" is still working. Implementation of the Government's infrastructure and investment climate packages also seems to be moving forward. At the same time, the Ambassador noted, there is a rising sense of impatience among the business community about the pace of economic reform. The first year of the Yudhoyono Administration saw little progress on investment climate issues as the Government struggled with the aftermath of the tsunami. Business is willing to give the new economic team a few months, but then wants to see action. There is concern in the business community that the Government has pulled back the labor reform bill, and that Parliament seems preoccupied with the anti-pornography bill instead of important legislation that would move Indonesia's economy forward. Although concluding a deal with ExxonMobil on the Cepu oilfield sent a very positive signal, the business community hopes the GOI will redouble its economic reform efforts. ¶3. (SBU) The Ambassador noted the U.S. is very optimistic about Indonesia, and views its success as critical given the country's size and strategic importance. The U.S. Government and U.S. companies want to see Indonesia competing with China and India for foreign investment. President Susilo Bambang Yudhoyono (SBY) and Boediono have communicated a very positive message to the public about the importance of welcoming foreign investment to Indonesia. The U.S. has an assistance program that is capable of responding quickly to a range of issues including civil service reform. The recent visits to Washington of Minister of Trade Mari Pangestu and Minister of Finance Sri Mulyani had also been extremely positive, and the U.S. wants to follow up these visits by deepening our economic relationship through the establishment of a strategic economic dialogue. GOI "Stepping Back" from Labor Reform Process -------------- ¶4. (SBU) Boediono welcomed the Ambassador's "forthright statement" of support. He said he understands impatience among business people, but noted that the investment climate package "is not all the Government wants to do." There are "extras", he noted. Boediono admitted that labor law reform has turned out more difficult than the Government thought, and won't be fully completed on schedule. The April 2006 labor demonstrations in France had set an unhelpful example for Indonesia, he noted. Nonetheless, Boediono professed to be optimistic about labor reform, "not in the sense that a bill will be agreed totally", but in the sense that business and labor would agree on necessary changes to balance their respective needs. ¶5. (SBU) The GOI's strategy on labor reform is to back off to allow business and labor to reach a compromise on key issues, including severance pay, minimum wages, and termination of workers with cause. Chairman of the JAKARTA 00007014 002 OF 003 Indonesian Employers Association (Apindo) Sofjan Wanandi has the lead on the issue for the business community. Once business and labor reach agreement, the GOI will incorporate the changes in either a revised labor law or regulation--the exact form "doesn't matter," Boediono said. (Note: Wanandi later told us any changes on severance pay or other issues would be reflected in revised regulations, not a new labor law. He added that Indonesian labor unions are having a hard time getting organized to negotiate, with unions fighting with each other over which unions would sit at the table.) ¶6. (SBU) The other major legal reforms contained in the investment climate package are moving forward smoothly, Boediono noted. The relevant parties have reached agreement on amendments to the draft tax laws, Boediono said, and changes should be effective on January 1, 2007. The new investment and customs laws are also proceeding smoothly in Parliament, and the GOI hopes both will be enacted in 2006. Privatization Policy Unclear -------------- ¶7. (SBU) The Ambassador asked about the GOI's apparent efforts to block a private sector solution to the longstanding Cemex dispute. Coupled with the 2005 efforts by the Ministry of State Owned Enterprises to re-nationalize long distance carrier PT Indosat, the overall impression is that the GOI has too much affinity for state-enterprises (SOEs) and too little regard for the efficiency benefits of privatization. ¶8. (SBU) Boediono agreed that the GOI's privatization policy "is not clear" and reflects differing views about privatization within the cabinet. However, the privatizations approved by Parliament (IPO of state gas company PGN and sales of residual shares of recapitalized banks) will proceed. But the Cabinet "reflects the current political situation in Indonesia," and has not come to an agreement about privatizations beyond those already approved by Parliament. Boediono admitted that compared to the Megawati Administration, the current Government's views are "not as solid" on privatization. Nonetheless, he said his personal view is that privatization is positive and would bring benefits for Indonesia. He added that he had discussed the Cemex case on May 23 with Vice President Kalla. "Implementation Unit" Key to Civil Service Reform -------------- -------------- ¶9. (SBU) The Ambassador noted the overarching importance of civil service reform and reiterated that the U.S. stands ready to help on this and other systemic reform issues. Boediono, who SBY has put in charge of civil service reform, agreed that the issue is very important, and said the Corruption Eradication Commission (KPK) has been urging the GOI to take up civil service reform because "just catching the thieves isn't enough." SBY is also "very keen" on civil service reform, Boediono said, but brings a politician's short-term focus to the issue--SBY wants to know what the tangible payoff would be over a three-year period. ¶10. (SBU) Boediono added that in order to facilitate civil service reform, he believes SBY needs a new unit in the Office of the President that would monitor the implementation of reforms in the bureaucracy. This so- called "implementation unit" would be manned by non-GOI professionals and would be based on the "Prime Minister's Delivery Unit" in the office of the British Prime Minister. It would not be a policy making body, but rather would focus on the implementation of reforms in three areas: --Economic reform, including implementation of the investment climate and other packages; --Administrative reform, which would include bureaucratic or civil service reform. --SOE Reform: Boediono said SBY is very interested in squeezing better performance out of Indonesia's SOEs, but JAKARTA 00007014 003 OF 003 admitted it is unclear whether the implementation unit would result in a more coherent privatization policy. ¶11. (SBU) Boediono said he is encouraged by the plan to set up the implementation unit, and hopes it will be set up soon and staffed by the right people. The design of the unit is almost finished and SBY is considering candidates to head the unit. The continuous involvement of SBY in reform issues through the unit would be very helpful, Boediono added. GOI Avian Influenza Response -------------- ¶12. (SBU) The Ambassador noted he is growing increasingly concerned about the lack of coordinated GOI action against avian influenza (AI). One of the two key GOI ministries -- the Ministry of Agriculture (MOA) -- falls under Boediono, the Ambassador noted. Thailand and Vietnam have shown that with strong government leadership, AI outbreaks in poultry can be controlled. But in Indonesia, there has been very little concerted effort by the MOA, and until something is done to deal with village-level outbreaks, Indonesia will continue to suffer human AI cases. If the international media begins to focus on the fact that Indonesia is the weak link in the international fight against AI, or if sustained and efficient human-to-human transmission occurs, the damage to Indonesia's economy would be huge. In response, Boediono admitted that although he has not been deeply involved in the AI issue (fellow Coordinating Minister Aburizal Bakrie heads the GOI's avian influenza effort),it is important that ministries under his coordination do their part. He promised to look into the issue. Papua -------------- ¶13. (SBU) The Ambassador concluded by noting he has suggested the GOI set up a body similar to the Aceh Reconstruction Agency (BRR) to more effectively channel development resources into Papua. One of the key reasons political events in Aceh are on a better track than in Papua is that in Aceh, the GOI controls reconstruction funds through the BRR which ensures they are well spent. In contrast, in Papua the money disappears and doesn't get to the people, reducing the Government's leverage and credibility. The Ambassador noted that the U.S. is prepared to support a BRR-like body in Papua with computer equipment and technical assistance. In response, Boediono said the point about the role of corruption and Government control is an "interesting one", and stated he hopes the "Australia problem" in Papua is finished. He closed by noting that Australia does not understand that sovereignty issues are "close to our hearts." PASCOE