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

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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

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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