SCENESETTER FOR EEB A/S SULLIVAN VISIT TO JAKARTA

UNCLAS SECTION 01 OF 03 JAKARTA 001933

SIPDIS

SIPDIS
SENSITIVE

FROM AMBASSADOR HUME TO EEB A/S SULLIVAN

E.O. 12598: N/A
TAGS: EFIN EINV ECON ENRG KCOR PGOV ID
SUBJECT: SCENESETTER FOR EEB A/S SULLIVAN VISIT TO JAKARTA


1. (SBU) Summary. Embassy Jakarta welcomes you to Indonesia. Yours
will be the first high-level State Department economic visit here in
several years. We encourage you to make a strong pitch for OPIC to
facilitate U.S. investment, for exploratory discussion of a
Bilateral Investment Treaty (BIT),and for the Government of
Indonesia (GOI) to do more to open its markets to foreign investment
and enhance its competitiveness. We also recommend you encourage
the GOI to streamline its asset-freezing process under UN 1267. End
Summary

BATAM ISLAND-YOUR FIRST STOP
--------------


2. (SBU) Your visit to Indonesia's Batam Island, 12 miles south of
Singapore, will give you insight into how the GOI uses "Special
Economic Zones" (SEZs),to "fast track" investment reforms. SEZs
allow duty free trade within select areas. Despite these
advantages, Batam's investment potential has been constrained by
regulatory uncertainty and local economic factors. The 2006
Indonesia-Singapore "Framework Agreement on Economic Cooperation"
focuses on developing Batam and extending SEZ status to adjacent
islands. Batam hosts several USG-assisted GOI initiatives including
the Customs Office "National Single Window Pilot Project" and
Indonesia's Investment Board's (BKPM) "One Stop Service Promotion
Center." In your conversations with government and business leaders
we encourage you to inquire about the status and effectiveness of
both these programs.


3. (SBU) USTR has also offered assistance in developing Indonesian
SEZ's under the U.S.-Indonesian Trade and Investment Framework
Agreement" (TIFA),which would serve as an effective counterweight
to Singapore's increasing influence over the region. Your visit
provides an opportunity to assess the openness of local officials to
such a proposal. Joe Bartlett, President of the AmCham, and
Economics Officer Jonathan Alan will accompany you during your visit
to Batam.

MACROECONOMICS NOT BAD
--------------


4. (SBU) With growth of 6.0% in the first quarter (5.5% for 2006),
high reserves, robust capital flows and dynamic trade, Indonesia's
macroeconomy is growing briskly, but still below the 6.6% growth
necessary to impact unemployment and alleviate poverty. Investment
though is slow; Indonesia is still regarded as corrupt and
over-regulated by investors, with inefficient state-owned
enterprises monopolizing key sectors and a complex licensing regime.


OPIC - Still Stuck
--------------


5. (SBU) The GOI does not have an updated OPIC agreement clarifying
the Foreign Government Approval ("FGA") process. As a result, OPIC
has been unable to obtain timely approvals for investment projects.
OPIC has received more than $600 million of investment inquiries for
Indonesia in last 12 months. We recommend you raise this issue in
your meetings with the Investment Coordinating Board (BKPM),the
Ministry of Finance and the Ministry of Trade.

Investment, BIT and Negative List
--------------


6. (SBU) Indonesia's newly-revised negative list for foreign
investment was issued on July 4. While investors may benefit from
the increased transparency and legal certainty, some new investment
limits are now officially lower than the upper limit of what was
previously allowed. GOI has stated the new list will not be applied
retroactively. We encourage you to remind GOI officials that
increased or sustained restrictions send the wrong signal and
undermine GOI's goal of increasing Foreign Direct Investment.

Bilateral Investment Treaty
--------------


7. (SBU) USTR has proposed to GOI Ministry of Trade (MOT) to begin
exploratory talks on negotiating a Bilateral Investment Treaty
(BIT); the GOI has not yet responded. We encourage you to highlight
the importance and benefits of a BIT, and to urge the GOI to begin
an exploratory dialogue. We also welcome Indonesia's comments on
our model BIT text.

Corruption's Toll and the Judiciary
--------------


8. (SBU) Indonesia's corruption hinders trade of goods, adding an
estimated 20% or more to business costs, and foreign investors
continue to complain about the dysfunctional judiciary. An American
citizen executive of the U.S.-based company Newmont Mining remains
entangled in a legal battle with GOI despite overwhelming

JAKARTA 00001933 002 OF 003


exculpatory evidence and an acquittal by a district court.
Prosecutors (in violation of Indonesia's own criminal code),have
appealed the acquittal to the Supreme Court, which has the power to
impose a jail sentence. We encourage you to remind GOI officials
the chilling effect cases like this have on future foreign
investment.

Millennium Challenge Threshold Program
--------------


9. (SBU) USAID and GOI signed a $55 million agreement in November
2006 for a Millennium Challenge Corporation (MCC) Threshold Program,
managed by USAID. The program includes a $35 million Control of
Corruption component that will address Supreme Court reforms,
judicial transparency, anti-money laundering enforcement and
prosecution of public corruption cases. The program will run from
2007 - 2009. You may wish to congratulate Indonesia on its MCC
program and the contribution it will make to combat corruption.


Bilateral Energy Dialogue and Biofuels
--------------


10. (SBU) Our bilateral Energy Policy Dialogue (EPD) is
re-energized. Our next meeting is tentatively planned for fall 2007
in Indonesia. The GOI is continuing its ambitious five-year,
multi-billion dollar investment plan to boost biofuel production.
The GOI has announced sensible biofuel policies, including a $108
million fund to create incentives for biofuels investments and $1.08
billion to improve agricultural and rural infrastructure. The GOI
has also signed 58 tentative agreements reportedly worth $12 billion
with foreign and domestic investors (mostly Chinese, Japanese, and
Malaysian firms). The GOI's biofuel initiative appears to be here
to stay, although at current prices for feedstock, Indonesian
biofuel remains uneconomic.

Asset Freezing
--------------


11. (SBU) Indonesia does not have a streamlined process to implement
asset-freezing obligations of Al-Qaeda-related individuals and
entities under UN 1267. Commercial bank compliance officers
complain that even when they receive timely asset-freezing orders
from GOI, the similarity of names and addresses in Indonesia make it
difficult to locate assets. Bank of Indonesia's (BI) credit bureau
is also a work in progress, with many borrowers not listed in the
database and commercial banks worried about data security. We
encourage you in your meeting with BI to raise the issue of a more
streamlined process for asset freezing under Indonesia's UN
obligations.

IPR - Steady Progress, More Prosecutions Needed
-------------- --


12. (SBU) The largest and most successful IPR raid ever in Indonesia
occurred on July 1 when Indonesian law enforcement raided two
factories suspected of producing pirated optical disks. While
impressive, sustained efforts are essential to avoid Indonesia's
return to the Priority Watch List. GOI needs to demonstrate success
in prosecuting not only working-level employees, but factory owners
as well. We suggest congratulating GOI officials on their success,
and encouraging continued efforts by emphasizing the economic
advantages of a strong IPR regime.

Tropical Forest Conservation Act
--------------


13. (U) GOI is eligible $19.6 million of "debt redirection" under
the Tropical Forest Conservation Act (TFCA) debt-for-nature program.
GOI is also hosting the UN Climate Change conference in Bali
December 3-14, which will draw attention to Indonesia's record as
the world's third largest producer of carbon emissions due to
deforestation. GOI is keen for solutions to deforestation, annual
haze and biodiversity loss. In your meeting with Ministry of
Finance officials you could encourage GOI to take full advantage of
the TFCA opportunity.

The U.S and ASEAN: Losing Influence?
--------------


14. (SBU) Our engagement with ASEAN remains robust; however lack of
U.S. participation at several recent key ASEAN events has caused a
loss of momentum. Meanwhile China continues to exert influence. In
your meetings with GOI officials the general message that "the U.S.
cares" about ASEAN would be helpful. Indonesia is also the country
coordinator for ASEAN-US economic cooperation. However, the MOT has
been slow to cooperate with USTR on initiatives. We suggest
informing GOI officials that the U.S. is interested to move more
briskly in expanding our economic cooperation with ASEAN, and would
appreciate MOT's responsiveness.

JAKARTA 00001933 003 OF 003



Economic Education
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15. (U) Indonesia's higher education system is underdeveloped. Many
students with means choose to attend graduate school abroad.
Indonesia has only 10,000 PhDs despite a population of 240 million.
English is not as widely taught as in other developing countries.
Indonesia's premier school for economics is the University of
Indonesia (UI); many senior GOI leaders rank among the alumni.

Media
--------------


16. (U) Indonesia's media is lively, but more oriented toward news
and opinion than investigation and analysis. Press freedom is still
developing, and in-depth, authoritative business and economics
reporting is weak, superficial and often tinged with nationalism.
Many in Indonesia do not read, and get their information primarily
from TV. Affluent Indonesians have access to wide range of foreign
cable TV channels, including CNBC, CNN, Fox and BBC.




17. (SBU) Journalists may ask why U.S. investment in Indonesia
remains slow. You may get questions on climate change: how U.S.
climate change and other environmental policies are linked to big
corporations; how the U.S. is doing in its struggle to find
alternative sources of energy. What is our policy on biofuels? How
could bilateral biofuel cooperation increase? You may also get
questions on the influence of U.S. drug, software and entertainment
companies on IPR policy, or avian influenza sample-sharing. How
does the U.S. assess IPR progress in Indonesia? What is the U.S.
doing to help Indonesia on air safety? Will Indonesia be considered
for MCC Compact Status this year? Also, there could be questions
about superpower competition from emerging economic powers China and
India.

Civil Aviation Safety Problems
--------------


18. (SBU) Indonesia suffered several serious civil aviation
accidents in early 2007, leading to an FAA Category 2 downgrade, EU
blacklisting, and negative media coverage. The FAA recently
finished a Technical Review of the Indonesian civil aviation
authorities at the request of the GOI to help identify aviation
safety issues and solutions.
Indonesia represents over $3 billion in current Boeing aircraft
orders. The CEO of Lion Air, the main purchaser of the Boeings, has
been invited to the dinner scheduled on July 25.

Port Security
--------------


19. (SBU) A U.S. Coast Guard (USCG) inspection has found Indonesia
not compliant with the International Ship and Port Facility Security
(ISPS) code. USCG will release a demarche giving Indonesia 90 days
to comply or face a Port Security Advisory (PSA). A PSA places
added security costs and increases delays on ships entering U.S.
ports subsequent to docking at Indonesian ports, and would
significantly impact Indonesia-US maritime trade.

HUME