EAST JAVA MUDFLOW UPDATE: FULL ECONOMIC IMPACT

UNCLAS SECTION 01 OF 02 JAKARTA 002375

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EAP/MTS AND DS/IP/EAP, DOE FOR CUTLER AND
GILLESPIE, COMMERCE FOR USDOC 4430

E.O. 12958: N/A
TAGS: ECON EINV EPET ELAB PGOV ASEC ID
SUBJECT: EAST JAVA MUDFLOW UPDATE: FULL ECONOMIC IMPACT
DIFFICULT TO QUANTIFY

REF: SURABAYA 26 (AND PREVIOUS)

JAKARTA 00002375 001.2 OF 002


THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT
ACCORDINGLY.


1. (SBU) Summary: During EAP Deputy Assistant Secretary Scot
Marciel's visit to the Sidoarjo muflow site, the site manager
expressed confidence that current efforts were mitigating the
risk to surrounding areas, but warned about possible seismic
activity. Local economic experts were univerisally critical
of government efforts to address the impact of the mudflow on
surrounding neighborhoods and businesses, despite positive
growth numbers. Minimal government money has been allocated
to relocate critical infrastructure and the mudflow
management body is facing serious financial difficulties.
The Japanese Consul General warned publicly about the
mudflow's impact on East Java's investment climate. End
Summary.


2. (SBU) On August 26, DAS Marciel, accompanied by two
staffers from the House Foreign Affairs Committee, visited
the Sidoarjo mudflow and received an update on operations
from Sofian Hadi, Director of Operations for the Sidoarjo Mud
Distaster Management Board (BPLS). Sofian told the visitors
that the situation at the site had improved in the
three-months since BPLS had been in operation, but would
become more difficult when the rainy season began in
November. He expressed concern, however, that recent
increases in mudflow rates (currently at one cubic
meter/second) and the emergence of new water geysers
throughout the area signaled the near-term onset of siesmic
activity that could threaten the dams' integrity. He
reiterated previous predictions that the flow rate of the
Porong river during the rainy season would be sufficient to
move the mud out to sea. Sofian admitted that financial
concerns threatened operations, mentioning that he had not
been paid in three months. (Note: We understand that
although BPLS is a government body, the Lapindo company is
responsible for paying the bills.)


3. (SBU) In a August 26 lunch with DAS Marciel, six local
economic experts painted a contradictory picture of the
impact of the mudflow on East Java's economy. According to
Indra Nur Fauzi, Managing Director, Regional Economic
Development Institute, East Java's economic growth in 2006
was approximately 5.80%, down only marginally from 5.84% in

2005. He suggested that the numbers were somewhat misleading
because there had been a significant shift from manufacturing
to trading and services over the past year. The provincial
government viewed this shift as a positive trend toward a
more mature economy. The experts disagreed with this
assessment, as the manufacturing sector had declined badly,
forcing manufacturing workers and business owners to move
into trading (primarily as importers of Chinese products).
Kresnayana Yahya, Director of Enciety Business Consultants,
said that the transportation sector had declined
approximately 60% in the effected area, increasing costs to
companies exporting through Surabaya's ports. Tourism in
areas south of the mudflow had been hard hit, with occupany
rates in Malang's 28 hotels falling to less than 20%
occupancy.


4. (SBU) All agreed that the government had failed to take a
serious or comprehensive approach to deal with the mudflow's
impact. Subagyo, a professor at Airlangga University, said
that the government, for example, had only allocated Rp 600
billion (approximately USD 63 million) in 2007 to buy land
for relocating infrastructure. Projected timetables to
replace the toll road ranged from 2008 to 2010, even though
construction had yet to begin. Yahya and Indra complained
that BPLS did not have the budget or the authority to handle
the problem. Yahya added that although the BPLS deputies
responsible for social and infrastructure issues had many
plans, they had no budget with which to implement them. The
experts lamented that neither the central nor provincial
governments had developed or implemented plans to offset the
economic impact of the mud flow through tax breaks,
rescheduled debts, economic incentives, fee waivers, etc.


5. (SBU) Representatives from Bank Indonesia noted that the

JAKARTA 00002375 002.2 OF 002


bank had taken steps to provide special treatment to members
of the business community affected by the mud, but this
policy was limited to only five municipalities and regencies.
Bank Indonesia is considering expanding coverage, but needs
to evaluate carefully claims that the mudflow is responsible
for business failures. While the Sidoarjo regency used to be
a favored property location in East Java, customers are
turning to other regions and property located miles from the
mudflow fail to find buyers. They noted that some businesses
have relocated to other areas in East Java or to Central
Java/Jogyakarta where salaries are lower. Bank Indonesia reps
referred to a "paradox of growth," where growth rates
remained high, yet poverty and unemployement increased. Bank
Indonesia statistics put East Java's second quarter growth at
6.01%, with expectations that export values will break
records for the year.


6. (SBU) In separate conversations with Principal Officer and
local media, the Japanese Gonsul General Yushi Suzuki
complained that the mudflow was harming Japanese businesses
and deterring Japanese investment in East Java. Most
existing Japanese investors are located at the Pasuruan
Industrial Estate Remang, located just south east of the
Sidoarjo, and are thus experiencing serious delivery
disruptions. According to the East Java Investment Board,
although Japan traditionally ranks fourth in East Javanese
investments (after Taiwan, South Korea, and China),in the
first six months of 2007, there has been no new Japanese
investment. According to the investment board, Japanese
companies have invested in 127 projects valued at USD 2.198
billion. Since January 2007, Japanese investment has been
limited to expansions of existing projects, valued at USD
21.807 million.
HUME