INDONESIA LOOKING AT TWO LARGE F-16 DEALS

C O N F I D E N T I A L SECTION 01 OF 02 JAKARTA 002725 SIPDIS SIPDIS DEPT FOR EAP, EAP/MTS, EAP/RSP, PM, PM/DTC, ISN, T SECDEF FOR USDP/ISA/AP (IPSEN) JOINT STAFF FOR CLEMMONS E.O. 12958: DECL: 09/24/2017 TAGS: PREL MARR ETTC PGOV ID SUBJECT: INDONESIA LOOKING AT TWO LARGE F-16 DEALS REF: A. JAKARTA 2475 ¶B. MOSCOW 4447 Classified By: Deputy Pol/C Stan Harsha for reasons 1.4 (b,d). ¶1. (C) SUMMARY: Indonesia is actively pursuing two large orders for new U.S. F-16 planes and parts to refurbish its existing older models. The two deals, a Foreign Military Sales (FMS) case and a commercial case, each involving several hundred million dollars, demonstrate that the Indonesian Air Force and Ministry of Defense can find the money to spend on high priority arms and are willing to buy U.S. equipment, if the deal is right. The F-16 purchases, should they proceed, suggest the Indonesian Air Force is serious about longer-term military cooperation with the USG. The Army and Navy, however, have shown little interest in U.S. equipment since the resumption of mil-mil relations in ¶2005. END SUMMARY. ¶2. (C) GOI CONSIDERS DEALS: The Indonesian government is seriously pursuing spending several hundred million dollars on U.S. F-16 fighter jets and parts as part of Indonesia's effort to rebuild its military. Despite a defense budget which is one of the lowest in the region, Indonesia is apparently finding the money and the financing to consider major deals. The two purchases, which originate from the Air Force and Defense Ministry, respectively, do not appear to be coordinated with one another, pointing up the bifurcation that persists in Indonesian military budgeting, planning and procurement. These deals come on the heels of a much-ballyhooed USD 1 billion arms deal with Russia, based entirely on credit, which was signed during President Putin's recent visit to Jakarta (see reftels). ¶3. (C) DEAL NO. 1 DIRECT USG SALE (FMS): The first deal involves a request for price and availability data by the Air Force for sixteen new F-16s block-52 production models, with the stated intention of taking delivery beginning in 2012. The basic block normally costs about USD 12.5 million and additional systems can run as high as USD 33 million per plane. While the details of the proposed order are not yet clear, a modest average cost of USD 30-35 million would mean USD 500 million for the entire fleet. The request was placed by the Air Force's Director of Aeronautics during a U.S. visit currently under way. The order appears to have been placed without internal coordination with either the headquarters of the Indonesian Armed Forces (TNI) or the Ministry of Defense (DEPHAN),although DEPHAN approval will almost certainly be needed for eventual completion. This way of doing business continues to be a pattern of individual service operation. The deal shows the Indonesian Air Force's preference for U.S. equipment. All of the six new FMS cases that Indonesia has opened since the lifting of U.S. restrictions in November 2005 have been placed by the Air Force, for a total of USD 47 million, while the Indonesian Navy and Army have yet to approach us. ¶4. (C) DEAL NO. 2: COMMERCIAL SALE: The second deal, which is being prepared by DEPHAN, involves the refurbishment and upgrading of ten older non-flyable and four flyable F-16 models already in Indonesia's fleet, plus the purchase and upgrading of six additional planes from either Belgium or Holland. All would require mid-life upgrades (MLU) in Indonesia, bringing the total current F-16 fleet to twenty. The deal, which is still being negotiated with a private company, would involve the establishment of a Maintenance and Repair Organization (MRO) which would eventually be transferred to DEPHAN, at a cost of USD 18-20 million. The estimated cost of each upgrade of the 20 planes is USD 9-11 million, excluding the cost of purchasing the six foreign planes. The deal, which is estimated to total USD 200 million, would be financed by an international consortium, with GOI guarantees, would involve repayment over several years at an interest rate at or near the EXIM Bank rate. ¶5. (C) IMPLICATIONS FOR U.S.-INDONESIA MILITARY RELATIONS: The commercial deal is likely to be finalized first, possibly JAKARTA 00002725 002 OF 002 by the end of 2007, while the FMS deal could well take until ¶2008. Neither is a certainty at this time, but each sale would be a huge boost to our overall defense engagement with the Indonesian military. The commercial deal will require an export license and end-user certificate. Over the past two years since sanctions were lifted, U.S. arms purchases by Indonesia have remained modest. With these two deals, the Indonesian Air Force is signaling its desire to engage more broadly and for the longer term. While multiple factors, including Indonesian progress on accountability, enter into the calculus, Mission strongly supports both sales as an appropriate manifestation of our expanding military relationship. HEFFERN