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Reference ID: 07JAKARTA2470
Created: 2007-09-06 11:08
Released: 2011-08-30 01:44
Classification: UNCLASSIFIED//FOR OFFICIAL USE ONLY
Origin: Embassy Jakarta
VZCZCXRO9114
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ZNR UUUUU ZZH
P 061108Z SEP 07 ZDK
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 6115
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 4284
RUEHBY/AMEMBASSY CANBERRA PRIORITY 1129
RUEHKO/AMEMBASSY TOKYO PRIORITY 0757
RUEAIIA/CIA WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY
RHHJJPI/PACOM IDHS HONOLULU HI PRIORITY
UNCLAS SECTION 01 OF 02 JAKARTA 002470
SIPDIS
SENSITIVE
SIPDIS
DEPT FOR EAP/MTS, EAP/RSP, EEB/IFD/OIA
E.O. 12958: N/A
TAGS: ECON EINV EFIN ENRG PGOV KGHG ID
SUBJECT: DAS MARCIEL MEETINGS ON INDONESIA'S ECONOMY,
INVESTMENT CLIMATE
REF: A. A) JAKARTA 2069 (NIKE CASE)
¶B. B) JAKARTA 2097 (COUNTERFEIT PHARMACEUTICALS)
JAKARTA 00002470 001.2 OF 002
¶1. (SBU) Summary. EAP Deputy Assistant Secretary Scot
Marciel, during his August 27-28 visit to Jakarta, heard
complaints that Indonesia is not attracting as much
investment as neighbor Vietnam. Reasons include the
Indonesian government and Parliament's ambivalence towards
foreign companies and punitive actions such as threatening or
jailing foreign business executives during contract disputes.
Domestic and international companies are often frustrated by
regulations issued without a consultative process. While
growth is good, a better business climate could improve
investment and infrastructure. End Summary.
Investment Still Sluggish
-------------------------
¶2. (SBU) At a working dinner on economic issues, a prominent
businesswoman noted that media stories about Indonesia are
all negative. The media was suppressed under Soeharto, but
now it publishes bad news, so that is what readers see.
Investors want a sense of security for their potential
investments and read these reports with concern. One GOI
official believed that growth is fast enough, stating "growth
is already at 6%. If we grow at 8% we will overheat." A
member of Parliament (DPR) noted that plenty of short-term
portfolio investment is coming in, but not long-term.
¶3. (SBU) On infrastructure projects, Marsillam Simanjuntak, a
Presidential advisor, said that the GOI's policies on
infrastructure are flawed. He asked, "Why do 10,000 MW
electricity projects need a government guarantee? China,
Japan and EU companies all participated in the tender, but
after China won, it requested a guarantee. This creates a
discrepancy of trust." He concluded the GOI has not yet
found a way to balance its legitimate need for power with
"vested interests." The Commissioner from a state-owned
enterprise said that Indonesia's state-owned sector should be
in the hands of the public, not the government. Conflicts of
interest cannot be resolved under the current system.
¶4. (SBU) DAS Marciel and the Ambassador noted that bad media
stories about Indonesia are discouraging to investors, who
are "waiting to see." A certain momentum of good news
stories is necessary to attract attention. The lack of legal
certainty has a chilling effect, such as the GOI appeal of
the Newmont verdict in the Buyat Bay case. Ongoing IPR
problems also dampen enthusiasm for Indonesia, such as the
GOI's rampant use of pirated Microsoft software and the large
percentage (20-25%) of counterfeit pharmaceuticals. The
Ambassador said that U.S. company executives here are afraid
of incarceration if they have a contract dispute such as Nike
recently experienced (ref A). Actions like these could cause
wider harm as investors may consider shutting down all
operations in Indonesia.
Business Wants More Consultation with GOI
-----------------------------------------
¶5. (SBU) American Chamber of Commerce (AmCham) members are
optimistic about expanding their businesses but still
frustrated at the lack of regulatory consultation. Laws and
regulations are largely being written with no connection to
the reality of the sectors they impact. Many GOI regulations
are "neither implementable nor enforceable," one
representative of a pharmaceutical company noted. Several
DPR members also have a streak of economic nationalism with
an attitude towards foreign investors of, "We want your
money, but we don't want you." "We are expanding, but we
could do more if the environment was easier," the AmCham
President noted. AmCham said that domestic companies are
equally concerned about the business climate, with legal
uncertainty high on the list. IPR issues are still a huge
concern. The biggest raid in history of counterfeit
pharmaceuticals (ref B) is "just the tip of the iceberg." In
the telecommunications sector, options for U.S. companies are
now only in services not in infrastructure.
Economic Advisor - Getting Enough Growth
----------------------------------------
JAKARTA 00002470 002.2 OF 002
¶5. (SBU) The Director of the Institute for Social and
Economic Research at the University of Indonesia, Dr. Chatib
Basri, also serves as an advisor to the Economic Cabinet
Ministers and to President Yudhoyono. Dr. Basri said the
biggest concern to the GOI's economic leaders is whether
growth will be strong enough to create jobs. There is
conflict between the Ministry of Industry, which seeks
protections, and the Ministry of Trade, which wants a more
open trading policy. Domestic companies fear competition.
The problem is not the demand side: exports are doing well
and will continue to do so as long as China maintains growth.
The supply side constraints include transportation and
energy infrastructure: a lack of good roads and adequate
electricity, for example. Foreign direct investment from the
U.S. is also problematic. Embassy Econ officers raised the
problems we've had with exploratory discussions on a
Bilateral Investment Treaty and with an updated Overseas
Private Investment Corporation (OPIC) agreement. Dr. Basri
said that, "Many in the GOI view it as politically negative
to be seen doing deals with the U.S. Major political players
such as Amien Rais say that everything related to the U.S. is
bad."
¶6. (SBU) Dr. Basri said that labor conditions are also
problematic. After Bolivia and Portugal, Indonesia has the
highest severance rates in the world. This acts as a kind of
"tax on business" and companies thus prefer to hire temporary
workers. Labor reform is too politically sensitive to
tackle, however. Unemployment in the formal sector and
underemployment is still high, but because there is no social
security, "only the rich can afford to be unemployed." To
alleviate rural poverty, Basri suggested to the President a
kind of employment scheme for rural infrastructure at below
minimum wages in order to attract those truly below the
poverty line into wage-paying jobs.
¶7. (SBU) Corruption still contributes to the cost of doing
business but has reduced dramatically: bribes added about
12% to the cost of production in 2001 but fell to 6% in 2005.
There is not yet a good incentive system for Indonesian
civil service officials to improve their performance, Dr.
Basri noted. Under Soeharto, the incentive system to
implement the President's priorities was clear: promotion or
jail. Streamlining government is starting to reduce extra,
corrupt sources of income. The GOI needs to find a way to
bring in "sweeteners" for motivation, Dr. Basri believes. In
terms of good civil service internal controls and budget
practices, "We're still with the dinosaurs," Dr. Basri noted.
Local governments are producing bad regulations because
there is no consultation process or regulatory impact
assessment. Some are trying to make improvements, however.
One way to promote change may be to support reform-minded
local officials who are moving fastest to improve the
business climate.
Biofuels and Climate Change
---------------------------
¶8. (SBU) On biofuels, Dr. Basri said that he was, "skeptical
from the Qtset," since the President wanted to use this
program mainly for employment generation. Dr. Basri believes
an alternative fuel program will not work until the
administered prices for fuel subsidies are fully removed. In
his view, the program will neither produce an economically
sound product nor will it create jobs in the way the
President originally conceived it. Dr. Basri was tasked by
the Ministry Finance to draft a paper on climate change for
the UN Framework Conference on Climate Change 13th Conference
of Parties (UNFCCC COP-13) conference in Bali December 3-14.
Embassy will follow up with Dr. Basri to get an advance copy.
HUME
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