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Cablegate: Indonesia - Corporate Social Responsibility Requirement

VZCZCXRO8074
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2438/01 2480220
ZNR UUUUU ZZH
R 050220Z SEP 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6070
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0736
RUEHBJ/AMEMBASSY BEIJING 4271
RUEHBY/AMEMBASSY CANBERRA 1108
RUEHUL/AMEMBASSY SEOUL 4166
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 002438

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-BAUKOL
SINGAPORE FOR BAKER
COMMERCE FOR 4430/BERLINGUETTE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO-FINEMAN
DEPARTMENT PASS EXIM BANK

E.O. 12958: N/A
TAGS: EINV ECON EFIN PGOV ID

SUBJECT: INDONESIA - CORPORATE SOCIAL RESPONSIBILITY REQUIREMENT
CREATES CONFUSION


1. (U) Summary. The new limited liability company law has created
great confusion in the business community by mandating that "natural
resources" companies engage in corporate social responsibility (CSR)
activities. The law is very vague and domestic business leaders
have already raised objections. International businesses chambers,
including the American Chamber of Commerce are still unsure what the
potential impact could be. Attention is now focused on the Ministry
of Finance, which will draft the implementing regulations t flesh
out the precise CS requireements companie will face. End Summary.

Limited Liability Legilation:
Surprise on Corporate Social Responsibilty
-------------------------------------------
2. (SBU) Parliament (DPR) passed draft a new law n limited
liability companies on July 20, 2007, hich awaits Presidential
signature and numbering. Article 74 of this law has created a great
dealof concern among both foreign and domestic busineses in
Indonesia. The article states that "resouce based" companies are
obligated to contribute o corporate social responsibility (CSR)
programs. (See unofficial translation at paragraph 7). The
inclusion of this article came as a surprise to any business
leaders and was reportedly insertedat the last minute by Members of
Parliament.

ndonesian Business Objects
--------------------------

3. (U) The Indonesian Chamber of Commerce KADIN) and other business
associations have issud a joint statement object ing to Article 74.
KADN Chairman Hidayat noted that KADIN would firmly rject any
implementing regulations (which have yetto be promulgated by the
Ministry of Finance) tht would require a certain percentage of
profit b diverted to CSR. Accordi(ng to KADIN, such a requrement
would simply constitute a tax on business Rafendi Djamin,
coordinator of Human Rights Wath Group, said a legal instrument is
needed to foce companies to be socially responsible and was plased
that Indonesia woul(d be the first country t pass such a law.

Intenational Business Confused
-------------------------------

4. (SBU) The American Chamber of Commr"ce (AmCham) held a
well-attended meeting of ove 20 companies on August 9 to discuss
the CSR legislation. AmCham members commented that Article 44 - as
currently drafted and in the absence of ip lementing regulations -
is unclear on several cuunts. Specifically, the new law:

-- fails to df"ine CSR;
-- does not designate a government agency to oversee CSR
activities;
-- does not discuss possible sanctions for noncompliance;
-- desiga te approved recipients of CSR funds; or
-- clarffy what is meant by a "natural resource" company.

Not all AmCham members are worried. One representative of a major
oil and gas company suggested hhat western firms have "nothing to
worry about" i(nce they already have significant CSR programs.AAmCham members concluded it would be wise to team p with other
business chambers, to discuss international best practices of CSR
with the relevant mnnistries, and to educate GOI officials and
Parliament about what many businesses are already doing in CSR.

Re-Election Pork?
-----------------

5. (SBU) There are several theories about what led Parliament to
insert this last-minute clause into the legislation. One theory is
that it is all about pork; since many officials are being elected
for the first time, the CSR Article 74 may be an attempt by Members
of Parliament to show constituencies they are improving their
localities. This may be an attempt to bring re-election pork to
home districts. Another theory suggests that domestic and regional
companies are more the target than western companies. Domestic and

JAKARTA 00002438 002 OF 003


Asian companies, as a generalization, tend to do less community
development and CSR than western ones. A related issue is that
under current law, extractive industry companies are required to
make an environmental impact statement and then file an
environmental mitigation plan to the Ministry of Environment. Once
they are finished extracting the resources, they are required to
implement the environmental mitigation plan. However, many smaller
Indonesian firms go out of business at the end of the resource
extraction and never implement the mitigation plan, leaving the
clean-up to the GOI or sub-national governments. Thus one goal of
the Article 74 may be to receive CSR benefits "up front" from
domestic companies.

Comment: No implementation?
---------------------------

6. (SBU) The CSR Article 74 seems to be an example of inexperienced
legislators, who lack both expert staff and an adequate consultative
process, passing confused and confusing legislation. The business
community has three months to provide comments on the law to the
Ministry of Justice and Human Rights before implementing regulations
are formulated. Prominent business leader and Chairman of the
Indonesian Employers' Association, Sofyan Wanandi, is recommending
that the CSR requirement not be implemented, according to the head
of the International Business Council, Peter Fanning. Many pieces
of legislation in Indonesia which can neither be properly
implemented nor enforced, simply die on the vine. Alternately, the
relevant Ministry delays the regulations for years. The CSR Article
74, is so garbled, confused and hastily drafted (without
consultation), it may suffer a similar fate.

7. (U) Text of Article 74, Unofficial Translation.

BEGIN TEXT
----------

Limited Liability Company Law, Chapter V, Social and Environmental
Responsibility, Article 74.

(1) Limited Liability Companies that conduct their businesses in the
area of and/or related to natural resources are obligated to conduct
Social and Environmental Responsibility.

(2) Social and Environmental Responsibility as referred to in line
(1) is the obligation of the Limited Liability Company, which is
budgeted and calculated as the cost of the Limited Liability
Company, whereby its implementation is carried out by considering
the sense of propriety and regularity.

(3) Limited Liability Companies that do not carry out their
obligations as referred to in line (1) shall be sanctioned according
to the stipulations of the legislation.

(4) Further stipulation on the Social and Environmental
Responsibility shall be further regulated under Government
Regulations.

Elucidation of Article 74

Line (1) This stipulation is aimed to maintain the establishment of
a harmonious, balanced and compatible relationship between the
Limited Liability Company and environment, values, norms and
cultures of the local community. "Limited Liability Companies that
conduct their businesses in the area of natural resources" refers to
Limited Liability Companies, whose business activity manages and
utilizes natural resources or whose business activity has an impact
on the functions of natural resource capacity.

Line (2) Self explanatory.

Line (3) "Shall be sanctioned according to the stipulations of the
legislation" refers to penalty by sanction to be regulated in the
respective legislation.

Line (4) Self explanatory.

JAKARTA 00002438 003 OF 003

END TEXT

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