Cablegate: Indonesia Trade and Investment Highlights - March 2007

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DE RUEHJA #1055/01 1030935
ZNR UUUUU ZZH
R 130935Z APR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 4331
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
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RUEHBY/AMEMBASSY CANBERRA 0659
RUEHBJ/AMEMBASSY BEIJING 4046

UNCLAS SECTION 01 OF 03 JAKARTA 001055

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E.O. 12958: N/A
TAGS: ETRD EINV ECON KIPR ID
SUBJECT: INDONESIA TRADE AND INVESTMENT HIGHLIGHTS - MARCH 2007

1. Summary: After lengthy negotiations, Parliament passed a new
Investment Law on March 29 that is now awaiting presidential
approval. The new law will require further implementing regulations
to come into force. Members of the G-33 met in Jakarta from March
20 to 21, with the G-33 claiming it clarified and reduced by half
the indicators it would use to determine which agriculture products
would receive special protection in the Doha Development Round
negotiations. Indosat, Indonesia's second largest telecom company,
reported $154.8 million in 2006 profits on March 23, a 13.1% profit
decline from 2005. The Minister of State Owned Enterprises
appointed Mustafa Abubakar as the new chairman of the State Logistic
Agency (Bulog) on March 21 after the previous chairman was arrested
on corruption allegations. On March 26, the Indonesian Chamber of
Commerce and Industry (Kadin) identified 10 prime industrial
clusters needing increased development in order to transform
Indonesia into an industrialized and commercially developed country
by 2030. The GOI re-affirmed its commitment to privatization of
unprofitable state owned enterprises(SOEs) at a conference held
April 12. End summary.

Parliament Passes Investment Law
--------------------------------

2. On March 29, Parliament passed a new Investment law aimed at
improving Indonesia's investment climate and attracting greater
foreign investment into Indonesia. The law, which replaces the 1967
Foreign Investment Law and the 1968 Domestic Investment Law, is now
waiting for President Susilo Bambang Yudhoyono's signature to come
into force. The law establishes basic investment protections
including the following:

-- Equal treatment for domestic and foreign investors. However,
equal treatment is not applicable to investors from countries which
obtain, "special rights based in an agreement with Indonesia."

-- The Government of Indonesia (GOI) will not undertake any
nationalization action, unless by law. In the event that the GOI
"takes action to nationalize," it will grant compensation with
specified amount based on the market value or arbitration if the two
parties do not agree.

-- Investors may freely transfer assets to other parties, as long as
assets are not determined (by law) to be state assets.

-- Investors may transfer and repatriate capital, profits,
royalties, income from asset sales, and other sources, in foreign
currency, in accordance prevailing laws and regulations. However,
this does not restrict the right of the GOI to receive taxes or
royalties or implement laws and regulations requiring reporting of
the transfer of funds. The GOI may also implement laws to protect
the rights of creditors and to avoid losses to the State.

-- Investments disputes between the Government and Investors may be
settled through international arbitration based upon prior agreement
between the parties.

3. In addition, the law requires investors to give priority to
Indonesian manpower. After mediation attempts and tripartite
proceedings, disputes between investors and labor will ultimately be
settled through the industrial courts. The law contains a new
provision requiring the GOI to terminate agreements or cooperation
contracts with investors following a binding court decision that
they have committed a corporate crime (including a tax crime or
inflating recovery cost and/or other mark-ups) resulting in loss to
the state. The law also specifies that certain sectors are closed
to foreign investment or open with restrictions, and requires the
GOI to determine open and closed sectors through a Presidential
Regulation.

4. The new law also appears to increase the authority of the
Investment Coordinating Board (BKPM)in both implementing and
proposing investment policy. The BKPM's duties under the law
include coordinating and implementing one door integrated services,
developing an investor roadmap, provide consultation to investors
seeking capital investments, and others. Although the law contains
no provision authorizing BKPM to approve investments, BKMN approval
is needed in order for investors to receive immigration facilities
or investment incentives. The law requires the GOI to launch a
"one-stop" service facility to speed up investment approval. It
also provides the authority for the GOI to issue a range of
incentives to both domestic and foreign investors, including:

JAKARTA 00001055 002 OF 003

--exemptions or reductions of income tax, import duties, and value
added tax;
--accelerated asset amortization and depreciation, and;
--exemption or reductions from land and building taxes.

5. Minister of Trade Mari Pangestu noted during a March 29 plenary
meeting that the new investment law offers a strong legal basis for
investment, easier access to obtain permits, including those
regarding taxes, and land rights.
Like many Indonesian laws, the Investment law will require further
implementing regulation. Such regulations will clarify open and
closed sectors (negative list), provisions for granting incentives,
and procedures for "one stop" integrated investment services.

G-33 Meeting in Jakarta
-----------------------

6. Indonesia hosted a Group of 33 (G-33) meeting March 20-21 to
assess the progress of negotiations on the Doha Development Agenda
(DDA) and reflect on the course of action on Special Products (SP)
and the Special Safeguard Mechanism (SSM). Press reports noted that
the G-33 continues to press for the acceptance of the SP and SSM
proposals, which allow for the exemption of tariff cuts on certain
products specific to each country. Chair of the G-33, Minister of
Trade Mari Pangestu, emphasized unity and solidarity in the process
of DDA negotiations, noting that ministers and high officials
pledged their full support toward addressing the issues of food
security, protection of livelihoods, and promotion of rural
development in developing countries. Pangestu told the press on
March 21 that the G-33 had agreed on three points: early removal of
trade distorting subsidies in developed countries that pose
significant market barriers to developing countries; upholding the
developing countries proposal to cut agriculture subsidies to
developed country farmers; and the need for developed countries to
show leadership and move the multilateral negotiations forward by
creating detailed and specific offers. The G-33 also claimed it
clarified and reduced by half the indicators it would use to
determine which agriculture products will receive special
protection.

7. Pangestu also noted that the meeting was not about the G-33
finding a "breakthrough" on major differences with the G-4, but
rather committing to engage constructively toward a solution.
Meeting participants included WTO Director General Pascal Lamy,
Brazilian Minister of External Affairs Celso Amorim, G-10
Representative, Japanese Minister of Agriculture Toshikatsu Matsuka,
and European Commissioner for Trade Peter Mandelson.

Indosat Net Profit Down
-----------------------

8. Indonesia's second largest telecom firm, PT. Indosat, reported
net profits of Rp 1.41 trillion ($154.8 million) in 2006, a 13.1%
decrease year-on-year from Rp 1.54 trillion ($169.1 million) in
2005. Indosat's mobile subscriber base failed to keep pace with
industry growth, growing only 15% last year to 16.7 million, and
lagging behind the rapid growth of the industry. Indonesia's mobile
phone industry has grown rapidly in recent years and analysts
predict the number of users will top 100 million by 2010 from 65
million last year. Attractive growth has also attracted new entrants
into the increasingly crowded telecom market.

GOI Replaces Logistic Chief
---------------------------

9. On March 21, the Indonesia's State Owned Enterprises Ministry
appointed a new head at the State Logistic Agency (Bulog) following
the arrest of the previous chief on corruption charges. The new
head is Mustafa Abubakar, a former senior official at the Ministry
of Marine Affairs and Fisheries and former World Bank consultant to
Bank Rakyat Indonesia and Bank Indonesia. Previous to his current
post, Abubakar served as Inspector General at the Ministry of Marine
Affairs and Fisheries from 1999 to 2006.

10. Abubakar's appointment comes after the Attorney General's office
arrested former chief Widjanarko Puspoyo on March 20 over
allegations of graft involving imports of cattle from Australia in
2001 that caused an estimated $1.2 million in losses to the state.
Bulog was established in 1967 to strengthen Indonesia's food supply
and distribution. Its main function today is to stabilize prices of
commodities such as sugar and rice.

JAKARTA 00001055 003 OF 003

KADIN Identifies 10 Prime Industries in Roadmap
--------------------------------------------- --

11. The Indonesian Chamber of Commerce and Industry (Kadin)
identified 10 prime industrial clusters needing increased
development in order to transform Indonesia into an industrialized
and commercially developed country by 2030. Kadin called for
appropriate policies at the national level to promote increased
investment and better management in industries. Kadin also
recommended re-orienting government policy away from promoting the
export of raw materials toward directing raw materials to supplying
domestic production. Kadin Head of Industry and Technology, Rahmat
Gobel, expressed concern over the future competitiveness of
Indonesian industry, noting that tariff cuts starting in 2010 will
intensify competition in the ASEAN market. Gobel also said that in
this increasingly competitive environment, national industrial
restructuring will be vital to boost competitiveness in key sectors
and ensure business survival. The 10 prime Industries are:

-- Textile and footwear;
-- Electronic and parts thereof;
-- Automotive and parts thereof;
-- Shipping;
-- Infrastructure Developers, such as power plants, toll roads,
telecommunication, construction, cement, steel and ceramic;
-- Capital goods and machineries;
-- Upstream petro-chemical, including fertilizer;
-- Fisheries;
-- Agriculture, poultry, forestry and plantation, including food and
beverage; and
-- Cultural and traditional based industry, such as traditional
medicine, handicrafts, and batik.

Government Commits to Privatization
-----------------------------------

12. The GOI re-affirmed its commitment to privatization of
unprofitable state owned enterprises(SOEs) at a conference held
April 12. President Susilo Bambang Yudhoyono and State Minister for
State-Owned Enterprises Sugiharto called for the 20 current
unprofitable SOEs to be privatized. Sugiharto restated his
commitment to selling a 30% stake in state toll road operator Jasa
Marga and to privatizing Bank Negara Indonesia (BNI), the country's
second largest bank. Both Sugiharto and the President said they
expect privatization activities to start this quarter.

HEFFERN

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