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Cablegate: U/S Jeffery Meets with Economists and Business Leaders

VZCZCXRO2670
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2649/01 2630033
ZNR UUUUU ZZH
R 200033Z SEP 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6354
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0828
RUEHBY/AMEMBASSY CANBERRA 1215
RUEHWL/AMEMBASSY WELLINGTON 1783
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHRC/USDA FAS WASHDC
RUEKJCS/SECDEF WASHDC
RHEHNSC/NSC WASHDC
RHHMUNA/USCINCPAC HONOLULU HI
RHHJJAA/JICPAC HONOLULU HI
RUEKJCS/JOINT STAFF WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 002649

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR A/S HILL AND EAP/MTS
DEPT FOR E STAFF - JEFF YOUNG
TREASURY FOR IA-RDOHNER, ABAUKOL, KBERG
SINGAPORE FOR BAKER
DEPT PASS USTR FOR DBHATIA AND DKATZ
COMMERCE FOR 4430/BERLINGUETTE
ENERGY FOR A/S HARBERT, CUTLER AND GILLESPIE

E.O. 12598: N/A
TAGS: EAID ECON PGOV EINV ID
SUBJECT: U/S JEFFERY MEETS WITH ECONOMISTS AND BUSINESS LEADERS


1. (SBU) Summary. U/S Jeffery discussed Indonesia's economy and
investment climate with economists and business leaders September
10-11 in Jakarta. Outlying regions such as Aceh and Papua face
infrastructure and development challenges. Large established
western companies with good local partners can be profitable in
Indonesia, but despite investment climate problems such as legal
uncertainty and corruption which deters new entrants. End Summary.


Aceh, Papua and Decentralization Challenges
-------------------------------------------

2. (SBU) During a working dinner on September 10, Under Secretary
discussed reconstruction, investment climate and decentralization
challenges in Indonesia. Former Economic Minister Dorodjatun
Kuntjoro-Jakti noted that the tsunami losses in Aceh were
unbelievable but the generosity of the donors was tremendous. A
World Bank representative donor noted that there were 1,600 ethnic
Chinese businesspeople active in the local Nias market before the
disasters: now many are refusing to go back. Dozens of companies in
Aceh relocated to Medan. Hundreds of the best and brightest
students were wiped out. The Asian Development Bank country
director noted that now that much of the reconstruction is completed
or underway, the growing challenge is finding the people to train
for hospitals and clinics. An Asia Foundation representative
worried that the current donor-induced boom could bring on a
donor-induced slump after 2009.

3. (SBU) Regarding Papua, the Ambassador noted that the local
government has capacity constraints to spend both budget and donor
money. The World Bank said that 3% of GDP is currently sitting in
local government accounts, unspent. The October 2005 fuel price
hikes absorbed disposable income from the economy, increasing the
budget and thus regional transfers in 2006. This, in turn, created
absorption problems for many local governments. Money is often
going to local government apparatus such as vehicles and buildings
rather than to social welfare programs. Corruption makes it hard to
get programs through that can withstand real scrutiny, but locally
elected officials are under real political pressure to improve
services. Dorodjatun said that infrastructure development is
difficult because most construction companies in Indonesia are
Chinese-controlled and located in East Java, unwilling to go to
places like Papua. Road density in Papua is only 1 kilometer per
100 square kilometers.

Investment Climate: The Usual Suspects
--------------------------------------

4. (SBU) U/S Jeffery asked what the impediments are to an improved
investment climate and one economist noted, "the usual suspects,"
referring to Indonesia's oft-criticized obstacles. These include a
lack of legal certainty; unclear land titles leading to problems
with collateral; poor roads, inefficient ports; insufficient
electricity in many areas; corrupt tax and customs administration;
and labor issues, especially non-competitive severance pay. While
the growth rates are respectable, they have not been enough to bring
down poverty and unemployment significantly. Indonesia also has
natural disasters with great frequency. Dorodjatun added that
Indonesia lost ten years of infrastructure development due to the
financial crisis of 1997-98. However, the Ambassador added that
many U.S. companies have been operating in Indonesia for a long
time, and are making healthy profits, so the picture is not all
bleak.

AmCham Complains, but Wants
Indonesia to Reach Its Potential
--------------------------------

5. (SBU) In a closed meeting with business leaders from the
American Chamber of Commerce, a representative of the insurance
industry said that Indonesians have not yet embraced the concept of

JAKARTA 00002649 002 OF 002


insurance, relying instead on the extended family. Fourteen
international companies including MetLife, New York Life and AETNA
left Indonesia in the past five years. An attorney who represents
foreign interests stated that the legal system in Indonesia is
"harrowing." He advises clients in commercial disputes that they
cannot afford the corrupt court system and will lose because they
cannot play the game the Indonesian way. Western company executives
are sometimes jailed in the case of a dispute with a local partner.
The Parliament is a big part of the problem, demanding payment for
passing legislation. There are honest judges, however, and the
current anti-corruption efforts are the most credible in Indonesia's
history. The Anti-Corruption Commission (KPK) needs more money and
staff.

6. (SBU) A representative of the oil and gas industry noted that a
western company needs the right local partner to protect it.
Interests have to be aligned. A mining industry representative
concurred, noting that if you are big enough, established and have
the right partner, you can survive the other problems. Former
President Soeharto succeeded in making business deals because he
took Indonesia's bureaucracy out of the equation. When Soeharto
fell, hundreds of contracts of work (the partnership between the
central government and the foreign investor) were cancelled. While
Indonesia's natural resource potential is huge, the business climate
makes it tough for any but the largest players and deters new
entrants. Another issue is the lack of encouragement of
entrepreneurship. While Indonesians are early adopters of western
gadgets and goods (new cell phone technology, Krispy Kreme donuts),
innovative businesses and original ideas get little support. AmCham
members concluded that despite problems, they are making money.
Indonesia can have stronger growth and they want it to reach its
potential.

7. (U) After delivering well-received remarks to a joint lunch
meeting of American and Indonesian Chamber of Commerce (AmCham -
KADIN) business leaders, U/S Jeffery answered questions about
biofuels, the Tropical Forest Conservation Act debt swap and energy
cooperation. Prominent business leader and Chairman of the
Indonesian Employers' Association Sofyan Wanandi, said that Asia is
still concerned about ongoing ripple effects of the sub-prime
mortgage problems in the U.S. How serious are the worldwide effects
and how will it impact U.S. consumer behavior? U/S Jeffery noted
that the U.S. economy still has strong fundamentals, and that
responsible policy makers have been injecting liquidity into the
system. Asian markets and the ASEAN region are also stronger than
ever, thus more able to withstand external shocks. The recent APEC
statement in support of the Doha round emphasizes that free and fair
trade benefit all our economies.

HUME

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