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Cablegate: National Investment Team Vs Negative List

VZCZCXRO7600
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #2973/01 2970602
ZNR UUUUU ZZH
R 240602Z OCT 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6776
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHKL/AMEMBASSY KUALA LUMPUR 2396
RUEHBK/AMEMBASSY BANGKOK 8197
RUEHGP/AMEMBASSY SINGAPORE 6191

UNCLAS SECTION 01 OF 02 JAKARTA 002973

SIPDIS

SINGAPORE FOR SUSAN BAKER

SIPDIS
SENSITIVE

DEPT FOR EAP/MTS, EAP/RSP, EB/TPP, EB/TPP/BTA
COMMERCE FOR SBERLINGUETTE
USTR FOR BWEISEL
TREASURY FOR IA-BAUKOL

E.O. 12598: N/A
TAGS: CASC ASEC EINV ECON ID
SUBJECT: NATIONAL INVESTMENT TEAM VS NEGATIVE LIST


1. (SBU) Summary. The Government of Indonesia (GOI) reestablished
its National Team for the Enhancement of Export and Investment
(PEPI) to coordinate investment policy formulation and
implementation in addition to investment promotion. The institution
was reinvigorated in response to complaints from the international
business community over Indonesia's "negative list" of sectors
limiting foreign investment. GOI officials are already directing
disgruntled foreign investors to this new national team, however
PEPI's success (and ultimate longevity) may be determined by how
well it achieves its first objective: clarifying the grandfathering
provision of Indonesia's 2007 Investment law. End Summary.

Season of Discontent
--------------------
2. (SBU) PEPI was reestablished to assuage increasing investor
anxiety over implementation of Indonesia's 2007 investment law.
Investors have expressed concern over "mixed messages" from the GOI
on several issues, most notably the retroactive application of
investment limits to companies incorporated in Indonesia before
enactment of the law. GOI officials, (including Minister Pangestu),
have repeatedly assured pre-existing foreign investors they would be
"grandfathered" and not subject to the same requirements and
restrictions as new investors. Nonetheless some investors have
complained of pressure from GOI officials to begin divesting.

3. (SBU) For example, the foreign owners of Jakarta-based security
firms were recently called in to meet police officials who informed
them that they would be expected to divest their majority shares by
the end of the year. The police officials had even "helpfully"
identified local business partners ready to buy the divested shares.
When the foreign investors complained, the police officials
insisted that that the investors had "misinterpreted" the
grandfathering provision of the law.

PEPI to the Rescue
------------------
4. (SBU) Bacelius Ruru, the newly designated Executive Secretary of
PEPI, tells us that PEPI has prepared a draft recommendation
clarifying the grandfathering provision. Ruru explained that
companies that applied for or received a business license prior to
the enactment of the investment law would not be required to divest
their shares. In addition, those companies would also be allowed to
expand their business (within the same sector) to the maximum
ownership percentage allowed under the previous regulations. If
enacted as an implementing regulation, Ruru hopes the clarification
will serve to calm investor anxiety as well as deter GOI officials
from enforcing their own interpretation of the law on sectors they
regulate. While the recommendation has been endorsed by the
ministerial-led working group, it is unclear how or when it will be
ultimately codified as an implementing regulation.

How it Works
------------
5. (SBU) PEPI was legally re-established in July 2007 through
Presidential Decree but was not formally announced until September
25 when Minister for Coordinating Economic Affairs Boediono
presented it as part of the GOI's annual update on economic reforms.
PEPI used the interim time to identify office space and recruit and
staff a full-time secretariat comprising over a dozen personnel.
This latest version of PEPI is organized with three working groups:


-- Investment Policy Formulation;
-- Investment Policy Implementation;
-- Investment Promotion.

The three working groups are led by Minister Pangestu, (with
Vice-Chair Minister of Transportation Djamal), Minister of
Administrative Reforms Effendi (with Vice-Chair Investment Board
Chairman Lutfi) and Minister of Industry Fahmi (with Vice-Chair
Minister of Tourism Wacik) respectively. While the Secretariat
maintains its offices in the same building as the Investment
Coordinating Board (BKPM), PEPI officials insist it is an autonomous
institution with an independent budget that answers to the President
through the ministerial working groups.

6. (SBU) The actual process for converting working group
recommendations from proposals to policy is both unclear and
untested. As explained by PEPI officials, recommendations from the

JAKARTA 00002973 002 OF 002


working groups will go to the lead Ministers for endorsement, and
then be forwarded to Coordinating Minister Boediono for provisional
approval. The Ministry for Coordinating Economic Affairs would then
direct the recommendation either to the President's office for final
approval and issuance as a Presidential Decree, or to the relevant
line Ministry for issuance as a regulation.

And For My Next Trick...
------------------------
7. (SBU) Ruru explained that PEPI's most important role is to serve
as the government's coordinating mechanism on investment policy. In
addition, PEPI has responsibility for formulating a "more
integrated" approach to investment promotion and providing
recommendations on implementation of the investment law, including
advising the government on future changes to the negative list.
Ruru also expressed the willingness of PEPI to play an informal role
in helping to mediate investment disputes, but conceded it had
little direct authority. Lastly, Ruru expounded on the technical
challenges inherent to investment policy and requested assistance
for PEPI in the form of advisors (statisticians, economists,
investment specialists) like those provided to the Ministry of Trade
by the USAID-funded Indonesia Trade Assistance Project (ITAP).

The Verdict is Still Out, However...
------------------------------------
8. (SBU) COMMENT: In Indonesia, the setting up of a "National Team"
to address any high-profile issue is a standard consensus-building
strategy, and therefore not remarkable in itself. The success
record of these teams in other sectors is not encouraging. Nor is
the uncertainty of how PEPI will manage its relationship with the
notoriously turf-conscious BKPM. But PEPI's independent budget,
full-time staff and confidence in taking on the contentious issue of
grandfathering give cause for guarded optimism.

HUME

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