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Cablegate: Usabc Seeks Business Opportunities in Jakarta

VZCZCXRO3685
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3035/01 3040616
ZNR UUUUU ZZH
R 310616Z OCT 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6861
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 1031
RUEHBJ/AMEMBASSY BEIJING 4436
RUEHBY/AMEMBASSY CANBERRA 1454
RUEHUL/AMEMBASSY SEOUL 4263
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 06 JAKARTA 003035

SIPDIS

SENSITVE
SIPDIS

DEPT FOR EAP/MTS AND EB/ESC/IEC
DEPT PASS USTR FOR KATZ AND BROOKS
DEPT PASS OPIC, EXIM, TDA
TREASURY FOR IA-SETH SEARLS
DOE FOR CUTLER/PI-32 AND GILLESPIE/PI-32
COMMERCE FOR 4430/BERLINGUETTE

E.O. 12598: N/A
TAGS: ECON EINV ENRG ETRD EFIN PGOV ID
SUBJECT: USABC SEEKS BUSINESS OPPORTUNITIES IN JAKARTA

Ref: A)Jakarta 3010 (SBY Lays Out Priorities)

B)Jakarta 2969 (Time Magazine Libel Case)

1. (SBU) Summary. President Susilo Bambang Yudhoyono (SBY) and
seven cabinet ministers told a U.S.-ASEAN Business Council (USABC)
delegation that Indonesia desires closer business and investment
ties with U.S. companies. The five-day trade mission to Jakarta ran
from October 22 - 26. Vice President Jusuf Kalla told the
delegation on October 24 that Indonesia wants to capitalize on its
hard-won macroeconomic stability to draw in foreign investment and
technology. He promised to work cooperatively to address U.S.
business concerns about the investment climate. He struck a
discordant note, however, when he seemed to defend the GOI's
criminal prosecution of Newmont Mining Co. Foreign Minister
Wirajuda said The U.S. should demonstrate engagement by signing the
ASEAN Treaty of Amity and Cooperation TAC. (SBY meeting reported ref
A.)

2. (SBU) Summary Continued. USABC President Matt Daley told GOI
interlocutors throughout the five-day visit that most of the
companies on the delegation have been long-term, socially
responsible investors in Indonesia. He said American companies want
to be productive partners in building Indonesia's future. USABC
leaders also proposed establishing a university-based governance and
anti-corruption research institute in Indonesia. Despite the good
atmospherics, USABC delegates said concerns over the foreign
investment negative list, contract sanctity, judicial impartiality,
weak infrastructure, and inflexible labor laws hinder greater U.S.
investment. End Summary

Ambassador on Past, Present, and Future
---------------------------------------

3. (SBU) Ambassador Hume kicked off the delegation's week with an
October 22 breakfast address highlighting the messages we have
stressed with GOI economic contacts. The Ambassador underlined that
the USG is focused on Indonesia's future and that we are
uninterested in re-litigating past business disagreements. He said
we continue to urge the GOI to draw a line under past investment
disputes by resolving them in a transparent, rule-based manner that
honors contractual commitments. Once the past is indeed past, he
said, we have stressed the importance of clarifying the present
rules of the road for foreign investors. Certainty and
predictability are crucial in attracting the multi-billions of
dollars of foreign investment that Indonesia needs to lower poverty
and unemployment. With the past put to rest and the present
clarified, Ambassador Hume said the real challenge for the GOI is to
create a vision of the future for Indonesia. He stressed that
foreigners can help make that vision a reality, but that the crucial
decisions lie with the GOI and their business leaders.


USABC Stresses Long-Term Partnerships
-------------------------------------

4. (SBU) Throughout the week, USABC President Matt Daley picked up
on the Ambassador's themes and stressed to his GOI hosts that the
majority of U.S. companies on the delegation have a long history of
socially responsible investment in Indonesia. He contrasted the
partnership-oriented long-term role that American companies have
played in Indonesia with those of other countries that have sought
only a mercantilist relationship. USABC delegates uniformly praised
the courageous political decisions SBY has taken in the first three
years of his administration. They said his strong leadership has
been a key factor in resurgent foreign interest in doing business in
Indonesia. Nonetheless, throughout the trip USABC delegates said
they remained concerned by several issues that inhibit trade and
investment. They are concerned by the expansive nature of the
recent foreign investment negative list. They worry about threats
to contract sanctity. The recent Time libel case (ref B) has
renewed their disquiet over judicial impartiality. Weak energy and
transportation infrastructure make Indonesia less competitive than
its neighbors. Inflexible labor laws hinder greater foreign
investment by dramatically raising the costs of hiring and firing
workers in response to changing market conditions.


JAKARTA 00003035 002 OF 006


5. (U) USABC leaders made a pitch in all their meetings with GOI
officials for a proposal to establish a university-based governance
and anti-corruption research institute in Indonesia. USABC Vice
Chairman Rod Hills is leading the initiative. Coordinating Minister
Boediono, Finance Minister Sri Mulyani, BKPM Chairman Lutfi, and
former Foreign Minister Ali Alatas offered their support. USABC
will work with Indonesian and American companies to finance this
project, said Hills. The proposed Indonesian institute would be
part of the Hills Program on Governance (HPG) at the
Washington-based Center for Strategic and International Studies
(CSIS) and its five HPG centers worldwide. CSIS will host a
workshop in Jakarta in early 2008 to scope the issues and framework
for the proposed research institute. USABC President Matt Daley
made reference throughout the week to Ambassador Hume's briefing for
the delegates and stressed to GOI officials that USABC has its focus
firmly fixed on Indonesia's future and is not seeking to re-litigate
past disputes. Hills and Daley stressed that the HPG was offered in
that spirit.

VP Kalla: RI Needs Foreign Capital and Technology
--------------------------------------------- ----

6. (SBU) Vice President Jusuf Kalla told visiting delegates of the
U.S.-ASEAN Business Council (USABC) on October 24 that Indonesia
plans to capitalize on its hard-won macroeconomic stability to
attract greater levels of foreign investment and technology. He
promised to work cooperatively to address U.S. business concerns
about the investment climate. Noting the almost-daily new highs for
crude oil benchmarks, he made a pitch for greater U.S. upstream oil
and gas investment. Kalla said that Indonesia, like most of Asia,
will need to focus on efficiency and greater use of technology to
overcome high global oil prices since "it is not always possible to
use market prices for oil" in the consumer market. Bountiful
investment opportunities exist for U.S. companies in the biofuels
sector, said Kalla.

7. (SBU) Kalla freely offered that the GOI still faces hurdles in
attracting foreign investment. Bureaucracy and poor infrastructure
create disincentives for foreign investors, according to Kalla, and
the GOI is continuing to work on these problems. Noting that lack
of electricity is a powerful disincentive, Kalla invited U.S.
companies to be part of the solution by building power plants. A
delegate later told Kalla that greater foreign infrastructure
investment will require the GOI to be more transparent and
consistent in explaining the terms and conditions under which it
will provide guarantees and other forms of financial support for
infrastructure.

8. (SBU) In response to a delegate's concern about the recent $111
million libel judgment against Time magazine, Kalla said rule of law
and anti-corruption issues were central to the GOI's agenda. He
noted that judges will see their salaries doubled next year, but
added that the entire judiciary needs greater training and more
accountability and transparency. Kalla struck a discordant note,
however, when he followed up by defending the GOI's prosecution of
Newmont Mining Co. on criminal pollution charges. "What would
happen to them in California?" asked Kalla. "They would be in
jail," he said, ignoring that the Indonesian court that heard the
case dismissed all charges, completely rejecting the GOI's case. On
the Time case, Kalla told the Time Warner delegate to take heart
because "you have a good lawyer and you just need to let the system
work." Kalla acknowledged problems with a labor system that grants
100 weeks of severance pay to dismissed workers. However, he smiled
and added, "We understand your concerns, but salaries are not so big
here." Kalla closed the meeting with a promise to work together to
address U.S. business concerns with the negative list for foreign
investment.

Finance Minister: Tax Arrears Cleaned Up
----------------------------------------

9. (U) Finance Minister Sri Mulyani Indrawati highlighted progress
on the Ministry's reform roadmap and discussed areas for further
improvement in an October 26 meeting with the delegation. The
Ministry now spends 50% of its budget on salaries, part of its
government-wide model for civil service reform, according to

JAKARTA 00003035 003 OF 006


Mulyani. The Tax Directorate has cleaned up all its arrears, she
claimed, which will now allow it to begin evaluation of
government-wide arrears. At Indonesia's largest port Tanjung Priok,
the Ministry has revamped customs processing, replacing 1,300
workers with 600 new workers while increasing overall customs
productivity. The Finance Ministry will focus on Tanjung Priok as a
first step toward implementing the ASEAN single window for customs,
she said.

10. (U) Mulyani also looked beyond her Ministry and commented on
larger government reform efforts. She acknowledged that the
judicial system is critical to many Finance Ministry efforts,
particularly foreign investment disputes. She conceded the judicial
system needs to be improved, but cautioned that the demand for
change is different from the capacity for change. Inadequate
training of judges, weak court administration, and increasing demand
for judges in newly established districts lowers overall judicial
quality and can lead to adverse decisions. She cited the Asian Pulp
and Paper case as an example of the challenges they face. Two of
the three judges who ruled against foreign investors in the case
were religious judges, who lacked experience to handle such a
complex foreign investment dispute, according to Mulyani. Aside
from the judicial system, Mulyani said that the larger reform
process required close coordination with other ministries, including
the police and military.

SOEs: One Down, Hundreds to Go
------------------------------

11. (SBU) In his October 23 meeting, Minister of State Owned
Enterprises (SOE) Sofyan Djalil told delegates he will emphasize SOE
privatization to increase economic competition. He pointed to the
March 2007 privatization of the National Bank of Indonesia (BNI) as
a success and pledged that two more SOEs would be up for initial
public offerings before the end of this year with a goal of 16 more
in 2008. The Ministry is actively seeking investors for the steel,
airline and shipping industries, said Djalil. He said that while
SOEs enjoy a high level of technical capacity, management and
financial capacity are weak. Delegates asked Djalil to push the GOI
to assign foreign commercial disputes to specially trained judges.
He demurred, but did say legal system reform is a GOI priority and
that they welcome international cooperation.

12. (SBU) Djalil called Garuda, the nation's flagship air carrier,
"a big headache." He said he hopes to complete restructuring of the
carrier by year's end with an IPO brought to market by 2010. He
cautioned that Garuda will be the national airline for many years to
come and that the foreign ownership limit is not likely to rise
above 49% anytime soon. Djalil said Garuda's past problems were due
to mismanagement and political intervention. He said the airline
will operate both Boeing and Airbus for the near future but may
eventually choose one brand exclusively. Although the Minister
spoke hopefully of Boeing building a regional maintenance center in
Indonesia, Boeing told us the company had only committed to doing an
audit of Garuda's maintenance facility.


Foreign Minister Says Reform Speeding Ahead
-------------------------------------------

13. (SBU) Foreign Minister Hassan Wirajuda told delegates on October
24 that Indonesia remains committed to implementing fully the
political and economic reforms begun in response to the 1997 Asian
financial crisis. On the political front, Indonesia's
democratization is proceeding smoothly, with all local officials
slated to be directly elected by 2009. Wirajuda reminded the
audience that the GOI continues to campaign against corruption and
reviewed a number of successes on that front. He also said
Indonesia, in cooperation with the United States, had made progress
against terrorism and was working to promote moderate Islam and
dialogue between Islam and the West.

14. (SBU) In response to several delegates' questions, Wirajuda
discussed Southeast Asian regional integration at length. ASEAN is
one of the world's most economically dynamic regions, he said,
adding that the emerging East Asian regional order, including the

JAKARTA 00003035 004 OF 006


East Asian Summit, should be centered on ASEAN. Indonesia, he said,
had an inclusive vision of Asia. He strongly urged the U.S. to
remain engaged in the region and to sign the ASEAN Treaty of Amity
and Cooperation (TAC).

15. (SBU) TimeWarner's Hugh Stephens asked about Indonesia's
progress on corruption and noted that the recent decision against
Time Magazine sent a negative signal to foreign investors. Wirajuda
said he understood the situation and explained that the case was
initiated 6 years ago, when the political climate in Indonesia was
different from today. He acknowledged, however, that Indonesia's
reforms were still a process and underscored Indonesia's commitment
to making progress on this front.

Parliament Chief Promises Better Investment Climate
--------------------------------------------- ------

16. (U) During a October 24 meeting with Indonesian House of
Representatives Chairman (DPR) Agung Laksono, USABC members
underscored their collective dedication to long-term business
relations with Indonesia. Noting USABC's decision to finance a new
governance center in Indonesia, USABC founder Rod Hills emphasized
the group's commitment to working with the GOI to improve the
business climate by battling corruption and promoting good
governance. Hills praised the progress Indonesia had already made
on the good governance front, but warned a rash of disturbing
judicial decisions could raise Indonesia's business profile for all
the wrong reasons. Delegates welcomed Laksono's rather unusual
offer of assistance in settling some of the judicial disputes likely
to imperil foreign investment.

17. (U) Laksono thanked the USABC for its investments and pledged to
continue to work to make Indonesia an attractive destination for
foreign companies. Laksono briefed the group on his legislative
agenda, and noted that several pending laws would enhance
Indonesia's investment climate. Next year's budget, he added, would
triple the amount of money set aside for infrastructure development.
Turning to the notorious Time magazine lawsuit, Laksono
characterized the $111 million decision against Time as
"unfortunate," and expressed regret that he could not personally
intervene as DPR Chairman. According to Laksono, the decision had
negative implications both for press freedom in Indonesia and
foreign investment. Responding to a question on the increasing
prevalence of nationalism, Laksono argued that in a break from the
past nationalism was a productive force helping to increase
Indonesia's competitiveness.


Telecom Ministry Wants 'Healthy Competition'
--------------------------------------------

18. (SBU) Acting Director General Freddy Tulung in the Ministry of
Communications and Information (MCI) told delegates on October 25
that the Indonesian telecommunications market is growing steadily.
They underscored the GOI's commitment to healthy competition within
the information and communications technology (ICT) sector. Tulung
said GOI telecoms priorities include improving human resource
capacity and increasing the amount of local content in broadcasting
and telecommunications.

19. (SBU) USABC delegates raised the issue of foreign ownership
limits for telecoms (65% for cellular operators and 49% for
fixed-line operators) outlined in the negative list. Ministry
officials said they have to follow the law, but reiterated they
strongly desire partnerships with U.S. businesses for local ICT
manufacturers and local independent software vendors. A Qualcomm
delegate voiced concern over the GOI's offer of a free 2.3GHz
frequency license to the winner of the government's universal
service obligation tender. She said this would be unfair to high
speed data service providers who are paying hundreds of millions of
dollars for frequency licenses. Ministry officials said they
planned to re-examine the frequency license issue to improve
competition and optimization of frequency usage. Qualcomm also
appealed for the GOI to take a neutral position on the technology to
be licensed to for mobile television. The GOI has not yet made a
decision on this, according to Tulung.

JAKARTA 00003035 005 OF 006

Industry Minister: Energy Diversification Key
---------------------------------------------

20. (SBU) Industry Minister Fahmi Idris told delegates on October 24
that energy security is crucial to a vibrant Indonesian industrial
sector. He said the GOI is seeking increased international energy
partnerships, and cited the recent MOU with Iceland on geothermal
power production as one he would like to see replicated. He added
that Chinese investors, who wish to take advantage of Kalimantan's
rich coal deposits, are looking to build energy-intensive steel
mills in the province. Idris's said oil and gas deposits in
Indonesia are diminishing to the point that the GOI must promote new
and alternative forms of energy, including Coal Bed Methane (CBM)
and coal liquefaction. His statement brought a response from U.S.
energy delegates, who said Indonesia has plenty of conventional oil
and gas still in the ground. They said the GOI only needed to get
the proper systems of financial incentives in place, while executing
upstream regulatory oversight more efficiently and quickly. A Ford
Motor Co. delegate told Idris that the GOI's vehicle luxury tax
continues to be an impediment to new market entrants and was the
primary reason they chose to build their new factory in Thailand,
rather than Indonesia.

ISO: Alternative and Clean Energy Deals
---------------------------------------

21. (SBU) On 26 October, Minister of Energy and Mineral Resources
Purnomo Yusgiantoro told delegates that Indonesia wants U.S.
investment in the downstream energy sector. He said the new
National Energy Council, which he will chair, will include
government and industry stakeholders and shows the GOI is serious
about attracting foreign investment. Purnomo also emphasized the
attractive opportunities in coal production, CBM, and liquefaction.
He said his ministry has been charged by President Yudhoyono with
training larger numbers of medium-skilled workers who can work
outside Indonesia on the many international oil and natural gas
projects that are short of workers. He described the status of the
pending mining law, but did not give the impression it would pass
anytime soon.

22. (SBU) On electricity, Purnomo told delegates that projects using
renewable and clean fuels can bypass the normal tender process and
go straight into direct negotiations with state utility PLN. He
urged U.S. firms to take advantage of this accelerated development
plan and to partner with Indonesia on a whole range of renewable and
clean energy projects. Purnomo said the Fast Track electricity
building program remains on schedule to bring 6900 MW on-line by
2010. Energy company and infrastructure delegates requested
Purnomo's help in dealing with the VAT implications of temporarily
bringing in deep water drilling rigs. Purnomo agreed that Indonesia
would benefit from the consortium's plan. He said the tax laws are
complicated, however, and that his ministry continues to disagree
with Finance over taxation of oil and gas Production Sharing
Contracts. He closed by saying the GOI remains committed to
offering 26 oil and gas exploration blocks for tender during 2007.

DELEGATION LIST
---------------

23. (U) Daley said this year's delegation is 50 percent larger than
last year's. Representatives from the following companies
participated in the USABC mission:

- AES Corporation
- The Boeing Company
- Cargill, Inc.
- Caterpillar, Inc.
- Chevron
- PT Coca-Cola Indonesia
- Conoco-Phillips
- Exxon Mobil
- Federal Express
- Ford Motor Company
- Freeport McMoRan Copper & Gold, Inc.
- General Electric Company

JAKARTA 00003035 006 OF 006


- The Hills Companies
- International Paper Company
- Island Power
- JHPIEGO (An international health organization affiliated
with Johns Hopkins University)
- Johnson and Johnson
- Kraft Foods
- Marathon Oil
- McDermott International
- Microsoft Corporation
- Monsanto Company
- Oracle Corporation
- QUALCOMM
- PT HM Sampoerna Tbk
- Star TV (News Corporation)
- Time Warner, Inc.
- United Parcel Service
HUME

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