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Cablegate: Indonesia - Finance Minister Reforms Debt Management,

DE RUEHJA #3347/01 3410925
R 070925Z DEC 07





E.O. 12598: N/A

REF: A) JAKARTA 3296 - Capital Markets;

B) JAKARTA 3338 - Tax Reform

1. (SBU) Summary: Finance Minister Mulyani has achieved notable
progress in 2007 in debt management and capital markets supervision.
She is also leading a pilot project on civil service reform, by
tripling salaries for her Ministry and introducing performance
standards. Efforts at the Directorate of Customs, however, are less
successful, as customers continue to encounter delays and
corruption. Parliament members noted they want to see greater
efficiency from the Ministry of Finance (MOF) before rolling out
increased salaries more broadly to other agencies. Despite
challenges, Mulyani's dynamic Ministry has achieved a lot in 2007,
and become an example for others in the Government of Indonesia
(GOI) to follow. End Summary.

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Finance Minister Leading Reforms

2. (SBU) Finance Minister Mulyani, the most dynamic reformer in the
GOI, has been using bilateral and multilateral assistance
strategically to assist in her internal reforms at the Ministry of
Finance. She is cleaning up important directorates and improving
performance and transparency, including the Directorate General for
Tax (reftel B). Reforms in the Directorate for Debt Management
(DMO), and in the Capital Markets and Financial Institutions
Supervisory Authority (BAPEPAM-LK) have been big successes in 2007.
Progress in Customs is less impressive thus far.

Debt Management, Bond Market Deepening

3. (SBU) Capital market development has been a priority for the
Ministry of Finance (MOF) and much progress has been made over the
past two years. The most notable change has been in debt issuance
and management. The GOI's decision to meet a greater portion of its
funding requirements domestically through the expanded issuance of
government debt has dramatically reduced Indonesia's dependence on
hard currency loans and donor finance, lowering its foreign exchange
exposure and making the country less vulnerable to exogenous shocks.

4. (SBU) Mulyani's goal was to broaden and deepen the variety of
debt instruments and the investor base. An Treasury Department Debt
Advisor is currently in place providing technical assistance to
support these goals. The MOF implemented a primary dealer system
for government securities in the first quarter of 2007. The DMO
held the first of several T-Bill auctions in May. ORI's or retail
bonds, a class of securities specifically targeting small retail
investors, can now be purchased via subscription through a variety
of banks nationwide, making them more available. A withholding tax
was applied to the T-Bills, which caused problems for a number of
investors, but the auctions continue to be over-subscribed. The
Ministry of Finance is aware that it currently lacks a rational and
consistent approach for tax treatment of securities, and plans to
address this in 2008 (reftel A).

5. (SBU) An efficient T-Bill market is an important component of the
capital market development program. Short-term instruments could
become an important source of funding and allow the GoI to meet its
financial obligations in the event of a financial crisis. As
Treasury Advisor to DG Debt Management William Cotter notes, "In the
event of a crisis, investors won't buy 30-year bonds but will
actively seek refuge in T-Bills."

Foreign Ownership of Bonds Climbs

6. (U) Despite the volatility in global markets in August 2007,
investors continue to buy Indonesia's bonds. According to a report
by Citibank and the Director General for Debt Management, the number
of non-resident bond holders of Indonesian sovereign debt has
increased dramatically in the past two years. The amount of debt in
foreign hands has increased from Rp 26 trillion ($2.7 billion) in
2005 to Rp 80 trillion ($8.6 billion) in mid-2007. The amount of

JAKARTA 00003347 002 OF 004

foreign investment in debt with maturity over ten years is now half
of the total held by foreigners, versus almost none in late 2004.

Government Bond Futures, Derivatives

7. (SBU) With the recent merger of the Jakarta and Surabaya Stock
Exchanges into the Indonesia Stock Exchange (Bursa Efek Indonesia or
BEI), Treasury's OTA Advisor William Cotter is assisting at the
request of the Chairman of the Capital Markets and Financial
Institutions Supervisory Agency (BAPEPAM-LK) in development of a
government bond futures market. The MOF fully supports the contract
and clearing specifications, which are in the final stages of
development, and hopes eventually to launch a T-Bill contract on the
new exchange once the outstanding volume of bills is large enough to
support trading.

8. (U) Although MOF, BI, and BAPEPAM-LK have made a number of
individual efforts to generate activity in the repo market, there
has been little progress until recently (see reftel A). Both BI and
the MOF acknowledge the benefits of such market, but were reluctant
to collaborate and to lead the efforts in stimulating this sector.
The MOF now hopes to make progress towards a repo market as a
project priority in 2008.

Customs Reform

9. (U) The Finance Ministry, on July 1, 2007 began rolling out its
latest bureaucracy reform program, based on two ministerial decrees
issued late June 2007. It includes improving, by the end of 2008,
6,475 public service procedures related to the ministry, with 35 of
them being top priorities for reform. Sixteen of the priority
public service procedures are within the tax and customs office. The
Directorate General for Customs and Excise support is increasing
public participation in the regulatory process by permitting media
and public participation and comment.

Cleaning up Tanjung Priok,
Indonesia's Largest Port

10. (U) Mulyani began with an overhaul of customs at Tanjung Priok,
Indonesia's largest seaport near Jakarta, launching the Customs Main
Service Office (KPU), a merger of four custom offices, in Tanjung
Priok. This reform aims to reduce delays and bureaucracy. The KPU
will serve same services as they provided in the past for
export-import processing at the port. New customs officials must
pass a competency test conducted nationwide for customs officers.
Goals for improved services at Customs and Excise include:

--The processing of "priority lane" imported goods at ports within a
minimum 20 minutes and a maximum four hours.
--The processing of "green lane" imported goods within 20 minutes.

--The processing of "red lane" imported goods within four hours.
--The processing of "rush handling" imported goods within 120
--The processing of exported goods within a minimum one hour and a
maximum four hours.
--The processing of customs payment refunds within 30 days, and
customs payment complaints within 60 days.
--The processing of notices on specific imported goods within a

...But Problems Continue

11. (SBU) Starting with Indonesia's largest seaport, moving 80% of
goods into and out of the nation sends a symbolic message that
Mulyani is cleaning house. On the ground, however, users are still
encountering problems and say clearances still take days instead of
hours. A 2007 survey of 589 manufacturing firms in five
metropolitan areas by the Institute for Economic and Social Research
(LPEM) showed that from 2005 to 2007, red lane goods clearance had

JAKARTA 00003347 003 OF 004

been reduced from 7.6 days to 6.1, and green lane goods from 6.1 to
3.1. However, 38% of companies in 2007 (versus only 20% in 2005)
reported paying bribes "occasionally" for services. Another problem
is that the USG, the EU and others have experienced major delays in
diplomatic shipments in recent months. Customs is allegedly
requiring closer inspection due to smuggling, fraudulent
classification of goods, and abuse and counterfeiting of diplomatic
permits. One shipper told us that until MOF standardizes and cleans
up customs procedures at all seaports, graft and smuggling will
opportunistically move to nearby facilities with less scrutiny.

12. (SBU) A new regulation (P-25/BC/2007) on goods classification
(low, medium and high risk) issued August 2007 was intended to
expedite the clearance process, with low risk, 10% of goods are
subject to physical inspection; high risk means 100%. EU contacts
told us that European shippers of food products find they are still
being targeted for delays and informal facilitation fees. Customs
plans to roll out the National Single Window (NSW) in the second
quarter of 2008, related to the ASEAN Single Window initiative.
Underway is a NSW pilot project in Tanjung Priok to be completed by
year end, with four (out of 37) agencies involved in the goods
clearance process.

No More Moonlighting: Civil Service Reform

13. (SBU) Many GOI officials in the past "moonlighted" working 2-3
jobs to compensate for low salaries (reftel A). One official at the
State Audit Board (BPK) said that he served as a consultant in the
evening and taught university courses on the weekend to make ends
meet. Other high-ranking officials serve on Boards of Commissioners
for state-owned enterprises, earning large additional fees and
salaries. There are obvious conflicts of interest in the GOI owning
and advising firms which it is also regulating. President Yudhoyono
placed the Finance Ministry among the top priorities for
bureaucratic reform, along with the Supreme Court and Supreme Audit
Board (BPK). MOF reform, launched July 2007, is designed as a
pilot project for other government ministries and agencies.
Acknowledging public and Parliamentary skepticism, Mulyani called
for improved performance from officials at her ministry, which is
responsible for managing state finances and 75% of state revenues.
"I expect an attitude change from every unit in doing their jobs,
and to continue carrying out the reforms we are doing," she said
during the swearing-in of two of the ministry's secretariat general
officials and 18 customs officials on August 3. "There is a lot of
pessimism out there regarding our reform efforts, and we are not in
a position to claim a clean slate on our track record."

14. (SBU) The Finance Ministry's reform program has attracted
controversy, as it involves a increase in benefits totaling Rp 4.3
trillion ($477 million) for its some 62,000 civil servants, ranging
from Rp 1.3 million to Rp 46 million for high-ranking officials.
Mulyani argued for the raise, saying it would help maintain
professionalism and prevent graft among the Ministry's officials.
"Without the increase, employees with high performance are underpaid
and tempted by the private sector," she said. "There have been cases
in which some officials became very rich from unknown sources. In
another case, a tax official we just trained and funded to study
abroad was, within two months, hired as a consultant by the company
whose taxes he had just assessed."

15. (U) Reforms at the Ministry's Directorate General for State
Treasury include the processing of all project proposals and
assessments within 20 days after details of the state budget have
been issued, and fund disbursements within an hour after a project
has been approved. The Capital Markets and Financial Institutions
Supervisory Agency (BAPEPAM-LK) should process the registration of
any new, publicly-listed company within 45 days.

Not Yet Institutional Reform

16. (SBU) Marsillam Simanjuntak, former Attorney General and current
Presidential Advisor, said that the moonlighting issue underlies a
larger institutional problem of meager salaries for government

JAKARTA 00003347 004 OF 004

officials. Simanjuntak said that the Rp 5 trillion budget increase
for Ministry of Finance salaries is provisional only for one year:
this is not yet institutional reform, he stated. Offering
competitive salaries and improving performance for government
officials across all agencies remains a major future challenge.

DPR Wants to See Greater
Efficiency from Higher Salaries

17. (SBU) In a meeting with Parliamentarians from Commission XI
(Finance, Budget and Banking) on December 3, DPR Members said that
they expect to see greater efficiencies from the increased salaries
at MOF. "Before we roll out on a wider basis, we really want to see
improved performance." Minister Mulyani has introduced key
performance indicators for every position in the Ministry of Finance
and is strengthening and regularizing requirements for advancement.
In addition, she has empowered the function of the Ministry's
Inspector General to investigate misconduct. But DPR members
clearly want to assert the power of the purse and make the salary
increases conditional.

Donors Helping Mulyani's
Transformation in Several Areas

18. (SBU) In addition to those mentioned above, USAID is funding
other advisors at the Ministry of Finance. USAID assisted the MOF
to improve fiscal policies, accelerate public sector debt
restructuring, and reform tax policies. Efforts to strengthen the
public sector debt restructuring process were done by improving
capacity and implementation of the MoF's policy at the Asset
Management Company (PPA), and improving development and
implementation of the MoF's risk management and restructuring
capabilities. Major achievements include the debt restructuring of
Garuda and Merpati, two of the largest national Indonesian airlines.
USAID and Treasury OTA also coordinate effectively with other
donors: AUSAID has advisors at the Fiscal Policy Office, the IMF at
DG Tax (reftel B), and the World Bank in several directorates under
its Government Financial Management and Revenue Administration
Project (GFM-RAP) program.


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