VZCZCXRO0152
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJS #0011/01 0280947
ZNR UUUUU ZZH
R 280947Z JAN 10
FM AMCONSUL SURABAYA
TO RUEHJA/AMEMBASSY JAKARTA 0515
RUEHC/SECSTATE WASHDC 0526
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHWL/AMEMBASSY WELLINGTON 0199
RUEHBY/AMEMBASSY CANBERRA 0231
RUEHJS/AMCONSUL SURABAYA 0539

UNCLAS SECTION 01 OF 02 SURABAYA 000011 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EPET EINV SENV ENRG PGOV MCC KMCA ID
SUBJECT: EAST JAVA MUDFLOW UPDATE:  REDUCED VOLUME OF MUDFLOW AIDS 
DIKE EFFORTS; LOCAL GOVERNMENT FOCUSES ON ECONOMIC RECOVERY 
 
REF: A. A. 06 JAKARTA 11110 AND PREVIOUS (INCREASING MUDFLOW THREATENS INFRASTRUCTURE AND MORE HOMES) 
     ¶B. B. 07 JAKARTA 1038 AND PREVIOUS (LAPINDO MUD VOLCANO FLOODS ROADS AND RAIL) 
     ¶C. C. 10 SURABAYA 7 (MIXED REACTIONS IN EASTERN INDONESIA TOWARD ASEAN/CHINA FTA) 
 
SURABAYA 00000011  001.2 OF 002 
 
 
This message is Sensitive But Unclassified.  Please protect 
accordingly. 
 
¶1.  (SBU) SUMMARY: Concerns that the 2006 Sidoarjo mud volcano 
would quickly engulf the entire regency have proven unfounded. 
Reduced volume of mudflow aided efforts to contain the area 
affected.  Initial bank restrictions on loans to Sidaorjo 
businesses and residences threatened the overall economy. 
Concerted efforts by the regency government calmed tensions and 
banks are again issuing loans to Sidoarjo.  Government efforts 
to aid SMEs in the aftermath of the disaster have garnered 
national recognition.  However, challenges to Sidoarjo's 
economic recovery remain. END SUMMARY 
 
EXPECTED EXTENT OF DISASTER NOT REALIZED 
---------------------------------------- 
 
¶2. (SBU) In the aftermath of the 2006 mudflow disaster in 
Sidoarjo, uncertainty about the likely extent of the disaster 
led to widespread concern that mud would soon cover a 
significant area of the regency and completely disrupt the 
transportation infrastructure connecting Surabaya with southern 
East Java (ref A).  Indeed, the mud quickly destroyed the 
toll-road that runs south out of Surabaya and threatened other 
transportation infrastructure.  The mud temporarily flooded the 
remaining north-south road and the adjacent Surabaya-Malang 
railway for seven weeks in April and May of 2007 (ref B). 
 
¶3. (SBU) However, three and a half years after the initial 
disaster, these fears have not completely materialized.  The 
government agency responsible for responding to the disaster, 
BPLS, has successfully contained the mud to a 1750 acre area 
along the southern edge of the regency.  The older road and the 
Surabaya-Malang railroad were repaired in 2007 and continue to 
operate in the shadow of a massive earthen dike.  In addition, 
progress continues on construction of a toll road to replace the 
one destroyed by the mud.  BPLS reports that the road will be 
completed in early 2011 and the Minister of Public Works is 
scheduled to participate in a groundbreaking ceremony this 
weekend on a critical flyover.  However, BPLS has only acquired 
80% of the land necessary to build the road. 
 
¶4. (SBU) According to Soffian Hadi, the Deputy for Operational 
Affairs at BPLS, the volume of mud flow has reduced 
significantly in recent months.  The mudflow peaked at 120,000 
cubic meters per day - enough to fill the Washington Monument 
four times.  The rate has since dropped to 72,000 cubic meters 
per day, and BPLS projects that the volume will decrease to 
about 36,000 cubic meters per day by 2013.  Soffian said that 
this dramatic reduction in mud volume has given BPLS the time it 
needed to keep the mud from once again spilling over the dike 
that protects the road and railway.  It has also reduced the 
chances that dramatic subsidence will threaten the area's 
infrastructure, at least for the foreseeable future. 
 
ECONOMIC IMPACT OF CONCERNS 
--------------------------- 
 
¶5. (SBU) The local economy took a substantial hit in the 
immediate aftermath of the disaster as a result of the 
widespread expectation that the mud would eventually cover vast 
areas of the Sidoarjo Regency.  This expectation led banks to 
refuse to issue loans anywhere in Sidoarjo.  Win Hendrarso, the 
Regent of Sidoarjo, explained that the banks' decision not only 
prevented people near the mud from obtaining loans.  It also 
blocked businesses from obtaining operational loans, stopped 
issuance of mortgages, and even prevented people from financing 
the purchase of motorcycles - even if applicant lived several 
miles from the site of the mudflow.  This had a devastating 
impact on both local businesses and the local property market. 
The chairman of the local Chamber of Commerce (KADIN) said that 
the inability to obtain operational loans lead local business 
production to drop by 75% in the aftermath of the disaster. 
Similarly, the chairman of the Sidoarjo Property Developer's 
Association (REI) said that the lack of mortgages cut property 
values in half. 
 
GOVERNMENT EFFORTS TO AID SMEs 
------------------------------ 
 
¶6. (SBU) The local Sidoarjo government has focused on 
revitalizing the economy by correcting misperceptions about the 
scale of the disaster.  In 2007, Win travelled to Surabaya and 
Jakarta to meet with all the major banks operating in Sidoarjo 
 
SURABAYA 00000011  002.2 OF 002 
 
 
to allay concerns that the mudflow was poised to cover the 
entire regency.  He pointed out that the mud covered less than 
0.01% of Sidoarjo's total land area, and that the rest of the 
regency had not experienced any ill effects from the disaster. 
As a result, the Bank of Indonesia designated only those 
districts directly affected by the mud as "high risk" areas and 
ruled that banks could not refuse to issue loans to the rest of 
Sidoarjo.  REI said that due to the regent's efforts, loans are 
now available throughout the regency, although interest rates 
are often 2% or 3% higher than prevailing market rates. 
 
¶7. (SBU) The local government also enacted policies designed to 
make the business environment more amenable to SMEs.  For 
example, the government created "Economic Clusters" - areas 
designated as markets for specific products - which make it 
easier for small producers to bring their wares to consumers. 
In addition, the regency has implemented a "one-gate" system of 
business permit issuance, which consolidates the bureaucratic 
processes necessary to obtain a new business permit into one 
office.  According to the head of the Sidoarjo Investment and 
Permit Service Board, this system allows business permits to be 
issued in 3 weeks, as compared to 2 months for other cities and 
regencies in East Java.  KADIN pointed out that 90% of the 1500 
businesses in Sidoarjo are SMEs, so any efforts to assist them 
have far-reaching impact throughout the regency. 
 
¶8. (SBU) The regent said that these policies have helped 
Sidoarjo maintain growth rates over 4.8% each year since the 
mudflow disaster.   He also pointed to several awards that the 
regency has received as recognition of its efforts to promote 
economic growth in the face of the mudflow.  For example, in 
December 2009 the National Investment Board recognized Sidoarjo 
as one of the top 500 regencies and cities in Indonesia for ease 
of business permit issuance.  KADIN cautioned that difficulties 
remained, pointing the new Free Trade Agreement between China 
and ASEAN as a significant threat to local industry (ref C).  He 
also said that corruption remains a significant burden on the 
local economy, as "informal fees" are often prohibitive and 
limit the ability to set up a new business. 
MCCLELLAND