VZCZCXRO5115
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #4136/01 0880415
ZNR UUUUU ZZH
R 290415Z MAR 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 1996
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 9716
RUEHBY/AMEMBASSY CANBERRA 9279
RUEHUL/AMEMBASSY SEOUL 3635

UNCLAS SECTION 01 OF 02 JAKARTA 004136 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/MTS AND EB/IFD/OIA 
TREASURY FOR IA--AJEWELL 
 
E.O. 12598: N/A 
TAGS: EINV EFIN PGOV ID
SUBJECT: A/S HILL DISCUSSES REFORM WITH FINANCE MINISTER AND 
AMCHAM 
 
 
¶1. (SBU) Summary: Minister of Finance Sri Mulyani told 
Assistant Secretary Christopher Hill on March 3 that people 
are expecting more results from President Susilo Bambang 
Yudhoyono's (SBY) Administration in its second year, 
particularly in making the bureaucracy more responsible and 
efficient.  She expressed concern that some provincial 
governments are holding on to central government budget 
allocations instead of spending them on improved social 
services.  Mulyani also noted that Indonesia's legacy of 
corruption presents major obstacles, particularly in the 
area of tax reform.  In a separate meeting, AmCham members 
told A/S Hill that SBY has set out a good economic reform 
program and is making progress, albeit at a slow pace.  They 
claimed that the political inexperience of SBY's economic 
team, and strong nationalistic interests within Parliament, 
require the President to take a cautious approach to reform. 
AmCham members said that existing American investments are 
not leaving Indonesia, but labor and judicial concerns 
remain a constant worry and deter new investment.  At the 
same time, Chinese companies continue to expand investments 
in Indonesia's oil, gas and power sectors.  End Summary. 
 
Sri Mulyani: The People Want Results Now 
---------------------------------------- 
 
¶2. (SBU) Mulyani said that now that SBY has been in office 
for more than a year, people are very keen to see results. 
She noted that growth has slowed due to higher inflation 
from last year's fuel price hikes, but remains strong.  The 
economy has stabilized, but now the GOI needs to go deeper 
into structural reforms to make the bureaucracy more 
responsive and efficient.  "We are living with the painful 
legacy of past corruption," she said.  Mulyani noted she has 
taken strong steps against abuse by tax officials, telling 
them they will be opened up to monitoring and scrutiny.  "No 
more forgiveness, no more godfather protection," she said. 
 
¶3. (SBU) A/S Hill praised the GOI for setting out a solid 
economic policy framework and taking several bold decisions 
over the past year, including the October 2005 fuel subsidy 
cuts.  However, he added that the U.S. business community 
remains concerned about investment climate issues, including 
uncertainty about tax, labor and judicial reforms.  A/S Hill 
commented that outlining "known consequences" to officials 
engaged in corrupt activities can be a powerful tool. 
 
¶4. (SBU) Ambassador Pascoe noted that one of Mulyani's early 
successes was getting budget allocations sent to provicial 
governments on time (January 2), after multi-month delays 
last year.  Mulyani said that despite the allocations, she 
is watching spending because some localities are holding 
onto their money instead of using it for improved social 
services.  On the labor issue, Mulyani said that 
manufacturing could no longer be a growth engine for 
Indonesia since it is now competing with China and Vietnam. 
Rather than focusing on manufacturing, the GOI is looking 
for new ideas to promote the underdeveloped services sector, 
as well as agribusiness.  Former President Suharto handled 
mining and mineral policy poorly, she added, so the sector 
is suffering from tensions.  There is an urgent need for a 
new strategy for responsible natural resources development. 
 
¶5. (SBU) A/S Hill noted that despite the considerable press 
attention to India, Secretary Rice's visit would help 
highlight Indonesia.  Mulyani said that her two basic 
messages for the Secretary would be that on internal 
matters, Indonesia "is on the right path to reform."  But 
pushing reforms forward can be fatiguing, and sometimes it 
seems that "corruption" is the only label in town.  On 
external issues Mulyani said Indonesia needs support. 
"Though we are not yet achieving strong results, we'd like a 
pat on the back that we are maintaining momentum on change 
in the right direction.  We need support, not criticism.  If 
Dr. Rice can make supportive statements, that would be 
great," she said. 
 
AmCham Governors: Reforms on the Right Track 
-------------------------------------------- 
 
¶6.  (SBU) American Chamber of Commerce Board of Governors 
members told A/S Hill that President Yudhoyono is a savvy 
but cautious leader, who is moving in the right direction 
 
JAKARTA 00004136  002 OF 002 
 
 
with a solid economic reform program.  However, his economic 
ministers, while technically competent, tend to lack 
"political maturity."  Nationalistic interests with their 
supporters in politics often undermine reform efforts. 
Within this dynamic, SBY prefers to postpone difficult 
policy decisions until the Indonesian public expects a 
change and perceives SBY has no other choice, and SBY has an 
opportunity to reach accommodation with his political 
opponents.  On the whole, Board members felt the President's 
approach is producing good results, albeit at a pace slower 
than most investors would like.  They noted that SBY's 
success in raising fuel prices 126 percent in October 2005 
was emblematic of this approach, and it stood in stark 
contrast to former President Megawati's failed attempt to 
raise fuel prices in early 2003 by a much smaller amount. 
Some Board members did wonder, though, whether SBY could 
maintain forward momentum. 
 
¶7.  (SBU) AmCham Board members said that most American 
companies maintained their investments in Indonesia during 
and after the financial crisis, and those that stayed put 
have typically earned good profits over the past four years. 
But persistent business and investment climate issues 
continue to worry existing investors and deter significant 
new investment, with labor and judicial concerns posing the 
greatest risks to foreign investors.  Under Indonesia's 
labor law, foreign firms must maintain bank deposits to 
cover the possible cost of severance payments for all their 
employees, and it is almost impossible to dismiss employees 
unless they have committed a crime and police bring criminal 
charges against them.  Furthermore, Indonesia's weak 
judicial system provides little guarantee of sanctity of 
contract.  Frivolous cases remain a real threat, including 
those resulting in criminal charges against heads of foreign 
companies (i.e.: Newmont Mining and Manulife Insurance). 
 
¶8. (SBU) The Ambassador commented that the SBY 
Administration inherited the Newmont case and had 
miscalculated by entrusting the courts to quickly dismiss 
it.  Amcham Board members said they continue to work closely 
with the Embassy and other business associations, such as 
the influential Indonesian Chamber of Commerce, to assist 
and push the government on further reform. 
 
¶9.  (SBU) Several AmCham members said that SBY and some of 
his ministers are very concerned that Indonesia is losing 
out in the regional competition for investment.  As multi- 
nationals pursue a "China plus one" strategy in Asia, it 
appears most are viewing Malaysia, Thailand and Vietnam as 
more business friendly than Indonesia.  The Ambassador noted 
there is a sense within the GOI economic team that Indonesia 
had lost 10 years of development while its ASEAN rivals had 
developed niches in sectors such as automotives and 
electronics.  AmCham members expressed concern that Chinese 
investors, with support from the Chinese government and the 
ethnic Chinese Indonesian community, are rapidly expanding 
their investments in Indonesia's oil, gas and power sectors. 
A/S Hill agreed that China's regional and cultural links, as 
well as often shady business practices, provide Chinese 
companies with a leg up in winning contacts in Indonesia. 
However, he assured the group that senior USG officials, 
including President Bush, remain committed to advocating for 
U.S. companies overseas. 
 
AMSELEM