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FM AMEMBASSY JAKARTA
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RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
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RUEHBY/AMEMBASSY CANBERRA 9547
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UNCLAS SECTION 01 OF 03 JAKARTA 007014 
 
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TAGS: ECON EINV EFIN PREL KFLU ID
SUBJECT: COORDINATING MINISTER BOEDIONO ON THE INVESTMENT 
CLIMATE AND CIVIL SERVICE REFORM 
 
 
¶1. (SBU) Summary. Coordinating Minister for Economic Affairs 
Boediono told the Ambassador May 24 that the Government of 
Indonesia (GOI) would "step back" from the labor reform 
process to give unions and employers time to work out a 
compromise on severance pay and other issues.  He provided 
details on an "implementation unit" planned for the Office 
of the President that would employ non-GOI professionals to 
monitor the implementation of reforms in the bureaucracy, 
and expressed optimism the unit would help advance reforms. 
Boediono admitted that the GOI does not have a unified 
policy on privatization, a situation he attributed to 
political differences in the cabinet.  The Ambassador 
reiterated that the U.S. remains optimistic about Indonesia 
and wants to assist Indonesia's economy as much as possible 
through our trade and investment relationship and aid 
program.  He also stated his concerns about the GOI's 
flagging efforts to control the avian influenza (AI) virus, 
particularly in the Ministry of Agriculture.  End Summary. 
 
"Boediono Effect" Working 
------------------------- 
 
¶2. (SBU) The Ambassador began by noting that the relatively 
subdued response in Indonesia to the recent volatility in 
emerging markets shows the "Boediono effect" is still 
working.  Implementation of the Government's infrastructure 
and investment climate packages also seems to be moving 
forward.  At the same time, the Ambassador noted, there is a 
rising sense of impatience among the business community 
about the pace of economic reform.  The first year of the 
Yudhoyono Administration saw little progress on investment 
climate issues as the Government struggled with the 
aftermath of the tsunami.  Business is willing to give the 
new economic team a few months, but then wants to see 
action.  There is concern in the business community that the 
Government has pulled back the labor reform bill, and that 
Parliament seems preoccupied with the anti-pornography bill 
instead of important legislation that would move Indonesia's 
economy forward.  Although concluding a deal with ExxonMobil 
on the Cepu oilfield sent a very positive signal, the 
business community hopes the GOI will redouble its economic 
reform efforts. 
 
¶3. (SBU) The Ambassador noted the U.S. is very optimistic 
about Indonesia, and views its success as critical given the 
country's size and strategic importance.  The U.S. 
Government and U.S. companies want to see Indonesia 
competing with China and India for foreign investment. 
President Susilo Bambang Yudhoyono (SBY) and Boediono have 
communicated a very positive message to the public about the 
importance of welcoming foreign investment to Indonesia. 
The U.S. has an assistance program that is capable of 
responding quickly to a range of issues including civil 
service reform.  The recent visits to Washington of Minister 
of Trade Mari Pangestu and Minister of Finance Sri Mulyani 
had also been extremely positive, and the U.S. wants to 
follow up these visits by deepening our economic 
relationship through the establishment of a strategic 
economic dialogue. 
 
GOI "Stepping Back" from Labor Reform Process 
--------------------------------------------- 
 
¶4. (SBU) Boediono welcomed the Ambassador's "forthright 
statement" of support.  He said he understands impatience 
among business people, but noted that the investment climate 
package "is not all the Government wants to do."  There are 
"extras", he noted.   Boediono admitted that labor law 
reform has turned out more difficult than the Government 
thought, and won't be fully completed on schedule.  The 
April 2006 labor demonstrations in France had set an 
unhelpful example for Indonesia, he noted.  Nonetheless, 
Boediono professed to be optimistic about labor reform, "not 
in the sense that a bill will be agreed totally", but in the 
sense that business and labor would agree on necessary 
changes to balance their respective needs. 
 
¶5. (SBU) The GOI's strategy on labor reform is to back off 
to allow business and labor to reach a compromise on key 
issues, including severance pay, minimum wages, and 
termination of workers with cause.  Chairman of the 
 
JAKARTA 00007014  002 OF 003 
 
 
Indonesian Employers Association (Apindo) Sofjan Wanandi has 
the lead on the issue for the business community.  Once 
business and labor reach agreement, the GOI will incorporate 
the changes in either a revised labor law or regulation--the 
exact form "doesn't matter," Boediono said.  (Note:  Wanandi 
later told us any changes on severance pay or other issues 
would be reflected in revised regulations, not a new labor 
law.  He added that Indonesian labor unions are having a 
hard time getting organized to negotiate, with unions 
fighting with each other over which unions would sit at the 
table.) 
 
¶6. (SBU) The other major legal reforms contained in the 
investment climate package are moving forward smoothly, 
Boediono noted.  The relevant parties have reached agreement 
on amendments to the draft tax laws, Boediono said, and 
changes should be effective on January 1, 2007.  The new 
investment and customs laws are also proceeding smoothly in 
Parliament, and the GOI hopes both will be enacted in 2006. 
 
Privatization Policy Unclear 
---------------------------- 
 
¶7. (SBU) The Ambassador asked about the GOI's apparent 
efforts to block a private sector solution to the 
longstanding Cemex dispute.  Coupled with the 2005 efforts 
by the Ministry of State Owned Enterprises to re-nationalize 
long distance carrier PT Indosat, the overall impression is 
that the GOI has too much affinity for state-enterprises 
(SOEs) and too little regard for the efficiency benefits of 
privatization. 
 
¶8. (SBU) Boediono agreed that the GOI's privatization policy 
"is not clear" and reflects differing views about 
privatization within the cabinet.  However, the 
privatizations approved by Parliament (IPO of state gas 
company PGN and sales of residual shares of recapitalized 
banks) will proceed.  But the Cabinet "reflects the current 
political situation in Indonesia," and has not come to an 
agreement about privatizations beyond those already approved 
by Parliament.  Boediono admitted that compared to the 
Megawati Administration, the current Government's views are 
"not as solid" on privatization.  Nonetheless, he said his 
personal view is that privatization is positive and would 
bring benefits for Indonesia.  He added that he had 
discussed the Cemex case on May 23 with Vice President 
Kalla. 
 
"Implementation Unit" Key to Civil Service Reform 
--------------------------------------------- ---- 
 
¶9. (SBU) The Ambassador noted the overarching importance of 
civil service reform and reiterated that the U.S. stands 
ready to help on this and other systemic reform issues. 
Boediono, who SBY has put in charge of civil service reform, 
agreed that the issue is very important, and said the 
Corruption Eradication Commission (KPK) has been urging the 
GOI to take up civil service reform because "just catching 
the thieves isn't enough."  SBY is also "very keen" on civil 
service reform, Boediono said, but brings a politician's 
short-term focus to the issue--SBY wants to know what the 
tangible payoff would be over a three-year period. 
 
¶10. (SBU) Boediono added that in order to facilitate civil 
service reform, he believes SBY needs a new unit in the 
Office of the President that would monitor the 
implementation of reforms in the bureaucracy.  This so- 
called "implementation unit" would be manned by non-GOI 
professionals and would be based on the "Prime Minister's 
Delivery Unit" in the office of the British Prime Minister. 
It would not be a policy making body, but rather would focus 
on the implementation of reforms in three areas: 
 
--Economic reform, including implementation of the 
investment climate and other packages; 
 
--Administrative reform, which would include bureaucratic or 
civil service reform. 
 
--SOE Reform: Boediono said SBY is very interested in 
squeezing better performance out of Indonesia's SOEs, but 
 
JAKARTA 00007014  003 OF 003 
 
 
admitted it is unclear whether the implementation unit would 
result in a more coherent privatization policy. 
 
¶11. (SBU) Boediono said he is encouraged by the plan to set 
up the implementation unit, and hopes it will be set up soon 
and staffed by the right people.  The design of the unit is 
almost finished and SBY is considering candidates to head 
the unit.  The continuous involvement of SBY in reform 
issues through the unit would be very helpful, Boediono 
added. 
 
GOI Avian Influenza Response 
---------------------------- 
 
¶12. (SBU) The Ambassador noted he is growing increasingly 
concerned about the lack of coordinated GOI action against 
avian influenza (AI).  One of the two key GOI ministries -- 
the Ministry of Agriculture (MOA) -- falls under Boediono, 
the Ambassador noted.  Thailand and Vietnam have shown that 
with strong government leadership, AI outbreaks in poultry 
can be controlled.  But in Indonesia, there has been very 
little concerted effort by the MOA, and until something is 
done to deal with village-level outbreaks, Indonesia will 
continue to suffer human AI cases.  If the international 
media begins to focus on the fact that Indonesia is the weak 
link in the international fight against AI, or if sustained 
and efficient human-to-human transmission occurs, the damage 
to Indonesia's economy would be huge.  In response, Boediono 
admitted that although he has not been deeply involved in 
the AI issue (fellow Coordinating Minister Aburizal Bakrie 
heads the GOI's avian influenza effort), it is important 
that ministries under his coordination do their part.  He 
promised to look into the issue. 
 
Papua 
----- 
 
¶13. (SBU) The Ambassador concluded by noting he has 
suggested the GOI set up a body similar to the Aceh 
Reconstruction Agency (BRR) to more effectively channel 
development resources into Papua.  One of the key reasons 
political events in Aceh are on a better track than in Papua 
is that in Aceh, the GOI controls reconstruction funds 
through the BRR which ensures they are well spent.  In 
contrast, in Papua the money disappears and doesn't get to 
the people, reducing the Government's leverage and 
credibility. The Ambassador noted that the U.S. is prepared 
to support a BRR-like body in Papua with computer equipment 
and technical assistance.  In response, Boediono said the 
point about the role of corruption and Government control is 
an "interesting one", and stated he hopes the "Australia 
problem" in Papua is finished.  He closed by noting that 
Australia does not understand that sovereignty issues are 
"close to our hearts." 
 
PASCOE