VZCZCXRO8555
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #7944/01 1741048
ZNR UUUUU ZZH
R 231048Z JUN 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6274
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9869
RUEHBJ/AMEMBASSY BEIJING 3494
RUEHBY/AMEMBASSY CANBERRA 9652
RUEHUL/AMEMBASSY SEOUL 3681

UNCLAS SECTION 01 OF 04 JAKARTA 007944 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS AND EB/IFD/OIA 
TREASURY FOR OASIA 
USDOC FOR WGOLIKE/4430 AND JBENDER 
DEPT PASS TO USTR DKATZ AND WEISEL 
 
E.O. 12598: N/A 
TAGS: EINV ECON EFIN ID
 
SUBJECT: INDONESIA - SLOW PROGRESS ON INVESTMENT REFORMS 
 
REF  A) Jakarta 3563 (GOI Unveils Investment Package) 
     B) Jakarta 2315 (GOI Readies Investment Package) 
     C) Jakarta 5420 (Tax, Customs Chiefs Replaced) 
     D) Jakarta 5704 (GOI/Unions Assign Blame) 
     E) Jakarta 4465 (Worker Protests Against Labor Law) 
 
¶1.  (SBU) Summary:  The Government of Indonesia (GOI), led 
by Coordinating Minister for the Economy Boediono, continues 
to move ahead with the broad array of reforms outlined in 
its February 27 investment climate policy package. 
Parliament held hearings on the GOI's draft investment law 
(Ref A) on June 7 and June 23, but has raised many of the 
same contentious issues that delayed the GOI's finalization 
of the draft law for over a year.  In a development that 
cheered the business community, Finance Minister Sri Mulyani 
removed the powerful and seemingly untouchable Director 
Generals for Taxation and Customs on April 21 (Ref C), 
paving the way for an agreement between the GOI and the 
business community on revisions to a package of 
controversial tax law amendments pending in Parliament. 
Employers and some labor groups are gently exploring ways 
forward on revisions to Indonesia's restrictive labor law 
after mass demonstrations in May led the GOI to back down 
from its plan to submit comprehensive revisions to the law. 
Some of the less sweeping measures in the investment package 
are also bearing fruit: business contacts say the GOI has 
reduced the time needed to start a business and clear goods 
through customs.  Although keeping implementation of the 85 
measures in the package on schedule will be a major 
challenge, senior GOI officials hope a private-public 
"external monitoring group" will exert effective pressure on 
mid-level bureaucrats to achieve results.  End Summary 
 
¶2.  (SBU) The GOI, led by Coordinating Minister for the 
Economy Boediono, is moving ahead with a package of reforms 
designed to make Indonesia's economy more friendly to 
foreign and domestic investors.  The reform package, 
contained in Presidential Decree 3/2006, tracks closely with 
the recommendations of an Indonesian Chamber of Commerce and 
Industry (Kadin) "roadmap" for improving the business 
environment and a Consultative Group of Indonesia (CGI) 
paper outlining high priority policy areas.  Most of the 
package's 85 outputs are revised decrees, regulations, or 
draft laws, making it difficult to gauge the real-world 
impact of the measures.  Nonetheless, there has been 
significant progress on three of package's four cornerstones 
-- the enactment of new investment, tax and customs laws -- 
which, if completed, would be a significant boost to the 
investment climate.  Progress on amending Indonesia's 
restrictive labor laws has proven much more difficult, but 
neither the GOI nor Kadin are ready to give up yet. 
 
Parliament Begins Consideration of Investment Law 
--------------------------------------------- ---- 
 
¶3. (SBU) After a year of jockeying between Minister of Trade 
Mari Pangestu and Investment Coordinating Board (BKPM) 
Chairman Muhammed Lutfi, the GOI finalized its draft 
investment law and submitted it Parliament on March 21. 
The draft law would replace separate laws for domestic and 
foreign direct investment and create equal treatment of 
both.  It would also codify a number of international 
investment principles including unrestricted repatriation of 
profits and capital, rules and compensation for 
expropriations, a clear and concise negatives list, and 
removal of limits on investments and forced divestments. 
The GOI intentionally left the language of the draft law 
very general in order to allow it the flexibility to address 
a number of contentious issues through separate implementing 
regulations.  Pangestu has stated the GOI intends to issue 
the regulations at the same time Parliament passes the 
investment law, and the World Bank is providing technical 
assistance.  Forthcoming regulations include: 
 
--Two Presidential Decrees listing sectors closed to foreign 
investment (negative list) and open to investment with 
conditions.  Pangestu told the CGI on June 14 that the list 
will be clearly defined using SITC codes and linked to 
Indonesia's national interests (i.e. not solely driven by 
 
JAKARTA 00007944  002 OF 004 
 
 
demands by specific sectors for protection). 
 
--A decree spelling out the provision of integrated 
registration and licensing procedures by regional 
governments for investors. 
 
--A list of tax and other incentives available for investors 
as well as procedures for applying for them. 
 
--A decree outlining the role and functions of a 
restructured BKPM, emphasizing its role as an investment 
promotion body. 
 
--A decree streamlining the investment process. 
 
¶4. (SBU) The most controversial issue has been the GOI's 
stated intention to shift the GOI's investment regime from 
an approval to a registration system by stripping the BKPM's 
approval authority and turning it into an investment 
promotion body, reforms Lutfi has strongly resisted.  While 
Pangestu may have prevailed in her scuffle with Lutfi, the 
battle over the fate of the BKPM and other challenging 
issues could continue in Parliament.  Parliament's 
Commission VI held its first hearing on the proposed law on 
June 7, during which Pangestu fielded a wide range of 
concerns from representatives of major political parties. 
These included the future role of the BKPM in investment 
policy and approvals, the absence of a clear negative list 
and non-tax investment incentives, and the wisdom of 
including provisions for national treatment and unrestricted 
repatriation of profits and capital.  At a subsequent June 
23 hearing, Pangestu responded to comments from Commission 
VI members, emphasizing that the GOI produced the draft law 
after inter-agency discussion and that both the Ministry of 
Industry and BKPM participate in the committee that drafted 
the law and will prepare the regulations. 
 
GOI Resubmits Draft Tax Laws to Parliament 
------------------------------------------ 
 
¶5. (SBU) After less than five months on the job, Finance 
Minister Sri Mulyani replaced her notoriously corrupt and 
seemingly "untouchable" Director General of Taxation Hadi 
Purnomo on April 27, who had served under three Presidents 
and five finance ministers.  Mulyani also replace Director 
General of Customs Edy Abdurrahman.  The move cheered the 
business community, which has long viewed corruption and 
inefficiency at the two agencies as glaring examples of 
Indonesia's poor business climate.  The new DG for Taxation, 
Darmin Nasution, is taking an active role in modernizing tax 
administration, reforming internal procedures, and making 
the tax service more customer friendly. 
 
¶6.  (SBU) Purnomo was responsible for sabotaging months of 
GOI and private sector consultation to produce amendments to 
Indonesia's income tax, value added tax and luxury tax, and 
taxation procedures laws (Laws 17/2000, 18/2000, and 16/2000 
respectively).  The amendments aimed to strike a better 
balance between taxpayer rights and protections and tax 
office authority, but business community displeasure with 
the final package led Parliament to delay consideration of 
the amendments until 2007.  As one of its first investment 
policy reform tasks, the GOI in March decided to recall 
Purnomo's amendments from Parliament and discuss revisions 
to them with the Indonesian Chamber of Commerce (KADIN). 
The GOI then, on June 5, submitted its latest drafts to 
Parliament. 
 
¶7.  (U) According to a World Bank report, the new amendments 
would allow taxpayers to be present during audits and view 
their results, pay only their own self-assessment during 
appeals (instead of the disputed amount), face 
administrative rather than criminal sanctions for first time 
violations, and enjoy some safeguards if tax authorities 
freeze their assets.  The amendments would also cut the 
statutory limit for tax assessments from ten to five years, 
extend filing deadlines for corporate income tax filers, 
allow automatic extensions, and remove the requirement that 
every refund request first undergo and audit.  They would 
 
JAKARTA 00007944  003 OF 004 
 
 
also drop a GOI plan to make mutual fund dividends taxable, 
reduce the corporate tax rate to 28 percent immediately and 
to 25 percent by 2010, and cut taxes on dividends.  Low 
income earners would also face lower taxes, and minimum wage 
earners would be exempt from taxes altogether.  The draft 
VAT law amendments would exempt unprocessed agriculture 
products, electricity and water. 
 
Parliament Helps Improve Customs Law 
------------------------------------ 
 
¶8.  (SBU) The GOI submitted a draft customs law to 
Parliament in September 2005 that focuses largely on 
combating smuggling, under-invoicing, and customs fraud by 
imposing harsher penalties and fines and greater authorities 
for customs officials.  Critics of the draft complain that 
by expanding the authority of customs officers, it will 
encourage even greater rent-seeking behavior while doing 
little to improve the efficiency of customs processing.  On 
this issue, Parliament may be playing a constructive role. 
Ministry of Finance officials are holding weekly closed-door 
meetings with a special Parliament committee to consider 
revisions to the draft law.  According to contacts at 
Customs, these discussions have focused on implementation of 
a customs single window and other measures to speed up 
customs processing, as well as a more clearly defined list 
of restricted products. 
 
Labor Law Revisions Remain in Limbo 
----------------------------------- 
 
¶9. (U) The GOI made labor law reform one of its highest 
priorities for 2006, with emphasis on reducing Indonesia's 
relatively high severance payments and tough restrictions on 
outsourcing and contract workers.  According to a World Bank 
report, the GOI's draft law would reduce the average 
severance pay from nine to seven months, length of service 
pay from 19 to six months, and remove distinctions between 
severance levels for dismissals with cause and those due to 
economic factors.  The draft law would also permit employers 
to use fixed-term contracts for all work activities for up 
to five years, and permit the expansion of outsourcing. 
 
¶10. (SBU) The GOI worked closely with the Indonesian 
Employers Association (APINDO) in formulating the drafts, 
but failed to properly consult labor.  The labor movement, 
which initially seemed somewhat amenable to a more 
competitive labor law held a series of demonstrations in 
April and May, including one on May 3 that ended in a minor 
riot in front of the Parliament.  Shortly after the 
demonstrations, President Yudhoyono announced the GOI would 
drop its plan to submit the draft law to Parliament in the 
near future and would instead create a group with 
representatives from five universities to study the issue 
further.  The protests also prompted House of 
Representatives Speaker and Golkar Deputy Chairman Agung 
Laksono on June 2 to officially request that the GOI abandon 
its plans to amend the labor law. 
 
¶11. (SBU) Since the May demonstrations, APINDO Chairman 
Sofjan Wanandi has held discussions with the Confederation 
of Indonesian Prosperous Trade Unions (KSBSI), and both 
parties have agreed to hold a "national bipartite summit" 
that would include employers, unions and academics towards 
in late June.  Wanandi tells us he is upbeat about the 
process and still optimistic about the possibility of seeing 
new labor laws (or more likely regulations) enacted by the 
end of the year.  However, the Confederation of All- 
Indonesian Workers' Union (KSPSI) and other labor 
federations have yet to agree to the proposed June bipartite 
meeting. 
 
Some Reforms Already Having an Impact 
------------------------------------- 
 
¶12. (U) Some reforms are already having an impact.  A World 
Bank consultant who is closely monitoring the investment 
climate reforms has told us the Ministry of Justice's (MOJ) 
implementation of an electronic business registration filing 
 
JAKARTA 00007944  004 OF 004 
 
 
and notification system has reduced the number of days 
needed to register a company from 45 to 21 days.  The MOJ 
hopes to further reduce this figure to just ten days by 
fully decentralizing the registration process to its 
district offices.  This could turn out to cause new delays, 
however, as most MOJ district offices lack computer 
equipment and training to run their own on-line registration 
programs. In addition, the Ministry of Manpower and 
Transmigration has simplified procedures for to obtaining 
expatriate work permits, cutting the process from seven to 
four days, and extended their validity from one to two 
years. 
 
¶13. (SBU) Other reforms, however, may not be having the 
desired effect.  The Ministry of Trade has taken credit for 
streamlining the issuance of eight types of business 
licenses, including the "business trading license" or SIUP 
most companies operating in Indonesia are required to 
obtain.  However, the World Bank consultant told us that 
Minister of Trade Mari Pangestu blew up at her staff after 
learning that she had approved new regulations for SIUP 
applications that actually expanded their coverage and 
reporting requirements. 
 
Government Sets Up Monitoring Bodies 
------------------------------------ 
 
¶14. (SBU) Although the Coordinating Minister for the Economy 
has spearheaded the GOI's investment climate reforms, it has 
very limited authority over the 16 line ministries it 
oversees.  Minister of Trade Mari Pangestu and Minister of 
Finance Sri Mulyani are preoccupied with difficult reform 
agendas inside their ministries.  The result is that the GOI- 
wide effort to monitor the progress and content of the 85 
measures in the package remains weak, despite the fact that 
the package was issued under cover of a Presidential 
Instruction, one of the highest forms of GOI regulations. 
The Coordinating Ministry's strategy for overcoming its own 
institutional weakness has been to establish a private- 
public "external monitoring group", led by respected 
economist Faisal Basri, to put private sector pressure on 
the GOI to perform.  But monitoring the many items in the 
package is a very large task, and the group is struggling to 
organize itself effectively in the absence of GOI budget 
support.  The World Bank has agreed to support the group 
with both operating costs and technical assistance. 
 
Comment: Implementation is Key 
------------------------------ 
 
¶15. (SBU) GOI missteps, particularly on the draft labor law, 
have resulted in setbacks in key areas of the reform 
process.  But the business community remains optimistic, if 
impatient, and still hopes that the GOI will complete most 
of its ambitions investment climate reforms on schedule by 
year's end.  The battleground on the most significant 
reforms has largely shifted to Parliament, where nationalist 
sentiments and opposition politics are certain to be 
significant hurdles.  Much may depend on whether Vice 
President and Golkar Party Chairman Yusuf Kalla throws his 
political weight behind passage of the four proposed laws in 
Parliament.  The challenge on the smaller items in the 
package will be to keep pressure on the entrenched 
bureaucracy through the monitoring group, the CGI process, 
and other business interventions. 
 
AMSELEM