VZCZCXRO3643
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #8614/01 1910828
ZNR UUUUU ZZH
R 100828Z JUL 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6988
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9892
RUEHBY/AMEMBASSY CANBERRA 9701
RUEHBJ/AMEMBASSY BEIJING 3506

UNCLAS SECTION 01 OF 03 JAKARTA 008614 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EB/TPP/MTA AND EAP/MTS 
TREASURY FOR IA - SETH SEARLS 
USDOC FOR GOLIKE/4430 
DEPT PASS USTR DKATZ 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON KIPR ID
SUBJECT: INDONESIA TRADE AND INVESTMENT HIGHLIGHTS - MAY- 
JUNE 2006 
 
 
¶1.  Summary:  Minister of Trade Mari Pangestu met with 
Parliament on June 7 and 22 to outline key provisions of the 
Government of Indonesia's (GOI) draft investment law. 
Investment Coordinating Board (BKPM) figures showed foreign 
investment approvals dropped to USD 3.66 billion for the 
first five months of 2005 from 4.87 billion during the same 
period in 2005, a decline of 33.1 percent YoY.  Indonesia 
and Singapore signed a framework agreement on June 25 to 
develop a "Special Economic Zone" in the Indonesia islands 
of Batam, Bintan and Karimun.  Major labor federations on 
June 19 cancelled earlier plans to hold a national bipartite 
meeting with employers at the end of June to discuss 
proposed revisions to Indonesia's labor law.  Minister of 
Manpower and Transmigration Erman Suparno announced the same 
day the GOI would focus on establishing social guarantees 
for workers instead of amending the labor law.  Minister of 
Trade Pangestu noted on June 19 that her ministry had 
compiled a list of ten priority sectors to guide Indonesia's 
participation in bilateral and multilateral trade 
negotiations.  The Ministry of Industry said it expects USD 
2.5 billion in new investment in Indonesia's electronic 
sector by 2009.  The GOI signed agreements on May 29 with 
investors to build seven toll roads worth USD 1.4 billion. 
The Business Software Alliance, with support from the 
police, is investigating over 300 tips to its hotline of 
suspected end-user software piracy.  End Summary. 
 
Parliament Debates Draft Investment Law 
--------------------------------------- 
 
¶2.  Minister of Trade Mari Pangestu met with members of 
Parliamentary Commission VI on June 7 and June 22 to outline 
key provisions of the Government of Indonesia's (GOI) draft 
investment law.  In the two meetings, Commission VI members 
asked questions or raised concerns about a number of 
provisions in the draft law, including the wisdom of moving 
from an investment approval to an investment registration 
regime and reorganizing the Investment Coordinating Board 
(BKPM) into an investment promotion agency.  The MPs also 
raised concerns about providing national or non- 
discriminatory treatment for foreign investments and 
permitting the uninhibited repatriation of profits and 
capital.  They urged the Minister to protect vulnerable 
industries through a clearly defined "negative list" and set 
up a system of investment incentives. 
 
¶3.  On June 22, Pangestu told the Commission VI members that 
the new law would simplify and shorten procedures for 
establishing a new business by establishing online 
registration systems managed by regional Ministry of Justice 
offices.  The draft law would provide foreign and domestic 
investments with equal treatment, with the exception of 
investments in sectors the GOI specifies in a negative list. 
She emphasized that under the draft law, the GOI would 
continue existing policies for repatriation of profits. 
 
Foreign Investment Declines 
--------------------------- 
 
¶4.  The BKPM announced on June 17 that foreign investment 
approvals dropped to USD 3.66 billion from January to May 
2006 from 4.87 billion during the same period in 2005, a 
decline of 33.1 percent.  Meanwhile, domestic investment 
approvals for the first five months of 2006 rose to Rp 60.48 
trillion (USD 6.6 billion) from Rp 35.18 trillion (USD 3.8 
billion) during the same period in 2005, a 72 percent 
increase.  BKPM also reported that foreign realized 
investment from January to May 2006 rose to USD 3.14 
billion, a 5.2 percent increase from USD 2.98 billion in 
¶2005.  Metals, electronics, paper and printing, textiles, 
automotive and transportation, and the trade and repair 
sectors attracted the greatest investor interest. 
 
¶5.  Analysts have raised questions about the accuracy of 
BKPM data as a barometer of Indonesia's investment picture 
because the agency's data do not include the financial 
services or extractive industries sectors (oil, gas and 
mining).  In addition, analysts have noted significant 
discrepancies between BKPM and Bank Indonesia investment 
data likely due to delays in BKPM field verification 
surveys.  BKPM Chairman Muhammad Lutfi explained in June 
 
JAKARTA 00008614  002 OF 003 
 
 
that the data discrepancies are in part due to the fact that 
BKPM figures include local investor equity and domestic 
loans in support of foreign investments. 
 
Indonesia-Singapore SEZ Cooperation 
----------------------------------- 
 
¶6.  Indonesian President Susilo Bambang Yudhoyono and 
Singaporean Prime Minister Lee Hsien Loong met in Batam on 
June 25 to witness the signing of a bilateral framework 
agreement to establish "Special Economic Zones" (SEZ) on the 
Indonesian islands of Batam, Bintan and Karimun.  Yudhoyono 
expressed hope that the agreement would attract foreign 
investment to the islands by providing one-stop services 
that will reduce the high cost of doing business.  Indonesia 
also hopes to benefit from Singapore's massive business 
network, as well as technological and promotional skills. 
Singapore, in return, will provide investment advice, help 
promote the three islands as manufacturing destinations, and 
provide capacity building for Indonesian officials and 
workers.  According to GOI officials, the Batam framework 
will serve as a model for other planned SEZ's throughout the 
country. 
 
Labor Law Reform Losing Steam? 
------------------------------ 
 
¶7.  At a June 19 meeting, representatives of Indonesia's 
largest labor federations reportedly decided to cancel plans 
to hold a "national bipartite meeting" with the Indonesia 
Employers Association (APINDO) in late June.  The meeting 
had been planned to try to resolve differences over GOI 
plans to revise the country's labor laws.  Investors have 
complained that restrictions in Indonesia's labor law, 
particularly provisions related to severance pay and 
contract workers, significantly deter new manufacturing 
investment in Indonesia.  President Yudhoyono has instructed 
an independent academic team from five universities to study 
the issue and provide its recommendations.  Separately, on 
June 19, Minister of Manpower and Transmigration Erman 
Suparno reportedly said that the GOI was focusing its 
attention on establishing social guarantees for workers 
rather than amending the labor law (Law 13/2003).  However, 
Suparno did not specifically state that the GOI had 
abandoned its stated plans to amend the labor law in 2006. 
 
GOI Announces Ten Priority Products 
----------------------------------- 
 
¶8.  On the sidelines of the annual congress of the 
Indonesian Economists Association (ISEI), Minister of Trade 
Mari Pangestu announced on June 19 that the GOI had 
prioritized ten economic sectors for further development. 
The list of priority products would guide and facilitate GOI 
positions at bilateral and multilateral trade negotiations. 
They are: 
 
-- Textiles and garments 
-- Electronics 
-- Automotive spare parts 
-- Cocoa 
-- Coffee 
-- Shrimps 
-- Crude palm oil 
-- Furniture 
-- Handicraft 
-- Shoes/footwear 
 
GOI Targets USD 2.5 Billion Electronics Investment 
--------------------------------------------- ----- 
 
¶9.  Ministry of Industry Director of Electronics Abdul Wahid 
announced on June 19 that the GOI expects new investment in 
the electrical and electronics sectors to reach USD 2.5 
billion by 2009.  Although Indonesia's electronic industries 
are currently located primarily on Java and Batam Islands, 
Wahid noted that the GOI would seek to develop the industry 
in other areas such as Medan and Makassar.  With an 
additional USD 2.5 billion in investment, Wahid said he 
expects the sector could directly employ another 150,000 
workers.  In 2005, Indonesia's exports of electrical and 
 
JAKARTA 00008614  003 OF 003 
 
 
electronic products reached USD 7.38 billion and the sector 
employed 230,000 workers.  Indonesia's main exports of 
electronic and electrical products include: 
 
-- Flat screen televisions, LCD 29 inch and above; 
-- Air conditioners; 
-- Washing machines; and 
-- Refrigerators. 
 
Investors Sign Toll-Road Project Agreements 
------------------------------------------- 
 
¶10. On May 29, the GOI singed agreements with six separate 
investors for 155 km of toll road projects worth an 
estimated Rp 12.7 trillion (USD 1.4 billion).  The 
expressways will be located in Java and Sulawesi and 
construction will begin next year, according to the Ministry 
of Public Works.  Investors hope the toll roads will be 
operational by 2009 or 2010. 
 
--------------------------- 
Table 1: Toll Road Projects 
--------------------------- 
Road               Length  Investment    Investor 
                    (km)  (Rp trillion) 
--------------------------------------------- ----------- 
Cinere-Jagorawi     14.7     1.7     Translingkar Kita Jaya 
 
Depok-Antasari      21.7     2.3     Citra Wasphutowa 
 
Makassar 
(Section IV)        11.6     0.4     Toll Road Section 4 
 
Kanci-Pejagan       34       2.1     Semesta Marga Karya 
 
Pandaan-Malang      30       2.9     Setdco Intrinsict 
 
Bogor Ring Road     11       1.6     Jasa Marga 
 
Gempol-Pasuruan     32       1.8     Jasa Marga 
 
TOTAL              155      12.7 
 
Hotline Receives Hundreds of Tips on End User Piracy 
--------------------------------------------- ------- 
 
¶11.  The Business Software Alliance (BSA) announced on May 
15 that it is investigating numerous tips to its telephone 
hotline for reporting suspected end-user software piracy by 
private businesses, including foreign companies.   According 
to one BSA official, the association has received 300 tips 
on companies using illegal software since it established the 
hotline in 2005, including 64 reports this year.  BSA says 
it will cooperate with the Indonesia National Police in the 
coming months to raids some of the companies suspected of 
using illegal software.  On June 6, BSA established a 
representative office in Jakarta. 
 
Table 2: Indonesia Trade Performance Jan-May 2006: 
(in USD billions) 
--------------------------------------------- ------ 
                  May   May   Pct  2006  2005  Pct 
                  2006  2005  YoY  Jan-  Jan-  YoY 
                                   May   May 
--------------------------------------------- ------ 
Exports           8.3   7.2  15.3  38.4  33.8  13.6 
 Oil and Gas      1.8   1.4  28.6   8.6   7.3  17.8 
 Non-oil and Gas  6.5   5.8  12.1  29.8  26.5  12.4 
 
Imports           5.1   4.9   4.1  23.1  23.6  -2.1 
 Oil and Gas      1.7   1.2  41.7   6.8   6.6   3.0 
 Non-oil and Gas  3.4   3.7  -8.1  16.3  17.0  -4.1 
 
Balance of Trade  3.2   2.3  39.1  15.3  10.2  50.0 
 
Source: Central Bureau of Statistics (BPS) 
 
PASCOE