VZCZCXRO0181
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #9336/01 2061036
ZNR UUUUU ZZH
R 251036Z JUL 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7786
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9927
RUEHBY/AMEMBASSY CANBERRA 9765
RUEHBJ/AMEMBASSY BEIJING 3535

UNCLAS SECTION 01 OF 06 JAKARTA 009336 
 
SIPDIS 
 
DEPT FOR EAP/IET, EB/IFD/OIA 
DEPT PASS OPIC, EXIM, TDA 
DOE FOR TOM CUTLER/PI-32 AND JANE NAKANO/PI-42 
COMMERCE FOR USDOC 4430--GOLIKE 
TREASURY FOR IA-ANDY BAUKOL 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ECON ENRG EAIR ELTN ECPS PREL ID
SUBJECT: INFRASTRUCTURE DEVELOPMENT UPDATE 
 
REF: A) JAKARTA 2984; B) 05 JAKARTA 975 
 
¶1. (SBU) Summary: The Government of Indonesia's (GOI) is 
making progress on a new infrastructure investment strategy. 
Major legislative and regulatory elements are replacing the 
failed pre-Financial Crisis system that relied largely on 
unsolicited offers by investors.  The GOI has made important 
advances on ministerial risk-sharing and land acquisition 
regulations, as well as an overarching Presidential Decree. 
Most work has been completed on the financial risk 
management plan.  The GOI is facing challenges in fully 
staffing the tender evaluation and risk sharing units within 
government.  Business contacts, the Asian Development Bank 
(ADB), and some GOI officials agree that the key short-term 
challenge is pushing even a single project through the new 
system to prove it is relevant.  Continued strong, high- 
level political backing for the Jakarta monorail project and 
the recently announced 10,000 MW crash electricity building 
program, both of which are outside the new system, raise 
concerns that the GOI is backing away from a rule-based, 
market-driven, and transparent infrastructure investment 
policy.  End summary. 
 
November 1-3 Infrastructure Conference 
-------------------------------------- 
 
¶2. (SBU) Indonesia's long-delayed second national 
"Infrastructure Summit," now scheduled for November 1-3, has 
been downgraded to a series of workshops aimed at creating a 
few model tenders in specific sectors like airports, ports, 
toll roads, gas pipelines, and electricity.  Senior 
infrastructure advisor at the Coordinating Minister for 
Economic Affairs, Bambang Susantono, told us that the GOI 
finally scuppered the previous "summit" concept, 
acknowledging the clear message of unhappiness from 
investors over the format and substance of the January 2005 
Summit (reftel B).  Potential investors may engage in give- 
and-take discussions with relevant ministers and key 
advisors, rather than sit through long speeches and plenary 
sessions.  The GOI has also unofficially jettisoned it 91- 
project tender smorgasbord offered at the January 2005 
Infrastructure Summit.  Instead, Bambang told us the GOI 
will focus on one or two model tender projects in each of 
the seven core areas.  The GOI is emphasizing it wants the 
conference to yield concrete solutions and feasible 
projects.  The GOI has met some of the targets it set for 
itself since the January 2005 Infrastructure Summit (see 
reftel B).  However, none of our contacts could give us a 
precise timetable for when the various new infrastructure 
units throughout the government will be fully staffed. 
 
Rebuilding Credibility 
---------------------- 
 
¶3. (SBU) The GOI knows it bungled its initial 2005 campaign 
to drum up private sector infrastructure investment 
interest.  A recent Wall Street Journal article said the 
January 2005 Infrastructure Summit was "widely judged as a 
failure by participating investors due to a lack of adequate 
government planning."  The GOI offered domestic and foreign 
investors 91 projects worth $22.5 billion: only seven have 
reached the tendering process and only one of those became 
an actual deal.  Those 91 projects are still officially part 
of President Susilo Bambang Yudhoyono's medium-term plan for 
$150 billion in infrastructure investment from 2005-2009. 
That investment is needed to help meet an official annual 
economic growth projection of 6.6 percent in the same 
period.  The government has forecast 6.2 percent economic 
growth for 2006, significantly above the 5.6 percent 
expansion in 2005.  Indonesia's infrastructure development 
has been lagging behind regional neighbors and is one of the 
most serious bottlenecks to sustained economic growth. 
 
¶4. (SBU) At the February 21, 2006 conference (reftel A), the 
GOI announced a special stimulus package in matrix form 
consisting of 85 measures to remove tax, customs and excise, 
and labor obstacles to greater infrastructure investment. 
Potential investors tell us that the package is a timetable 
of pending regulatory changes rather than actual policy 
 
JAKARTA 00009336  002 OF 006 
 
 
initiatives, and will reserve judgment until they see the 
promised measures actually implemented.  Foreign investors 
have told us and the GOI that their primary metrics to judge 
whether the infrastructure investment environment has 
improved will be keyed to: a new electricity law that 
explicitly permits private sector investment in electricity 
generation; standards for tender preparation and bid 
evaluation that use international best practices; and strong 
guarantees of international arbitration.  We have annotated 
below the progress to date on the GOI's major regulatory 
changes proposed under the Policy Plan: 
 
- Replacing Presidential Decree (Keppres) 7/1998 to create a 
more transparent and predictable regulatory framework for 
private sector participation. (Completed.) 
 
- Revising Presidential Decree 36/2005 on land acquisition. 
(Completed. See paragraph 13.) 
 
- Adopting regulations clarifying the specific roles of 
central and local governments on infrastructure projects. 
(Pending.) 
 
- Adopting regulations on foreign loan and grants. 
(Pending.) 
 
- Amending transportation laws (including land, sea, and 
air) relating to decentralization and regulatory functions 
over state-owned enterprises. (Draft law submitted to 
Parliament and an administration priority for the 2006 
legislative session, according to the GOI.) 
 
- Adopting regulations on the tariff policy for Public 
Private Partnership (PPP) projects for all modes of 
transportation. (Pending.) 
 
- Implementing regulations for the Toll Road Law (38/2004). 
(Pending.) 
 
- Amending Oil and Natural Gas Regulations 35/2004 (Upstream 
Activity) and 36/2005 (Downstream Activity). (Pending.) 
 
- Amending Electricity and Energy laws. (Draft laws 
submitted to Parliament but no action expected during 2006 
session.) 
 
¶5. (SBU) ADB Principal Economist Ramesh Subramaniam, who is 
a key technical advisor to the Finance Ministry, told us he 
doubts the feasibility of getting one quality tender project 
in each of the seven sectors by the November conference 
date.  Subramaniam said that he has advised the GOI to 
sharpen its focus further still.  The ADB has told the GOI 
at several levels that it would reap far greater benefits 
from one or two well planned and credibly implemented 
infrastructure projects using world-class best practices, 
than from another large conference seeking a dozen tenders 
across seven sectors.  (Comment: Embassy has given the same 
advice for many months.  End comment.) Subramanian said that 
the GOI remains wedded, however, to the key short-term 
objective of getting high quality bidding documents for one 
or two projects in each of the seven sectors.  He said that 
international, best-practice tender documents require 
specific terms of reference for each infrastructure sector. 
They must also be prepared by people with highly technical 
skills and specialized knowledge.  For this reason Vladimir 
Bohun, a retired ABD employee who is currently an ABD-funded 
Senior Infrastructure Advisor at the State Ministry for 
National Development Agency (BAPPENAS), said he believed 
even seven projects was too ambitious if the GOI wants to 
follow international best practices. 
 
New Regulatory Structure 
------------------------ 
 
¶6. (SBU) The key challenge for the GOI is to assure that its 
offers of partial or full government support are limited to 
high-quality projects.  It has created an elaborate system 
to evaluate both project tenders and possible government 
support.  Sitting atop the structure is the National 
 
JAKARTA 00009336  003 OF 006 
 
 
Committee for the Acceleration of Infrastructure, known by 
its Indonesian acronym KKPPI.  It is composed of line 
ministers from the relevant constituent sectors, such as 
energy, public works, and transport, and chaired by the 
Coordinating Minister for the Economy Boediono.  (Note: 
Sixteen line ministries report to Minister Boediono.  End 
Note.)  The ministerial committee will be supported by a 
secretariat of professional staff split between the Office 
 
SIPDIS 
of the Coordinating Minister of the Economy and BAPPENAS. 
Each line ministry in turn will have a "Public Private 
Partnership Node," which will be responsible for vetting 
preferred projects to assure that only priority projects and 
high-quality bid packages are forwarded to the KKPPI for 
consideration.  The contracting agency within each ministry 
will have a PPP Node, according to the plan.  For example, 
state electricity company PLN, downstream regulatory agency 
BPH Migas, and state gas company PGN are all scheduled to 
have their own PPP Node within the Ministry of Energy and 
Mineral Resources. 
 
¶7. (SBU) The jobs in PPP Nodes are to be full-time within 
each Ministry, though none are currently staffed.  Susantono 
said the KKPPI secretariat and the nodes in the Ministries 
of Public Works, Transportation, and Energy and Mineral 
Resources are all slated to be up and running by the end of 
July.  Bambang said that Minister Boediono will convene 
cabinet principals in July to re-evaluate the GOI's 
infrastructure targets and set their work program in 
preparation for the November conference. 
 
New Risk Sharing Package for Infrastructure 
------------------------------------------- 
 
¶8. (U) On June 2, the GOI announced important new guidelines 
for financial risk-sharing for PPP infrastructure projects. 
The guidelines were overdue and had been originally promised 
by the GOI for completion in March.  The final regulation, 
issued as Finance Ministry Decree 38/2006 ("Implementation 
Instructions for the Control and Management of 
Infrastructure Provision Risks"), covers risk sharing for 
PPP infrastructure projects in the energy, transportation, 
telecommunications, water resources, and housing sectors. 
The types of risk covered are: 
 
-- Political risk: policies, actions, or decisions taken by 
government or state entities that directly and significantly 
impose financial losses on a business enterprise through 
expropriation, legal or regulatory change, currency 
convertibility restrictions or funds repatriation 
prohibitions. 
 
-- Project Performance Risk: Risk associated with project 
implementation, which includes location risk and operational 
risk. 
 
-- Demand Risk: When demand for goods or services produced 
are lower than agreed.  (Note: The GOI will also structure 
risk sharing agreements so that they share in the upside 
risk if demand greatly exceeds forecasts.) 
 
Risk Management Unit and KKPPI Staff Pending 
-------------------------------------------- 
 
¶9. (SBU) Officials at the Ministry of Finance (MOF) on the 
Risk Management Committee told us that they were unsure when 
the dedicated Risk Management Unit would be established. 
The current committee, which serves on an ad-hoc basis in 
addition to normal duties, will continue during the 
transition period.  Officials expected that a draft 
Presidential Decree on the overall reorganization of the MOF 
would include the new Risk Management Unit.  They were 
unsure if the Risk Management Unit would be housed under the 
Directorate for Debt Management or the Directorate for 
Fiscal Policy. 
 
Process and Decision-Making for Risk Sharing 
-------------------------------------------- 
 
¶10. (SBU) The process for securing GOI risk-sharing support 
 
JAKARTA 00009336  004 OF 006 
 
 
as outlined in the decree is close to what Minister Boediono 
announced at the February 21 conference (reftel A).  The 
line ministries will propose PPP infrastructure projects to 
the KKPPI, providing a pre-feasibility study; a plan of the 
form of public-private cooperation or risk-sharing; a plan 
for project financing; a schedule and evaluation process; 
and documentation of the results of public consultation on 
the proposed project.  KKPPI will then evaluate the proposal 
according to publicly announced criteria and transparent 
priorities.  After being favorably evaluated for feasiblity 
and priority-ordered by the KKPPI, the MOF Risk Management 
Unit will evaluate the project's suitability for government 
support.  If the MOF concurs with government support, it 
will decide an appropriate level of risk exposure and 
request budget approval from Parliament.  Currently the GOI 
has decided that it will submit projects in groups for 
budget approval by Parliament, but it is still deciding 
whether to submit projects more frequently annually.  Once 
the Parliament has approved the funds, the project will then 
be tendered, with the MOF having the final say on approval, 
as a means to provide quality control over the tender 
process. 
 
Industry Reaction Mixed 
----------------------- 
 
¶11. (SBU) Officials at the Ministry of Finance on the Risk 
Management Committee said that the initial reaction from the 
private sector was that it wanted more types of risks 
covered.  Members of the American Chamber of Commerce 
(AMCHAM) tell us that they like the preliminary descriptions 
of how the program will work, but they will be watching 
carefully how the MOF implements it.  Vladimir Bohun said he 
hopes that the GOI will simply describe the risk it is 
willing to share and then leave it to the private investors 
to offer their bids for what they need.  This will allow 
maximum flexibility for businesses to be creative while 
ensuring that the GOI gets the best terms for its risk. 
Potential investors tell us they feel the initial $217 
million requested for risk-sharing by Minister Mulyani in 
May is too little to attract serious foreign participation, 
particularly on larger infrastructure projects. 
 
World Bank, ADB Infrastructure Involvement 
------------------------------------------ 
 
¶12. The GOI has requested World Bank and ADB assistance in 
financing infrastructure development through a $400 million 
Development Policy Loan (DPL), $300 million of which will 
come from the ADB and $100 million from the World Bank.  The 
DPL would not be tied to specific sectors or projects, 
according to our World Bank contacts.  The DPL consists of 
three consecutive reform programs to be implemented by the 
GOI through 2009.  The programs will aim to assist the GOI 
in legal and institutional reforms, policy reforms in 
specific sectors (e.g. transportation, oil and gas, 
telecommunications, water and sanitation), and a transparent 
bidding process.  World Bank and ADB contacts tell us they 
will only make subsequent disbursements if the GOI shows 
real progress within agreed time frames.  Our World Bank 
contacts tell us the GOI will need to demonstrate it can 
implement a well-structured model transaction.  In 
particular, the World Bank and ADB will closely monitor the 
effectiveness of the Risk Management Unit and the KKPPI 
project evaluation process.  The GOI faces a significant 
challenge, as our World Bank and ADB contacts continue to 
uncover fresh examples of pressure by well-connected local 
investors who are seeking to undermine the role of the KKPPI 
on infrastructure projects. 
 
Land Acquisition Decree 
----------------------- 
 
¶13. (SBU) Uncertainty and bottlenecks related to land 
acquisition have delayed or sunk infrastructure projects in 
the recent past.  Land title issues are problematic in 
Indonesia, with only a fraction of land having clear legal 
title.  In addition, rising land prices spurred by 
speculators and rent-seekers with inside information have 
 
JAKARTA 00009336  005 OF 006 
 
 
been a perennial problem in the Indonesian infrastructure 
sector.  The new decree will handle land issues under 
project performance risk.  The GOI may compensate delays in 
land acquisitions by extension of the concession period or 
by other unspecified means approved by the Minister of 
Finance if the GOI has caused the delays.  The GOI may also 
compensate increases in land prices by extending the 
concession period, paying a percentage of the higher price, 
or by other unspecified means approved by the Minister of 
Finance. 
 
¶14. (SBU) The GOI made only minor changes to the initial 
draft presidential decree on land acquisition for 
infrastructure projects, which President Yudhoyono signed on 
June 6.  Investors are likely to welcome the changes, while 
anti-corruption NGOs and legislators continue their drumbeat 
against it.  Public Works Minister Djoko Kirmanto said in 
early June the revisions had been finalized with several 
contentious articles dropped. 
 
¶15. (SBU) The decree allows the government to take over 
government land for projects deemed in the public interest, 
as well as the ability to strip private land owners of their 
property rights if they do not agree to government 
compensation offers.  Legislators and NGOs which opposed the 
new decree said it is too vague in its definition of "public 
interest" and violates landowners' rights under the 1962 
Property Law.  They say they fear the new legislation will 
be abused by government officials to take private land 
arbitrarily.  Crticis argue also that the new system, with 
an independent land assessor appointed by the government, 
provides too many incentives for collusion between officials 
and business interests.  They also criticized the deadlines 
the decree sets for property negotiations, which they said 
could force landowners to accept unfair compensation 
offers.  Still, the GOI has created a process by which 
landowners can appeal compensation offers that they view as 
inadequate.  Previously, no such right of appeal existed. 
Potential infrastructure investors are likely to applaud the 
speed of the process and its streamlined nature. 
 
¶16. (SBU) The GOI did significantly scale back the types of 
infrastructure projects for which investors may seek a 
public interest designation.  The GOI initially considered 
including 21 categories but settled on roads, freeways, 
dams, airports, railways and flood dikes, according to the 
Public Works Ministry.  It specifically excluded 
telecommunications infrastructure. "There has to be a 
mechanism that stops people from holding the government 
hostage over important infrastructure projects, 
Communications and Information Minister Sofyan Djalil told 
reporters recently. He added, "At the moment, we see people 
blocking roads because they don't want to give up their land 
to the government.  The state needs a law to ensure the 
process is expedited." 
 
Comment 
------- 
 
¶17. (SBU) The GOI has been working hard in certain areas, 
namely in coming up with the financial risk-sharing 
mechanism.  The amount of money the GOI has allocated for 
risk-sharing does not match the ambitious goals it has set, 
according to most knowledgeable infrastructure observers. 
We do believe it will be sufficient to get one model 
transaction done.  More troubling is the many ways in which 
the GOI is working at cross purposes.  For example, the 
recently announced crash electricity building program to add 
10,000 MW of generating capacity by 2009 will be done mostly 
by direct offer, rather than through a competitive, 
transparent bidding system.  Vice President Kalla has made 
vague public comments that the GOI may extend some form of 
government support to the companies participating in the 
crash program, similar to the "comfort letters" of the 
past.  Extending selective government support to the 
companies involved in the crash program or the Jakarta 
monorail project would undermine Indonesia's attempts to 
show foreign investors that they have a fair and transparent 
system based on international best practices. 
 
JAKARTA 00009336  006 OF 006 
 
 
 
PASCOE