VZCZCXRO2711
PP RUEHLMC
DE RUEHJA #2687/01 2911004
ZNR UUUUU ZZH
P 181004Z OCT 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1414
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP 0027

UNCLAS SECTION 01 OF 03 JAKARTA 012687 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP DAS JOHN AND EB/IFD DAS DIBBLE 
AID FOR ANE/AA-KUNDER 
TREASURY FOR IA-BAUKOL 
DEPT PASS USTR FOR WEISEL AND KATZ 
 
E.O. 12958: N/A 
TAGS: EINV ECON KMCA KCOR ID
SUBJECT:  INDONESIA AND MCC COMPACT ELIGIBILITY 
 
Ref: A) Jakarta 12254 (Anti-Corruption Update) 
     B) 05 Jakarta 13647 (Indonesia and MCC) 
     C) Jakarta 5420 (Tax, Customs Chiefs Fired) 
     D) Jakarta 11379 (2007 Budget) 
 
¶1. (SBU) Summary.  President Susilo Bambang Yudhoyono's 
(SBY) administration has made important progress in the past 
year implementing a broad-based development strategy 
emphasizing poverty reduction, private sector growth, and 
good governance.  SBY's bold anti-corruption efforts 
continue to dismantle decades of public sector corrupt 
practices in Indonesia, and Indonesia's score on the MCC's 
"Control of Corruption" indicator now lies within the margin 
of error of the median.  Budgets for social spending have 
increased significantly two years in a row, and SBY has 
placed a strong emphasis on educational spending, with the 
highest ever budget for 2007.  As in previous years, the 
MCC's primary education data for Indonesia fail to capture 
the majority of spending that flows through local government 
channels--the best estimate available calculates that 2006 
spending was between 1.77 - 1.85% of GDP, far above 
Indonesia's MCC scores.  Health spending is also rising, and 
in response to a 2005 polio outbreak, the GOI and 
international donors conducted a series of National 
Immunization Days (NIDs) in 2005-06 costing $70 million. 
The GOI reduced the number of days to start a business by a 
third in 2006.  Although Indonesia's 2007 Millennium 
Challenge Corporation (MCC) scores fall short of the median 
on corruption and several "investing in people" categories, 
Indonesia has made important progress in the last two years 
in these areas and has bought fully into the MCC development 
model.  We see little sign that SBY will change his highly- 
regarded, pro-western economic team in an expected upcoming 
cabinet reshuffle, making continued progress on key reforms 
likely through the 2009 election.   With a Threshold Program 
set for MCC Board approval in the near future, we recommend 
Washington agencies support Indonesia's next step to compact 
eligibility in 2007.  End Summary. 
 
Bold Anti-Corruption Efforts Continue 
------------------------------------- 
 
¶2. (SBU) Indonesia's 2007 MCC scores provide a useful 
benchmark of the country's development successes and 
challenges, but fail to reflect the full reform 
accomplishments or momentum underway. Indonesia's score on 
the MCC "Control of Corruption" indicator has improved in 
three consecutive years, testimony to the anti-corruption 
efforts of the GOI and changing attitudes toward corruption 
among the Indonesian public.  However, many of the GOI's 
most robust anti-corruption efforts have taken root only 
since the SBY Administration came to power in October 2004. 
As a result, the MCC data do not fully capture the progress 
in the past two years given the lag time for compilation of 
corruption perception indices.  We anticipate that 
Indonesia's future MCC corruption scores will more fully 
reflect the positive impact of the SBY Administration's 
reform agenda, and propel Indonesia's score - already for 
the past two years within the statistical margin of error to 
achieve the median - clearly into positive territory. 
 
¶3. (SBU) SBY's anti-corruption efforts remain strong two 
years after he took office.  Indonesia's corruption fighting 
bodies (Corruption Eradication Commission, Interagency 
Corruption Eradication Team, Attorney General's Office, 
Financial Intelligence Unit) are energized and becoming more 
institutionalized.  SBY or his Ministers have replaced or 
sidelined corrupt senior officials, including the 
notoriously corrupt Directors General for Tax and Customs 
and the entire management board of state-owned oil company 
Pertamina.  More changes of corrupt or ineffective ministers 
are likely soon.  Police Chief Sutanto, appointed in July 
2005, has proven to be an effective reformer who has 
dismissed the heads of two provincial police forces for 
misconduct.  The list of officials convicted or under 
investigation for corruption continues to grow and now 
includes a former Minister of Religious Affairs, the former 
Chairman of the Investment Coordinating Board (BKPM), a 
prominent Jakarta judge, several senior officials of state- 
owned enterprises, an Indonesian diplomat and two former 
police generals.  Although SBY's record is not perfect and 
his cabinet is uneven, for the first time in Indonesia's 
recent history there is a clear sense that the good guys are 
winning.  . 
 
 
JAKARTA 00012687  002 OF 003 
 
 
¶4. (SBU) Decentralization remains a challenge and anti- 
corruption efforts are uneven at provincial levels.  Some 
local leaders/bodies feel free to ignore mandates from 
Jakarta.  However, the President and reform-minded Cabinet 
members continue to push from the top, using limited 
executive authority over an unwieldy bureaucracy as a 
positive force for change.  SBY has kept anti-corruption 
high on the political agenda.  He has granted permission for 
investigations of high-ranking officials to proceed and made 
strong statements against corruption in domestic and 
international speeches.  Parliament, while dodging internal 
reform, has helped by ratifying the United Nations 
Convention against Corruption, and passing whistleblower 
protection legislation this year. 
 
¶5. (SBU) The 2006 and 2007 budgets showed increases in 
spending for education, health, the judiciary, police and 
military (Ref C).  The 2007 budget also contains an overall 
23.3% increase in personnel spending for the civil service, 
which many view as vital to reducing public corruption. 
This includes a 15% increase in base salaries for the civil 
service, military and police; higher civil service pensions; 
a higher allowance for teachers; and a 20% increase in 
official per diem for the police and the Ministry of 
Defense. 
 
Social Spending Increasing, Especially Education 
--------------------------------------------- --- 
 
¶6. (SBU) The central government is backing its new 
priorities with funding.  The major funding vehicle for 
local governments in Indonesia is the "General Allocation 
Fund" or DAU.  The DAU has grown steadily since 2001 to Rp 
145.7 trillion (US $15.8 billion or 4.7% of GDP) in 2006. 
Its nominal value rises to Rp 163.7 trillion (US $17.8 
billion or 4.6% of GDP) in the GOI's initial draft FY 2007 
budget.  Salaries of Indonesia's 1.48 million teachers as 
well as those of health workers are paid by DAU funds. 
Local governments now account for about a third of total 
government spending.  However, the ability of local 
government units to formulate, allocate and monitor budgeted 
funds and reporting to the central government is very 
uneven.  This reality continues to complicate data 
collection for several MCC indicators, an important point 
the GOI has repeatedly sought to clarify with USG 
counterparts including the MCC. 
 
¶7. (U) The GOI is raising education spending to a historic 
high in 2007, and is committed to raising it further in 
years ahead.  The President announced in August that 
education would receive its highest budget allocation ever 
at Rp 51.3 trillion (US $5.7 billion) or 10.3% of total 
government spending for 2007.  This is an increase from Rp 
43.9 trillion (US $4.8 billion in 2006, and includes Rp 12.6 
trillion (US $1.4 billion) to continue two nationwide 
education assistance programs launched in 2005.  The 
President urged the regions, in a speech to the Council of 
Regional Representatives on August 23, to give education a 
top priority, including the improvement of school 
facilities. 
 
¶8. (U) Actual primary education spending continues to be 
difficult to calculate because there is no single source of 
centralized data.  However, USAID developed a sophisticated 
model to calculate the total public expenditure for primary 
education in Indonesia for 2004-2006.  This model is based 
on extensive collaboration with officials at the Education, 
Religion, Finance, Development, and Social Welfare 
Ministries, plus analyses of actual education spending in 17 
districts.  For 2006, the model estimates total primary 
education spending at 1.77 - 1.85% of GDP, significantly 
above the reported MCC data points.  (Note: The GOI adjusted 
this slightly to 1.74% as noted in its submission to the MCC 
on October 6, 2006.  End Note.)  Primary education spending 
has been increasing since 2004 and the positive trend is 
expected to continue in the 2007 budget. 
 
Health Spending - Polio and Other Challenges 
-------------------------------------------- 
 
¶9. (U) Health spending in Indonesia is also rising.  The 
2007 central budget allocation for health increased by 20% 
from 2006 to Rp 15.3 trillion (US $1.7 billion).  This 
includes an additional Rp 3.6 trillion (US $387 million) in 
spending for rural health clinics (Puskesmas) and local 
 
JAKARTA 00012687  003 OF 003 
 
 
hospitals.  In response to a 2005 wild polio outbreak, the 
GOI sponsored a series of National immunization days in 2005- 
06 targeting 24 million children under age 5 at a total cost 
of US $70 million.  This program has been highly successful, 
and no new cases have been reported since February 2006. 
Routine immunization coverage remains challenging, however, 
especially among poor and hard-to-reach populations in 
Indonesia's remote areas.  The Ministry of Health recognizes 
the urgent need to re-invigorate the routine immunization 
system, while also struggling with high-profile, competing 
priorities such as avian influenza, HIV/AIDS, and 
tuberculosis.  Indonesia's Threshold Plan is designed to 
addresses the vaccination challenge for this huge nation of 
33 provinces, 440 districts, 349 regencies and 91 
municipalities. 
 
Days to Start a Business Reduced 
-------------------------------- 
 
¶10. (U) One of the SBY Administration's top economic policy 
priorities is to improve the investment climate by reducing 
Indonesia's "high-cost economy."  In September 2006, the 
International Financial Corporation (IFC) reduced 
Indonesia's oft-cited "151 days to start a business" figure 
to 97 days.  The GOI achieved this reduction mainly by 
speeding the approval process for company articles of 
incorporation at the Ministry of Justice. 
 
Comment: A MCC Compact and Indonesia's Reforms 
--------------------------------------------- - 
 
¶11. (SBU) Indonesia's GDP is more than 25 times larger than 
the largest MCC compact country (Ghana), and three times 
larger than the next largest threshold country (Ukraine). 
Its large population and diversity, huge size, cultural 
complexity, and decentralized political system create 
development challenges that smaller countries do not face. 
Nonetheless, the SBY Administration is pushing through 
public sector reforms in a variety of areas and levels, some 
of which were never touched before.  These new initiatives, 
combined with the country's diversity and complexity, create 
significant challenges for data collection.  Precise 
indicator scores aside, Indonesia has bought into the MCC 
development approach and its development program is aligned 
with MCC goals. 
 
¶12. (SBU) The upcoming Presidential visit offers an 
extraordinary opportunity to maximize the impact of an 
announcement of MCC compact eligibility for Indonesia.  A 
high profile announcement during the visit would send the 
strongest possible signal of USG support for Indonesia's 
reformers, and demonstrate U.S. determination to see 
Indonesia succeed, despite its myriad challenges.  With 
Indonesia's Threshold Program likely set for board approval 
on November 8, we strongly urge Washington agencies to make 
Indonesia eligible for a MCC compact in FY07. 
 
PASCOE