VZCZCXRO7684
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0300/01 0360846
ZNR UUUUU ZZH
R 050846Z FEB 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 3134
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/USDA FAS WASHDC
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0201
RUEHHE/AMEMBASSY HELSINKI 0874
RUEHBY/AMEMBASSY CANBERRA 0388
RUEHTC/AMEMBASSY THE HAGUE 3292
RUEHSM/AMEMBASSY STOCKHOLM 2043
RUEHBS/USEU BRUSSELS
RHHMUNA/USCINCPAC HONOLULU HI
RUEAIIA/CIA WASHDC
RHHJJAA/JICPAC HONOLULU HI
RUEKJCS/JOINT STAFF WASHDC
RHEFDIA/DIA WASHDC

UNCLAS SECTION 01 OF 06 JAKARTA 000300 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
AIDAC 
 
DEPT FOR EAP/MTS AND EB/IFD/ODF 
TREASURY FOR IA - SETH SEARLS 
USDA FOR FAS/EC/MCHAMBLISS 
NSC FOR MORROW and MELINE 
USAID FOR ANE/EAA 
 
E.O. 12958: N/A 
TAGS: EAID ECON PGOV KCOR EINV ID
SUBJECT: TSUNAMI RECOVERY AND TRANSFORMATION - ACEH AT TWO YEARS 
 
REF: A) 06 JAKARTA 13604; B) 05 JAKARTA 16372; C) 05 JAKARTA 16521 
 
¶1. (SBU) Summary.  Aceh is undergoing a remarkable transformation 
and recovery since the devastating December 2004 tsunami.  All 
displaced persons are out of tents and in houses or temporary 
shelters.  New or renovated houses are everywhere and the 
International Federation of the Red Cross (IFRC)'s temporary shelter 
program has been a huge success, although thousands still reside in 
barracks.  The Reconstruction and Rehabilitation Agency for Aceh and 
Nias (BRR), along with non-government organizations (NGOs), donors 
and local governments, are dealing with substandard construction and 
other challenges due to fraud related to the 900 contractors 
operating in Aceh.  The west coast road is slow but passable:  USAID 
has repaired and is maintaining the section from Banda Aceh to Lamno 
and construction has already begun in three of five priority 
sections.  Several rebuilt ports can now receive ships with 
reconstruction supplies.  Local infrastructure -- water, sanitation, 
and electricity -- is still inadequate in several areas and overall 
electricity generation capacity is not sufficient for new 
construction.  Simuelue and Nias islands are facing reconstruction 
delays related to logistics: fewer ships and planes can access the 
islands with rebuilding materials.  Donors and BRR are working to 
address this. 
 
¶2.  (SBU) Summary -- Continued.  Aceh's economy is experiencing a 
boom, with more economic activity now than before the tsunami and a 
remarkable new openness taking root.  Inflation remains high, but is 
gradually receding.  Banking activity is growing, as people who 
formerly hid money under the mattress during the conflict deposit 
their funds in local banks.  Construction is creating jobs, though 
many Acehnese lack skills.  Fishing is largely restored and 
plantations left unattended during the conflict are being replanted. 
 Manufacturing still has not recovered, but donors including USAID 
are helping support trading companies, livelihood programs and 
small-to-medium enterprise development.  We report via septel on 
challenges facing BRR, Aceh politics and GAM reintegration as it 
relates to reconstruction.  End Summary. 
 
Why Are the Barracks Still Full? 
-------------------------------- 
 
¶3. (U) Officers from Embassy Jakarta and Consulate Medan made a 
January 16-20 swing through Meulaboh and Banda Aceh to observe 
progress on reconstruction from the December 2004 earthquake and 
tsunami.  With billions of dollars of assistance pouring in for 
 
SIPDIS 
rebuilding and post-conflict programs, and hundreds of foreigners 
working throughout the province, Aceh has been flung open to the 
world.  People move freely in streets and markets without fear. 
 
 
¶4. (U) The picture is particularly optimistic on the housing side. 
All displaced persons are out of tents and in houses, temporary 
shelters or barracks.  The estimates of the number of people in the 
deteriorating barracks vary from 5,000 to 70,000.  It is clear, 
however, that the number of persons living in barracks in Meulaboh, 
West Aceh has been virtually unchanged for the last six months. 
There are several explanations for this.  Much of the barracks 
population is mobile and includes a number of renters and squatters. 
 Some residents prefer the barracks because their new houses have 
not yet been hooked up with water or electricity.  Other barracks 
residents told us their new houses are too close to the sea and they 
are still too traumatized by the tsunami to go back.  One 
significant factor appears to be that after the tsunami, many 
victims fled to neighboring cities or moved in with relatives rather 
than go to the tent camps.  As space becomes available, some members 
of this group are relocating to vacant spaces in the barracks. 
 
JAKARTA 00000300  002 OF 006 
 
 
 
¶5. (U) NGOs in Meulaboh point out that some barrack dwellers are 
Acehnese from poorer inland districts who are attracted to the 
robust economic activity in the tsunami-affected areas. 
Representatives from an international NGO told us that it is often 
difficult to separate the economic migrants from the actual tsunami 
victims when building houses.  Some in the barracks are migrant 
workers from other parts of Indonesia, rather than tsunami victims, 
taking advantage of widely available reconstruction work.  Others do 
not have clear land title, never owned land or have complex family 
situations such as divorce.  BRR wants to close all the barracks by 
June 2007, a goal which is likely impossible given the many 
unresolved issues of barracks occupants.  BRR notes in its two-year 
report that, "The validation and verification of beneficiaries to 
filter out the fraudulent and non-legitimate claims is an extremely 
time consuming exercise and has caused unwanted delays in the 
overall reconstruction." 
 
New Houses Everywhere, But Corruption an Issue 
--------------------------------------------- - 
 
¶6. (SBU) Despite the problems, new houses can be seen everywhere in 
Aceh.  Our interlocutors gave special praise to houses built by 
USAID implementing partner CHF, along with housing donated by the 
Turkish Red Crescent.  However, a significant portion of BRR-built 
homes have been criticized as inferior.  This is in part due to the 
fact that the homes many donors built exceed the minimum standards 
established by BRR, making the BRR houses relatively less desirable. 
 Even so, BRR itself acknowledges that about 1,700 of its contracted 
houses were substandard and failed to comply with the agency's own 
standards.  BRR is now renovating some of the houses found to be 
problematic.  Another issue is that while BRR mandated earthquake 
resistant housing, "a widespread lack of technical understanding of 
seismic design and construction detai...and a lack of safety culture 
lead to irresponsibility on the part of building contractors," BRR 
noted in its update report.  Thus housing of varying quality is 
being built, but many residents are using their own funds to improve 
or expand donor-built houses.  A substantial number of people are 
better housed than they were before the tsunami. 
 
¶7. (SBU) Several observers told us the IFRC's temporary shelter 
program has been very successful and helped get many residents out 
of tents.  The transitional shelters were very well received, and 
many residents have attached them to their new houses or kept them 
for extended family or storage.  In other cases, local governments 
provided land so that large clusters of these shelters could be 
constructed in order to decommission tents.  The sturdy shelters are 
impressive, with treated wood and simple metal frames. 
 
¶8. (SBU) All NGOs, many government officials and journalists we met 
complained about the corruption associated with construction 
contractors.  In many cases, donors have had to divert resources 
from programs to monitoring and supervision of construction. 
Companies that wind up on informal black lists of unreliable 
contractors simply re-form under a different name.  Some expressed 
disappointment that BRR was not doing a better job of monitoring 
contractors, but admitted the agency doesn't really have the 
resources to do so.  BRR told us that one person may control a dozen 
different contracting companies or could register with false 
information, making enforcement difficult.  BRR encourages NGOs to 
check out prospective contractors and test them with a smaller 
project before handing them a larger one. 
 
Roads and Ports: Steady Improvements 
------------------------------------ 
 
 
JAKARTA 00000300  003 OF 006 
 
 
¶9. (SBU) Over 1,500 kilometers of roads have been repaired in Aceh 
and Nias.  On the badly damaged west coast road between Banda Aceh 
and Meulaboh, USAID is assisting BRR and provincial authorities in 
their efforts to complete land acquisition and to provide access to 
the road right-of-way for the Banda Aceh-Calang segment.  USAID has 
repaired and is maintaining the section from Banda Aceh to Lamno. 
Construction has begun in three of five priority sections.  The 
construction of this $240 million road remains the signature USAID 
project in Aceh, but land access and cost overruns continue to delay 
the work.  The Multi-Donor Fund's temporary section from Lamno to 
Calang is in worse shape.  Calang's damaged port has delayed 
progress upgrading and maintaining the west coast road because large 
ships with reconstruction supplies cannot berth. 
 
¶10. (U) Japan will complete most of the reconstruction and repairs 
to the 122-kilometer section of the west coast road from Calang to 
Meulaboh by the end of June 2007.  Several donors and Acehnese told 
us the 155 kilometers journey from Banda Aceh to Calang takes 
approximately five hours, a considerable improvement from a year ago 
when the road was largely impassable.  The main roads in Meulaboh, 
which were pitted with gigantic holes when we visited in December 
2005, are now freshly paved.  Meulaboh port, restored by Singapore, 
now has a wharf large enough for trucks to unload the shiploads of 
cement and other supplies coming in for reconstruction.  The 
Netherlands and Singapore helped restore Malahayati port in Aceh 
Besar, and ferry terminals at Ulee Lheu (Banda Aceh) and Balohan 
(Weh Island) have also been refurbished.  The port at Kuala Langsa 
in the west is currently undergoing renovation and ports at Calang 
(west coast) and Sinabang (Simuelue) await reconstruction.  BRR told 
us it hoped all the west coast ports could be completed by the end 
of 2008.  The Asian Development Bank (ADB) is funding rehabilitation 
of the 490-kilometer east coast road from Banda Aceh to the North 
Sumatra border, but has yet to begin construction. 
 
¶11. (SBU) When the Indonesian military (TNI) hastily re-routed and 
repaired the west coast road on an emergency basis shortly after the 
tsunami, it used some private land but failed to compensate all 
 
SIPDIS 
owners.  In December 2006, some villages set up ad hoc roadblocks 
demanding informal tolls of about a dollar and compensation from 
vehicles seeking to pass. The International Federation of the Red 
Cross told us some of its vehicles could not pass at all in December 
and had to turn back.  After a few weeks, the provincial and local 
governments helped resolve this issue by promising compensation. 
 
Local Infrastructure: Lots to Do 
-------------------------------- 
 
¶12. (SBU) Providing water, sanitation and electricity to newly 
constructed homes remains a significant problem.  An official from 
the Meulaboh office of the Ministry of Public Works told us that 
some NGOs are taking on these types of infrastructure projects in 
some areas and working out memoranda of understanding (MOU) with 
local governments.  Right now NGOs are doing about 80% of the 
infrastructure work, with BRR doing about 20%.  Local governments 
and BRR are promising to finish projects which NGOs cannot complete 
or provide.  The World Bank-managed Multi-Donor Fund (MDF), which 
still has $160 million remaining, has joined with BRR to create the 
$273 million "Infrastructure Reconstruction Financing Facility" for 
roads, sanitation and water and other infrastructure projects. 
According to several observers, one reason infrastructure remains a 
problem is that local governments are spending their money on areas 
not affected by the tsunami because they believe that BRR or others 
will eventually step in to improve infrastructure damaged by the 
tsunami. 
 
SIPDIS 
 
¶13. (U) Aceh suffered $50 million of damage to its electricity 
 
JAKARTA 00000300  004 OF 006 
 
 
generation and transmission capacity after the tsunami, and there is 
not enough electricity to support all the new construction in Aceh. 
BRR is addressing this by working with bilateral donors and 
international financial institutions to develop new power plants and 
improve power distribution.  Australia and New Zealand are helping 
to plan a geothermal plant and Japan is providing assistance for a 
hydropower project in Bireun, but these could take five years or 
more. 
 
Remarkable Economic Recovery... 
------------------------------- 
 
¶14. (U) Despite long-term challenges, the amount of economic 
activity now throughout the province is visibly greater than before 
the tsunami.  In Banda Aceh a new, earthquake-resistant 
international hotel is full of visitors and serving banana splits 
and chocolate eclairs in its cafe.  At least two more international 
quality hotels are also planned.  Elsewhere, markets are humming, 
mosques are repaired or under renovation, coffee shops are packed, 
new restaurants are going up.  However, the inflow of large amounts 
of money, the scarcity of many types of construction supplies and 
equipment, and the presence of free-spending agencies has brought 
high inflation.  Inflation was a huge problem in 2005, causing 
several donors to cut by half or more the number of housing and 
other projects they could carry out.  In Banda Aceh, the provincial 
capital, houses today cost typically ten times as much to rent as 
they did prior to the tsunami.  Year-on year inflation remained high 
at 14% in October 2006, but is nonetheless significantly lower than 
the 35% YoY rate in January 2006. 
 
¶15. (U) The Aceh Regional Development Bank (BPD) reports that 
deposits and loans increased significantly in 2006.  Many who during 
the conflict kept money under the mattress are now placing it in 
banks.  The BPD opened 15 new branches in 2006 and plans another 25 
new branches in 2007 for a total of 55.  Indicators from 2002-2005 
show a steady increase in assets and deposits. 
 
----------------------------------- 
Table 1: Banking Indicators in Aceh 
----------------------------------- 
 
Banking Indicators     2002     2003    2004    2005 
--------------------------------------------- ------- 
Assets (Rp trillion)   7,608   9,880   10,784  16,588 
 
Deposits (Rp trillion) 6,083   7,656    7,952  13,887 
 
Credit (Rp trillion)   1,578   2,123    3,201   3,634 
 
LDR %                   26%     28%      40%     26% 
(Loan-to-deposit ratio) 
 
NPL %                   2.98%  2.65%     2.80%  3.06% 
(Non-performing loans) 
 
Source: BRR Two-Year Update Report 
 
But Employment Concerns Remain... 
--------------------------------- 
 
¶16. (U) Construction jobs are creating livelihoods for some 
Acehnese, but many lack the necessary skills and several contractors 
are using labor from outside Aceh.  Many fishing communities have 
been reestablished, although more infrastructure is needed to 
support the fishing industry, including transportation, 
refrigeration, processing.  Some donors and advisors have noted that 
 
JAKARTA 00000300  005 OF 006 
 
 
more needs to be done to develop "mid-level" processing related to 
agricultural products as well as attracting investors to develop 
large-scale manufacturing.  During the conflict, plantation 
companies abandoned thousands of hectares of oil palms and rubber 
trees when Javanese trans-migrants, who had been brought in to work 
the plantations, fled.  Farmers left other land unplanted during the 
conflict because they were reluctant to invest in crops such as 
coffee, cocoa and vanilla which required more than one season to 
produce. Firms from Indonesia, Singapore, and Malaysia have already 
started to compete for lucrative plantation properties which were 
neglected during the conflict.  However, some observers worry that 
the boom times won't last and that once the donors leave, an 
economic contraction may be inevitable. 
 
¶17. (U) In the manufacturing sector, two large fertilizer factories 
(PT Pupuk Iskandar Muda and Asean Aceh Fertilizer), a cement company 
(Cement Andalas) and a large pulp and paper company (Aceh Kraft 
Paper) have shut down, resulting in the layoffs of thousands of 
workers.  Cement Andalas announced in mid-January its intention to 
invest $450 million in the construction of two new cement factories 
in Aceh Basar and Langkat, North Sumatra, providing 850 jobs, though 
the company did not mention a timeline.  Donors and BRR are helping 
to develop Aceh's private sector by training and lending to trading 
companies and other businesses in the small-to-medium enterprise 
sector.  Some Indonesian and foreign businesses have expressed 
concern, however, about Aceh's less-than-welcoming sharia 
environment for outside investment.  The new governor-elect, Irwandi 
Yusuf, shares these concerns and has promised to moderate the 
enforcement of sharia in the province. 
 
Social Issues Remain a Concern 
------------------------------ 
 
¶18. (U) Many Acehnese who lost spouses during the disaster have 
re-married and are starting new families.  However, some residents 
have not yet recovered from the trauma of the disaster, and break 
down in tears when talking about it.  One of Indonesia's two largest 
Islamic NGOs, Muhammidiyah, reports that it continues to provide 
care throughout the province for more than one thousand tsunami 
orphans.  Counselors point out that a "victim mentality" is 
beginning to show in some cases.  Some people feel dependent or 
disempowered, finding it easier to take handouts than build a new 
life.  Now that donors are supplying many of the basic essentials 
such as shelter and health care, some NGOs are responding to the 
emotional needs by training counselors to help with disaster trauma. 
 The overall impression, however, is that people are moving on. 
 
New Disaster: Severe Flooding in December 
----------------------------------------- 
 
¶19. (U) Of the 70,000 hectares of farmland damaged by the tsunami, 
donors and ordinary Acehnese brought 50,000 back into production. 
However, heavy rains in December 2006 flooded several districts in 
Aceh as well as in North Sumatra and Riau provinces, temporarily 
displacing more than 200,000 people and destroying the first crops 
since the tsunami in some areas.  One area, Aceh Tamiang, was 90% 
submerged, with many roads and bridges completely destroyed.  The 
World Food Programme worked with the Indonesian military (TNI) and 
local governments to distribute food and non-food items to the flood 
victims and the UN began the rehabilitation phase in mid-January. 
The UN and other donors are supporting local government efforts to 
clean the mud from buildings, replace tools and equipment, and again 
restore farmlands. 
 
¶20. (U) Some observers told us that the severe floods happened early 
enough in the rice growing season that the rice harvest should 
 
JAKARTA 00000300  006 OF 006 
 
 
partially recover.  BRR told us that it can help at the outset of 
new disasters due to its presence and network, but then local 
governments must take over: BRR has its hands more than full with 
tsunami-related issues.  In the tsunami-affected areas, BRR notes 
 
SIPDIS 
that flood control infrastructure is under-funded and that community 
practices of dumping garbage into drains is exacerbating the 
problems.  One clear lesson from the December floods, however, is 
that the local governments have improved their capacity to deal with 
this type of emergency. 
 
Simuelue and Nias Islands 
------------------------- 
 
¶21. (U) Simuelue Island has presented difficult logistical problems. 
 Ferries serve the island only twice a week and trucks wait for 
ferry space to transport supplies, sometimes for several days.  BRR 
has attempted to ameliorate these problems by rebuilding Simuelue's 
airport and extending the airstrip to make it long enough for C-130 
transport aircraft to land and bring in outside supplies. 
Contractors are respecting BRR requests not to cut down local trees 
for lumber, but don't have a good logistics plan to bring in outside 
supplies.  BRR is giving contractors an extra incentive to rebuild 
Simuelue by offering twice the money (Rp 84 million or $9,200 
instead of Rp 42 million or $4,600) for a house there.  One NGO told 
us, "Simuelue is still a mess, but it was a mess even before the 
tsunami."  Money is flowing slowly to Simuelue however, despite the 
 
SIPDIS 
problems, and the island is getting its first asphalt road. 
 
¶22. (U) Like Simuelue, Nias Island's logistical problems are 
challenging.  Nias was lesser developed than Aceh before the 
tsunami, and reconstruction on the island has lagged.  BRR notes in 
 
SIPDIS 
its two-year tsunami update report that Nias's port facilities in 
Gunung Sitoli are too small to handle the volume of reconstruction 
materials required.  Flights to Nias are unreliable and the airstrip 
is too short to accommodate large aircraft.  Donors and contractors 
have been substituting smaller vessels at an alternate jetty for 
shipments but there are bottlenecks.  Donors and BRR are working on 
ways to improve road infrastructure and bring in trucks, timber, 
steel frames for housing and other items needed in Nias.  Numerous 
media reports indicate that local corruption may also be 
contributing to the problem.  Donors and BRR are recognizing the 
need to focus more attention on Nias. 
 
PASCOE