VZCZCXRO8857
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #1878/01 1920626
ZNR UUUUU ZZH
R 110626Z JUL 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 5366
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0580
RUEHBJ/AMEMBASSY BEIJING 4148
RUEHBY/AMEMBASSY CANBERRA 0885
RUEHUL/AMEMBASSY SEOUL 4094
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 06 JAKARTA 001878 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-BAUKOL 
COMMERCE FOR 4430/GOLIKE 
DEPT PASS FEDERAL RESERVE SAN FRANCISCO/FINEMAN 
DEPT PASS EXIM BANK 
 
E.O. 12958: N/A 
TAGS: EINV ECON EAIR EFIN PGOV ID
 
SUBJECT: INDONESIA - NEW PACKAGES ON INVESTMENT, INFRASTRUCTURE 
 
REF: A) JAKARTA 13236; B) 06 JAKARTA 10361; C) JAKARTA 978; D) 
 
JAKARTA 1282; E) 06 JAKARTA 13236 
 
¶1. (SBU) Summary: On June 8, the Government of Indonesia (GOI) 
issued a new Presidential Instruction with four components: 
investment climate improvement; infrastructure development; 
empowerment of micro, small, and medium enterprises; and financial 
sector reform.  These are updates to packages that were announced at 
various times in 2006 by Coordinating Minister for the Economy 
Boediono (reftels).  They are now being issued simultaneously under 
one umbrella Presidential Instruction to move the economic reform 
agenda forward for the next twelve months.  End Summary. 
 
Four New Packages 
----------------- 
 
¶2. (U) The GOI issued four broad packages of financial and 
investment-related regulations on June 8 under Presidential 
Instruction (InPres) 6/2007.  The investment, financial sector, and 
infrastructure packages are continuations of the same packages 
issued by Coordinating Minister for the Economy Boediono in 2006. 
The package for micro, small, and medium enterprises (MSMEs) is an 
expansion of several programs previously issued under the 2006 
investment package.  Minister Boediono used these packages to help 
to push through economic policy goals and coordinate the 16 
Ministries under his purview.  He has also uses them to encourage 
other ministries outside his purvey to move in the reformist 
direction as well. 
 
Investment Policy Package 
------------------------- 
 
¶3. (U) The GOI claims it implemented 80 of the 85 actions in the 
2006 package, the most important being the passage of the new 
investment law in March 2007.  This year's Investment Climate Policy 
(ICP) package consists of three sections: Institutions, Customs 
Clearance and Taxation.  Section I focuses on institutional reform 
goals intended to improve Indonesia's institutional capacity to 
facilitate increased investment, including: 
 
-- Formulating clearer distinctions of authority between the Central 
Government and Regional Government in regard to investment; 
 
-- Reduction of taxes and tariffs for investors; 
 
-- Simplifying procedures for establishing a business. 
 
The second section addresses customs reform, and outlines various 
objectives, including: 
 
-- Development of an online investment licensing system; 
 
-- Establishment of a National Single Window for customs and cargo 
clearance; 
 
-- Streamlining of customs clearance procedures to allow non-suspect 
goods to be released within 30 minutes. 
 
The final section, Taxation, proposes to improve tax service 
through: 
 
-- Increasing the number of taxpayer offices; 
 
-- Establishing a code of ethics for tax officials. 
 
The GOI's record on implementing reforms remains decidedly mixed. 
However independent observers tell us they appreciate GOI's 
ambitious goal-setting and are impressed to see responsibilities 
specifically tasked to particular ministries.  The ICP also provides 
valuable insight into GOI's own assessment of its progress.  It also 
has potential to serve as an effective tool of reform, despite its 
status as a non-binding Presidential Instruction. 
 
Unrelated to New Investment Law 
------------------------------- 
 
¶4. (U) The ICP package serves as a political document that has no 
 
JAKARTA 00001878  002 OF 006 
 
 
direct relationship to the new 2007 Investment Law.  It is neither 
part of the law, nor part of the law's implementing regulations. 
The package of initiatives is, however, a useful policy analysis 
guide in that it serves as a separate, independent document designed 
to outline President Susilo Bambang Yudhoyono's vision to improve 
the investment climate, as well as his reform agenda.  The package 
is related to the investment roadmap originally conceived by the 
Indonesian Chamber of Commerce (KADIN) during SBY's election 
campaign and has since been institutionalized by the President as an 
annual report.  It serves primarily as a strategic paper intended to 
establish goals and influence policy direction, but lacks the legal 
standing of a Presidential Decree. 
 
What's New for 2007 
------------------- 
 
¶5. (U) The ICP 2007 package reflects several updates from last year, 
including realigned milestones and target dates, but also lists some 
goals that have already been achieved (most likely as a means to 
document "easy" successes in the run up to the 2009 Presidential 
election.)  The most noteworthy difference from 2006 is that the new 
package more clearly designates responsibilities for specific 
outcomes among competing government agencies and ministries.  This 
is significant because rivalries within the GOI are often blamed for 
the slow pace of investment climate reforms.  The most often cited 
example is the bitter divisions between the Ministry of Trade and 
the Investment Coordinating Board (BKPM).  Delineating 
responsibilities with greater precision may also signal the ICP 
package becoming more of an implementing document than a strategy 
paper. 
 
Not Perfect, but Better 
----------------------- 
 
¶6. (SBU) Local expat consultants familiar with the ICP package 
expressed admiration for the document's intentions but remain 
concerned with quality control issues. "Just because the package 
identifies reforms as completed does not mean they were done well," 
one widely respected expat consultant told us.  Impressed to see the 
2007 document identify ministries responsible for specific outcomes, 
some experts defended the document's lack of detail, arguing that 
strategically "less is more."  As one senior expat consultant with 
over 20 years of experience in Indonesia explained, "In Jakarta's 
Javanese, consensus-driven culture, publishing a goal with too much 
precision can weaken the ability to reach that goal."  In his view, 
deliberate vagueness is a virtue that serves to avoid hardening the 
positions of potential adversaries.  Some analysts told us this is 
particularly important for the credibility of a document with no 
force of law behind it.  Indonesia's local media has been less 
impressed, dubbing the package "SBY's wish list" and describing it 
as "ineffective" and "lacking priorities".  More specifically, local 
media note the absence of incentives for government officials to 
implement the reform measures, which in many cases run in direct 
conflict with their own rent-seeking opportunities.  In short, 
without significant accompanying bureaucratic reforms, local critics 
remain skeptical of the package's overall effectiveness.  Meanwhile, 
local government observers acknowledge that although the ICP package 
is far from perfect, they appreciate the goal-setting and hope the 
newly-included designation of responsibilities will help forestall 
governmental rivalries that have slowed the pace of reform. 
 
Infrastructure and Transportation 
--------------------------------- 
 
¶7. (U) Last year's package purported to address several policy 
improvements, the major one being regulations for public-private 
partnerships for infrastructure development (ref E).  However, many 
investors tell us that they will need to see significant reforms and 
improvements in investment climate before international investors 
bring financing for major infrastructure projects.  The GOI said it 
plans to accelerate transportation infrastructure through the 
passage of four new bills in the transportation sector, 
establishment of a National Transportation Safety Board, and 
provision of institutional guidelines for mass rapid transit (MRT) 
management in Jakarta. 
 
¶8. (U) Ministry of Transportation (MoT) sources tell us that it 
 
JAKARTA 00001878  003 OF 006 
 
 
plans to send four bills to Parliament this year concerning Railway, 
Maritime, Aviation, and Land Transportation.  Current legislation in 
the four sectors dates back to 1992 and does not provide for an 
effective mechanism for private investments in the transportation 
sector or regional transportation planning after decentralization. 
Transportation projects have attracted few investors despite the 
GOI's strong marketing efforts to attract investment during the 2006 
Infrastructure conference (ref B).  Despite the public relations 
blitz, the GOI has failed, for example, to provide tender documents 
for its model transportation projects, leaving private investors 
without the basic mechanism for participation.  Still, in step with 
the ongoing decentralization process, many regional governments have 
implemented transportation projects, but they have done so in a 
piecemeal fashion with little consideration for capacity, other 
infrastructure links, or transportation projects in neighboring 
districts.  Our MoT sources say the new legislation will focus on 
increasing opportunities for outside investment in the sector and 
streamlining the procedure to do so.  However, they provided few 
specifics on how they hope to achieve these twin goals.  The new 
bills also target better strategic planning and coordination for 
transportation links and infrastructure at the regional (provincial) 
level. Parliament passed the Railway Bill in May.  They may pass the 
Maritime Bill by August 2007 and perhaps the Aviation Bill by the 
end of 2007, according to our MoT contacts.  That high level of 
productivity would be a sharp break from recent years, however. 
 
Increased Foreign Investment for Air Carriers 
--------------------------------------------- 
 
¶9. (U) Heru Prasetyo, Director of the Legal and International 
Cooperation Bureau, stated that the Transportation sector will 
welcome increased foreign ownership under the new negative list 
(issued July 4), including increased foreign ownership of air 
carriers (49% under the new Negative List).  However, he noted that 
foreign firms would have difficulty reaching that level of ownership 
under the current investment climate.  Prasetyo also stated that 
over the next five-to-ten years the Department of Transportation 
will reduce the number of regional transportation ports (such as 
international maritime ports) and increase coordination of 
multi-region, large-scale infrastructure projects through dialog 
with regional governments.  Prasetyo stated the actions will 
hopefully lead to a more efficient allocation of state and local 
budget resources. 
 
New Domestic Transportation Safety Board 
---------------------------------------- 
 
¶10. (U) The MoT said it also intends to set up a new National 
Transportation Safety Board (NTSB) to improve land transportation 
safety throughout Indonesia.  A National Transportation Safety 
Commission (KNKT) already exists under the MoT, but it is 
overburdened by the high number of transportation accidents, is 
understaffed, and lacks budgetary funding and authority for 
investigations.  Unlike the Jakarta based KNKT, the NTSB will have 
offices throughout Indonesia and focus exclusively on road accidents 
at the provincial level.  The provincial level will also be 
responsible for funding the NTSB, however, so it is unclear if it 
will have enough resources to do a credible job. 
 
Mass Transit for Jakarta 
------------------------ 
 
¶11. (U) Jakarta's choking traffic lowers both quality of life and 
economic growth.  To remedy these twin maladies, the GOI 
infrastructure acceleration plan calls for the creation of an 
institution for Mass Rapid Transit (MRT) in Jakarta.  Our GOI 
contacts express the hope that this institution will also serve as a 
role model for MRT development authorities in other large cities. 
The MRT authority's primary function will be to manage the 
controversial Jakarta monorail project (ref A), which is being built 
primarily by companies associated with Vice President Jusuf Kalla. 
The on-again-off-again monorail project is now underway again after 
a recently issued government regulation (No. 103/2006) granting 
minimum ridership guarantees to the monorail project.  The monorail 
project is scheduled for completion in 2010.  Prasetyo told us that 
the local Jakarta administration will be responsible for 
establishing this authority. 
 
JAKARTA 00001878  004 OF 006 
 
 
 
Micro, Small and Medium Enterprises Package 
------------------------------------------- 
 
¶12. (U) The new package for "Empowerment of Micro, Small and Medium 
Enterprises" (MSME) consists of three major elements: 
 
Section I seeks improved access of MSME's to financing by: 
 
-- Improving MSME access to financial resources; 
 
-- Strengthening MSME credit insurance; 
 
-- Better use of non-bank funds to empower MSMEs. 
 
Section II aims to improve private entrepreneurship and human 
resources by: 
 
-- Better education and training including graduate school 
programs; 
 
-- Encouraging technology-based entrepreneurship; 
 
Section III's goal is enhancement of market opportunities for MSME 
products by: 
 
-- Expansion of MSME product promotional institutions; 
 
-- Encouraging partnerships between producers and both traditional 
markets and modern shops; expanding market synergy. 
 
-- Expanding information on shipping and transportation for goods. 
 
-- Tax incentives for MSMEs. 
 
-- Finalizing the preparation of a draft law on MSMEs for submission 
to Parliament by December 2007. 
 
¶13. (SBU) The GOI has had several iterations of assistance packages 
for MSMEs, some of which have been successful.  However, high 
interest rates, inadequate access to capital, corruption and 
bureaucratic red tape continue to hinder many entrepreneurs.  An 
additional shortcoming for Indonesia's MSME development is a lack of 
good entrepreneurship training and only a handful of well-respected 
business schools.  Indonesia's venture capital industry is also 
underdeveloped, and commercial banks lend directly to 
small-and-medium firms.  According to the World Bank, few offshore 
venture capital compaiies have shown an interest in investing in the 
cu ntry due to transparency and corporate governance issues.  One of 
the program elements in the financial sector reform package (see 
below) is to enhance the role of venture capital in MSMEs: it calls 
for an assessment report by November 2007. 
 
¶14. (SBU) Tax incentives for MSMEs will likely face a slow battle 
through the Directorate General for Taxation (DG Tax): DG Tax still 
has insufficient capacity for good tax policy study, review and 
decision-making.  According to an International Monetary Fund 
economist based in Jakarta, the parts of this MSME package with the 
best chances of success are the credit schemes and the educational 
improvements.  One noteworthy positive development is the program 
element to develop a warehouse receipt system as a financing 
instrument for MSMEs.  A system of designated warehouses providing 
officially, centrally registered receipts for commodities stored, 
allows MSME traders and farmers to store their goods for as long as 
needed without having to dispose of them, and use the receipts as 
collateral for loans.  This was also a required program action under 
the third Development Policy Loan (December 2006) provided by the 
World Bank. 
 
Financial Sector Package 
------------------------ 
 
¶15. (SBU) The new financial sector package contains four main 
elements: 
 
-- Strengthening financial sector coordination; 
 
 
JAKARTA 00001878  005 OF 006 
 
 
-- Restructuring state-owned banks and facilitating sharia banking; 
 
-- Strengthening non-bank financial institutions, especially 
insurance and pensions. 
 
-- Increasing stability, efficiency and liquidity of capital 
markets; 
 
-- Harmonization of laws and regulations governing the financial 
sector. 
 
¶16. (SBU) The new financial sector package reflects the fact, though 
not stated, that many of last year's items were accomplished (ref 
B).  The GOI has established a primary dealers market, and auctioned 
its first T-Bill auctions in 2007.  We were also pleased that some 
of the problematic areas in the draft of this package (such as 
regulation of ratings agencies), discussed in a meeting with major 
donors (U.S., Australia, World Bank, Asian Development Bank and IMF) 
were removed or revised in response to donors' written comments. 
 
Financial Sector Safety 
Net Law: Postponed Again 
------------------------ 
 
¶17. (SBU) One item that was not accomplished, however, and reappears 
in this package again, is the establishment of the Financial Sector 
Safety Net Law.  This bill was supposed to be submitted to 
Parliament by December 2006, but has been postponed again to October 
¶2007.  The law is in response to the 1997-98 financial crisis, to 
define the role of the Central Bank, Ministry of Finance, and the 
Coordinating Ministry for the Economy in the event of another major 
shock.  A senior manager at the State Asset Company (PPA) Raden 
Pardede told us that the power relationships between the key 
agencies are still complicated, "In the event of another crisis that 
presented a systemic risk, important decisions would probably be 
deferred to the President."  The reason this draft has been delayed 
several times is that, given the fallout of the crisis and ongoing 
corruption investigations connected to the Indonesia Bank 
Restructuring Agency and Bank Indonesia Liquidity Assistance (BLBI), 
"No one wants the responsibility for the really tough decisions in 
case of a new crisis actually put in writing.  They're afraid they 
might end up in jail," Pardede told us. 
 
State Bank Governance 
--------------------- 
 
¶18. (SBU) One noteworthy element of the package is the development 
of materials for public education in the field of finance by 
September 2007.  Commercial banks, mutual funds and credit card 
companies have been calling for this for years.  A large majority of 
the banking and investing public is still poorly educated about 
basic banking and investment principles, though the private sector 
has been active in this area in a piecemeal way.  A mandate for 
improvement of state-owned banks via a decree by the Minister of 
State-Owned Enterprises (SOEs) was also postponed from last year 
(originally August 2006, now October 2007).  A new Minister for SOEs 
Sofyan Djalil was appointed in a Cabinet reshuffle on May 7 (ref D) 
who may do more to support privatization, but management at 
state-owned banks has a history of being heavily subject to 
political interference.  Indonesia's large state-owned banks are 
Bank Mandiri, Bank Nasional Indonesia (BNI), Bank Rakyat Indonesia 
(BRI), and BTN (which provides subsidized mortgages).  Together they 
control about 40% of banking assets in the country. 
 
Insurance Regulation 
-------------------- 
 
¶19. (SBU) We were pleased to see that improvement of insurance 
regulation and supervision via an amended regulation was included in 
this package.  Indonesia's insurance sector is in bad shape (ref C). 
 It suffers from weak regulation; poor enforcement; inadequate 
training; low professional standards; and insufficient capital.  The 
goal for the amended regulation is January 2008 and involves three 
agencies (Finance, Law and Human Rights, State Secretary).  The 
foreign insurance companies in Indonesia have been lobbying the 
regulator for improved supervision for many months. 
 
 
JAKARTA 00001878  006 OF 006 
 
 
Capital Markets, Sharia Bonds 
----------------------------- 
 
¶20. (SBU) The merger of the Jakarta and Surabaya Stock Exchanges was 
postponed a year from October 2006 to October 2007.  The Ministry of 
Finance hopes the merger will improve efficiency.  The package also 
seeks to improve price discovery for bond trading and valuation of 
securities.  Another goal added, which was not in last year's 
package, is the development of Islamic Sharia Government Bonds and 
other sharia financial instruments.  This requires the issuance of 
government regulations under the Ministry of Finance, but no 
deadline was set in the new package. 
 
HUME