VZCZCXRO3491
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #1933/01 1971104
ZNR UUUUU ZZH
R 161104Z JUL 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 5449
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS

UNCLAS SECTION 01 OF 03 JAKARTA 001933 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
FROM AMBASSADOR HUME TO EEB A/S SULLIVAN 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON ENRG KCOR PGOV ID
SUBJECT: SCENESETTER FOR EEB A/S SULLIVAN VISIT TO JAKARTA 
 
¶1. (SBU) Summary.  Embassy Jakarta welcomes you to Indonesia.  Yours 
will be the first high-level State Department economic visit here in 
several years.  We encourage you to make a strong pitch for OPIC to 
facilitate U.S. investment, for exploratory discussion of a 
Bilateral Investment Treaty (BIT), and for the Government of 
Indonesia (GOI) to do more to open its markets to foreign investment 
and enhance its competitiveness.  We also recommend you encourage 
the GOI to streamline its asset-freezing process under UN 1267. End 
Summary 
 
BATAM ISLAND-YOUR FIRST STOP 
----------------------------- 
 
¶2. (SBU) Your visit to Indonesia's Batam Island, 12 miles south of 
Singapore, will give you insight into how the GOI uses "Special 
Economic Zones" (SEZs), to "fast track" investment reforms.  SEZs 
allow duty free trade within select areas.  Despite these 
advantages, Batam's investment potential has been constrained by 
regulatory uncertainty and local economic factors.  The 2006 
Indonesia-Singapore "Framework Agreement on Economic Cooperation" 
focuses on developing Batam and extending SEZ status to adjacent 
islands.  Batam hosts several USG-assisted GOI initiatives including 
the Customs Office "National Single Window Pilot Project" and 
Indonesia's Investment Board's (BKPM) "One Stop Service Promotion 
Center."  In your conversations with government and business leaders 
we encourage you to inquire about the status and effectiveness of 
both these programs. 
 
¶3.  (SBU) USTR has also offered assistance in developing Indonesian 
SEZ's under the U.S.-Indonesian Trade and Investment Framework 
Agreement" (TIFA), which would serve as an effective counterweight 
to Singapore's increasing influence over the region.  Your visit 
provides an opportunity to assess the openness of local officials to 
such a proposal.  Joe Bartlett, President of the AmCham, and 
Economics Officer Jonathan Alan will accompany you during your visit 
to Batam. 
 
MACROECONOMICS NOT BAD 
---------------------- 
 
¶4.  (SBU) With growth of 6.0% in the first quarter (5.5% for 2006), 
high reserves, robust capital flows and dynamic trade, Indonesia's 
macroeconomy is growing briskly, but still below the 6.6% growth 
necessary to impact unemployment and alleviate poverty.  Investment 
though is slow; Indonesia is still regarded as corrupt and 
over-regulated by investors, with inefficient state-owned 
enterprises monopolizing key sectors and a complex licensing regime. 
 
 
OPIC - Still Stuck 
------------------ 
 
¶5. (SBU) The GOI does not have an updated OPIC agreement clarifying 
the Foreign Government Approval ("FGA") process.   As a result, OPIC 
has been unable to obtain timely approvals for investment projects. 
OPIC has received more than $600 million of investment inquiries for 
Indonesia in last 12 months.  We recommend you raise this issue in 
your meetings with the Investment Coordinating Board (BKPM), the 
Ministry of Finance and the Ministry of Trade. 
 
Investment, BIT and Negative List 
--------------------------------- 
 
¶6. (SBU) Indonesia's newly-revised negative list for foreign 
investment was issued on July 4.  While investors may benefit from 
the increased transparency and legal certainty, some new investment 
limits are now officially lower than the upper limit of what was 
previously allowed.  GOI has stated the new list will not be applied 
retroactively.  We encourage you to remind GOI officials that 
increased or sustained restrictions send the wrong signal and 
undermine GOI's goal of increasing Foreign Direct Investment. 
 
Bilateral Investment Treaty 
--------------------------- 
 
¶7. (SBU) USTR has proposed to GOI Ministry of Trade (MOT) to begin 
exploratory talks on negotiating a Bilateral Investment Treaty 
(BIT); the GOI has not yet responded.  We encourage you to highlight 
the importance and benefits of a BIT, and to urge the GOI to begin 
an exploratory dialogue.  We also welcome Indonesia's comments on 
our model BIT text. 
 
Corruption's Toll and the Judiciary 
----------------------------------- 
 
¶8. (SBU) Indonesia's corruption hinders trade of goods, adding an 
estimated 20% or more to business costs, and foreign investors 
continue to complain about the dysfunctional judiciary.  An American 
citizen executive of the U.S.-based company Newmont Mining remains 
entangled in a legal battle with GOI despite overwhelming 
 
JAKARTA 00001933  002 OF 003 
 
 
exculpatory evidence and an acquittal by a district court. 
Prosecutors (in violation of Indonesia's own criminal code), have 
appealed the acquittal to the Supreme Court, which has the power to 
impose a jail sentence.  We encourage you to remind GOI officials 
the chilling effect cases like this have on future foreign 
investment. 
 
Millennium Challenge Threshold Program 
-------------------------------------- 
 
¶9. (SBU) USAID and GOI signed a $55 million agreement in November 
2006 for a Millennium Challenge Corporation (MCC) Threshold Program, 
managed by USAID.  The program includes a $35 million Control of 
Corruption component that will address Supreme Court reforms, 
judicial transparency, anti-money laundering enforcement and 
prosecution of public corruption cases.  The program will run from 
2007 - 2009.  You may wish to congratulate Indonesia on its MCC 
program and the contribution it will make to combat corruption. 
 
 
Bilateral Energy Dialogue and Biofuels 
-------------------------------------- 
 
¶10. (SBU) Our bilateral Energy Policy Dialogue (EPD) is 
re-energized.  Our next meeting is tentatively planned for fall 2007 
in Indonesia.  The GOI is continuing its ambitious five-year, 
multi-billion dollar investment plan to boost biofuel production. 
The GOI has announced sensible biofuel policies, including a $108 
million fund to create incentives for biofuels investments and $1.08 
billion to improve agricultural and rural infrastructure.  The GOI 
has also signed 58 tentative agreements reportedly worth $12 billion 
with foreign and domestic investors (mostly Chinese, Japanese, and 
Malaysian firms).  The GOI's biofuel initiative appears to be here 
to stay, although at current prices for feedstock, Indonesian 
biofuel remains uneconomic. 
 
Asset Freezing 
-------------- 
 
¶11. (SBU) Indonesia does not have a streamlined process to implement 
asset-freezing obligations of Al-Qaeda-related individuals and 
entities under UN 1267.  Commercial bank compliance officers 
complain that even when they receive timely asset-freezing orders 
from GOI, the similarity of names and addresses in Indonesia make it 
difficult to locate assets.  Bank of Indonesia's (BI) credit bureau 
is also a work in progress, with many borrowers not listed in the 
database and commercial banks worried about data security.  We 
encourage you in your meeting with BI to raise the issue of a more 
streamlined process for asset freezing under Indonesia's UN 
obligations. 
 
IPR - Steady Progress, More Prosecutions Needed 
--------------------------------------------- -- 
 
¶12. (SBU) The largest and most successful IPR raid ever in Indonesia 
occurred on July 1 when Indonesian law enforcement raided two 
factories suspected of producing pirated optical disks.  While 
impressive, sustained efforts are essential to avoid Indonesia's 
return to the Priority Watch List.  GOI needs to demonstrate success 
in prosecuting not only working-level employees, but factory owners 
as well.  We suggest congratulating GOI officials on their success, 
and encouraging continued efforts by emphasizing the economic 
advantages of a strong IPR regime. 
 
Tropical Forest Conservation Act 
-------------------------------- 
 
¶13. (U) GOI is eligible $19.6 million of "debt redirection" under 
the Tropical Forest Conservation Act (TFCA) debt-for-nature program. 
 GOI is also hosting the UN Climate Change conference in Bali 
December 3-14, which will draw attention to Indonesia's record as 
the world's third largest producer of carbon emissions due to 
deforestation.  GOI is keen for solutions to deforestation, annual 
haze and biodiversity loss.  In your meeting with Ministry of 
Finance officials you could encourage GOI to take full advantage of 
the TFCA opportunity. 
 
The U.S and ASEAN: Losing Influence? 
------------------------------------ 
 
¶14. (SBU) Our engagement with ASEAN remains robust; however lack of 
U.S. participation at several recent key ASEAN events has caused a 
loss of momentum.  Meanwhile China continues to exert influence.  In 
your meetings with GOI officials the general message that "the U.S. 
cares" about ASEAN would be helpful.  Indonesia is also the country 
coordinator for ASEAN-US economic cooperation.  However, the MOT has 
been slow to cooperate with USTR on initiatives.  We suggest 
informing GOI officials that the U.S. is interested to move more 
briskly in expanding our economic cooperation with ASEAN, and would 
appreciate MOT's responsiveness. 
 
JAKARTA 00001933  003 OF 003 
 
 
 
Economic Education 
------------------ 
 
¶15. (U) Indonesia's higher education system is underdeveloped.  Many 
students with means choose to attend graduate school abroad. 
Indonesia has only 10,000 PhDs despite a population of 240 million. 
English is not as widely taught as in other developing countries. 
Indonesia's premier school for economics is the University of 
Indonesia (UI); many senior GOI leaders rank among the alumni. 
 
Media 
----- 
 
¶16. (U) Indonesia's media is lively, but more oriented toward news 
and opinion than investigation and analysis.  Press freedom is still 
developing, and in-depth, authoritative business and economics 
reporting is weak, superficial and often tinged with nationalism. 
Many in Indonesia do not read, and get their information primarily 
from TV.  Affluent Indonesians have access to wide range of foreign 
cable TV channels, including CNBC, CNN, Fox and BBC. 
 
 
 
¶17. (SBU) Journalists may ask why U.S. investment in Indonesia 
remains slow.  You may get questions on climate change: how U.S. 
climate change and other environmental policies are linked to big 
corporations; how the U.S. is doing in its struggle to find 
alternative sources of energy.  What is our policy on biofuels?  How 
could bilateral biofuel cooperation increase?  You may also get 
questions on the influence of U.S. drug, software and entertainment 
companies on IPR policy, or avian influenza sample-sharing.  How 
does the U.S. assess IPR progress in Indonesia?  What is the U.S. 
doing to help Indonesia on air safety?  Will Indonesia be considered 
for MCC Compact Status this year?  Also, there could be questions 
about superpower competition from emerging economic powers China and 
India. 
 
Civil Aviation Safety Problems 
------------------------------ 
 
¶18. (SBU) Indonesia suffered several serious civil aviation 
accidents in early 2007, leading to an FAA Category 2 downgrade, EU 
blacklisting, and negative media coverage.  The FAA recently 
finished a Technical Review of the Indonesian civil aviation 
authorities at the request of the GOI to help identify aviation 
safety issues and solutions. 
Indonesia represents over $3 billion in current Boeing aircraft 
orders.  The CEO of Lion Air, the main purchaser of the Boeings, has 
been invited to the dinner scheduled on July 25. 
 
Port Security 
------------- 
 
¶19. (SBU) A U.S. Coast Guard (USCG) inspection has found Indonesia 
not compliant with the International Ship and Port Facility Security 
(ISPS) code.  USCG will release a demarche giving Indonesia 90 days 
to comply or face a Port Security Advisory (PSA).  A PSA places 
added security costs and increases delays on ships entering U.S. 
ports subsequent to docking at Indonesian ports, and would 
significantly impact Indonesia-US maritime trade. 
 
HUME