VZCZCXRO2867
PP RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2375/01 2410820
ZNR UUUUU ZZH
P 290820Z AUG 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 5983
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBY/AMEMBASSY CANBERRA 1071
RUEHKO/AMEMBASSY TOKYO 0707
RUEHWL/AMEMBASSY WELLINGTON 1693
RUEHJS/AMCONSUL SURABAYA 1915
RHHMUNA/HQ USPACOM HONOLULU HI
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 JAKARTA 002375 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS AND DS/IP/EAP, DOE FOR CUTLER AND 
GILLESPIE, COMMERCE FOR USDOC 4430 
 
E.O. 12958: N/A 
TAGS: ECON EINV EPET ELAB PGOV ASEC ID
SUBJECT: EAST JAVA MUDFLOW UPDATE: FULL ECONOMIC IMPACT 
DIFFICULT TO QUANTIFY 
 
REF: SURABAYA 26 (AND PREVIOUS) 
 
JAKARTA 00002375  001.2 OF 002 
 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE PROTECT 
ACCORDINGLY. 
 
¶1. (SBU) Summary: During EAP Deputy Assistant Secretary Scot 
Marciel's visit to the Sidoarjo muflow site, the site manager 
expressed confidence that current efforts were mitigating the 
risk to surrounding areas, but warned about possible seismic 
activity.  Local economic experts were univerisally critical 
of government efforts to address the impact of the mudflow on 
surrounding neighborhoods and businesses, despite positive 
growth numbers.  Minimal government money has been allocated 
to relocate critical infrastructure and the mudflow 
management body is facing serious financial difficulties. 
The Japanese Consul General warned publicly about the 
mudflow's impact on East Java's investment climate. End 
Summary. 
 
¶2. (SBU) On August 26, DAS Marciel, accompanied by two 
staffers from the House Foreign Affairs Committee, visited 
the Sidoarjo mudflow and received an update on operations 
from Sofian Hadi, Director of Operations for the Sidoarjo Mud 
Distaster Management Board (BPLS).  Sofian told the visitors 
that the situation at the site had improved in the 
three-months since BPLS had been in operation, but would 
become more difficult when the rainy season began in 
November.  He expressed concern, however, that recent 
increases in mudflow rates (currently at one cubic 
meter/second) and the emergence of new water geysers 
throughout the area signaled the near-term onset of siesmic 
activity that could threaten the dams' integrity. He 
reiterated previous predictions that the flow rate of the 
Porong river during the rainy season would be sufficient to 
move the mud out to sea.  Sofian admitted that financial 
concerns threatened operations, mentioning that he had not 
been paid in three months.  (Note: We understand that 
although BPLS is a government body, the Lapindo company is 
responsible for paying the bills.) 
 
¶3. (SBU) In a August 26 lunch with DAS Marciel, six local 
economic experts painted a contradictory picture of the 
impact of the mudflow on East Java's economy. According to 
Indra Nur Fauzi, Managing Director, Regional Economic 
Development Institute, East Java's economic growth in 2006 
was approximately 5.80%, down only marginally from 5.84% in 
¶2005.  He suggested that the numbers were somewhat misleading 
because there had been a significant shift from manufacturing 
to trading and services over the past year. The provincial 
government viewed this shift as a positive trend toward a 
more mature economy.  The experts disagreed with this 
assessment, as the manufacturing sector had declined badly, 
forcing manufacturing workers and business owners to move 
into trading (primarily as importers of Chinese products). 
Kresnayana Yahya, Director of Enciety Business Consultants, 
said that the transportation sector had declined 
approximately 60% in the effected area, increasing costs to 
companies exporting through Surabaya's ports.  Tourism in 
areas south of the mudflow had been hard hit, with occupany 
rates in Malang's 28 hotels falling to less than 20% 
occupancy. 
 
¶4. (SBU) All agreed that the government had failed to take a 
serious or comprehensive approach to deal with the mudflow's 
impact.  Subagyo, a professor at Airlangga University, said 
that the government, for example, had only allocated Rp 600 
billion (approximately USD 63 million) in 2007 to buy land 
for relocating infrastructure. Projected timetables to 
replace the toll road ranged from 2008 to 2010, even though 
construction had yet to begin.  Yahya and Indra complained 
that BPLS did not have the budget or the authority to handle 
the problem.  Yahya added that although the BPLS deputies 
responsible for social and infrastructure issues had many 
plans, they had no budget with which to implement them.  The 
experts lamented that neither the central nor provincial 
governments had developed or implemented plans to offset the 
economic impact of the mud flow through tax breaks, 
rescheduled debts, economic incentives, fee waivers, etc. 
 
¶5. (SBU) Representatives from Bank Indonesia noted that the 
 
JAKARTA 00002375  002.2 OF 002 
 
 
bank had taken steps to provide special treatment to members 
of the business community affected by the mud, but this 
policy was limited to only five municipalities and regencies. 
 Bank Indonesia is considering expanding coverage, but needs 
to evaluate carefully claims that the mudflow is responsible 
for business failures.  While the Sidoarjo regency used to be 
a favored property location in East Java, customers are 
turning to other regions and property located miles from the 
mudflow fail to find buyers. They noted that some businesses 
have relocated to other areas in East Java or to Central 
Java/Jogyakarta where salaries are lower. Bank Indonesia reps 
referred to a "paradox of growth," where growth rates 
remained high, yet poverty and unemployement increased.  Bank 
Indonesia statistics put East Java's second quarter growth at 
6.01%, with expectations that export values will break 
records for the year. 
 
¶6. (SBU) In separate conversations with Principal Officer and 
local media, the Japanese Gonsul General Yushi Suzuki 
complained that the mudflow was harming Japanese businesses 
and deterring Japanese investment in East Java.  Most 
existing Japanese investors are located at the Pasuruan 
Industrial Estate Remang, located just south east of the 
Sidoarjo, and are thus experiencing serious delivery 
disruptions.  According to the East Java Investment Board, 
although Japan traditionally ranks fourth in East Javanese 
investments (after Taiwan, South Korea, and China), in the 
first six months of 2007, there has been no new Japanese 
investment.  According to the investment board, Japanese 
companies have invested in 127 projects valued at USD 2.198 
billion.  Since January 2007, Japanese investment has been 
limited to expansions of existing projects, valued at USD 
21.807 million. 
HUME