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UNCLAS SECTION 01 OF 02 JAKARTA 002470 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS, EAP/RSP, EEB/IFD/OIA 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ENRG PGOV KGHG ID
SUBJECT: DAS MARCIEL MEETINGS ON INDONESIA'S ECONOMY, 
INVESTMENT CLIMATE 
 
REF: A. A) JAKARTA 2069 (NIKE CASE) 
     ¶B. B) JAKARTA 2097 (COUNTERFEIT PHARMACEUTICALS) 
 
JAKARTA 00002470  001.2 OF 002 
 
 
 ¶1. (SBU) Summary.  EAP Deputy Assistant Secretary Scot 
Marciel, during his August 27-28 visit to Jakarta, heard 
complaints that Indonesia is not attracting as much 
investment as neighbor Vietnam.  Reasons include the 
Indonesian government and Parliament's ambivalence towards 
foreign companies and punitive actions such as threatening or 
jailing foreign business executives during contract disputes. 
 Domestic and international companies are often frustrated by 
regulations issued without a consultative process.  While 
growth is good, a better business climate could improve 
investment and infrastructure.  End Summary. 
 
Investment Still Sluggish 
------------------------- 
 
¶2. (SBU) At a working dinner on economic issues, a prominent 
businesswoman noted that media stories about Indonesia are 
all negative.  The media was suppressed under Soeharto, but 
now it publishes bad news, so that is what readers see. 
Investors want a sense of security for their potential 
investments and read these reports with concern.  One GOI 
official believed that growth is fast enough, stating "growth 
is already at 6%.  If we grow at 8% we will overheat."  A 
member of Parliament (DPR) noted that plenty of short-term 
portfolio investment is coming in, but not long-term. 
 
¶3. (SBU) On infrastructure projects, Marsillam Simanjuntak, a 
Presidential advisor, said that the GOI's policies on 
infrastructure are flawed. He asked, "Why do 10,000 MW 
electricity projects need a government guarantee?  China, 
Japan and EU companies all participated in the tender, but 
after China won, it requested a guarantee.  This creates a 
discrepancy of trust."  He concluded the GOI has not yet 
found a way to balance its legitimate need for power with 
"vested interests."  The Commissioner from a state-owned 
enterprise said that Indonesia's state-owned sector should be 
in the hands of the public, not the government.  Conflicts of 
interest cannot be resolved under the current system. 
 
¶4. (SBU) DAS Marciel and the Ambassador noted that bad media 
stories about Indonesia are discouraging to investors, who 
are "waiting to see."  A certain momentum of good news 
stories is necessary to attract attention.  The lack of legal 
certainty has a chilling effect, such as the GOI appeal of 
the Newmont verdict in the Buyat Bay case.  Ongoing IPR 
problems also dampen enthusiasm for Indonesia, such as the 
GOI's rampant use of pirated Microsoft software and the large 
percentage (20-25%) of counterfeit pharmaceuticals.  The 
Ambassador said that U.S. company executives here are afraid 
of incarceration if they have a contract dispute such as Nike 
recently experienced (ref A).  Actions like these could cause 
wider harm as investors may consider shutting down all 
operations in Indonesia. 
 
Business Wants More Consultation with GOI 
----------------------------------------- 
 
¶5. (SBU) American Chamber of Commerce (AmCham) members are 
optimistic about expanding their businesses but still 
frustrated at the lack of regulatory consultation. Laws and 
regulations are largely being written with no connection to 
the reality of the sectors they impact.  Many GOI regulations 
are "neither implementable nor enforceable," one 
representative of a pharmaceutical company noted.  Several 
DPR members also have a streak of economic nationalism with 
an attitude towards foreign investors of, "We want your 
money, but we don't want you."  "We are expanding, but we 
could do more if the environment was easier," the AmCham 
President noted.  AmCham said that domestic companies are 
equally concerned about the business climate, with legal 
uncertainty high on the list.  IPR issues are still a huge 
concern.  The biggest raid in history of counterfeit 
pharmaceuticals (ref B) is "just the tip of the iceberg."  In 
the telecommunications sector, options for U.S. companies are 
now only in services not in infrastructure. 
 
Economic Advisor - Getting Enough Growth 
---------------------------------------- 
 
JAKARTA 00002470  002.2 OF 002 
 
 
 
¶5. (SBU) The Director of the Institute for Social and 
Economic Research at the University of Indonesia, Dr. Chatib 
Basri, also serves as an advisor to the Economic Cabinet 
Ministers and to President Yudhoyono.  Dr. Basri said the 
biggest concern to the GOI's economic leaders is whether 
growth will be strong enough to create jobs.  There is 
conflict between the Ministry of Industry, which seeks 
protections, and the Ministry of Trade, which wants a more 
open trading policy.  Domestic companies fear competition. 
The problem is not the demand side: exports are doing well 
and will continue to do so as long as China maintains growth. 
 The supply side constraints include transportation and 
energy infrastructure: a lack of good roads and adequate 
electricity, for example.  Foreign direct investment from the 
U.S. is also problematic.  Embassy Econ officers raised the 
problems we've had with exploratory discussions on a 
Bilateral Investment Treaty and with an updated Overseas 
Private Investment Corporation (OPIC) agreement.  Dr. Basri 
said that, "Many in the GOI view it as politically negative 
to be seen doing deals with the U.S.  Major political players 
such as Amien Rais say that everything related to the U.S. is 
bad." 
 
¶6. (SBU) Dr. Basri said that labor conditions are also 
problematic.  After Bolivia and Portugal, Indonesia has the 
highest severance rates in the world.  This acts as a kind of 
"tax on business" and companies thus prefer to hire temporary 
workers.  Labor reform is too politically sensitive to 
tackle, however.  Unemployment in the formal sector and 
underemployment is still high, but because there is no social 
security, "only the rich can afford to be unemployed."  To 
alleviate rural poverty, Basri suggested to the President a 
kind of employment scheme for rural infrastructure at below 
minimum wages in order to attract those truly below the 
poverty line into wage-paying jobs. 
 
¶7. (SBU) Corruption still contributes to the cost of doing 
business but has reduced dramatically: bribes added about 
12% to the cost of production in 2001 but fell to 6% in 2005. 
 There is not yet a good incentive system for Indonesian 
civil service officials to improve their performance, Dr. 
Basri noted.  Under Soeharto, the incentive system to 
implement the President's priorities was clear: promotion or 
jail.  Streamlining government is starting to reduce extra, 
corrupt sources of income.  The GOI needs to find a way to 
bring in "sweeteners" for motivation, Dr. Basri believes.  In 
terms of good civil service internal controls and budget 
practices, "We're still with the dinosaurs," Dr. Basri noted. 
 Local governments are producing bad regulations because 
there is no consultation process or regulatory impact 
assessment.  Some are trying to make improvements, however. 
One way to promote change may be to support reform-minded 
local officials who are moving fastest to improve the 
business climate. 
 
Biofuels and Climate Change 
--------------------------- 
 
¶8. (SBU) On biofuels, Dr. Basri said that he was, "skeptical 
from the Qtset," since the President wanted to use this 
program mainly for employment generation.  Dr. Basri believes 
an alternative fuel program will not work until the 
administered prices for fuel subsidies are fully removed.  In 
his view, the program will neither produce an economically 
sound product nor will it create jobs in the way the 
President originally conceived it.  Dr. Basri was tasked by 
the Ministry Finance to draft a paper on climate change for 
the UN Framework Conference on Climate Change 13th Conference 
of Parties (UNFCCC COP-13) conference in Bali December 3-14. 
Embassy will follow up with Dr. Basri to get an advance copy. 
 
HUME