VZCZCXRO2670
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2649/01 2630033
ZNR UUUUU ZZH
R 200033Z SEP 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6354
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0828
RUEHBY/AMEMBASSY CANBERRA 1215
RUEHWL/AMEMBASSY WELLINGTON 1783
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHRC/USDA FAS WASHDC
RUEKJCS/SECDEF WASHDC
RHEHNSC/NSC WASHDC
RHHMUNA/USCINCPAC HONOLULU HI
RHHJJAA/JICPAC HONOLULU HI
RUEKJCS/JOINT STAFF WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 002649 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR A/S HILL AND EAP/MTS 
DEPT FOR E STAFF - JEFF YOUNG 
TREASURY FOR IA-RDOHNER, ABAUKOL, KBERG 
SINGAPORE FOR BAKER 
DEPT PASS USTR FOR DBHATIA AND DKATZ 
COMMERCE FOR 4430/BERLINGUETTE 
ENERGY FOR A/S HARBERT, CUTLER AND GILLESPIE 
 
E.O. 12598: N/A 
TAGS: EAID ECON PGOV EINV ID
SUBJECT: U/S JEFFERY MEETS WITH ECONOMISTS AND BUSINESS LEADERS 
 
 
¶1. (SBU) Summary. U/S Jeffery discussed Indonesia's economy and 
investment climate with economists and business leaders September 
10-11 in Jakarta.  Outlying regions such as Aceh and Papua face 
infrastructure and development challenges.  Large established 
western companies with good local partners can be profitable in 
Indonesia, but despite investment climate problems such as legal 
uncertainty and corruption which deters new entrants.  End Summary. 
 
 
Aceh, Papua and Decentralization Challenges 
------------------------------------------- 
 
¶2. (SBU) During a working dinner on September 10, Under Secretary 
discussed reconstruction, investment climate and decentralization 
challenges in Indonesia.  Former Economic Minister Dorodjatun 
Kuntjoro-Jakti noted that the tsunami losses in Aceh were 
unbelievable but the generosity of the donors was tremendous.  A 
World Bank representative donor noted that there were 1,600 ethnic 
Chinese businesspeople active in the local Nias market before the 
disasters: now many are refusing to go back.  Dozens of companies in 
Aceh relocated to Medan.  Hundreds of the best and brightest 
students were wiped out.  The Asian Development Bank country 
director noted that now that much of the reconstruction is completed 
or underway, the growing challenge is finding the people to train 
for hospitals and clinics.  An Asia Foundation representative 
worried that the current donor-induced boom could bring on a 
donor-induced slump after 2009. 
 
¶3. (SBU) Regarding Papua, the Ambassador noted that the local 
government has capacity constraints to spend both budget and donor 
money.  The World Bank said that 3% of GDP is currently sitting in 
local government accounts, unspent.  The October 2005 fuel price 
hikes absorbed disposable income from the economy, increasing the 
budget and thus regional transfers in 2006.  This, in turn, created 
absorption problems for many local governments.  Money is often 
going to local government apparatus such as vehicles and buildings 
rather than to social welfare programs.  Corruption makes it hard to 
get programs through that can withstand real scrutiny, but locally 
elected officials are under real political pressure to improve 
services.  Dorodjatun said that infrastructure development is 
difficult because most construction companies in Indonesia are 
Chinese-controlled and located in East Java, unwilling to go to 
places like Papua.  Road density in Papua is only 1 kilometer per 
100 square kilometers. 
 
Investment Climate: The Usual Suspects 
-------------------------------------- 
 
¶4. (SBU) U/S Jeffery asked what the impediments are to an improved 
investment climate and one economist noted, "the usual suspects," 
referring to Indonesia's oft-criticized obstacles.  These include a 
lack of legal certainty; unclear land titles leading to problems 
with collateral; poor roads, inefficient ports; insufficient 
electricity in many areas; corrupt tax and customs administration; 
and labor issues, especially non-competitive severance pay.  While 
the growth rates are respectable, they have not been enough to bring 
down poverty and unemployment significantly.  Indonesia also has 
natural disasters with great frequency.  Dorodjatun added that 
Indonesia lost ten years of infrastructure development due to the 
financial crisis of 1997-98.  However, the Ambassador added that 
many U.S. companies have been operating in Indonesia for a long 
time, and are making healthy profits, so the picture is not all 
bleak. 
 
AmCham Complains, but Wants 
Indonesia to Reach Its Potential 
-------------------------------- 
 
¶5. (SBU)  In a closed meeting with business leaders from the 
American Chamber of Commerce, a representative of the insurance 
industry said that Indonesians have not yet embraced the concept of 
 
JAKARTA 00002649  002 OF 002 
 
 
insurance, relying instead on the extended family.  Fourteen 
international companies including MetLife, New York Life and AETNA 
left Indonesia in the past five years.  An attorney who represents 
foreign interests stated that the legal system in Indonesia is 
"harrowing."  He advises clients in commercial disputes that they 
cannot afford the corrupt court system and will lose because they 
cannot play the game the Indonesian way.  Western company executives 
are sometimes jailed in the case of a dispute with a local partner. 
The Parliament is a big part of the problem, demanding payment for 
passing legislation.  There are honest judges, however, and the 
current anti-corruption efforts are the most credible in Indonesia's 
history.  The Anti-Corruption Commission (KPK) needs more money and 
staff. 
 
¶6. (SBU) A representative of the oil and gas industry noted that a 
western company needs the right local partner to protect it. 
Interests have to be aligned.  A mining industry representative 
concurred, noting that if you are big enough, established and have 
the right partner, you can survive the other problems.  Former 
President Soeharto succeeded in making business deals because he 
took Indonesia's bureaucracy out of the equation.  When Soeharto 
fell, hundreds of contracts of work (the partnership between the 
central government and the foreign investor) were cancelled.  While 
Indonesia's natural resource potential is huge, the business climate 
makes it tough for any but the largest players and deters new 
entrants.  Another issue is the lack of encouragement of 
entrepreneurship.  While Indonesians are early adopters of western 
gadgets and goods (new cell phone technology, Krispy Kreme donuts), 
innovative businesses and original ideas get little support.  AmCham 
members concluded that despite problems, they are making money. 
Indonesia can have stronger growth and they want it to reach its 
potential. 
 
¶7. (U) After delivering well-received remarks to a joint lunch 
meeting of American and Indonesian Chamber of Commerce (AmCham - 
KADIN) business leaders, U/S Jeffery answered questions about 
biofuels, the Tropical Forest Conservation Act debt swap and energy 
cooperation.  Prominent business leader and Chairman of the 
Indonesian Employers' Association Sofyan Wanandi, said that Asia is 
still concerned about ongoing ripple effects of the sub-prime 
mortgage problems in the U.S.  How serious are the worldwide effects 
and how will it impact U.S. consumer behavior?  U/S Jeffery noted 
that the U.S. economy still has strong fundamentals, and that 
responsible policy makers have been injecting liquidity into the 
system.  Asian markets and the ASEAN region are also stronger than 
ever, thus more able to withstand external shocks.  The recent APEC 
statement in support of the Doha round emphasizes that free and fair 
trade benefit all our economies. 
 
HUME