VZCZCXRO3685
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3035/01 3040616
ZNR UUUUU ZZH
R 310616Z OCT 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6861
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 1031
RUEHBJ/AMEMBASSY BEIJING 4436
RUEHBY/AMEMBASSY CANBERRA 1454
RUEHUL/AMEMBASSY SEOUL 4263
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 06 JAKARTA 003035 
 
SIPDIS 
 
SENSITVE 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/ESC/IEC 
DEPT PASS USTR FOR KATZ AND BROOKS 
DEPT PASS OPIC, EXIM, TDA 
TREASURY FOR IA-SETH SEARLS 
DOE FOR CUTLER/PI-32 AND GILLESPIE/PI-32 
COMMERCE FOR 4430/BERLINGUETTE 
 
E.O. 12598: N/A 
TAGS: ECON EINV ENRG ETRD EFIN PGOV ID
SUBJECT: USABC SEEKS BUSINESS OPPORTUNITIES IN JAKARTA 
 
Ref: A)Jakarta 3010 (SBY Lays Out Priorities) 
 
     B)Jakarta 2969 (Time Magazine Libel Case) 
 
¶1. (SBU) Summary.  President Susilo Bambang Yudhoyono (SBY) and 
seven cabinet ministers told a U.S.-ASEAN Business Council (USABC) 
delegation that Indonesia desires closer business and investment 
ties with U.S. companies.  The five-day trade mission to Jakarta ran 
from October 22 - 26.  Vice President Jusuf Kalla told the 
delegation on October 24 that Indonesia wants to capitalize on its 
hard-won macroeconomic stability to draw in foreign investment and 
technology.  He promised to work cooperatively to address U.S. 
business concerns about the investment climate.  He struck a 
discordant note, however, when he seemed to defend the GOI's 
criminal prosecution of Newmont Mining Co.  Foreign Minister 
Wirajuda said The U.S. should demonstrate engagement by signing the 
ASEAN Treaty of Amity and Cooperation TAC. (SBY meeting reported ref 
A.) 
 
¶2. (SBU) Summary Continued. USABC President Matt Daley told GOI 
interlocutors throughout the five-day visit that most of the 
companies on the delegation have been long-term, socially 
responsible investors in Indonesia.  He said American companies want 
to be productive partners in building Indonesia's future. USABC 
leaders also proposed establishing a university-based governance and 
anti-corruption research institute in Indonesia.  Despite the good 
atmospherics, USABC delegates said concerns over the foreign 
investment negative list, contract sanctity, judicial impartiality, 
weak infrastructure, and inflexible labor laws hinder greater U.S. 
investment.  End Summary 
 
Ambassador on Past, Present, and Future 
--------------------------------------- 
 
¶3. (SBU) Ambassador Hume kicked off the delegation's week with an 
October 22 breakfast address highlighting the messages we have 
stressed with GOI economic contacts.  The Ambassador underlined that 
the USG is focused on Indonesia's future and that we are 
uninterested in re-litigating past business disagreements.  He said 
we continue to urge the GOI to draw a line under past investment 
disputes by resolving them in a transparent, rule-based manner that 
honors contractual commitments.  Once the past is indeed past, he 
said, we have stressed the importance of clarifying the present 
rules of the road for foreign investors.  Certainty and 
predictability are crucial in attracting the multi-billions of 
dollars of foreign investment that Indonesia needs to lower poverty 
and unemployment.  With the past put to rest and the present 
clarified, Ambassador Hume said the real challenge for the GOI is to 
create a vision of the future for Indonesia.  He stressed that 
foreigners can help make that vision a reality, but that the crucial 
decisions lie with the GOI and their business leaders. 
 
 
USABC Stresses Long-Term Partnerships 
------------------------------------- 
 
¶4. (SBU) Throughout the week, USABC President Matt Daley picked up 
on the Ambassador's themes and stressed to his GOI hosts that the 
majority of U.S. companies on the delegation have a long history of 
socially responsible investment in Indonesia.  He contrasted the 
partnership-oriented long-term role that American companies have 
played in Indonesia with those of other countries that have sought 
only a mercantilist relationship.  USABC delegates uniformly praised 
the courageous political decisions SBY has taken in the first three 
years of his administration.  They said his strong leadership has 
been a key factor in resurgent foreign interest in doing business in 
Indonesia.  Nonetheless, throughout the trip USABC delegates said 
they remained concerned by several issues that inhibit trade and 
investment.  They are concerned by the expansive nature of the 
recent foreign investment negative list.  They worry about threats 
to contract sanctity.  The recent Time libel case (ref B) has 
renewed their disquiet over judicial impartiality.  Weak energy and 
transportation infrastructure make Indonesia less competitive than 
its neighbors.  Inflexible labor laws hinder greater foreign 
investment by dramatically raising the costs of hiring and firing 
workers in response to changing market conditions. 
 
 
JAKARTA 00003035  002 OF 006 
 
 
¶5. (U) USABC leaders made a pitch in all their meetings with GOI 
officials for a proposal to establish a university-based governance 
and anti-corruption research institute in Indonesia.  USABC Vice 
Chairman Rod Hills is leading the initiative.  Coordinating Minister 
Boediono, Finance Minister Sri Mulyani, BKPM Chairman Lutfi, and 
former Foreign Minister Ali Alatas offered their support.  USABC 
will work with Indonesian and American companies to finance this 
project, said Hills.  The proposed Indonesian institute would be 
part of the Hills Program on Governance (HPG) at the 
Washington-based Center for Strategic and International Studies 
(CSIS) and its five HPG centers worldwide.  CSIS will host a 
workshop in Jakarta in early 2008 to scope the issues and framework 
for the proposed research institute.  USABC President Matt Daley 
made reference throughout the week to Ambassador Hume's briefing for 
the delegates and stressed to GOI officials that USABC has its focus 
firmly fixed on Indonesia's future and is not seeking to re-litigate 
past disputes.  Hills and Daley stressed that the HPG was offered in 
that spirit. 
 
VP Kalla: RI Needs Foreign Capital and Technology 
--------------------------------------------- ---- 
 
¶6. (SBU) Vice President Jusuf Kalla told visiting delegates of the 
U.S.-ASEAN Business Council (USABC) on October 24 that Indonesia 
plans to capitalize on its hard-won macroeconomic stability to 
attract greater levels of foreign investment and technology.  He 
promised to work cooperatively to address U.S. business concerns 
about the investment climate.  Noting the almost-daily new highs for 
crude oil benchmarks, he made a pitch for greater U.S. upstream oil 
and gas investment.  Kalla said that Indonesia, like most of Asia, 
will need to focus on efficiency and greater use of technology to 
overcome high global oil prices since "it is not always possible to 
use market prices for oil" in the consumer market.  Bountiful 
investment opportunities exist for U.S. companies in the biofuels 
sector, said Kalla. 
 
¶7. (SBU) Kalla freely offered that the GOI still faces hurdles in 
attracting foreign investment.  Bureaucracy and poor infrastructure 
create disincentives for foreign investors, according to Kalla, and 
the GOI is continuing to work on these problems.  Noting that lack 
of electricity is a powerful disincentive, Kalla invited U.S. 
companies to be part of the solution by building power plants.  A 
delegate later told Kalla that greater foreign infrastructure 
investment will require the GOI to be more transparent and 
consistent in explaining the terms and conditions under which it 
will provide guarantees and other forms of financial support for 
infrastructure. 
 
¶8. (SBU) In response to a delegate's concern about the recent $111 
million libel judgment against Time magazine, Kalla said rule of law 
and anti-corruption issues were central to the GOI's agenda.  He 
noted that judges will see their salaries doubled next year, but 
added that the entire judiciary needs greater training and more 
accountability and transparency.  Kalla struck a discordant note, 
however, when he followed up by defending the GOI's prosecution of 
Newmont Mining Co. on criminal pollution charges.  "What would 
happen to them in California?" asked Kalla.  "They would be in 
jail," he said, ignoring that the Indonesian court that heard the 
case dismissed all charges, completely rejecting the GOI's case.  On 
the Time case, Kalla told the Time Warner delegate to take heart 
because "you have a good lawyer and you just need to let the system 
work."  Kalla acknowledged problems with a labor system that grants 
100 weeks of severance pay to dismissed workers.  However, he smiled 
and added, "We understand your concerns, but salaries are not so big 
here."  Kalla closed the meeting with a promise to work together to 
address U.S. business concerns with the negative list for foreign 
investment. 
 
Finance Minister: Tax Arrears Cleaned Up 
---------------------------------------- 
 
¶9. (U) Finance Minister Sri Mulyani Indrawati highlighted progress 
on the Ministry's reform roadmap and discussed areas for further 
improvement in an October 26 meeting with the delegation.  The 
Ministry now spends 50% of its budget on salaries, part of its 
government-wide model for civil service reform, according to 
 
JAKARTA 00003035  003 OF 006 
 
 
Mulyani.  The Tax Directorate has cleaned up all its arrears, she 
claimed, which will now allow it to begin evaluation of 
government-wide arrears.  At Indonesia's largest port Tanjung Priok, 
the Ministry has revamped customs processing, replacing 1,300 
workers with 600 new workers while increasing overall customs 
productivity.  The Finance Ministry will focus on Tanjung Priok as a 
first step toward implementing the ASEAN single window for customs, 
she said. 
 
¶10. (U) Mulyani also looked beyond her Ministry and commented on 
larger government reform efforts.  She acknowledged that the 
judicial system is critical to many Finance Ministry efforts, 
particularly foreign investment disputes.  She conceded the judicial 
system needs to be improved, but cautioned that the demand for 
change is different from the capacity for change.  Inadequate 
training of judges, weak court administration, and increasing demand 
for judges in newly established districts lowers overall judicial 
quality and can lead to adverse decisions.  She cited the Asian Pulp 
and Paper case as an example of the challenges they face.  Two of 
the three judges who ruled against foreign investors in the case 
were religious judges, who lacked experience to handle such a 
complex foreign investment dispute, according to Mulyani.  Aside 
from the judicial system, Mulyani said that the larger reform 
process required close coordination with other ministries, including 
the police and military. 
 
SOEs: One Down, Hundreds to Go 
------------------------------ 
 
¶11. (SBU) In his October 23 meeting, Minister of State Owned 
Enterprises (SOE) Sofyan Djalil told delegates he will emphasize SOE 
privatization to increase economic competition.  He pointed to the 
March 2007 privatization of the National Bank of Indonesia (BNI) as 
a success and pledged that two more SOEs would be up for initial 
public offerings before the end of this year with a goal of 16 more 
in 2008.  The Ministry is actively seeking investors for the steel, 
airline and shipping industries, said Djalil.  He said that while 
SOEs enjoy a high level of technical capacity, management and 
financial capacity are weak.  Delegates asked Djalil to push the GOI 
to assign foreign commercial disputes to specially trained judges. 
He demurred, but did say legal system reform is a GOI priority and 
that they welcome international cooperation. 
 
¶12. (SBU) Djalil called Garuda, the nation's flagship air carrier, 
"a big headache."  He said he hopes to complete restructuring of the 
carrier by year's end with an IPO brought to market by 2010.  He 
cautioned that Garuda will be the national airline for many years to 
come and that the foreign ownership limit is not likely to rise 
above 49% anytime soon.  Djalil said Garuda's past problems were due 
to mismanagement and political intervention.  He said the airline 
will operate both Boeing and Airbus for the near future but may 
eventually choose one brand exclusively.  Although the Minister 
spoke hopefully of Boeing building a regional maintenance center in 
Indonesia, Boeing told us the company had only committed to doing an 
audit of Garuda's maintenance facility. 
 
 
Foreign Minister Says Reform Speeding Ahead 
------------------------------------------- 
 
¶13. (SBU) Foreign Minister Hassan Wirajuda told delegates on October 
24 that Indonesia remains committed to implementing fully the 
political and economic reforms begun in response to the 1997 Asian 
financial crisis.  On the political front, Indonesia's 
democratization is proceeding smoothly, with all local officials 
slated to be directly elected by 2009.  Wirajuda reminded the 
audience that the GOI continues to campaign against corruption and 
reviewed a number of successes on that front.  He also said 
Indonesia, in cooperation with the United States, had made progress 
against terrorism and was working to promote moderate Islam and 
dialogue between Islam and the West. 
 
¶14. (SBU) In response to several delegates' questions, Wirajuda 
discussed Southeast Asian regional integration at length.  ASEAN is 
one of the world's most economically dynamic regions, he said, 
adding that the emerging East Asian regional order, including the 
 
JAKARTA 00003035  004 OF 006 
 
 
East Asian Summit, should be centered on ASEAN.  Indonesia, he said, 
had an inclusive vision of Asia.  He strongly urged the U.S. to 
remain engaged in the region and to sign the ASEAN Treaty of Amity 
and Cooperation (TAC). 
 
¶15. (SBU) TimeWarner's Hugh Stephens asked about Indonesia's 
progress on corruption and noted that the recent decision against 
Time Magazine sent a negative signal to foreign investors.  Wirajuda 
said he understood the situation and explained that the case was 
initiated 6 years ago, when the political climate in Indonesia was 
different from today.  He acknowledged, however, that Indonesia's 
reforms were still a process and underscored Indonesia's commitment 
to making progress on this front. 
 
Parliament Chief Promises Better Investment Climate 
--------------------------------------------- ------ 
 
¶16. (U) During a October 24 meeting with Indonesian House of 
Representatives Chairman (DPR) Agung Laksono, USABC members 
underscored their collective dedication to long-term business 
relations with Indonesia.  Noting USABC's decision to finance a new 
governance center in Indonesia, USABC founder Rod Hills emphasized 
the group's commitment to working with the GOI to improve the 
business climate by battling corruption and promoting good 
governance.  Hills praised the progress Indonesia had already made 
on the good governance front, but warned a rash of disturbing 
judicial decisions could raise Indonesia's business profile for all 
the wrong reasons.  Delegates welcomed Laksono's rather unusual 
offer of assistance in settling some of the judicial disputes likely 
to imperil foreign investment. 
 
¶17. (U) Laksono thanked the USABC for its investments and pledged to 
continue to work to make Indonesia an attractive destination for 
foreign companies.  Laksono briefed the group on his legislative 
agenda, and noted that several pending laws would enhance 
Indonesia's investment climate.  Next year's budget, he added, would 
triple the amount of money set aside for infrastructure development. 
 Turning to the notorious Time magazine lawsuit, Laksono 
characterized the $111 million decision against Time as 
"unfortunate," and expressed regret that he could not personally 
intervene as DPR Chairman.  According to Laksono, the decision had 
negative implications both for press freedom in Indonesia and 
foreign investment.  Responding to a question on the increasing 
prevalence of nationalism, Laksono argued that in a break from the 
past nationalism was a productive force helping to increase 
Indonesia's competitiveness. 
 
 
Telecom Ministry Wants 'Healthy Competition' 
-------------------------------------------- 
 
¶18. (SBU) Acting Director General Freddy Tulung in the Ministry of 
Communications and Information (MCI) told delegates on October 25 
that the Indonesian telecommunications market is growing steadily. 
They underscored the GOI's commitment to healthy competition within 
the information and communications technology (ICT) sector.  Tulung 
said GOI telecoms priorities include improving human resource 
capacity and increasing the amount of local content in broadcasting 
and telecommunications. 
 
¶19. (SBU) USABC delegates raised the issue of foreign ownership 
limits for telecoms (65% for cellular operators and 49% for 
fixed-line operators) outlined in the negative list.  Ministry 
officials said they have to follow the law, but reiterated they 
strongly desire partnerships with U.S. businesses for local ICT 
manufacturers and local independent software vendors.  A Qualcomm 
delegate voiced concern over the GOI's offer of a free 2.3GHz 
frequency license to the winner of the government's universal 
service obligation tender.  She said this would be unfair to high 
speed data service providers who are paying hundreds of millions of 
dollars for frequency licenses.  Ministry officials said they 
planned to re-examine the frequency license issue to improve 
competition and optimization of frequency usage.  Qualcomm also 
appealed for the GOI to take a neutral position on the technology to 
be licensed to for mobile television.  The GOI has not yet made a 
decision on this, according to Tulung. 
 
JAKARTA 00003035  005 OF 006 
 
 
 
Industry Minister: Energy Diversification Key 
--------------------------------------------- 
 
¶20. (SBU) Industry Minister Fahmi Idris told delegates on October 24 
that energy security is crucial to a vibrant Indonesian industrial 
sector.  He said the GOI is seeking increased international energy 
partnerships, and cited the recent MOU with Iceland on geothermal 
power production as one he would like to see replicated.  He added 
that Chinese investors, who wish to take advantage of Kalimantan's 
rich coal deposits, are looking to build energy-intensive steel 
mills in the province.  Idris's said oil and gas deposits in 
Indonesia are diminishing to the point that the GOI must promote new 
and alternative forms of energy, including Coal Bed Methane (CBM) 
and coal liquefaction.  His statement brought a response from U.S. 
energy delegates, who said Indonesia has plenty of conventional oil 
and gas still in the ground.  They said the GOI only needed to get 
the proper systems of financial incentives in place, while executing 
upstream regulatory oversight more efficiently and quickly.  A Ford 
Motor Co. delegate told Idris that the GOI's vehicle luxury tax 
continues to be an impediment to new market entrants and was the 
primary reason they chose to build their new factory in Thailand, 
rather than Indonesia. 
 
ISO: Alternative and Clean Energy Deals 
--------------------------------------- 
 
¶21. (SBU) On 26 October, Minister of Energy and Mineral Resources 
Purnomo Yusgiantoro told delegates that Indonesia wants U.S. 
investment in the downstream energy sector.  He said the new 
National Energy Council, which he will chair, will include 
government and industry stakeholders and shows the GOI is serious 
about attracting foreign investment.  Purnomo also emphasized the 
attractive opportunities in coal production, CBM, and liquefaction. 
He said his ministry has been charged by President Yudhoyono with 
training larger numbers of medium-skilled workers who can work 
outside Indonesia on the many international oil and natural gas 
projects that are short of workers.  He described the status of the 
pending mining law, but did not give the impression it would pass 
anytime soon. 
 
¶22. (SBU) On electricity, Purnomo told delegates that projects using 
renewable and clean fuels can bypass the normal tender process and 
go straight into direct negotiations with state utility PLN.  He 
urged U.S. firms to take advantage of this accelerated development 
plan and to partner with Indonesia on a whole range of renewable and 
clean energy projects.  Purnomo said the Fast Track electricity 
building program remains on schedule to bring 6900 MW on-line by 
¶2010.  Energy company and infrastructure delegates requested 
Purnomo's help in dealing with the VAT implications of temporarily 
bringing in deep water drilling rigs.  Purnomo agreed that Indonesia 
would benefit from the consortium's plan.  He said the tax laws are 
complicated, however, and that his ministry continues to disagree 
with Finance over taxation of oil and gas Production Sharing 
Contracts.  He closed by saying the GOI remains committed to 
offering 26 oil and gas exploration blocks for tender during 2007. 
 
DELEGATION LIST 
--------------- 
 
¶23. (U) Daley said this year's delegation is 50 percent larger than 
last year's.  Representatives from the following companies 
participated in the USABC mission: 
 
- AES Corporation 
- The Boeing Company 
- Cargill, Inc. 
- Caterpillar, Inc. 
- Chevron 
- PT Coca-Cola Indonesia 
- Conoco-Phillips 
- Exxon Mobil 
- Federal Express 
- Ford Motor Company 
- Freeport McMoRan Copper & Gold, Inc. 
- General Electric Company 
 
JAKARTA 00003035  006 OF 006 
 
 
- The Hills Companies 
- International Paper Company 
- Island Power 
- JHPIEGO (An international health organization affiliated 
      with Johns Hopkins University) 
- Johnson and Johnson 
- Kraft Foods 
- Marathon Oil 
- McDermott International 
- Microsoft Corporation 
- Monsanto Company 
- Oracle Corporation 
- QUALCOMM 
- PT HM Sampoerna Tbk 
- Star TV (News Corporation) 
- Time Warner, Inc. 
- United Parcel Service 
HUME