VZCZCXRO6096
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3347/01 3410925
ZNR UUUUU ZZH
R 070925Z DEC 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7314
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1278
RUEHBJ/AMEMBASSY BEIJING 4562
RUEHBY/AMEMBASSY CANBERRA 1718
RUEHUL/AMEMBASSY SEOUL 4331
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 003347 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS, EAP/RSP AND EB/IFD/OMA 
TREASURY FOR IA-BAUKOL, OTA-MCDONALD 
DEPT PASS USTR FOR WEISEL 
SINGAPORE FOR TREASURY-BAKER 
COMMERCE FOR 4430-BERLINGUETTE 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR TCURRAN 
DEPARTMENT PASS EXIM BANK 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - FINANCE MINISTER REFORMS DEBT MANAGEMENT, 
CUSTOMS, CIVIL SERVICE 
 
REF: A) JAKARTA 3296 - Capital Markets; 
 
B) JAKARTA 3338 - Tax Reform 
 
¶1. (SBU) Summary: Finance Minister Mulyani has achieved notable 
progress in 2007 in debt management and capital markets supervision. 
 She is also leading a pilot project on civil service reform, by 
tripling salaries for her Ministry and introducing performance 
standards.  Efforts at the Directorate of Customs, however, are less 
successful, as customers continue to encounter delays and 
corruption.  Parliament members noted they want to see greater 
efficiency from the Ministry of Finance (MOF) before rolling out 
increased salaries more broadly to other agencies.  Despite 
challenges, Mulyani's dynamic Ministry has achieved a lot in 2007, 
and become an example for others in the Government of Indonesia 
(GOI) to follow. End Summary. 
 
Finance Minister Leading Reforms 
-------------------------------- 
 
¶2. (SBU) Finance Minister Mulyani, the most dynamic reformer in the 
GOI, has been using bilateral and multilateral assistance 
strategically to assist in her internal reforms at the Ministry of 
Finance.  She is cleaning up important directorates and improving 
performance and transparency, including the Directorate General for 
Tax (reftel B).  Reforms in the Directorate for Debt Management 
(DMO), and in the Capital Markets and Financial Institutions 
Supervisory Authority (BAPEPAM-LK) have been big successes in 2007. 
Progress in Customs is less impressive thus far. 
 
Debt Management, Bond Market Deepening 
-------------------------------------- 
 
¶3. (SBU) Capital market development has been a priority for the 
Ministry of Finance (MOF) and much progress has been made over the 
past two years. The most notable change has been in debt issuance 
and management.  The GOI's decision to meet a greater portion of its 
funding requirements domestically through the expanded issuance of 
government debt has dramatically reduced Indonesia's dependence on 
hard currency loans and donor finance, lowering its foreign exchange 
exposure and making the country less vulnerable to exogenous shocks. 
 
 
¶4. (SBU) Mulyani's goal was to broaden and deepen the variety of 
debt instruments and the investor base.  An Treasury Department Debt 
Advisor is currently in place providing technical assistance to 
support these goals.  The MOF implemented a primary dealer system 
for government securities in the first quarter of 2007.  The DMO 
held the first of several T-Bill auctions in May.  ORI's or retail 
bonds, a class of securities specifically targeting small retail 
investors, can now be purchased via subscription through a variety 
of banks nationwide, making them more available.  A withholding tax 
was applied to the T-Bills, which caused problems for a number of 
investors, but the auctions continue to be over-subscribed.  The 
Ministry of Finance is aware that it currently lacks a rational and 
consistent approach for tax treatment of securities, and plans to 
address this in 2008 (reftel A). 
 
¶5. (SBU) An efficient T-Bill market is an important component of the 
capital market development program. Short-term instruments could 
become an important source of funding and allow the GoI to meet its 
financial obligations in the event of a financial crisis. As 
Treasury Advisor to DG Debt Management William Cotter notes, "In the 
event of a crisis, investors won't buy 30-year bonds but will 
actively seek refuge in T-Bills." 
 
Foreign Ownership of Bonds Climbs 
--------------------------------- 
 
¶6. (U) Despite the volatility in global markets in August 2007, 
investors continue to buy Indonesia's bonds.  According to a report 
by Citibank and the Director General for Debt Management, the number 
of non-resident bond holders of Indonesian sovereign debt has 
increased dramatically in the past two years.  The amount of debt in 
foreign hands has increased from Rp 26 trillion ($2.7 billion) in 
2005 to Rp 80 trillion ($8.6 billion) in mid-2007.  The amount of 
 
JAKARTA 00003347  002 OF 004 
 
 
foreign investment in debt with maturity over ten years is now half 
of the total held by foreigners, versus almost none in late 2004. 
 
Government Bond Futures, Derivatives 
------------------------------------ 
 
¶7. (SBU) With the recent merger of the Jakarta and Surabaya Stock 
Exchanges into the Indonesia Stock Exchange (Bursa Efek Indonesia or 
BEI), Treasury's OTA Advisor William Cotter is assisting at the 
request of the Chairman of the Capital Markets and Financial 
Institutions Supervisory Agency (BAPEPAM-LK) in development of a 
government bond futures market.  The MOF fully supports the contract 
and clearing specifications, which are in the final stages of 
development, and hopes eventually to launch a T-Bill contract on the 
new exchange once the outstanding volume of bills is large enough to 
support trading. 
 
¶8. (U) Although MOF, BI, and BAPEPAM-LK have made a number of 
individual efforts to generate activity in the repo market, there 
has been little progress until recently (see reftel A).  Both BI and 
the MOF acknowledge the benefits of such market, but were reluctant 
to collaborate and to lead the efforts in stimulating this sector. 
The MOF now hopes to make progress towards a repo market as a 
project priority in 2008. 
 
Customs Reform 
-------------- 
 
¶9. (U) The Finance Ministry, on July 1, 2007 began rolling out its 
latest bureaucracy reform program, based on two ministerial decrees 
issued late June 2007.  It includes improving, by the end of 2008, 
6,475 public service procedures related to the ministry, with 35 of 
them being top priorities for reform.  Sixteen of the priority 
public service procedures are within the tax and customs office. The 
Directorate General for Customs and Excise support is increasing 
public participation in the regulatory process by permitting media 
and public participation and comment. 
 
Cleaning up Tanjung Priok, 
Indonesia's Largest Port 
------------------------- 
 
¶10. (U) Mulyani began with an overhaul of customs at Tanjung Priok, 
Indonesia's largest seaport near Jakarta, launching the Customs Main 
Service Office (KPU), a merger of four custom offices, in Tanjung 
Priok.  This reform aims to reduce delays and bureaucracy.  The KPU 
will serve same services as they provided in the past for 
export-import processing at the port.  New customs officials must 
pass a competency test conducted nationwide for customs officers. 
Goals for improved services at Customs and Excise include: 
 
--The processing of "priority lane" imported goods at ports within a 
minimum 20 minutes and a maximum four hours. 
--The processing of "green lane" imported goods within 20 minutes. 
 
--The processing of "red lane" imported goods within four hours. 
--The processing of "rush handling" imported goods within 120 
minutes. 
--The processing of exported goods within a minimum one hour and a 
maximum four hours. 
--The processing of customs payment refunds within 30 days, and 
customs payment complaints within 60 days. 
--The processing of notices on specific imported goods within a 
day. 
 
...But Problems Continue 
---------------------- 
 
¶11. (SBU) Starting with Indonesia's largest seaport, moving 80% of 
goods into and out of the nation sends a symbolic message that 
Mulyani is cleaning house.  On the ground, however, users are still 
encountering problems and say clearances still take days instead of 
hours.  A 2007 survey of 589 manufacturing firms in five 
metropolitan areas by the Institute for Economic and Social Research 
(LPEM) showed that from 2005 to 2007, red lane goods clearance had 
 
JAKARTA 00003347  003 OF 004 
 
 
been reduced from 7.6 days to 6.1, and green lane goods from 6.1 to 
3.1.  However, 38% of companies in 2007 (versus only 20% in 2005) 
reported paying bribes "occasionally" for services.  Another problem 
is that the USG, the EU and others have experienced major delays in 
diplomatic shipments in recent months.  Customs is allegedly 
requiring closer inspection due to smuggling, fraudulent 
classification of goods, and abuse and counterfeiting of diplomatic 
permits.  One shipper told us that until MOF standardizes and cleans 
up customs procedures at all seaports, graft and smuggling will 
opportunistically move to nearby facilities with less scrutiny. 
 
¶12. (SBU) A new regulation (P-25/BC/2007) on goods classification 
(low, medium and high risk) issued August 2007 was intended to 
expedite the clearance process, with low risk, 10% of goods are 
subject to physical inspection; high risk means 100%.  EU contacts 
told us that European shippers of food products find they are still 
being targeted for delays and informal facilitation fees.  Customs 
plans to roll out the National Single Window (NSW) in the second 
quarter of 2008, related to the ASEAN Single Window initiative. 
Underway is a NSW pilot project in Tanjung Priok to be completed by 
year end, with four (out of 37) agencies involved in the goods 
clearance process. 
 
No More Moonlighting: Civil Service Reform 
------------------------------------------ 
 
¶13. (SBU) Many GOI officials in the past "moonlighted" working 2-3 
jobs to compensate for low salaries (reftel A).  One official at the 
State Audit Board (BPK) said that he served as a consultant in the 
evening and taught university courses on the weekend to make ends 
meet.  Other high-ranking officials serve on Boards of Commissioners 
for state-owned enterprises, earning large additional fees and 
salaries.  There are obvious conflicts of interest in the GOI owning 
and advising firms which it is also regulating.  President Yudhoyono 
placed the Finance Ministry among the top priorities for 
bureaucratic reform, along with the Supreme Court and Supreme Audit 
Board (BPK).  MOF reform,  launched July 2007, is designed as a 
pilot project for other government ministries and agencies. 
Acknowledging public and Parliamentary skepticism, Mulyani called 
for improved performance from officials at her ministry, which is 
responsible for managing state finances and 75% of state revenues. 
"I expect an attitude change from every unit in doing their jobs, 
and to continue carrying out the reforms we are doing," she said 
during the swearing-in of two of the ministry's secretariat general 
officials and 18 customs officials on August 3.  "There is a lot of 
pessimism out there regarding our reform efforts, and we are not in 
a position to claim a clean slate on our track record." 
 
¶14. (SBU) The Finance Ministry's reform program has attracted 
controversy, as it involves a increase in benefits totaling Rp 4.3 
trillion ($477 million) for its some 62,000 civil servants, ranging 
from Rp 1.3 million to Rp 46 million for high-ranking officials. 
Mulyani argued for the raise, saying it would help maintain 
professionalism and prevent graft among the Ministry's officials. 
"Without the increase, employees with high performance are underpaid 
and tempted by the private sector," she said. "There have been cases 
in which some officials became very rich from unknown sources.  In 
another case, a tax official we just trained and funded to study 
abroad was, within two months, hired as a consultant by the company 
whose taxes he had just assessed." 
 
¶15. (U) Reforms at the Ministry's Directorate General for State 
Treasury include the processing of all project proposals and 
assessments within 20 days after details of the state budget have 
been issued, and fund disbursements within an hour after a project 
has been approved.  The Capital Markets and Financial Institutions 
Supervisory Agency (BAPEPAM-LK) should process the registration of 
any new, publicly-listed company within 45 days. 
 
Not Yet Institutional Reform 
---------------------------- 
 
¶16. (SBU) Marsillam Simanjuntak, former Attorney General and current 
Presidential Advisor, said that the moonlighting issue underlies a 
larger institutional problem of meager salaries for government 
 
JAKARTA 00003347  004 OF 004 
 
 
officials.  Simanjuntak said that the Rp 5 trillion budget increase 
for Ministry of Finance salaries is provisional only for one year: 
this is not yet institutional reform, he stated.  Offering 
competitive salaries and improving performance for government 
officials across all agencies remains a major future challenge. 
 
DPR Wants to See Greater 
Efficiency from Higher Salaries 
------------------------------- 
 
¶17. (SBU) In a meeting with Parliamentarians from Commission XI 
(Finance, Budget and Banking) on December 3, DPR Members said that 
they expect to see greater efficiencies from the increased salaries 
at MOF.  "Before we roll out on a wider basis, we really want to see 
improved performance."  Minister Mulyani has introduced key 
performance indicators for every position in the Ministry of Finance 
and is strengthening and regularizing requirements for advancement. 
In addition, she has empowered the function of the Ministry's 
Inspector General to investigate misconduct.  But DPR members 
clearly want to assert the power of the purse and make the salary 
increases conditional. 
 
Donors Helping Mulyani's 
Transformation in Several Areas 
------------------------------- 
 
¶18. (SBU) In addition to those mentioned above, USAID is funding 
other advisors at the Ministry of Finance.  USAID assisted the MOF 
to improve fiscal policies, accelerate public sector debt 
restructuring, and reform tax policies. Efforts to strengthen the 
public sector debt restructuring process were done by improving 
capacity and implementation of the MoF's policy at the Asset 
Management Company (PPA), and improving development and 
implementation of the MoF's risk management and restructuring 
capabilities.  Major achievements include the debt restructuring of 
Garuda and Merpati, two of the largest national Indonesian airlines. 
USAID and Treasury OTA also coordinate effectively with other 
donors: AUSAID has advisors at the Fiscal Policy Office, the IMF at 
DG Tax (reftel B), and the World Bank in several directorates under 
its Government Financial Management and Revenue Administration 
Project (GFM-RAP) program. 
 
HUME