VZCZCXRO8237
RR RUEHLMC
DE RUEHJA #1949/01 3291008
ZNR UUUUU ZZH
R 251008Z NOV 09
FM AMEMBASSY JAKARTA
TO RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEHC/SECSTATE WASHDC 3931
INFO RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 001949 
 
STATE FOR EAP/MTS, EAP/EP, EEB/IFD/ODF 
AIDAC FOR ANE, EGAT 
USTR FOR (EBRYAN) 
TREASURY FOR (BPELTON) 
 
SIPDIS 
 
E.O. 12598: N/A 
TAGS: EAID PREL PGOV ETRD ECON KMCA MCC ID
SUBJECT: MCC VISIT: NOW IS THE TIME FOR INTENSE WORK 
 
¶1. (U) SUMMARY. The MCC visit has successfully refocused 
Indonesian attention on a MCC Compact. Meetings with key 
ministers, the local Indonesian technical team, and many 
experts provided valuable input as well as allowed sharing 
of the requirements and timeline for a Compact. However, 
work is just beginning and a tremendous amount needs to be 
done in the next several months to be on target for a FY 
2011 signing. Challenges center on the need to strengthen 
the Indonesian team and to maintain the focused attention 
of officials, particularly at the operational level for 
development of high quality proposals. MCC team appreciated 
help provided by the Embassy and the Ambassador personally. 
The achieved involvement of high level GOI officials and 
the resulting expectations generated make reselection more 
crucial. See Action Request (Para 13). END SUMMARY 
 
¶2. (U) BACKGROUND ON VISIT. An MCC team visited Indonesia 
from November 10 Q 22 to review progress to date, meet key 
new Cabinet members and the local Indonesian technical 
team, and convey a sense of urgency about the timeline 
ahead. Team members included MCC Acting Vice President for 
Compact Development Darius Teter, Acting County Director 
Magda Ismail, lead economist Peter Rosner, monitoring 
evaluation expert Jeff Brown, environmental and social 
assessment expert Sergio Feld, and program analyst Martha 
Bowen. 
 
¶3. (U) PROGRESS IN COMPACT DEVELOPMENT TO DATE. Since 
IndonesiaQs selection in December 2008, the GOI has gotten 
off to a relatively slow start, partly due to elections and 
naming a new cabinet. A technical team under the National 
Development Planning Agency (BAPPENAS) was put in place in 
October. With assistance from the Asian Development Bank, 
Islamic Development Bank and the ILO, an analysis of 
constraints to growth, one of first steps in the 
development of a compact, was presented November 10th. 
Funds for compact development have been secured in the 2010 
budget, starting in January. 
 
¶4. (U) KEY TASKS NOW. MCC alerted the GOI that in order 
to sign a compact by FY 2011, the GOI will need to follow 
an aggressive timeline, including finalizing a list of 
strategic priority areas, soliciting and screening project 
concepts, and consulting with stakeholders, thereby 
developing concepts that address the countryQs most urgent 
priorities. It is essential that the GOI hone in on a few 
specific sectors or themes to focus their public 
consultations and identify potential investments. The 
concepts must show a) sufficiently high economic rates of 
return; b) clear rationale based on constraints to growth 
and poverty reduction and with clearly identified 
beneficiaries; and c) capacity of executing agencies or 
government ministry to implement the project within five 
years. Given the vast size of the Indonesian economy, a 
desirable feature would be the ability of the project to 
leverage funding from other sources (government, private 
sector, NGOs or donors). The development of the concept 
papers must be done in the next several months in order to 
allow time for substantial feasibility work and 
environmental and social impact assessments (which MCC is 
willing to fund.) For more complex and ambitious 
infrastructure projects, these studies may require a full 
year. 
 
¶5. (U) CHALLENGES. The two main issues are: helping the 
Indonesian team and keeping high level officials involved. 
The present GOI technical team is enthusiastic, but has 
limited experience in project identification, 
conceptualization and design, and lacks full-time high 
caliber leadership. The GOI has budget for recruiting staff 
and consultants, but GOI procurement procedures make it 
likely that creative solutions will be needed in order to 
be able to hire at market rates top talent to lead the 
process. The setup structure and reporting arrangements for 
the team may be overly complicated and stratified. As noted 
below key GOI officials are ready to help, but keeping them 
informed and engaged will be a challenge. 
 
¶6. (U) Positive Engagement. The GOI demonstrated 
continued interest and intellectual engagement in the 
opportunities afforded by MCC eligibility. The MCC team met 
with Minister of Finance Sri Mulyani, Minister of National 
Development Planning Armida Alisyahbana, Head of the 
Presidential Delivery Unit Kuntoro Mangkusubroto, Director 
General for US and Europe at the Ministry of Foreign 
Affairs Retno Lestari Priansuri, and the Deputy 
Coordinating Minister for Economic Affairs Erlangga Mantik. 
 
JAKARTA 00001949  002 OF 003 
 
 
They also met with donors, leading economists, 
environmental and womenQs NGOS, the national bureau of 
statistics, several other government ministries, and the 
Indonesian core technical team. 
 
¶7. (U) Minister Sri Mulyani. Minister Mulyani stated that 
in the bilateral context, Presidents SBY and Obama want to 
elevate the relationship between the United States and 
Indonesia to a higher level, especially on the policy and 
economic front. In the context of her focus on 
accountability for results and government effectiveness, 
Mulyani suggested that rather than simply funding 
activities already undertaken by Government, they should 
look for higher-profile and demonstration opportunities. 
 
Mulyani mentioned that MCC funding can be leveraged in a 
variety of sectors and can be combined with resources from 
local government and national government. Mulyani offered 
to be the Qgoal keeperQ in vetting proposed project 
concepts for MCC investment to ensure quality. 
 
The MCC team had a two-hour brainstorming session with 
Mulyani who had a plethora of project ideas, providing in 
her words a QmenuQ from which MCC would select projects 
such as: 
 
a. Basic Infrastructure (clean water supply): Create 
incentives for local government, including water pricing 
policy. 
 
b. Education: combine government resources (20% of GOI 
budget is supposed to be allocated to education) with donor 
resources for a World Bank project for school grants that 
would give the right incentives to local government. 
Another idea would be to use MCC funding for increasing the 
number of scholarships for students, particularly for civil 
servants, to complete graduate studies in the US. 
 
c. Economy: Assist with fiscal policy, social safety nets 
and fuel subsidy issues, which is consistent with G-20 and 
US policy. 
 
d. Tax administration: Improve tax collection capacity and 
transparency, reform the department of taxation, improve 
tax collection, and reduce tax evasion. The government is 
currently implementing a second phase of tax reform which 
involves improving: a) database and IT system for taxes; b) 
quality of human resources in tax auditing and 
investigation; and c) credibility of the relationship of 
the tax authority with the tax payer. 
 
e. Investment Climate: Improve the investment climate. At 
APEC, President Obama mentioned his interest in improving 
the investment climate through the free flow of goods for 
trade and creating an ASEAN single window for imports and 
exports. Domestically Minister Mulyani stated that the 
quality of the national single window should continue to be 
improved. 
 
f. Performance Based Budgeting:  Increase the 
implementation of performance based budgeting and improve 
the expenditure policy in Kabupatens (districts).  Starting 
from January 2010, Minister Mulyani will create an 
incentive reward system where Kabupatens are rewarded with 
the equivalent of $1.8 million USD when they demonstrate 
improved performance; there are over 550 Kabupatens in 
Indonesia. Indicators that are used for improved 
performance could be possibly Qtopped-upQ with MCC 
indicators. 
 
g. Climate Change:  Mulyani mentioned that Indonesia has an 
Qopen menuQ on Climate Change.  MCCQs environment expert 
held many meetings with various stakeholders during this 
visit to better understand climate change issues in the 
context of Indonesia. 
 
¶8. (U) Minister Armida Alisyahbana. Minister Armida is 
new but is quickly familiarizing herself with the MCC 
program. She is concerned about continued eligibility and 
scorecard data accuracy. Minister Armida mentioned that 
sustainability, the role of private sector (through public 
private partnerships), and the role of the regions are all 
factors which should be taken in consideration when 
selecting a project. 
 
¶9. (U) Kuntoro Mangkusubroto. Kuntoro has overall 
responsibility for encouraging the effectiveness, 
 
JAKARTA 00001949  003 OF 003 
 
 
coordination, and collaboration of government ministries 
and has hands-on experience in donor relations, 
coordination and project execution through his previous 
role as head of the Aceh Recovery program. Kuntoro 
immediately recognized the importance of a champion to see 
the compact through to completion. However, he believed the 
Compact was not big enough or driven by an urgent enough 
rationale to merit an arrangement such as the 
reconstruction agency which he successfully headed in Aceh. 
He did assign his senior deputy Heru Prasetyo to follow up 
on the MCC Compact development. 
 
¶10. (U) Indonesia Selection. The MCC team explained that 
Indonesia will need to be reselected by the MCC Board at 
its upcoming board meeting on December 9 in order to 
continue its engagement with MCC. In making its eligibility 
decisions, the Board may take into consideration both 
IndonesiaQs current scorecard performance as a Lower Middle 
Income Country (LMIC), as well as the fact that Indonesia 
would have met the criteria as a Low Income Country (LIC), 
including the Control of Corruption indicator. The MCC team 
expressed confidence that Indonesia will be reselected 
based on its performance as an LIC; however it cannot 
presume the boardQs decision. 
 
¶11. (U) Scorecard and Legislative Fix. Several questions 
from the GOI centered on IndonesiaQs scorecard, the 
accuracy of the indicators, and the potential amount of the 
Compact. MCC team urged the GOI to be in touch with the 
organizations that collect the indicator data to ensure the 
accuracy and timeliness of reporting. Under MCCQs statute, 
LMICs have access to a maximum of 25 percent of funds 
appropriate in any fiscal year Q a trivial amount for 
Indonesia even under an optimistic FY2011 budget scenario. 
MCC has been working with on legislative language that 
would essentially grandfather IndonesiaQs status as an LIC 
for funding. A version of the language may be in the final 
FY2010 appropriations bill. 
 
¶12. (U) Gratitude. The MCC team expressed gratitude to 
Ambassador Hume for his personal interest and support of 
MCC and for convening meetings with key ministers and 
government officials, including hosting a breakfast, and to 
Walter North and his team at USAID for their continued 
support, including helping to organize the MCC visit and 
providing bridge funding for the Indonesian technical core 
team. 
 
¶13. (U) Action Request. The enthusiasm generated by the 
MCC visit among high level GOI officials makes it all the 
more critical that Indonesia be reselected. The Post 
appreciates everyoneQs continued efforts to ensure this. 
Thanks. 
 
HUME