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Viewing cable 06JAKARTA3563, INDONESIA - GOI UNVEILS INVESTMENT CLIMATE PACKAGE

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Reference ID Created Released Classification Origin
06JAKARTA3563 2006-03-20 09:29 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Jakarta
VZCZCXRO4703
PP RUEHCHI RUEHDT RUEHHM
DE RUEHJA #3563/01 0790929
ZNR UUUUU ZZH
P 200929Z MAR 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1353
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHKO/AMEMBASSY TOKYO 9704
RUEHBJ/AMEMBASSY BEIJING 3338
RUEHBY/AMEMBASSY CANBERRA 9235
RUEHUL/AMEMBASSY SEOUL 3628
UNCLAS SECTION 01 OF 05 JAKARTA 003563 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS AND EB/IFD/OIA 
TREASURY FOR OASIA-JEWELL 
USDOC FOR WGOLIKE/4430 AND JBENDER 
DEPT PASS TO USTR DKATZ AND WEISEL 
 
E.O. 12598: N/A 
TAGS: EINV ECON EFIN ID
SUBJECT: INDONESIA - GOI UNVEILS INVESTMENT CLIMATE PACKAGE 
 
REF  A) Jakarta 2315 (GOI Readies Investment Package) 
     B) 05 Jakarta 8877 (June 2005 CGI Meeting) 
     C) Jakarta 2984 (Infrastructure Plan) 
     D) 05 Jakarta 13579 (September 2005 CGI Meeting) 
 
1. (U) Summary:  Coordinating Minister for Economic Affairs 
Boediono and Trade Minister Mari Pangestu outlined the GOI's 
February 27 investment climate policy package at a March 10 
meeting of the Consultative Group on Indonesia's (CGI) 
Investment Climate Working Group (ICWG).  ICWG members 
welcomed the regulatory and institutional reforms and target 
dates, and commended the GOI for consulting closely with the 
business community and other stakeholders.  They also noted 
that continuing a dialogue with business and monitoring the 
content of planned reforms would provide the key to 
implementing the package. Pangestu said the GOI would create 
its own internal implementation monitoring team led by the 
Coordinating Ministry of the Economy, as well as an external 
team with representatives from various business chambers. 
She outlined reforms underway to the Ministry of Justice's 
company registration process to reduce the number of days it 
takes to start a business. Pangestu reaffirmed that as part 
of the regulations implementing a new Investment Law, the 
GOI would move to a registration system for investments in 
those sectors open without conditions. Researchers from the 
University of Indonesia's Institute for Economic and Social 
Research (LPEM) presented results from its second business 
climate survey showing a gradual improvement in the 
investment climate, although taxes, customs, labor and 
macroeconomic instability remain significant challenges. 
Although the survey resulted largely positive, BKPM Chair 
Lutfi chided the LPEM researchers for failing to "hear both 
sides."  Boediono listed the seven "marquee" power plant and 
toll road projects it hopes to fast-track in 2006. End 
Summary. 
 
Economic Team Discusses Investment Policy Package 
--------------------------------------------- ---- 
 
2.  (U) On March 10, Coordinating Minister for Economic 
Affairs Boediono, Trade Minister Mari Pangestu, Finance 
Minister Sri Mulyani, Minister of Public Works Djoko 
Kirmanto, and Investment Coordinating Board (BKPM) Chairman 
Muhammad Lutfi briefed the ICWG on the GOI's March 2 
investment climate policy package and infrastructure 
development plans.  The investment climate package sets out 
an 85-item matrix of regulatory and institutional reforms 
the GOI plans to take in 2006, along with a target date for 
completion of each measure and the responsible ministry. The 
package focuses on five areas: general investment policies; 
customs, excise and duties policies; taxation; labor; and 
small and medium sized enterprises.  Over the past 18 
months, the ICWG and international business community have 
consistently identified the first four of these areas as 
major obstacles for attracting greater investment.  The 
package includes measures of significant interest to the 
business community and investors, including: 
 
-- Submission of a draft investment law to Parliament by the 
end of March 2006 that would unify Indonesia's separate laws 
for foreign and domestic investors and provide traditional 
investment protections including national treatment, the 
right to repatriation of profits, and a guarantee against 
nationalization. 
 
--Implementing Regulations for Investment Law: The GOI will 
prepare revisions to several implementing regulations that 
it will issue no later than the date Parliament approves the 
new investment law.  These will include a revised Government 
Regulation that will set out "clear, simple, and 
transparent" criteria for the negative list; revisions to 
Government Regulation 25 on the responsibilities of local 
governments in the area of investment; and regulations 
reducing the number of days needed to establish a business 
(Ministry of Trade). 
 
-- Submission to Parliament of revisions to Manpower Law 
(No. 12/2003) by the end of April 2006 addressing business 
community concerns about the cost of dismissing workers, 
outsourcing and expatriate work permits (Ministry of 
 
JAKARTA 00003563  002 OF 005 
 
 
Manpower and Transmigration). 
 
-- Revitalization of a National Team for the Enhancement of 
Exports and Investment (PEPI) by the end of March 2006 to 
better coordinate investment policies and help solve high 
profile investment disputes (Coordinating Ministry for the 
Economy). 
 
-- Acceleration of customs processing by June 2006 to 30 
minutes for the green lane and 3 days for the red lane, and 
reduction of the use of the red lane to just 10 percent by 
December (Ministry of Finance). 
 
-- A decision by the end of March 2006 on whether to 
withdraw amendments to three tax laws submitted to 
Parliament last year (Ministry of Finance). 
 
-- Establishment of tax facilities for certain business 
sectors by the end of June 2006, and revisions to rules and 
regulations on value added taxes (VAT) to coincide with 
passage of a package of amended tax laws (Ministry of 
Finance). 
 
3.  (U) Trade Minister Marie Pangestu said that the new 
investment policy package demonstrated the GOI's commitment 
to a steady process of reform.  Although the package 
contains a number of reforms promised since last year, 
Pangestu said that it remained a significant step because it 
establishes clearly which ministry has responsibility for 
which reforms and by what date.  She said the package had 
three broad thrusts: creating a new investment 
infrastructure, improving tax and labor laws and 
regulations, and reinvigorating PEPI to better coordinate 
policy and resolve critical issues as they arise.  Pangestu 
said the GOI knows of the business community's growing 
concern that the Government continues to say all the right 
things, but fails to execute. 
 
ICWG Members Praise the Package 
------------------------------- 
 
4.  (SBU) A number of ICWG members praised the 
comprehensiveness of the package, and complemented the GOI 
for consulting closely with the business community and other 
stakeholders as it developed the package.  They encouraged 
the GOI to focus on implementation.  In his remarks, the 
Ambassador emphasized that with so many reforms planned over 
the next year, the GOI will face a major challenge 
monitoring the content of proposed measures, including 
establishing a mechanism to seek comments on draft 
regulations from stakeholders.  He urged the GOI to continue 
close cooperation with the business community and other 
stakeholders.  The Ambassador welcomed the GOI's focus on 
reducing the number of days needed to start a business from 
151 to 30 days, which he noted has become a symbol of 
Indonesia's determination to improve the investment climate. 
He added that President Yudhoyono's pledge to move from an 
investment approval to an investment registration system 
provides another important symbol for investors; he asked 
Pangestu how the GOI planned to move forward on this issue. 
(Note:  The package does not refer explicitly to this 
issue.) 
 
5.  (SBU) World Bank Country Representative Andrew Steer 
described the GOI's February investment and infrastructure 
policy packages as comprehensive documents and major 
milestones, especially in light of real political 
challenges.  Steer said he saw the GOI leadership as serious 
about pursuing the investment climate reforms and remained 
optimistic that implementation of the package will prove 
successful. Steer expressed less confidence about the GOI's 
ability to meet the broad commitments in its recent 
infrastructure package.  Steer agreed with Ambassador 
Pascoe's emphasis on implementation, and recommended that 
the GOI provide monthly progress reports. 
 
6.  (SBU) American Chamber of Commerce (AmCham) President 
James Castle described as unprecedented the level of 
cooperation between the Indonesian Chamber of Commerce and 
Industry (KADIN) and international chambers, with support 
 
JAKARTA 00003563  003 OF 005 
 
 
from embassies.  He said the Yudhoyono Administration 
differs from its predecessors in that, despite some 
criticism, it has avoided becoming defensive and remained 
open to input and frank discussion.  The Japanese, EU, 
Netherlands and Korean Ambassador's also urged close GOI 
consultation with the business community and other 
stakeholders throughout the implementation process.  The UK 
Ambassador asked about GOI risk sharing and guarantees for 
infrastructure. 
 
GOI to Establish Two Monitoring Teams 
------------------------------------- 
 
7. (U) Pangestu explained that the Presidential Instruction 
3/2006 directs the Coordinating Ministry for Economic 
Affairs to establish two teams to monitor implementation of 
the investment and infrastructure policy packages. Jannes 
Hutagalung, Staff Expert at the Coordinating Ministry for 
the Economy will head an internal GOI team under the 
framework of the PEPI to report whether responsible 
Ministries implement measures on time, and produce a monthly 
report that Pangestu said could go outside the GOI. Pangestu 
noted the GOI currently still sought a credible chairman for 
the second team, which would monitor the content of reforms 
as well as their effectiveness, and would consist of 
officials from the GOI, KADIN and representatives from other 
professional associations.  . 
 
GOI Eyes Cuts in Days to Start a Business 
----------------------------------------- 
 
8.  (U) Pangestu said the GOI has finalized its draft of the 
new investment law, which the State Secretariat has begun 
processing prior to delivery to Parliament before the end of 
March.  The new law and its accompanying regulations will 
establish new investment procedures and reduce the time 
needed to establish a business.  In response to the 
Ambassador's question about the planned shift to an 
investment registration system, Pangestu said that under the 
new rules, an investor in a sector not closed or subject to 
certain conditions could begin working immediately to 
establish a legal business entity through the Ministry of 
Justice and Human Rights (MOJ) and to obtain technical, 
location and other licenses. 
 
9.  (U) Pangestu explained that the MOJ business 
establishment process currently consumes about half (75 
days) of the 151 days required to start a business in 
Indonesia. A recent survey, however, showed that the MOJ 
already has reduced the time needed for business 
establishment to 30 days.  The GOI expects to reduce this to 
five days by moving the process online and delegating more 
authority to district level MOJ offices.  After the MOJ 
issues required establishment papers to new businesses, the 
state gazette would record and publish a list of established 
companies. 
 
10. (U) Depending on the project, Pangestu noted that 
investors might yet need some central government technical 
licenses or approvals. All other licenses and approvals 
would fall to district governments. Pangestu said 15 
districts have integrated service centers offering all types 
of licenses and permits to establish a business. She 
reaffirmed the GOI's goal of reducing the time to start a 
business from 151 to "around 30 days." Pangestu and BKPM 
Chair Lutfi said the BKPM has reduced the time needed for 
businesses to obtain initial BKPM approval to five days. 
 
Business Climate Survey Shows Some Progress 
------------------------------------------- 
 
11.  (U) Dr. Ari Kuncoro of the University of Indonesia's 
LPEM presented the LPEM's second World Bank-funded 
investment climate business survey (LPEM presented the first 
survey to the June 2005 ICWG meeting).  The survey of 500 
manufacturing firms in five cities showed improvements in 
the overall investment climate, but with persistent problems 
in taxes, customs and labor.  Key results include: 
 
-- Firms' perceptions of the investment climate improved 
 
JAKARTA 00003563  004 OF 005 
 
 
from 2003 to the end of 2005. 
 
-- Businesses must file seven types of tax returns and 
devote 41 worker days each month to this, down from 44 days 
in mid-2005. "Harassment visits" by local authorities and 
informal payments demanded dropped significantly between the 
first and second survey, but firms still receive an average 
of 15 visits by local officials every 6 months. 
 
-- Public Utilities improved slightly, with a small decline 
in brownouts and water utility problems, but no decline in 
blackouts or telephone failures. 
 
-- Strikes declined, demonstrations remained the same, and 
few firms reported labor disputes. 
 
-- No significant improvement in the number of days to clear 
imported goods through customs since a 2004 survey by the 
Japan International Cooperation Agency (JICA).  Some 85 
percent of respondents said they must make informal payments 
to get customs clearance, up from 81 percent in mid-2005. 
These payments average one percent of the import value of 
goods, with half paid to customs officials. 
 
-- Fifty-seven percent of respondents reported making 
unofficial payments to tax officials to obtain value added 
tax (VAT) refunds, the same percent as in the first round of 
the survey. Respondents reported the time it took to obtain 
a VAT refund increased from 5.2 months in mid-2005 to 6.1 
months now. On average, 84 percent of VAT claims get 
refunded, down from 88 percent in mid-2005. 
 
-- Road quality remains the biggest infrastructure problem, 
with 22 percent of respondents claiming that travel time has 
increased, and 10 percent claiming it has decreased. 
 
-- Thirty-one percent of respondents said current labor 
regulations reduce competitiveness, with severance pay and 
lay-off procedures cited as the biggest obstacles.  Although 
wage disputes increased between the first and second half of 
2005, strikes and labor disputes declined. 
 
-- BKPM approval time improved from 36 days in first survey 
to 20 days in the second. This figure does not include the 
time needed to correct and resubmit forms the BKPM deems 
incomplete. Respondents indicated that on average the BKPM 
rejects applications twice before it deems them acceptable. 
The survey also noted that BKPM often requests changes to 
information, such as increasing the amount of capital 
invested or changing the shareholding structure, and that 
many rules or policies remain unclear, including the minimal 
capital investment. 
 
BKPM Head Lutfi Reacts Strongly to Survey 
----------------------------------------- 
 
12.  (U) Minister of Finance Sri Mulyani complimented LPEM's 
efforts and noted that the survey results helped the GOI 
identify real underlying problems.  The Minister agreed that 
the customs and tax offices, both under her Ministry, had 
the biggest problem areas and should remain a focus of 
reform efforts.  On VAT, she noted that when Minister 
Boediono had served as Finance Minister the GOI reduced the 
time it took to obtain VAT refunds from twelve to two 
months.  This came with a cost, however, as the number of 
fraudulent claims increased dramatically.  To address VAT 
problems, Sri Mulyani said the Director Generals of Tax and 
Customs will seek to establish better information sharing 
with the business community and a customs single window 
system.  She asked that the business community support these 
efforts and maintain realistic expectations.  Lastly, she 
noted that the LPEM data provided her ammunition to push the 
Director Generals to do more. 
 
13.  (U) BKPM Chairman Lutfi reacted defensively. He denied 
an LPEM finding that the BKPM, without notifying the public, 
had discontinued processing applications for foreign 
investments below USD 250,000, and cited several examples of 
BKPM approvals below this amount. He defended delays caused 
when investors have to correct and resubmit their 
 
JAKARTA 00003563  005 OF 005 
 
 
applications, noting that a "driver's license application is 
not complete without an attached photo." He said mistakes 
remain common because some companies use inexperienced 
attorneys, couriers or even office boys to submit 
applications. Lutfi, however, acknowledged the existence of 
room for improvement, and vowed that the BKPM would try 
harder.  Speaking immediately after Lutfi, Coordinating 
Minister Boediono welcomed Lutfi's remarks as "well taken, 
especially the promise to try harder." 
 
Boediono Gives New Details on Infrastructure Package 
--------------------------------------------- ------- 
 
14.  (U) Boediono provided details on the GOI's February 17 
infrastructure policy package. He said that Vice President 
Kalla would have a major role in its implementation, since 
the Vice President has a "passion for getting things done." 
He presented a power point slide listing one power plant and 
six toll road "marquee" projects that the GOI would 
accelerate to show investors its determination to move 
forward.  Boediono declined to offer details on plans for 
risk sharing on infrastructure projects, noting only that 
the GOI favored setting aside a portion of the budget to 
serve as a contingency fund to back up GOI guarantees or 
contingent liabilities. 
 
Comment: 
-------- 
 
15. (SBU) With the announcement of these policy packages, 
Boediono has laid out a detailed and ambitious work plan for 
2006. The basic hope behind the time-bound, matrix-based 
approach remains public and business pressure to encourage 
line ministries to deliver promised reforms. In contrast to 
the Megawati Administration's 2003 "White Paper," this time 
the GOI plans a more robust monitoring effort including 
consultation with the private sector and other stakeholders. 
We anticipate difficult battles, and the GOI will need help 
from the business community to keep its investment climate 
reforms on track.  PASCOE