Cablegate: Mcc Visit: Now Is the Time for Intense Work

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

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