Friday, July 28, 2006

Strong political mandate, weak economic performance

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Monday, October 17, 2005 Vincent Lingga, Jakarta

Judged against the strong political mandate Susilo Bambang Yudhoyono obtained in last September's presidential election, Indonesia's economic performance during the first year of his administration has been quite disappointing.

His government failed to make best use of its significant political capital to quickly regain investor confidence in Indonesia's economy through bold reforms in priority areas of greatest concern to businesspeople.

Early on during his first week in office last October, Susilo made the right remarks. He signaled quick action in the top priority areas of his programs by making working visits to the Attorney General's Office, and the directorate generals of taxation and customs.
He demonstrated his understanding of the formidable economic challenges the nation is facing by immediately holding meetings with Bank Indonesia's board of governors and with business leaders.
The market initially gave the benefit of the doubt to the uncomfortable mix of technocrats and politically-connected businessmen in Susilo's Cabinet.

He promised to resolve high-profile disputes with foreign investors -- the Cemex company of Mexico, Karaha Bodas, Exxon Mobil and Newmont of the United States. None of them has been settled, further validating the notion that Indonesia is an unpredictable place to do business.

Susilo made a strategic decision to proceed with the plan to hold an infrastructure summit in January, less than three weeks after the devastating earthquake and tsunami in Aceh province and Nias island, North Sumatra.

Infrastructure deficit has indeed become one of the biggest hurdles to investment in Indonesia as poor infrastructure impairs the competitiveness of the economy as production and distribution costs are made much higher than those in other countries. The prospect of imminent power shortages hangs over many provinces.

Economic performance during the first six months (October, 2004 to March, 2005) was fairly impressive with gross domestic product growing by 6.65 percent on a yearly basis in the fourth quarter of last year and 6.35 percent in the first quarter of this year.
The quality of growth also increased significantly with a much stronger foundation as the prime movers shifted more to investment and export. Investments (mostly domestic) grew by 15 percent, as evidenced by a 40 percent robust increase in capital goods imports, and exports expanded by 13 percent.

However, promises and symbolic moves, though needed, are not enough to maintain the momentum of market confidence. Investors require concrete, consistent measures because only consistent and effective implementation can give credibility to government policies. Unfortunately, it is these two factors that are acutely lacking in the Susilo government.

Most foreign investors remained on the sidelines, waiting for consistent policies and strong evidence of credible decision-making. Some foreign investment did flow back into the country but mostly in portfolio capital, which is skittish and can fly out any time at the slightest sign of problems.

Only about five of the around 90 infrastructure projects offered during the summit were eventually taken up by private investors because the government failed to enact more than a dozen rulings badly needed to strengthen legal certainty, straighten out taxation issues, improve the commercial viability of investment in infrastructure and set up a viable tariff system.

Economic growth slowed down to 5.54 percent in the second quarter, the balance of payments prospects worsened amid the steady decrease in foreign reserves caused by the huge need for oil imports and the lack of political courage to reduce the fuel subsidy.
Most analysts now foresee a growth of 5.5 percent to 5.7 percent this year, still respectably higher than last year's 5.1 percent.But this year's economic expansion could have been much faster.

When the government finally decided to bite the bullet in March, it seemed too little, too late. The 29 percent price hikes were rather meaningless in controlling fiscal deficit and fuel export smuggling and the market became increasingly jittery about fiscal sustainability.

The worsening economic conditions forced the government to amend the 2005 budget twice, while most of the reform agenda Susilo promised in such important areas to investors as customs, taxation, logistical arrangements and other basic infrastructure remained mere declarations of intent.

The entirely unrealistic budget for 2006 that Susilo proposed to the House of Representatives in mid-August was the last straw. Even though the draft budget was immediately revised, the damage had been done as the market lost trust in the government's ability to meet economic challenges.

The market immediately and severely punished the government, attacking the rupiah and pushing it down at one time to a five-year low of Rp 12,000 to the dollar in early September, thereby unleashing enormous inflationary pressures from imports. This forced Bank Indonesia to raise interest rates to as high as 11 percent now.

Worse still, only about 18 percent of the 2005 development (investment) budget had been spent as of last month due to bureaucratic inertia, thereby further tightening the contractive impact of the already austere budget.

The market hailed the bold Oct. 1 decision to double fuel prices in order to bring them closer to their economic costs. However, this long-delayed measure could be too bitter for the economy to swallow if the government is not able to cushion the shock impact of the inflationary pressures within the next few weeks.

One may argue that it is not fair to judge the Susilo government by ordinary yardsticks, given the devastating natural disasters in northern part of Sumatra late last year that preoccupied the government for almost two months early this year.
The steady rise in international prices to historical highs is also completely beyond his control.

Investors, however, don't expect instant results in all areas. What they really want to see is a steady progress in the right path of a consistent reform process. Everything does not have to be fixed at once.

It is also well advised for the government to realize that an economic policy cannot be sold in a vacuum. The environment should support the credibility of the policy and the government, notably its economic team.

No one doubts Susilo's integrity. But the market now has low trust in his economic team and several economics ministers have perceived conflicts of interest.
The first anniversary of his administration seems to be opportune for a reshuffle of his Cabinet.
The writer is a Senior Editor at The Jakarta Post.
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China, the world's largest telecom market

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Monday, October 31, 2005, The Jakarta Post

Huawei Technologies Co. Ltd, China's largest producer of telecommunications equipment, invited journalists from India, Malaysia and Indonesia, including Vincent Lingga from The Jakarta Post, to observe its operations in Beijing, Shanghai and Shenzhen from Oct. 17 to Oct. 22.


The visit also coincided with PT/Wireless & Networks Comm China 2005, considered Asia's biggest industry event in Asia, and a series of workshops on the telecom industry in Beijing. The following is his report.
Theoretically, differences in countries' wages should be reflected in differences in their productivity levels and that any misalignment will be corrected over time.


However, this economic theory will not likely apply in China, with its population of 1.3 billion, at least within the foreseeable future, as the country will still be able to out-compete other developing economies in the manufacturing of almost anything that is labor-intensive.


Millions of people are still moving from the countryside to the cities. According to China's National Bureau of Statistics estimate, from 150 to 200 million surplus rural workers are adrift between the villages and the cities.


This huge pool of surplus labor explains why China's wages have been rising less quickly than productivity and why the country will remain a highly competitive factory of the world for some time.


It could take at least two decades for them to be absorbed by industry and, as this process takes place, it will continue to subdue wage growth and global inflation, further strengthening China's important role as a factory of the world and a huge market.


China, however, does not stop at labor-intensive manufacturing; a factory of the world. It is rapidly turning its manufacturing leadership into technological strength, as the astonishing growth in its information and communication technology (ICT) has shown.


China's early decision to deregulate the ICT sector and break up the state telecommunications monopoly into four competing firms has now turned the country into the world's largest telecom market.


China's 1.3 billion-population may overstate its true consumer demand -- it is still classified as a poor country in terms of gross domestic product (GDP), which totaled US$1.65 trillion last year.


However, measured on purchasing power parity (PPP), China's economy stood as the second-largest in the world, after the United States, with a per capita income of $5,600 last year.


China's rapidly growing middle class, generated by an annual economic expansion of over 9 percent, has been snapping up consumer electronics, mobile phones and other sophisticated telecom gadgets, including third-generation (3G) wireless phone devices.


The latest annual reports of China's National Bureau of Statistics showed that fixed-line phone penetration in China last year reached 25 percent (of total population) and mobile penetration 27 percent (GSM and Code Division Multiple Access).


The number of Internet users exceeded 100 million and broadband subscribers 45 million.
Telecoms operators
Telecom operators in China are entirely domestic and comprise two big fixed-line operators with nationwide licenses (China Telecom and China Netcom), two small players (China Satcom and China Railcom) and two mobile carriers (China Unicom and China Mobile).


China Mobile operated a GSM network with 222 million subscribers as of last year and China Unicom also offers both GSM and CDMA with 84 million and 28 million subscribers, respectively, as of last year.
However, foreign ITC equipment vendors are well entrenched in China thanks to the opening early on the domestic market to foreign competition.


According to a study report released last March by the International Finance Corporation, the World Bank's private-sector arm, such foreign equipment manufacturers as Motorola, Nokia, Intel, IBM and Dell are among the largest foreign investors in China and the largest exporters from China.


A recent survey on China made by the Organization for Economic Cooperation and Development (OECD) showered great praise on China's bold reforms over the past 25 years, which have allowed market forces a much bigger role in the economy and opened up its market wide to foreign competition and investment.


Over the past decade alone, China has restructured or closed thousands of state companies every year with millions of workers thrown out of jobs each year.


After two decades of reforms and privatization, only about a third of China's economy is still directly controlled by the government through state companies concentrated in key sectors as utilities.


The biggest positive impact of this open market competition can easily be noted in the industry of ITC equipment, which links the Internet, telephone systems and computer databases together.


"Right from the outset, the domestic market has been opened wide to international competition," Ms. Zhang Qi, a director-general at the Information and Communications Ministry, noted at a seminar in Beijing recently.


The manufacture of such high-tech products as telecom-equipment also has greatly been bolstered by multinational companies, which moved their research and development (R&D) activities to China.


China and India have been the most favored destinations for transnational companies moving their R&D centers overseas, the United Nations Conference on Trade and Development (UNCTAD) said in its latest annual Investment Report issued last month.


In China alone, the number of foreign R&D units increased from zero to 700 over the past 10 years, the UNCTAD report added.


For example, giant telecom company Motorola set up its R&D center in Beijing and Lucent technologies in Nanjing.


Even though domestic ITC equipment makers emerged from the shadow of foreign market leaders, they have won significant shares in important segments within both domestic and international markets.


Domestic makers have now gained about 50 percent of the mobile handset market, which was previously dominated completely by foreign vendors.


Huawei, China's largest telecom equipment manufacturer, held almost 45 percent of the ADSL market, while state-owned ZTE and Harbour Networks, two other domestic makers, held 16 percent and 9 percent, respectively.


Moreover, Huawei and ZTE have developed mature 3G products and are set to win a significant portion of operators' capital investment in 3G networks.


Fully supported by the Chinese government, which wants to see Chinese companies have global competitiveness, domestic vendors have steadily improved and expanded their research and development work and established partnerships with foreign suppliers.


Take for example, Lenovo's recent US$1.25 billion purchase of IBM's PC business in cash and stocks. TCL, China's second-largest handset maker, set up a joint venture with Alcatel in 2004 in the handset business, while Huawei tied up with 3Com in 2003.
Software industry


The software industry also has grown rapidly along with the telecom equipment industry. The IFC report estimated the Chinese software industry at almost $20 billion in 2003, growing at an annual rate of over 25 percent.


Currently, Japan and the United States dominate the software market, as Chinese companies still work to qualify for international standards.


China's software exports, including software outsourcing, were estimated at $3.2 billion in 2004, up from $2 billion in 2003 and a mere $250 million in 1999. The rapid expansion of software outsourcing in China is the result of government support, the shifting of foreign companies' R & D centers to China.


Unlike India, where large Indian companies dominate the software outsourcing market, foreign firms moving their own software development operations to China, represent key drivers in China's outsourcing market.
These developments will, however, greatly benefit China because expertise developed at these centers will eventually diffuse into the Chinese market, thereby improving the capabilities of Chinese software outsourcing firms.


Even though Indian and Western companies have been expanding in China, Japan will likely remain China's largest software export market for the foreseeable future due to the geographic proximity of the two countries, low-cost labor in China and cultural or linguistic reasons.
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Huawei harbors global telecom ambitions
Monday, October 31, 2005
At a glance, it could be any university campus with studious young men and women continually strolling to and from their rooms carrying books and laptops. Its residents also like to call their huge compound a campus.


However, this is not a university. The vast complex is the Shenzhen headquarters of Chinese telecommunications equipment giant Huawei Technologies, where at the noon bell thousands descend from their gleaming office towers and march like factory workers past manicured lawns and soaring palm trees to the cafeterias.


The campus-type complex is like a mini-village housing graduate recruits -- engineers and scientists -- who are the main young business and technology brains behind the company's high-tech product portfolios.


Huawei's impressive headquarters facility is surrounded by a number of sleek stone and glass structures that house the company's various departments.


The headquarters and its huge research and development (R&D) center -- more than 45 percent of Huawei's 35,000 employees are engaged in R&D work -- is a testament to the company's confidence and global ambitions.


Even its main rivals in the developed countries now express great respect for Huawei's rapidly growing R&D capability, with its highly skilled, yet relatively low-paid engineers.


And, judging by Huawei's stunning track record, the strategy is working, as can be seen from the broad range of its products and market acceptability of its equipment in 90 countries around the world.


Set up in 1988 as a PABX distributor with a few thousand dollars-worth of sales, Huawei has grown into China's largest provider of telecoms infrastructure equipment and associated software.


It has more than 40 percent of the domestic market for fixed-line switchers and 55 percent of the transmission equipment market, with domestic sales totaling US$3.3 billion in 2004 and $1.70 billion in the first half of this year alone.


Through foreign partnerships and its own extensive overseas sales networks, Huawei has also turned its international business into a multibillion-dollar operation, generating US$2.28 billion in international revenues in 2004, up 117 percent from 2003, according to the company's annual report.


In the first half of this year alone, Huawei booked $2.47 billion in international sales revenues.
Impressive portfolio
Huawei has developed an impressive portfolio including wireless products (UMTS, CDMA2000, GSM/ GPRS/ EDGE and WiMAX), network products ( NGN, xDSL), optical network and data communications, value-added services (intelligent network, CDN/SAN and wireless data), and mobile and fixed terminals.


Huawei Technologies, nearly unknown before the telecoms bubble, has become an overnight sensation in its aftermath. Based in China -- where labor is cheap and engineers plentiful -- telecom demand is still rising and local companies are often favored. Huawei is now a tough competitor for Western suppliers.


However, Huawei's Director of Corporate Communications, Fu Jun, denies that his company focuses on the lower end of the telecoms equipment market.


"Our main competitive edge is our ability to meet customer requirements and, by doing that, we can still produce gross margins of between 40 percent and 60 percent," Fu says.


"Huawei possesses leading and quick service supply capabilities in the development of telecom value-added services, which deliver good platforms for service providers to implement original applications globally," noted Laurent Mayer, president of 123Multimedia, the biggest content provider in France, at a seminar in Beijing recently.


True, Huawei still stands deep in the shadows of industry heavyweights like Nokia, Lucent, Alcatel, Dell, Cisco Systems Inc. and the Nortel Networks Corporation. But its domestic and foreign sales to developed and developing markets have grown by leaps and bounds, especially over the last five years, thanks to its expanding partnerships with foreign technology suppliers.


Huawei can now legitimately claim to be a world-class telecom supplier, the most global of any Chinese company that has succeeded in penetrating what formerly resembled a gentleman's club of suppliers for mobile network infrastructure.


Last year, for example, Huawei out-competed many rivals, including Alcatel and Siemens for rights to build 3G (third-generation) wireless phone networks in the United Arab Emirates. It asserted its American ambitions by tying up with 3Com, the arch rival of Cisco.
Huawei also clinched a contract with Dutch operator Telfort for 3 G network infrastructure that could reach the value of $500 million.


The company won over $400 million in contracts in Africa from telecom operators in Kenya, Nigeria and Zimbabwe covering third-generation (3G), NGN, optical transmission, switches, routers and intelligent networks products.


Huawei has also become one of the mainstream equipment suppliers in Indonesia. It has signed a deal with PT Excelcomindo in Jakarta to provide a customized network solution covering many isolated islands.


The project will deliver GSM and GPRS services to 40 percent of Indonesia's 220 million population. The company has also set up a 3G trial network in Bali.


Accessing Western management techniques


From the outset, Huawei has been fully aware of the problem inherent within many Chinese businesses -- top-down management. It therefore early on set up partnerships with foreign management consultants that offered the best expertise in their fields: With IBM (in IT projects and process reengineering), Hay Group (in human resource management), PricewaterhouseCoopers (in financial management) and Germany's Fraunhofer Gesellschaft (in production management and quality control), to ensure a world-class performance by Huawei in all areas of its business.


This leaves nearly half of the company's 35,000 staff free to focus on technology R&D and a further third on sales, marketing and customer service, with about 11 percent of staff working on the production floor.


This ratio of resource allocation and Huawei's investment in R&D, which takes up at least 10 percent of its revenues, is considered by most analysts as the most appropriate for a company that focuses on high-tech and knowledge-based products, such as telecom equipment.


Huawei looks overseas for research and development expertise as well as sales. It set up a big software development center in Bangalore, India -- the software hothouse of Asia -- a research center for advanced mobile technology in Stockholm, Sweden, and two other R&D facilities in Silicon Valley and Dallas, Texas.


The R&D center in Bangalore, designed to tap into India's huge pool of highly skilled workers, already employs almost 1,000 on advanced research and development in telecommunications and networking solutions, especially 3G systems, said Huawei's senior vice president Liu Xinsheng.


The facility also conducts software testing for mission-critical resources and delivers world class technologies, including wideband switching, embedded systems, 3G mobile communications, wireless infrastructure, network management, data communications, intelligent networks, and IP applications like VoIP.


Competing in China has not, as some outside analysts believe, been all that easy. Ever since market reforms and deregulation were introduced into the market, numerous foreign vendors have entered the Chinese market, establishing local production and R&D facilities and hiring local staff for sales and marketing.


"We created from the outset a level playing field for all market telecom equipment vendors," asserted Ms Zhang Qi, a director general at the information and communications ministry at a seminar in Beijing on Oct. 20.


And, of course, Huawei was not the only domestic company to seize the opportunities offered by a booming telecommunications market as a clutch of other Chinese companies have entered the fray as well, including state-owned ZTE Corporation, now the second-largest vendor.


The telecom operators themselves have changed beyond measure. No longer content to follow slavish central directives, they are locked in a fierce battle to deliver real value to their consumer and business customers, and expect their suppliers to be key partners in the process. (Vincent Lingga)
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Indonesia needs big bang reform to woo investment

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Monday, November 21, 2005 Vincent Lingga, The Jakarta Post, Jakarta

No one says economic reform is easy. As World Bank country director for Indonesia Andrew Steer says, it requires a national political consensus and an effective coalition between the government and the business community.
A broad-based reform is also not easy because it essentially amounts to taking away rents that have built up in the economic system. Yet even much more challenging is that the political environment for tough policy making is now more demanding because the House of Representatives is no longer satisfied with simply taking the legislative initiative.

However, most analysts and businesspeople are complaining the pace of reform in Indonesia should be much faster because the key drivers of reform are already in place: the strong political mandate of President Susilo Bambang Yudhoyono and the broad-based popular sentiment that things have to change.

Sofyan Wanandi, chairman of the Employers Association, observed at an investment workshop here last week the implementation of reform measures was utterly disappointing because of inertia within the bureaucratic machinery.

James Castle, a seasoned business consultant who has more than 30 years of experience in the country, says the national leadership has a strong political will and commitment to reform, but the bureaucratic machinery responsible for implementing reform measures has not changed and remains resistant to change.

No wonder the issues and recommendations -- on governance, institutions and infrastructure -- discussed at the World Bank's workshop on "Improving Indonesia's Investment Climate: Reform Experiences from the Region" here last week were mostly the same as those discussed at numerous other seminars and studies by multilateral agencies.

In fact, most of the policy recommendations presented at the two-day workshop were very similar to the reform agenda that was supposed to be implemented over five years ago when the country was still under the special oversight of the International Monetary Fund.

International and national speakers and panelists, as well as participants, at the workshop unavoidably sang the same old song: How Indonesia has remained among the least attractive places for investment, as confirmed by national and international business surveys over the past five years.

Vice President Jusuf Kalla was right in asserting in his opening remarks at the workshop that "the government has been listening to the voices of the private sector and is well aware of the complaints from businesses about the hassles from so many layers of bureaucratic requirements, the rivers of red tape that investors must wade through".

But what the business community wants to see is concrete action and steady, if small, progress, as well as the right signals on the long-term policy direction.

Had President Susilo started his reform drive with some big-bang regulatory reform earlier this year, significant progress could have been made in the investment climate and, most importantly, the government could have built on its credibility in policy making and implementation.

But the government failed to strike hard while the iron was still hot. It did not seize the momentum for change.

Unlike Indonesia, South Korea, the first country to recover fully from the 1997 Asian economic crisis, acted immediately on the back of popular demand for change and succeeded within less than two years to reduce by half the number of its economic regulations to 6,308 by the end of 1999.

This reform, as Jong Seok Kim, a member of the Korean Regulatory Reform Committee, described at the workshop, significantly improved virtually all areas of the economy.

The story of how the Malaysian Industrial Development Authority (the equivalent of the Investment Coordinating Board here) successfully transformed that country into a favorite global investment destination also hinges on a conducive regulatory environment.

True, all business surveys have shown that regulations affect, for good or bad, investment. Good, sensible regulations with a high degree of compliance help markets function properly and economies grow. But excessive, low-quality regulations, different interpretations of regulations and regulatory uncertainties are inimical to investment.

A bad regulatory environment is one of the main barriers to new investment in Indonesia, the main source of economic inefficiency and the main reason why the costs of logistics and starting up a business in the country are among the highest in Asia.

Poor logistics make Indonesia even less attractive for business because most investors now demand efficient supply-chain management to enable them to tap comparative local advantages and economies of scale.

The modern production system requires efficient supply-chain management to allow for lower warehousing costs, lean manufacturing and just-in-time delivery.

But as discussions at the workshop showed, the slow-pace of reform does not have much to do with the painstaking democratic process of reaching a political consensus.
The main problem is the combination of bureaucratic inertia and resistance from vested interests, a problem that can be resolved only by strong executive leadership.
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Business Articles 2005 - Part 2

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Big challenges of improving investment climate 
Friday, July 08, 2005 Vincent Lingga, The Jakarta Post, Jakarta

Although the government claims otherwise, Indonesia remains the least attractive among East Asian countries for foreign direct investment (FDI).

Its political stability -- one of the strategic factors for a good investment climate - did in fact strengthened after the peaceful, clean and fair general elections last year. But most other fundamentals for a conducive investment climate remain acutely weak.

True, FDI has started flowing in, but most of it has been for acquisitions and not green-field projects, the very kind of FDI the country badly needs to create new productive assets and jobs.

Judging from the presentations by panelists from developed and developing countries at the Organization for Economic Cooperation and Development's (OECD) two-day Conference on Investment for Asian Development that ended here on Wednesday, the challenges are indeed formidable for Indonesia to regain investor confidence.

Most of Indonesia's fundamentals for a conducive investment climate -- macroeconomic stability, legal certainty, policy consistency and predictability, and good basic infrastructure -- are still very weak. And the government would be well advised to realize that special incentives for foreign direct investment (FDI) are no substitute for sound macroeconomic policies and a conducive investment climate.

This clearly shows the crucial role of the government in creating a good investment climate. While the government has limited influence on natural resources and other fixed factors such as geography, its policies and behaviors play a key role in shaping the investment climate. Put another way, good governance reduces the costs and risks of doing business and minimizes barriers to sound competition.

Its rationale is that strong and consistent law enforcement is key to minimizing government policy-related costs and risks -- which are quite high in this country -- as well as those regarding regulations on taxation, customs, labor, local autonomy and basic infrastructure.

Strong legal certainty in turn helps build the credibility and certainty of government policies and curb corruption and other forms of rent-seeking behavior.

Policy credibility, certainty and predictability, which also are acutely lacking in Indonesia, are vital for both domestic and foreign investors because direct (not portfolio) investment is inherently forward-looking and long-term in nature.

Investors expect risks associated with changes in such factors as competition, customer behavior, and market preferences, but the government can offset these risks by helping to maintain a stable and secure environment for business operations.

A stable regulatory and policy environment apparently is not sufficient to woo FDI, especially in such countries as Indonesia with strong nationalistic sentiments. Even though the benefits of FDI in developing countries have been well documented, an atmosphere of supportive public opinion is also necessary to nurture conducive political and social conditions for FDI operations.

The experiences of China, Thailand and Vietnam, which have had great success in attracting FDI, shows that investment promotion cannot just be aimed at foreign investors. Such campaigns should also be targeted at local consumers and workers to persuade them to accept the presence of FDI and for all branches of government to convince them of the advantages of less and more efficient regulation of business.

Vietnam, a socialist country, which experienced long and bitter experiences with foreign colonialists, is the paragon, attracting US$48.5 billion in FDI in 5,500 projects between 1987-2004. Vietnam's investment officials Nguyen Van Cuong and Nguyen Huy Hoang recounted this at the conference, that enlightening their own people of the benefits of FDI has been central in their investment promotion campaign.

This is highly relevant for the Indonesian government that is drafting legislation for both domestic and foreign investment to replace the 1967 FDI law and the 1968 domestic investment law. Providing equal treatment to both domestic and foreign investment, as the new legislation is being designed to do, is a politically sensitive issue that needs a strong public-opinion support at the House of Representatives.

Another strong opinion emerging out of the conference warns the government against putting too much emphasis on the development of a "one-stop service center" for investment licensing, because what is designed as a one-stop shop often turns into just another additional stop with an extra bureaucratic layer.

The government's recent decision to dilute the authority of the Investment Coordinating Board (BKPM) and put it under the oversight of the trade ministry was seen an appropriate move, especially in light of regional autonomy.

BKPM, like most similar agencies in most developing countries, has never been able to operate as a one-stop service for investment licensing because most line ministries resist ceding their regulatory authority to another agency.

It would be much better for the government to purse a more direct approach by improving the efficiency of each individual ministry responsible for particular aspects of investment approvals and increasing the institutional capacity of investment bureaus at the provincial and regency-level administrations.

It would be more appropriate for the BKPM to function mainly as an investment promotion and facilitation agency and as a central source of all practical information for businesses, including as a matchmaker for joint-venture projects.

But then, however important investment is for generating growth and reducing poverty, it is not a panacea for specific poverty alleviation policies, especially in a country like Indonesia where the level of inequality in society is quite high.

The government should design an investor-targeting strategy focusing on stimulating a defined set of investment to selected categories of industries the government wants to develop in line with its objective to promote development with equity.

Such a strategy also allows the government to choose the kinds of FDI it wants and direct them to support its objectives related to employment, technology transfer, export competitiveness, skills development and other development goals.
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Government gears up to bite the bullet
Monday, September 05, 2005
Vincent Lingga, The Jakarta Post, Jakarta
The initially negative market reaction to the policy agenda of President Susilo Bambang Yudhoyono could soon turn into positive sentiment as technical details on how and when the reforms will be implemented begin to be unveiled on Monday.

The market, predictably, was disappointed with the package of measures on fiscal and monetary management, energy and investment Susilo unveiled last Wednesday because they lacked specifics and were not as bold as expected.

Nothing was actually new about the "new policy directives" -- in fact they had always been central to the reform package prescribed for Indonesia by the International Monetary Fund between 1998 and 2003.
Many analysts were even puzzled over the circumstances in which the policy agenda was decided. The package was first deliberated in a plenary Cabinet session on Tuesday night but was later fine-tuned by a smaller team of ministers on Wednesday.

The absence of chief economics minister Aburizal Bakrie from the final process, and from the grandstanding ceremony in which President Susilo announced the major policies in a nationwide television address on Wednesday afternoon, raised many eyebrows and strengthened speculation about an imminent Cabinet reshuffle.

Why did Susilo hasten the policy announcement without waiting for the return of Vice President Jusuf Kalla?
A move that unnecessarily raised questions amid the mounting demand for the replacement of the economic team of the Cabinet.
After all, Kalla, who chairs the economic team, had decided to cut short his visit to China and entirely canceled his engagements in Japan to be able to return to Jakarta on Thursday morning.

Susilo's move could nevertheless be understood if it was set against the immensely intense pressures he was facing due to the steady melting of the rupiah since mid-August.
This situation had forced the President either to act immediately or at least to decide on and announce something to help calm the market, otherwise the crisis of confidence in the government's economic management could have escalated into panic.

But the Cabinet meeting Susilo again convened on Thursday -- also attended by Vice President Kalla, chief economic minister Bakrie and almost all members of the economic team seemed able to repair some of the damage caused by the President's haphazard showmanship the day before.

The more conducive would it have been for the rupiah and macroeconomic stability if the technical details for the action plan on fiscal and monetary management, energy and investment had been voted on by the market as economically and politically feasible.

The Cabinet's decision to propose to the House of Representatives on Monday several scenarios on how to phase out fuel subsidies, which could explode to almost US$14 billion this year, is quite strategic. Such a move would prevent political turbulence as observed last March, when the government raised fuel prices by about 30 percent.

Anyway, the new fuel policy will exact major changes in the current and next year's state budgets, and all this process has to be approved by the House.

The President's directive that the gradual removal of fuel subsidies should be started only after a credible social-safety net mechanism to compensate the poor is in place is similarly vital to prevent social unrest and to minimize protests and demonstration. The government should indeed ensure fairness by protecting the poorest segment of society from the brunt of higher prices.

Therefore, as the President has hinted, the phasing out of fuel subsidies could begin only after October. November (after the Idul Fitri celebrations) may be the most appropriate time for ushering in the painful measure because the government needs more time to establish a credible social-safety net program and to precondition the people to the brunt.

Raising fuel prices this month or in October (the fasting month) after the 29 percent increase last March could be political suicide for Susilo's government.

The next two months are more than enough time for the government and the House to deliberate and agree on amendments to the current and next year's budgets to accommodate the new fuel policy.

The next few weeks also will be sufficient time for the government, business leaders, including bus companies, to discuss and calculate the impact of the higher fuel prices and work out what additional reforms are still urgently needed to cut the costs of doing business in order to offset the higher costs of energy and to further stimulate investment.

The central bank needs more time to introduce additional monetary measures to cope with anticipated stronger inflationary pressures after October.

These preparations are all necessary to prevent a reaction of panic. At a time when many people are still suffering from the brunt of the economic crisis and millions of others are either unemployed or underemployed, additional burdens stemming from higher fuel prices could easily incite public anger.

Massive street demonstrations, such as those in early 2003 and last March, would only make things murkier, injecting a factor of uncertainty. This in turn could press down the rupiah exchange rate and set off a vicious circle within the economy.

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Serving both stockholders and stakeholders
Monday, September 12, 2005

Vincent Lingga, The Jakarta Post, Jakarta

While many, if not most, large companies in Indonesia are still struggling even just to comply with current laws, an increasing number of business leaders in developing and developed countries have been promoting the principles of corporate social responsibility (CSR).

CSR has many definitions. Some call it simply: socially responsible investing. Others promote the concept as good corporate governance. But the essence is the same -- it is no longer sufficient for companies to comply with the laws if they are really serious about sustainable development in the long term, which will contribute to poverty alleviation.

The basic tenets of the CSR concept are by and large similar to the nine principles in the areas of human rights, labor and environment, which the United Nations has been promoting through its Global Compact Initiative.
Panelists at the 4th Asian Forum on Corporate Social Responsibility in Jakarta, which ended on Friday agreed that companies should go beyond simply making profit, beyond complying with the laws and beyond philanthropy.

The buzz-words at the two day conference -- organized by the Manila-based Ramon V. del Rosario/Asian Institute of Management Center for Corporate Responsibility -- were "socially responsible", "ethically right" and "environment friendly business practices".

But how can companies live up to these CSR principles in the real business world and still serve the interests of their shareholders by making a profit. Any way one looks at it, a business is not sustainable without profit.
The business environment in developing countries, where laws are mostly inadequate, the governments are corrupt and law enforcement is weak, is often not conducive to the implementation of CSR.

Most speakers, who are corporate chief executive officers, stressed community development through the transfer of business skills to rural people, the urban poor or small and micro-enterprises as the most effective, sustainable way of implementing CSR.

Donating to a worthy cause, though appreciated, is considered less effective than consistent efforts to empower the local community to provide for itself.

Bryan Dyer, Managing Director for Operations at PT PP London Sumatra Indonesia, a plantation company listed on the Jakarta stock exchange, emphasized the need for companies to issue not simply a financial report, but a development balance sheet that accounts for financial (economic) performance and achievements in social and environmental development.

Other panelists from such large companies as Shell Group, Unilever, Gujarat Ambuja Cements Ltd. and Jakob Oetama, Chairman of Indonesia's Kompas-Gramedia Group, presented CSR practices in projects designed to transfer business, technical and social competencies to people.
Companies, which cannot do CSR projects by themselves, manage the jobs in partnership with professional organizations or institutions.

Put another way, CSR is about capacity-building for sustainable livelihoods. It therefore respects cultural differences and seeks to find the business opportunities in building the skills of employees, the community and the government.
Building competence is the main objective, not merely throwing money around, as most state companies in Indonesia have been doing through their small and micro-enterprise development programs.

But capacity-building requires perseverance and even patience because social and business competence grows similar to a healthy economy, not by leaps and bounds, but by percentages. The main hallmarks of this process is that it utilizes, as much as possible, local labor, local contractors, suppliers, even when subcontracting the jobs elsewhere could be easier and less expensive.

The economic rationale is that good behavior is good business because having prosperous businesses side by side with slums or poor communities fosters resentment and eventually resistance. This means that a company's best defense is its reputation in the society.

There are, indeed, real limits imposed upon businesses by the short-term nature of the market. But research has shown that sustainable value creation follows from steady, quiet investment over a period of time rather than chasing every quarter's figures for publicity.

CSR case studies presented at the conference also showed how social responsibility can become an integral part of the wealth creation process and still, with proper management, is able to enhance business competitiveness.

CSR then is often about how company directors resolve the dilemma of conflicting stakeholder demands that requires delicate judgment.
Sometimes, especially in developing countries, it is about leadership and educating shareholders on the imperative of CSR because it is the shareholders who can decide to integrate CSR programs into the business mission and strategies for the management board to implement.
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Strong political mandate, weak economic performance
Monday, October 17, 2005
Vincent Lingga, Jakarta
Judged against the strong political mandate Susilo Bambang Yudhoyono obtained in last September's presidential election, Indonesia's economic performance during the first year of his administration has been quite disappointing.

His government failed to make best use of its significant political capital to quickly regain investor confidence in Indonesia's economy through bold reforms in priority areas of greatest concern to businesspeople.

Early on during his first week in office last October, Susilo made the right remarks. He signaled quick action in the top priority areas of his programs by making working visits to the Attorney General's Office, and the directorate generals of taxation and customs.
He demonstrated his understanding of the formidable economic challenges the nation is facing by immediately holding meetings with Bank Indonesia's board of governors and with business leaders.

The market initially gave the benefit of the doubt to the uncomfortable mix of technocrats and politically-connected businessmen in Susilo's Cabinet.

He promised to resolve high-profile disputes with foreign investors -- the Cemex company of Mexico, Karaha Bodas, Exxon Mobil and Newmont of the United States. None of them has been settled, further validating the notion that Indonesia is an unpredictable place to do business.

Susilo made a strategic decision to proceed with the plan to hold an infrastructure summit in January, less than three weeks after the devastating earthquake and tsunami in Aceh province and Nias island, North Sumatra.

Infrastructure deficit has indeed become one of the biggest hurdles to investment in Indonesia as poor infrastructure impairs the competitiveness of the economy as production and distribution costs are made much higher than those in other countries. The prospect of imminent power shortages hangs over many provinces.

Economic performance during the first six months (October, 2004 to March, 2005) was fairly impressive with gross domestic product growing by 6.65 percent on a yearly basis in the fourth quarter of last year and 6.35 percent in the first quarter of this year.
The quality of growth also increased significantly with a much stronger foundation as the prime movers shifted more to investment and export. Investments (mostly domestic) grew by 15 percent, as evidenced by a 40 percent robust increase in capital goods imports, and exports expanded by 13 percent.

However, promises and symbolic moves, though needed, are not enough to maintain the momentum of market confidence.
Investors require concrete, consistent measures because only consistent and effective implementation can give credibility to government policies. Unfortunately, it is these two factors that are acutely lacking in the Susilo government.

Most foreign investors remained on the sidelines, waiting for consistent policies and strong evidence of credible decision-making. Some foreign investment did flow back into the country but mostly in portfolio capital, which is skittish and can fly out any time at the slightest sign of problems.

Only about five of the around 90 infrastructure projects offered during the summit were eventually taken up by private investors because the government failed to enact more than a dozen rulings badly needed to strengthen legal certainty, straighten out taxation issues, improve the commercial viability of investment in infrastructure and set up a viable tariff system.

Economic growth slowed down to 5.54 percent in the second quarter, the balance of payments prospects worsened amid the steady decrease in foreign reserves caused by the huge need for oil imports and the lack of political courage to reduce the fuel subsidy. Most analysts now foresee a growth of 5.5 percent to 5.7 percent this year, still respectably higher than last year's 5.1 percent.But this year's economic expansion could have been much faster.

When the government finally decided to bite the bullet in March, it seemed too little, too late. The 29 percent price hikes were rather meaningless in controlling fiscal deficit and fuel export smuggling and the market became increasingly jittery about fiscal sustainability.

The worsening economic conditions forced the government to amend the 2005 budget twice, while most of the reform agenda Susilo promised in such important areas to investors as customs, taxation, logistical arrangements and other basic infrastructure remained mere declarations of intent.

The entirely unrealistic budget for 2006 that Susilo proposed to the House of Representatives in mid-August was the last straw. Even though the draft budget was immediately revised, the damage had been done as the market lost trust in the government's ability to meet economic challenges.

The market immediately and severely punished the government, attacking the rupiah and pushing it down at one time to a five-year low of Rp 12,000 to the dollar in early September, thereby unleashing enormous inflationary pressures from imports. This forced Bank Indonesia to raise interest rates to as high as 11 percent now.

Worse still, only about 18 percent of the 2005 development (investment) budget had been spent as of last month due to bureaucratic inertia, thereby further tightening the contractive impact of the already austere budget.

The market hailed the bold Oct. 1 decision to double fuel prices in order to bring them closer to their economic costs. However, this long-delayed measure could be too bitter for the economy to swallow if the government is not able to cushion the shock impact of the inflationary pressures within the next few weeks.

One may argue that it is not fair to judge the Susilo government by ordinary yardsticks, given the devastating natural disasters in northern part of Sumatra late last year that preoccupied the government for almost two months early this year. The steady rise in international prices to historical highs is also completely beyond his control.

Investors, however, don't expect instant results in all areas. What they really want to see is a steady progress in the right path of a consistent reform process. Everything does not have to be fixed at once.

It is also well advised for the government to realize that an economic policy cannot be sold in a vacuum. The environment should support the credibility of the policy and the government, notably its economic team.

No one doubts Susilo's integrity. But the market now has low trust in his economic team and several economics ministers have perceived conflicts of interest.
The first anniversary of his administration seems to be opportune for a reshuffle of his Cabinet.
The writer is a senior editor at The Jakarta Post.
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Business Articles 2005 - Part 1

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No significant progress in government-Cemex dispute 
 
Wednesday, January 26, 2005 Vincent Lingga, Jakarta
The President's lack of leadership to act firm and fast in resolving the government's four-year dispute with Cemex over the Mexican company's investment in the state-controlled Semen Gresik Group (SGG), could cost the government half a billion dollars and longer delays in the return of foreign direct investment.

It is now almost three months since the government initiated negotiations with Cemex to iron out an amicable solution to the impasse.
But it seems that no substantial progress has been made, despite a string of official claims that a final resolution is imminent. Indeed, State Minister of State Enterprises Sugiharto took everyone for a ride when he said a memorandum of understanding would be signed on Tuesday.
The government initially appeared determined to resolve the Cemex case, as one of four high-profile disputes with foreign companies it expected to settle during the first 100 days of its rule to jump-start the inflow of foreign direct investment (FDI).

However, the only achievement thus far has been Cemex's temporary (60 days) suspension of arbitration proceedings on its claim at the International Center for the Settlement of Investment Disputes (ICSID) in Washington.

A costly, messy lawsuit still looms over the government, and its failure to reach a basic agreement by February could trigger litigation proceedings at the ICSID, a World Bank affiliate. And, given its frustration with the capricious stance of the previous administration, Cemex will not likely commit to anything, unless it is absolutely sure of a smooth, clean deal.

The government has insisted that it proposed six options to resolve the dispute, but most of them are either politically unacceptable or commercially and fiscally unfeasible. It has ruled out selling its 51 percent stake in the SGG and buying out Cemex's 25.50 percent holding in the SGG.

The most commercially viable solution acceptable to both parties seems to be the option disclosed by Coordinating Minister for the Economy Aburizal Bakrie in November, after flying around the world to initiate a series of initial negotiations with Cemex management in France, Chile and Mexico.

Aburizal then said the government would sell three units of PT Semen Gresik, one of the SGG's three subsidiaries, with a total capacity of almost seven million metric tons to a new joint-venture company to be controlled by Cemex.

The other two subsidiaries of the SGG are PT Semen Padang in West Sumatra, with a capacity of five-and-a-half million tons, and PT Semen Tonasa in South Sulawesi, with three-and-a-half million tons.

Under this option, the government would maintain its 51 percent control of the SGG, but the holding company would retain only the other two subsidiaries, Semen Padang and Semen Tonasa.
This transaction, besides halting the litigation process -- which could otherwise inflict US$500 million in losses on the government -- would bring in hundreds of millions dollars in fresh capital to the SGG, which it could immediately invest in building a green-field cement factory to capitalize on the steadily rising demand for building materials.

Most analysts have predicted that, based on the current annual economic growth of 5 to 6 percent, Indonesia would see a significant cement deficit in 2007 if the industry does not increase its capacity.
Yet another important effect is the greatly positive signal the settlement of the dispute would give to foreign investors.
Sadly, though, even before the government and Cemex began serious negotiations over the basic principles of how to implement this option, PT Semen Gresik's "trade union" has launched a massive campaign to torpedo the plan.
The "trade union" -- fully backed by Semen Gresik's management -- has lobbied the House of Representatives, trumpeting fear that the government's sale of the cement unit would make the country vulnerable to cartel-like practices in the cement trade.
But this campaign seems to be modeled on the "rebellion" of the previous Semen Padang management, which, with the support of vested-interest politicians and senior officials in West Sumatra, succeeded in blocking the government's put option to sell its 51 percent stake in the SGG in October, 2001.
Rent-seekers in West Sumatra, in a desperate attempt to maintain Semen Padang as their cash cow, also whipped up narrow nationalistic sentiments against the government's plan to sell its controlling stake in the SGG.
Unfortunately, though, the then Megawati government, notorious for its lack of political leadership, simply succumbed to the rent seekers and left behind a time bomb for the new government of President Susilo Bambang Yudhoyono to defuse.
Even now the SGG holding company still suffers from the damaging impact of the Semen Padang rebellion.
Even though SGG shares were still traded on the Jakarta Stock Exchange, the SGG's consolidated financial reports for 2002 and 2003 were classified by its independent auditors with a disclaimer. No one really knew the actual market value of the SGG until the findings of a forensic audit, ordered by SGG shareholders on PT Semen Padang last year, were disclosed.
But the Susilo government seems about to repeat the mistake of its predecessor.
The ministerial team of privatization is not so ignorant as not to know that, what is claimed to be the Semen Gresik "trade union" is actually synonymous with Semen Gresik's management because virtually all the union leaders consist of the company's management and heads of divisions, departments or sections.
Blue-collar workers, who make up 90 percent of Semen Gresik employees, seem not represented in the trade union leadership.
This clearly indicates that what the union leaders claim to be the aspirations of Semen Gresik workers and the local people is actually the vested interests of those in the current management who want to do "business as usual".
Yet, the government seems unable to adequately respond to the rent-seekers' negative campaign and xenophobia sentiments.
The government should demonstrate its political leadership to resolve the dispute, once and for all, by making a firm decision on what it feels to be best for national interests, rather than bowing to political pressure from vested interests, who claim to represent the workers and local people.
The stakes are high, both in terms of potential financial losses and severe damage to the government's credibility.
The Susilo government, which has gained such a strong political mandate, should be able to make a bold -- albeit politically unpopular -- decision, as long as it is highly accountable, and in the best interests of the people.
The writer is Senior Editor at The Jakarta Post
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Preparing public for higher fuel prices
Thursday, February 24, 2005
Vincent Lingga, Jakarta

While economic rationale was initially the main demand arising from the plan to increase fuel prices, discussion is now focused on how to make the painful measure politically acceptable to the House of
Representatives and palatable to the general public.
Virtually no one will argue against the economic necessity to cut the huge fuel subsidies, most (80 percent) of which have been enjoyed by people of the middle- and high-income brackets.
Fuel subsidies, which could explode to over Rp 70 trillion (US$7.8 billion) this year, also cut into the budget for poverty alleviation and other social safety net programs, and threaten fiscal sustainability.
Even more damaging is that subsidies encourage gross inefficiency in fuel use -- while the country has now become a net oil importer -- hinder the development of alternative energy and make export smuggling a highly lucrative business.
However, as the government experienced in early 2003, what had been established as economically rational and approved through a national political consensus at the House was not automatically accepted by the general public.
The government in late January, 2003 was forced to scale back the fuel price hikes it introduced early that month due to a massive wave of demonstrations, thereby damaging its policymaking credibility.
Public acceptance, which is the key to the effectiveness of the upcoming fuel-price increase to achieve its objectives, will depend on whether the reform can be promoted as fair.
Therefore, the bold move to slash fuel subsidies, which is expected before the end of next month, cannot be conducted as a single, isolated measure. It must be introduced in a package with other programs to ensure fairness in sharing the burden and to build a conducive environment for rational public opinion. .
And the price increase should not be so steep as to unduly shock the economy.

This is what the government has been preparing for the last few weeks, though the process has been rather slow and haphazard.
The government is trying to establish fairness through the protection of the poor from bearing the brunt of the higher prices. The government has said it will maintain subsidies for kerosene, the most widely used fuel in poor households.
A Cabinet meeting last week decided to increase budgetary appropriations for helping poor families bear the higher prices to almost Rp 18 trillion from Rp 7.3 trillion originally allocated. These funds will be used for health services, education, rice subsidies, rural infrastructure and public housing.
But public acceptance also depends on the government's willingness to take on its full share of the burden through minimizing waste and inefficiency caused by corruption and by truly behaving and acting out of a real sense of urgency and crisis.
The government should go all out to convince the people that the fuel-price hike is really for their benefit, otherwise a new bout of social unrest could surface at the expense of economic and political stability.
The government needs to establish a reliable mechanism for ensuring that the poor are fully protected from the additional burdens to be inflicted by the new fuel-pricing policy -- that is, that the remaining subsidies reach their target beneficiaries.
Encouraging, though, is that the government already has a fairly comprehensive map of the country's poverty pockets so that the various forms of assistance have a better chance of reaching their target beneficiaries.
However, the government and business leaders are yet to sit down and calculate the impact of the higher fuel prices on production costs for goods and services, and the central bank needs to design appropriate monetary policies to manage anticipated inflationary pressures.
These preparations are all necessary to prevent a reaction of panic. At a time when many people are still suffering the brunt of the economic crisis and millions of others are either unemployed or underemployed, additional burdens stemming from higher fuel prices could easily incite public anger.
The absence of justice and an equitable sharing of burdens could sabotage the whole reform movement.

Massive street demonstrations, such as those in early 2003, would only make things murkier, increase uncertainty and affect political stability. This in turn could press down the rupiah exchange rate and consequently further increase fuel prices and foreign debt servicing at the expense of government spending on social safety net programs.
Moreover, it would be almost impossible to do business under a wildly fluctuating exchange rate.
There are only a few weeks left for the government to consult the House about the planned fuel-price hike, prepare the business community to cope with its consequences and sell the idea to the general public.
Time is not on the government's side. Delaying the measure would only create uncertainty, breed speculation and further damage the government's policymaking credibility.
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Corruption at Pertamina looms over fuel price hikes
Wednesday, March 09, 2005
Vincent Lingga, The Jakarta Post, Jakarta
So what! That may be the skeptical reaction of most people to the ruling by the Business Competition Supervisory Commission that state oil and gas company Pertamina and three of its business partners conspired to rig the tender for the sale of two very large crude carriers in mid-2004.

After all, many previous rulings in high-profile cases have been overturned in appellate courts on technicalities or procedural faults, despite the painstaking work of the antitrust body to build its rulings based on well-documented evidence.
The commission's ruling on the tanker sale also seems to have been based on well-documented evidence, capping almost eight months of poring over 291 documents and questioning 26 witnesses.
The conclusion, announced last week, simply validated the allegations by the Pertamina union and several anticorruption activists, who last year campaigned to block the tanker sale but succeeded only in creating a nationwide controversy and headline stories for a few days.
The evidence pieced together by the commission showed that Pertamina and three other companies -- Frontline Ltd., Goldman Sachs and PT Equinox shipping company -- conspired to rig the tender in the favor of Frontline, causing between US$20 million and $56 million in state losses.
The commission concluded that they violated Article 19 of the antimonopoly law prohibiting businesspeople from discriminating against other business players, and Article 22 banning businesspeople from conspiring to determine the winner of a tender.
Some of the evidence pieced together by the commission:
* Pertamina selected Goldman Sachs as the financial adviser and arranger of the tender without a beauty contest (competitive bid), in violation of government regulations.
* Frontline, which eventually won the tender, was allowed to submit a bid, through PT Equinox, as its Indonesian agent, after the deadline for bids had passed.
* The opening of Frontline's bid was not witnessed by a notary public, as Goldman Sachs required for the two earlier bidders.
As early as last September, after 30 days of preliminary investigation into the controversial tanker sale, the commission found strong indications of unfair competition in determining the winning bidder, and duly notified Pertamina and related parties of the findings.
However, Pertamina went ahead with the tanker sale, saying it faced severe cash flow problems, the tender was fair and transparent and Frontline was declared the winner because the other two bidders could not put up a 20 percent down payment and US$5 million surety bond for each of the two tankers.
The commission's findings only strengthened the public's suspicion about deep-rooted gross inefficiency and corruption at the state oil monopoly. And these findings certainly insulted the public's sense of justice, particularly as people now strain under the burden of the recent fuel price increases.
Rent-seekers seem to have re-entered Pertamina, especially after former Caltex Pacific Indonesia CEO Baihaki Hakim, who was appointed in February 2000 by then president Abdurrahman Wahid to clean up the state company, was replaced in September 2003.
It was Hakim who decided to order the two very large tankers in late 2002 from South Korea, in a bid to eliminate the mafia-style business practices that had cost the company hundreds of millions of dollars in tanker charges, as confirmed by PriceWaterhouseCoopers in a special audit in 1999.
Remember the controversial sale by tender of PT Indomobil, Indonesia's second largest automobile group, by the Indonesian Bank Restructuring Agency (IBRA) in late 2001?
The antitrust body, after three months of examining 170 documents and questioning dozens of witnesses, ruled in April 2002 that the three final bidders -- PT Bhakti Asset Management, PT Alpha Securitas Indonesia and PT Cipta Sarana Duta Perkasa -- had conspired to ensure Cipta Sarana won the bid.
The ruling, also built on well-documented evidence, stated that Cipta Sarana, an unknown company set up only in December 1998, did not qualify for the tender.
Similar to the Pertamina case, the commission discovered many circumstances and occurrences that raised disturbing questions about the integrity of the tender process.
However, all of the commission's rulings in the Indomobil case were overturned by appellate courts.
The commission also lost the case against Garuda's ticket reservation system and against the Jakarta International Container Terminal's alleged monopoly at the Tanjung Priok Port in Jakarta.
Many legal experts have questioned the technical competence of judges in the appellate courts (district courts and the Supreme Court) in dealing with complex business transactions.
But the commission suspects corruption in the district courts is one of the main reasons it lost these cases. In July 2002, the commission, frustrated by its many defeats in the district courts, demanded an audit of the assets of those judges who overturned its rulings. But again nothing happened.
Will the same thing happen to the commission's ruling on the tender for the tankers?
The answer could be yes, given the snail's pace of reform in the judicial system.
The situation is, however, not entirely hopeless. The March 1 fuel price increases have angered so many politicians, student leaders and activists that the government may have to act strongly on the commission's findings, otherwise public opposition to the new fuel policy will become much stronger and the government's credibility in fighting corruption will be eroded.
The writer is a senior editor at The Jakarta Post.
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Philip Morris buys a piece of Indonesian history
Tuesday, March 22, 2005
Vincent Lingga, Jakarta
Julius Tahija surprised the financial community in mid-1997 when he sold to the Soemitro Djojohadikusumo family his 40 percent stake in Bank Niaga, a sound, rapidly growing bank, that was then ranked 7th largest in the country.

The Tahijas certainly got a premium price (US$291 million) for the deal as the banking industry was then in its heyday after steadily robust growth spurred by the 1988 banking deregulation package.
However, less than one year later, Indonesia's banking industry collapsed, and the government was forced to nationalize all the country's largest banks, including Bank Niaga.
The Djojohadikusumos lost their entire investment.
In an even bolder move that shocked the tobacco industry last week, the Sampoerna family sold their 40 percent holding in PT Handjaya Mandala Sampoerna, a clove-cigarette (kretek) maker, for $2 billion to Philip Morris International Inc.

The Sampoerna founding family also gained a premium price, this time around 20 times estimated 2005 earnings, with very good reasons. PT HM Sampoerna is the second largest cigarette producer in the country, and Indonesia is the world's fifth largest cigarette market with total sales of about 215 billion cigarettes worth about $8.5 billion last year, more than 90 percent of which were kretek.
Both transactions demonstrated the great business acumen of the Tahijas and Sampoernas -- getting out of their respective businesses at the peak of their performance.

The Tahijas might not have been so politically and economically seasoned to predict the banking collapse within such a short time. But they accurately foresaw in July 1997 that while the banking industry is a vital component of the economy, it is a capital-hungry business that does not fit well with their business-risk profile.
How accurate their projections have been.
The 2004 bank architecture launched by the central bank has imposed such high capital standards that the country's 134 banks will gradually be forced to consolidate into two or three international-class banks and only three to five national anchor banks, with the rest downgraded to specialized or rural banks.

Whatever their reason -- whether commercial or moral grounds, given the large number of deaths blamed on smoking-related illnesses -- the Sampoernas' decision was a brilliant business move.
By one stroke, the Sampoernas got the equivalent of $2 billion in cash while at the same time leaving their family trove in the care of Philip Morris, the world's largest cigarette maker, which says it will expand the kretek market to other Asian countries such as China.
But the similarities between the two transactions stop here.
Philip Morris will not likely meet the tragic end that befell the Djojohadikusumos with their bank acquisition. The cigarette industry will not collapse, at least not within the foreseeable future, despite the increasingly strong antismoking sentiment.

Cigarettes are an addictive product and addicts are the ideal, most loyal consumers, especially in Indonesia where there are no significant restrictions on smoking.
Philip Morris must have made a thorough assessment of the kretek market, otherwise the cigarette giant would not plan on making an offer for the remaining 60 percent of PT HM Sampoerna, which, if accepted, will increase the value of the company to around $5.2 billion.
Given its role as the world's largest cigarette maker, Philip Morris must have spent a great deal on researching smoking habits in Indonesia. As the adage within the advertising industry says "If you want to get into people's wallets, first you have to get into their lives."
Philip Morris should have been fully aware of Sampoerna's massive marketing network throughout this vast archipelagic country that could be tapped for other consumer goods.
Unlike in most developed and newly-industrialized countries, where smokers have increasingly been treated as outcasts, and the industry has constantly been battered by antismoking activists, Indonesia will most likely remain a paradise for smokers.
Philip Morris, like other cigarette companies, can operate and market its products virtually without restrictions on nicotine, tar content and advertising.
Even though antismoking activists have attacked the cigarette industry as being evil, many observers here link clove cigarettes with Indonesia's history, culture and identity
"Clove cigarettes are part of the fabric and tradition (in Indonesia)," Philip Morris's President for Asia Pacific Matteo Pellegrini observed in remarks to reporters early last week.
"Kreteks capture the soul of the nation," notes Mark Hanusz in his book Kretek: The Culture and Heritage of Indonesia's Clove Cigarettes".
This factor and the significant economic role of the industry as the direct employer of more than 300,000 workers and millions of others in distribution, retailing and the growing of tobacco and cloves, and its huge excise tax contribution have prompted the government to remain highly tolerant of smoking and omnipresent cigarette advertising.
However, the antismoking camp has stepped up its campaign and things may not be so rosy for smokers in the future, at least in Jakarta for a start.
The Jakarta municipal administration has raised the momentum of the antismoking campaign through a bylaw that will ban smoking in public places, such as offices, buses, trains, airplanes, airport terminals, shopping malls, restaurants and hotels, starting next year.
Many may be skeptical about the bylaws enforcement. But by criminalizing smoking, the new regulation will empower individual non-smokers and antismoking organizations to initiate lawsuits against recalcitrant smokers and cigarette companies.
The antismoking campaign in other cities will also get a boost as the regulatory framework will gradually change the perception that smoking is simply a matter of lifestyle choice.
If the Jakarta example is followed by other cities, Sampoerna's top-selling brands Dji Sam Soe and A Mild, and Philip Morris's top-selling brand, Marlboro, will be among the hardest hit as their consumers are mostly middle and high-income people.
The writer is a senior editor of The Jakarta Post.
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Tax amnesty suggestion has powerful support in Cabinet
Wednesday, March 30, 2005

Vincent Lingga, The Jakarta Post, Jakarta
Apparently buoyed by its success in ushering in the unpopular policy of increasing fuel prices, the government is preparing another politically sensitive measure -- tax amnesty -- to lure back billions of dollars, which Indonesian businesspeople reportedly transferred overseas during the height of the economic crisis in 1998.

Even the previous government of Megawati Soekarnoputri, notorious for its high tolerance of corruption, scrapped the idea of a tax amnesty, which has been aggressively promoted by the Indonesian Chamber of
Commerce and Industry (Kadin) since 2003.

Such tax relief was considered an insult to the public's sense of justice as the scheme would benefit mostly businesspeople and big tax evaders, allowing them to essentially launder their hidden assets.
However the idea has gained powerful support at the center of executive power. Former Kadin leaders' Aburizal Bakrie, the current chief economics minister, and Vice President Jusuf Kalla, were assigned by
President Susilo Bambang Yudhoyono to conduct the day-to-day management of the economy.
Aburizal even promoted the tax amnesty like a mantra that could immediately generate a one-time cash infusion of at least Rp 50 trillion (US$5.3 billion) in state revenues in return for immunity from prosecution.
Such a huge sum of additional receipts through a one-shot deal could indeed be quite tempting for the cash-strapped government.
Despite the risks of moral hazards and damaged confidence in the credibility of tax-law enforcement, the tax amnesty is not without strong rationale, especially in Indonesia where tax evasion has always been quite extensive.
Registered personal income taxpayers are still less than 2 percent of the 120 million-strong workforce. The tax ratio (tax receipts against gross domestic product) are less than 13 percent, the lowest among ASEAN countries.
The proponents of the tax amnesty have strong points to support such a program, especially now when the country is desperate for new investment to create jobs.
First, since the corruption-infested tax directorate general is unable anyway to hunt down tax evaders and recoup their hidden assets, there is no harm in offering them a one-shot amnesty if the government can get a sizable amount of additional revenues.
Second, businesspeople will not hesitate to reinvest their capital in Indonesia to expand the economy and create jobs once their previously hidden assets are declared legitimate under the amnesty program.
Third, the scheme will net a large number of new taxpayers, including small and medium-scale enterprises (SMEs), thereby broadening the tax base for future tax collection. Tax registration also will make SMEs legitimate and consequently improve their access to finance.
Fourth, as the court system in the country is both corrupt and overburdened, a tax amnesty may allow the tax administration to minimize prosecution costs.
No wonder, given these potential benefits, many countries, including dozens of developed ones, have granted such one-time tax amnesties.
But the opponents of a tax amnesty also have equally strong points against introducing such a scheme, at least until an efficient, strong tax administration system is established.
Granting an indiscriminate tax amnesty now will mostly benefit the big businesspeople, including the former bank owners, who, according to an investigative audit by the Supreme Audit Agency (BPK) in 1999, misused Rp 138.5 trillion (US$15.40 billion) of the Rp 145 trillion Bank Indonesia extended in emergency liquidity credits to help bail out the banking industry in 1998 and 1999.
It would gravely insult the public's sense of justice if those same conglomerates, who had previously been released and discharged from criminal charges related to their bad debts, were granted tax amnesty under a weak and corrupt tax administration system.

Tax amnesty is supposed to encourage people and enterprises to register as taxpayers and start completely new without fear of prosecution of their past tax debts.

But granting tax amnesty without first establishing a strong tax administration system could only be a deception to allow tycoons to launder their hidden assets, tax-evaded money.

Successful tax amnesty programs in developed and developing countries have shown that the facility should be provided through a good mechanism, and the tax amnesty period should immediately be followed by strong law enforcement against tax evaders and manipulators.

Unless carefully designed and supported with strong information infrastructure to detect future tax delinquency, a tax amnesty program could instead increase disincentives to taxpayers.

Without this prerequisite, a tax amnesty will only cause moral hazards as people, expecting another amnesty in the future, will lower their tax compliance, and honest taxpayers will be discouraged to continue voluntary compliance.

A highly successful amnesty which nets a large number of new taxpayers could even adversely affect future tax collection if the tax administration cannot devote enough resources to handle the additional workload.

There are thus both great potential benefits and big risks inherent with the granting of a tax amnesty. But it depends on the quality of the tax administration system used to implement the program.

The government certainly is facing a mountain of work preparing an overall tax reform program, and that includes the drafting of a bill on a tax amnesty.

But then as the raucous opposition to the otherwise economically rational fuel-price hikes has demonstrated, even the best program will not sell unless it is properly marketed to those who will implement it and the public who will have to accept it. In the end, it is an exercise in practical politics.
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Pertamina's cash-flow problems and domestic fuel stocks
Monday, April 18, 2005
Vincent Lingga, The Jakarta Post, Jakarta
Is the government so strapped for cash that it failed to pay Pertamina Rp 23 trillion (US$2.42 billion) in fuel subsidies for the first quarter?

"No, we are by no means facing a liquidity crisis. In fact, the state budget thus far has booked a surplus of some Rp 10 trillion," asserted State Treasury Director General Mulia P Nasution last week.

However, Pertamina spokesman Abadi Poernomo had earlier disclosed to the media that the state oil company might soon have to default on some of its $1.64 billion in trade debts if the government did not soon reimburse the subsidies Pertamina had advanced during the January-March period.

Poernomo added that banks had refused to open new letters of credit (L/C) for the company to import oil, warning that national fuel stocks could fall below the minimum buffer level of 22 days' supply.

Strangely though, Pertamina's major creditors, including Bank Mandiri, Bank BNI and Bank Rakyat Indonesia, denied that they had any credit problems with Pertamina.

Another Pertamina official, this time from its public relations department, also denied that the company's crude oil suppliers had any problems with its L/Cs.

So, why then did the state oil monopoly resorted to such damaging disclosures? Doesn't Pertamina, as a state company, realize that such statements could jeopardize its own creditworthiness and even heighten the government's sovereign risk?

The fact is, however, a threat of fuel shortages always works wonders for Pertamina in collecting from the government.

The latest case occurred early last week when the government rushed to pay the company Rp 4.1 trillion (US$431 million) to provide it with access to a new credit line.

The payment was made one day after Pertamina warned through the media that the country might face a severe fuel shortage in May or June if the government did not reimburse the company for the overdue fuel subsidies.

The issue centered around the mechanism by which the government pays domestic fuel subsidies in respect of the difference between the prices at which Pertamina is required to sell fuels and their actual production costs.

Until mid-2004, the government reimbursed Pertamina for the subsidies that the company had advanced only after the Supreme Audit Agency or the government comptroller had audited Pertamina's domestic fuel sales accounts.

The audit requirement was deemed necessary to ensure that the amounts claimed by Pertamina in respect of the fuel subsidies were reasonable, given the company's reputation as a notorious "den of rent-seekers". Past experience also shows that quite a large proportion of subsidized fuels ends up being sold to industrial users or being smuggled overseas.

A consequence of this is that the reimbursement process often takes several months. But this was not too much of a problem in the past for the state oil monopoly as oil prices until the end of 2003 mostly averaged below $30/barrel.

However, with oil prices rising steeply since early 2004, domestic fuel subsidies have increased so sharply that Pertamina's cash-flow situation no longer allows it to give the government credit for the fuel subsidies for more than one month.

The finance minister therefore decided in mid-2004 to expedite the reimbursement process by making monthly payments of 90 percent of the subsidies paid by Pertamina if oil prices averaged below $33/bbl and 95 percent if oil prices exceeded $33/bbl. Reimbursement no longer requires an audit, but only verification.

Under this arrangement, only between 5 percent and 10 percent of actual fuel subsidy spending is subject to independent auditing, a process that takes several months. The government, for example, has yet to reimburse Pertamina for Rp 3.87 trillion in subsidy spending for the last quarter of 2004, pending the completion of an audit.

The problem, however, is that since early this year oil prices have been hovering above $45/bbl and monthly fuel subsidy spending has not been about Rp 3.3 trillion as the government had estimated for the whole year, but will reach as high as Rp 8 trillion.

Pertamina says that it needs at least $800 million a month for oil imports, which now account for almost one third of daily domestic consumption of about 178,000 kiloliters, if oil prices remain in excess of $45/bbl.

As Minister of Energy and Mineral Resources Purnomo Yusgiantoro revealed last week, the government had not reimbursed Pertamina for about Rp 23 trillion in fuel subsidies that the company had advanced in the January-March period.

Even though Pertamina has said its cash-flow situation was no longer adverse after the Rp 4.1 trillion payment made early last week, and the issue seems to have disappeared from the media radar screen, the tussle over the mechanism for fuel-subsidy reimbursement still leaves some worrisome questions.

If the government is not facing a liquidity problem, as Treasury Director General Mulia P Nasution asserted, why was it so seemingly unaware of Pertamina's cash flow situation that it fell behind in its payments to the company.

One may also question the true state of Pertamina's credit standing with oil suppliers overseas, such as Aramco, from which the state monopoly has been buying crude since the late 1970s. Why is Pertamina, given its position as an oil monopoly, state-owned company and an established, bulk buyer, unable to get trade credit of three months from its crude suppliers?

Without a better reimbursement mechanism, similar problems could recur, and Pertamina might once again resort to threats and brinkmanship in its dealings with the government.

But whatever the new mechanism Pertamina and the government decide on, it must not jeopardize the company's cash flow situation while at the same time ensuring that the amount of Pertamina subsidy spending that is reimbursed is really based on actual fuel sales to eligible consumers.

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