We need firm decisions and action, Mr. President!

Friday, June 02, 2006 Vincent Lingga, The Jakarta Post, Jakarta

Five months into his second year in office, President Susilo Bambang Yudhoyono has yet to grow on his job.
Seemingly failing to learn from his failure to establish a national economic council early on in his presidency in late 2004, Yudhoyono is about to set up an economic advisory task force within his executive office in charge of advising him and monitoring economic policy execution.

What then was the point of the "big bang" reshuffle of his economic team the President made with great fanfare last December when he appointed the highly respected economist Boediono as his chief economic minister?

What the President really needs is not another long list of economic advice nor economic advisers, but an effective economic management center that can quickly fix problems by executive fiat at the highest level.

The President and his economic ministers already have thick bundles of policy recommendations, reform measures designed on the basis of accurate diagnoses of our economic problems by the national business community, national and foreign economists, foreign chambers of commerce, the International Monetary Fund, the World Bank and several other well-known economic think tanks.

Many of the policy recommendations have been translated into impressive sets of infrastructure and investment reform measures that were introduced in the first quarter, and another package of reforms in the financial sector is in the pipeline, slated to be launched this month.

The biggest problem lies in the day-to-day management of the policy implementation. What is outstandingly missing is an effective system of fast decision-making to address implementation problems.

Hence, what Yudhoyono urgently needs is an effective economic management center within his executive office that can quickly decide and act firmly with utmost urgency to fix economic problems, remove barriers to reform implementation and coordinate inter-ministerial action.

The center should function like an operation room in a war-like situation, where economic ministers, top bureaucrats, top economists and leaders of business associations discuss and decide on concerted efforts to fix any economic problems.

An effective decision-making and management center would be more capable of setting the right priority for action and building up a favorable public-opinion environment and a national political consensus on the correct sequencing of economic reforms.

Unlike most Cabinet sessions on economic matters at present, which seem more perfunctory than business-like, meetings at the center should run as brainstorming sessions that bring the country's political leadership face-to-face with representatives of the main economic agents, all determined to translate political resolve into real action.

Any economic issues, such as barriers to exports and investment, credit financing for small and medium-size enterprises, port clearance, imports, tax assessment and even such matters as privatization of state companies would be settled quickly at the highest level.

Judging from his managerial capability, Vice President Jusuf Kalla is well positioned and greatly qualified to run such a center, but he is not the right man for the job. Given his business background and the widely diversified business conglomerate his family owns, Kalla would constantly be suspected of potential conflicts of interest.

Therefore it is the President who should personally chair this economic management center, but he should give a full mandate to his chief economic minister Boediono to conduct the daily operation of the center and coordinate inter-ministerial action.

Yudhoyono needs only to attend weekly or monthly decision-making meetings at the center. His personal presence at such meetings would keep all officials on their toes because they would have to be ready with answers to any questions the President or business leaders might ask.

The right management and coordination by chief economic minister Boediono, and the support of business leaders represented in the decision-making process, would create a conducive environment for economic policy implementation.

This kind of decision-making mechanism would make bureaucratic action more important than bureaucratic procedures and rigidities, resolving problems by executive fiat on the spot.

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Vested regional interests win in Cemex divestment

Monday, May 22, 2006 Vincent Lingga, The Jakarta Post, Jakarta

An acute lack of leadership on the part of President Susilo Bambang Yudhohoyono's government to act decisively on unpopular, yet good, measures is an apt way to describe this ongoing business saga.

For the ministers of finance and state enterprises botched what was supposed to be a normal business deal between Mexico's Cemex cement group and an Indonesian private conglomerate, the Rajawali group.

Finance Minister Sri Mulyani Indrawati, on behalf of the President and the chief economics minister Boediono, last Tuesday notified State Enterprises Minister Sugiharto that the government had no money to take up Cemex's 25 percent holding at Indonesia's largest cement group, state-controlled PT Semen Gresik (SG).

But what should have been a firm and wise stance to allow for the final closing of the Cemex-Rajawali deal could instead thrust it into legal limbo. For the finance minister also stated in the same letter that the government understood Sugiharto's initiative to buy back the Cemex stake as long as it followed prevailing rules and regulations, including transparent and accountable mechanism.

Sugiharto -- acting like a businessman flush with cash and with a yen for an acquisition -- immediately notified the Cemex chief in Singapore last Wednesday that the government, through state companies and regional administration-owned companies, would purchase Cemex's holding in SG at US$336.7 million -- the same price Cemex had agreed on with Rajawali early this month.

Let the legal experts decide whether Sugiharto's offer would still conform to the 1998 government-Cemex contract which stipulates that in the event Cemex divested its 25 percent stake in SG, the government would have to notify Cemex of whether to take over the stake or let the firm sell it to other parties.

Essentially, Sugiharto's letter is merely a proposal and not a legally straightforward reply to Cemex's May 5 notification to the government of its sales deal with Rajawali. Moreover, the government cannot transfer its first right of refusal to other parties, even state companies.

It is difficult to understand the real motive behind the government's ambiguous stance. Even if the rumor was true that Bosowa cement company, linked to Vice President Jusuf Kalla, was also a "partner" in the Cemex-Rajawali deal, the government should have allowed the private transaction to proceed.

Let Rajawali get "burned" by its investment in SG, for Cemex had suffered under its frustrating eight years of investment in SG. The likely troubles lying ahead were indicated by the West Sumatra governor's threat last week that whichever party takes over the Cemex holding, the West Sumatran people would push ahead with the long-held demand to spin off Semen Padang (SP) from SG.

The Cemex-Rajawali deal would not do any harm to national interests. Nor could Rajawali do any harm to SG. It would be a minority shareholder in SG because the government still owns 51 percent, with the investing public holding the remaining 24 percent.

Nor would Sugiharto serve any national (taxpayers) interests by mobilizing funds from state companies and firms owned by regional administrations to acquire the Cemex holding. This deal will instead erode $337 million from our international reserves as capital flight.

The greatest benefit to the cement industry, which has very bright prospects in view of the accelerated development of infrastructure, notably power plants and turnpikes, would be if Sugiharto mobilized the funds through state companies to build a green-field (new) cement plant to anticipate a national cement deficit beginning in 2008.

The only plausible reason behind Sugiharto's move could then be an inordinate fear that the Cemex-Rajawali deal would again set off protests, notably in West Sumatra, where vested interests, narrow-minded nationalists and various groups of rent seekers have tried since 2001 to spin off SP, one of three SG cement subsidiaries, from the SG group.

Leaders of the West Sumatra provincial legislature, the then governor of West Sumatra and top SP executives in mid-2001 passed a decree expropriating SP until such time as it is separated from SG.

But would the campaign to spin off SP from SG to make it a stand-alone state company really benefit the West Sumatra people? Not likely, if the findings of the special audit on SP by PriceWaterhouseCoopers in 2004-2005 is any indication. The rent seekers simply want to retain SP as their cash cow as they did in 2000-2003.

The forensic audit that was made at the order of SG shareholders and completed in May 2005 found almost all types of bad corporate governance practices rife in SP. They were notably rampant between 2001 and September 2003, when it was controlled by the then renegade management with the full support of local rent seekers within the legislature and local administration.

Auditors estimated tens of millions of dollars in outright and potential losses due to bad practices or even blatant fraud in procurement, inventory and marketing management.

Neither the SG management nor Sugiharto have come clean to reveal the auditors' stark findings to the West Sumatra people. Worse still, Sugiharto did not submit the audit to the Corruption Eradication Commission for further investigation and prosecution.

Now the government, the first one directly elected by around 60 percent of voters in 2004, has caved in to the misguided regional sentiments against private interests taking over the Cemex stake in SG.

What a great move to scare off potential foreign investment, as well as a resounding sullying of the pledged reform of state companies.

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The natural resource dilemma for government

Tuesday, March 21, 2006 Vincent Lingga, The Jakarta Post, Jakarta

How the government resolves the imbroglio currently gripping mining firm PT Freeport Indonesia and its operations in Papua will have a very significant bearing on other big mining ventures already operating, as well as on new investment in mineral development.

Mining, in addition to fisheries and plantations, should be one of the most promising resource-based ventures in Indonesia, thanks to the country's major reserves in oil and natural gas, copper, old, nickel, coal, tin, silver, diamonds and base metals.

However, legal and regulatory certainty is vitally important, especially for mining firms to invest, because this business is usually capital- and technology-intensive and very risky. It has a long payback period and the companies must operate mostly in remote areas where basic infrastructure is extremely inadequate.

But it is legal and regulatory certainty that has increasingly become a big issue after the launching in 2001 of regional autonomy, including the devolving of the central licensing authority for mining concessions -- with the exception of oil and natural gas -- to regional administrations.

Even tree-crop plantations, which are labor-intensive and generally eco-friendly, have been facing a plethora of obstructive bylaws. Only last Wednesday, executives of the Palm Oil Producers Association called on President Susilo Bambang Yudhoyono, urging him to remove the myriad of anti-business regulations, which have adversely affected the international competitiveness of Indonesia's palm oil industry.

There has been a perception, right or wrong, among the public, that most major mining companies -- which obtained their concessions under Soeharto's authoritarian rule between 1967 and 1998 -- bulldozed their way through the licensing system to obtain all the necessary permits for their operations in collusion with corrupt officials.

The democratic era and regional autonomy have encouraged local people, who for more than 32 years were completely excluded from the decision-making process regarding the exploitation of local natural wealth, to forcefully assert their rights.

They often resort to venting their frustrations during street protests and irrational demands that the mining operations in their areas be simply closed down, claiming that the mines have not benefited the local community, but have instead damaged the environment.

This is really a challenge for the government and investors because protesters usually consist of a mix of local leaders, pressure groups, human rights activists and environmentalists, some with genuine causes and legitimate grievances, but many others with self-seeking interests.

Certainly, business is not always right and those, which are found guilty of violating the laws and neglecting their social responsibility, must be brought to justice. But on the other hand, those which are not guilty but still find themselves being harassed and subjected to spurious claims, should be protected by the government.

Since protest demonstrators often block entry to a mine or plant, businesses need the government's firm action to get the protesters out of production compounds and to redirect their grievances to consultative forums or the court system.

Street protests, if not handled properly, will allow the mobs to have a field day, and businesses will be at the mercy of lynch mobs.

Simply ordering the closure of a mine without due process of the law boils down to the government succumbing to the mob's ultimatum, a precedent which could threaten the fate of many other resource-based investment ventures.

Only when there is certainty and consistency in law enforcement, so that the course of investment can reasonably be predicted, will big investors be interested to plough their capital in Indonesia.

Investors, domestic or foreign, understand and often expect that laws or rules can change over time to address social issues, new aspirations and new economic developments. But they will not accept unilateral official decisions made without any clear legal basis, merely the tremendous pressure from public protests.

It is always unpopular to stand up in the defense of big business, especially foreign big business, and politicians like the President, well-known now for his indecisiveness, do not like to do unpopular things.

But the experiences in other countries also demonstrate that a sign of true leadership is the ability to take the unpopular, yet vital, action that is in the best interest of the public.

Regional administrations also have a great interest in attracting more investments in natural-resource based ventures. Under regional autonomy, they are now entitled to 80 percent of the land rents and royalties from fisheries, forestry and mining companies. The revenue split between the central government and regional administrations is 85:15 and 70:30, respectively.

On the other hand, investors too should realize that merely abiding by the laws is no longer sufficient to secure smooth business operations.

They should broaden their social responsibility, not by philanthropic activities, which will only create a sense of artificial prosperity, but by empowering the local community through programs, which are designed to gradually transfer business, technical and social competence to local communities.

Successful investment ventures have shown that businesses, which have fulfilled their social obligations, are less vulnerable to pressures from local communities or administrations.

After all, a company's best defence is its reputation in the community.

The writer is a Senior Editor at The Jakarta Post

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Job prospects for unemployed bleak as growth slows

Friday, February 17, 2006 Vincent Lingga, The Jakarta Post, Jakarta

The country's economic growth rose to 5.60 percent last year from 5.13 percent in 2004. While this may seem like good news, there is reason to worry, because expansion in 2005 was lower than the official target of 6 percent.

Quarterly growth rates have steadily declined since the second quarter of last year, meaning grimmer job prospects for the country's estimated 11 million unemployed and the more than 2.5 million new job seekers who enter the labor market annually.

Yet more worrisome in terms of poverty alleviation efforts is the discouraging development of the agricultural sector, which employs more than 50 percent of the total workforce.

The Central Statistics Agency announced Wednesday that growth in terms of gross domestic product contracted 2.18 percent in the last quarter of 2005 from the third quarter, mainly due to negative growth of almost 20 percent in the agricultural sector.

The economy actually performed robustly during the first six months (October 2004 to March 2005) of President Susilo Bambang Yudhoyono's administration, with GDP expanding by 6.65 percent on a yearly basis in the fourth quarter of 2004 and 6.25 percent in the first quarter of 2005.

The quality of growth also increased significantly, with a much stronger foundation as the prime economic movers shifted more to investment and exports. Investment grew by 15 percent during the first quarter, as shown by a robust 40 percent increase in capital goods imports, while exports expanded by 13 percent.

However, the quarterly growth pace slackened to around 5.64 percent in the second and third quarters.

The lower-than-estimated growth last year had been widely predicted since last July, after steep increases in global oil prices pressured the rupiah and threatened fiscal sustainability as the government dragged its feet over the exploding fuel subsidy.

Strong inflationary pressure from imports dampened consumer confidence, and when the government finally decided to contain the fuel subsidy by increasing fuel prices by an average of 125 percent last October, the damage already had been done.

Growth prospects this year are no rosier, with personal consumption, which accounted for 65 percent of last year's growth, likely to continue declining, while private investment is expected to begin picking up only in the second semester.

Finance Minister Sri Mulyani Indrawati predicted late last year that GDP growth this year would most likely hover between 5.3 and 5.7 percent, lower than the official target of 6.2 percent, because new investment is expected to pick up only in the second semester.

Since most companies are still struggling with the cost-push inflation caused by the October fuel price increases and their multiplier effect, including the tremendous pressure for higher labor wages, many businesses will likely book smaller taxable income. Many others may even operate in the red.

Despite the tight fiscal condition, the public sector and private consumption are still expected to be the prime movers of growth, at least during the first semester.

The 2006 state budget provides a 20 percent expansion in spending to a total of Rp 645 trillion (US$64.5 billion). On top of that, another Rp 10-15 trillion in public sector investment, carried over from the 2005 budget, will be pumped into the economy.

However, the pump priming should be accompanied by a more concerted anti-inflation drive, otherwise the expansive public sector spending could increase inflation expectations, especially since higher electricity rates are looming.

A persistently high-inflationary environment is certainly inimical to consumer confidence and will make it much more difficult for the central bank to begin easing the credit crunch.

Hence, the urgency in the demand from businesses for the government to accelerate reform measures in such important areas as customs, taxation and basic infrastructure, to cut the costs of doing business and reinvigorate the pace of private investment.

Without more vigorous reform, the growth prospects this year could be even gloomier than last year.

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What's it worth to let debtors off the hook

Monday, February 13, 2006 Vincent Lingga, The Jakarta Post, Jakarta

The rationale and pragmatism of the government's intention to protect big debtors from criminal charges -- if they fully resolve their debts to the state -- is similar to the idea of a nationwide tax amnesty proposed by the business community.

The tax administration system is deemed incapable of catching all big tax evaders. A tax amnesty is, therefore, designed as bait to lure registered and potential taxpayers to declare all their wealth or assets.

But the offer of discharge and release for big debtors could easily be seen as an insult to the public's sense of justice. How could people, who should be blamed partly for the 1998 economic crisis, get such nice treatment.

The government, however, seems to be pragmatic enough to realize that bringing the big debtors to court not only would be quite arduous and time-consuming, but would not guarantee that the verdicts would truly mete out justice. The integrity and competence of the existing court system to deal with cases involving complex financial transactions is also a big question.

Just witness how the four big debtors, apparently frustrated with their futile search for justice, last week visited the President's office to express their grievances about the poor behavior of our law enforcement institutions.

Predictably, they were not able to meet with President Susilo Bambang Yudhoyono, but their complaint of being extorted by public prosecutors is simply further confirmation of how corrupt our justice system remains, despite the concerted antigraft drive.

In fact, it was the "bombed-out" court system that had in the first place prompted then president B.J. Habibie in 1998 and 1999 to opt for an out-of-court settlement to get optimum debt collection.

Habibie then was greatly concerned about two big risks: The integrity and capability of the judiciary system to handle so large a number of big cases and the probability that the debtors, who had received Rp 144.5 trillion (US$14.5 billion) in emergency liquidity loans from Bank Indonesia during the height of the crisis in late 1997 and early 1998, would hide or get rid of their assets during the long court process.

The Habibie administration therefore acted firmly to offer the debtors a discharge and release of criminal charges as bait to make them willing to cede their assets, whose value was estimated to be equivalent to their respective debt to the state. More than 15 big debtors accepted the offer, resolved their debts once and for all and got immunity from criminal prosecution.

Despite their shortcomings and questionable clauses that later put the subsequent governments in a dilemma, the debt-settlement agreements concluded under Habibie seemed to be the best deal that could have been gained during that time of crisis.

That the government eventually could recover only a fraction (between 20 and 30 percent) of the book value of the assets was quite a different issue. The market value of the assets depended not only on their book value and quality, but also on the prevailing political and economic condition and on how the Indonesian Bank Restructuring Agency managed the assets.

The idea of releasing cooperative debtors from criminal prosecution was revived by the government last week, but it just seems odd to many people. That is because the government is now in a much better position -- given the political and economic stability -- to negotiate better deals with the debtors.

Legal action against debtors, who have ceded their assets to the government, could cause messy litigation procedures, which would jeopardize the legal status of the assets, many of which have already been sold to new investors. This, in turn, could consequently sabotage the whole asset-recovery process conducted by the now defunct Indonesian Bank Restructuring Agency.

Yet more apprehensive is that legal actions would still have to go mostly through a protracted process in our courts, which remain largely as corrupt and as technically incompetent ever -- including those that ruled in favor of the debtors years ago.

It is worth remembering that even IBRA, which was then vested with quasi-judicial powers that made its legal actions similar to court orders, was rendered impotent as most of its decisions or legal claims had been rejected by either notoriously corrupt judges or incompetent judges who are not familiar with complex corporate transactions.

But for out-of-court debt-settlement deals to be credible and politically acceptable, the debtors should be able pledge assets equivalent in value to their debts, and the government should be able to verify the legal documents and assess the real value of the ceded assets before closing any deals.

Equally important is that uncooperative debtors must be incarcerated for a long time.

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