Indonesia, Japan agreement a boon for our economy

Wednesday, August 21, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Japan will cut to zero import tariffs on almost 90 percent of Indonesian export commodities under the Economic Partnership Agreement (EPA) that President Susilo Bambang Yudhoyono and Prime Minister Shinzo Abe are scheduled to sign today (Monday).

What a great concession for improving Indonesia's access to the Japanese market.
But the sweeping, deep import tariff cuts -- however crucial they are for expanding Indonesia's share of the Japanese market -- are not the most important program under the EPA.

It is instead the technical cooperation in institutional-capacity building in the private and public sectors that is most strategically vital for Indonesia. Without adequate institutional capacity to meet Japan's quality standards for services and goods, Indonesia will simply be unable to tap the wider trade opportunities to be generated under the EPA framework.

Japan will give technical assistance, through a manufacturing industry development center, to Indonesian manufacturers to meet international quality standards, thereby enabling them to become part of the global supply chain.

Certainly, automobiles and auto parts and components, electrical and electronic goods should be among the categories accorded top priority in the technical cooperation, given their extensive backward and forward linkages and the stage of development they have achieved in Indonesia.

Leading Japanese automakers such as Toyota, Honda, Suzuki and Daihatsu are well positioned to make Indonesia their production bases for some major components designed for the markets of the Association of Southeast Asian Nations (ASEAN).

These production bases can then be linked with their production units in other ASEAN countries such as Thailand, Malaysia or the Philippines through a brand-to-brand complemental scheme.
Similar intercompany linkages and brand-to-brand complemental programs can be implemented with motorcycles, electrical and electronic goods.

Japan will also provide technical assistance to help Indonesian certification agencies as well as companies meet Japanese industrial standards in agricultural, forestry and fisheries products.
Within the sphere of international trade, non-tariff barriers such as quality standards, including safety and hygienic requirements, could become major hurdles to Indonesian exports if companies are not capable of meeting the quality standards imposed by importing countries.

Also greatly beneficial is the technical cooperation in developing Indonesian training systems for healthcare workers, sailors and workers in tourism-related businesses such as hotels and restaurants.

Technical assistance for Indonesian certification of vocational skills and greater opportunities for internships at Japanese companies will help Indonesian workers gain access to the Japanese market.

Obviously, the EPA also includes measures to improve the investment climate and to expedite business licensing procedures, even though these programs are already in various stages of implementation as part of the overall economic reform to woo foreign investment.

The right focus of the EPA will make it effective in deepening and expanding bilateral economic cooperation. Japan has always been important for Indonesia as the source of investment, capital goods, basic industrial inputs and official aid.

Japan absorbs more than 20 percent of Indonesian exports and supplies 13 percent of Indonesian imports, and has been the single largest foreign investor and provider of development aid to Indonesia.

However, the bulk of Indonesian exports to Japan have always been low value added commodities such as oil and gas and other resource-based commodities such as forestry products, minerals and coal.

The institutional capacity building program under the EPA will help Indonesia upgrade its manufacturing industries to produce higher value added goods for export to Japan and other countries.

Indonesia also has always been important for Japan as a major supplier of natural resources such as oil and natural gas and wood, and as the largest country in ASEAN and given its strategic position on the Malacca Strait, Indonesia also is vital for Japan's geopolitical interests.

At the end of the day, though, the EPA is simply a document that still needs to be translated into well-focused concrete programs by the governments and private sectors of both Japan and Indonesia.

Japanese investors are no different from other foreign businesspeople. The EPA will not prompt Japanese investors to put their money into Indonesia unless some basic preconditions are met.
Indonesia must make significant, steady progress in the long-awaited reforms of the tax and customs services, business licensing and labor regulations, and improvements in basic infrastructure.

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KPPU integrity on the line with Indosat case

Wednesday, August 15, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The decision the Business Competition Supervisory Commission (KPPU) will soon make on the Indosat case will determine whether this supposed vanguard of fair market competition will be able to retain what little trust the public still has in its integrity and technical competence.

Already heavily criticized for wasting its valuable resources investigating cases with little merit, with most of its past rulings being thrown out by district courts, the KPPU risks another misstep in its judgment on the allegations that Singapore Temasek Holdings violated Indonesia's anti-monopoly law.

Right from the outset the KPPU seems to have been biased in handling this case. Most analysts expected the KPPU would close the case after making inquiries into complaints filed by the Federation of Trade Unions at state companies last October, especially after the federation itself withdrew its complaint last April for what it claimed to be a complete lack of evidence.

However, the KPPU stepped up its inquiry into a full investigation amid a seemingly endless wave of attacks against Temasek's investment in Indonesia's telecoms industry and a bout of subterfuge by domestic and foreign investors seeking to acquire Indosat's shares.

Temasek has been charged with violating Article 27 of the Anti-Trust Law by dominating the market and engaging in price-fixing, because the Singapore government-owned investment company indirectly holds shares in both PT Telkomsel and PT Indosat, Indonesia's largest and second largest mobile telecommunications operators.

The article in essence says a business actor cannot own majority shares in several similar companies operating in the same field in the same relevant market, if this cross ownership will give it control over 50 percent of the market for a certain type of good or service, or give two or three business actors, or a group of business actors, control over 75 percent of the market for a particular good or service.

Temasek owns 54.15 percent of the SingTel Group, which in turn owns 35 percent of Telkomsel. Temasek also wholly owns ST Telemedia (STT), which controls 75 percent of Asia Mobile Holdings which in turn owns almost 42 percent of Indosat.

According to Pande Radja Silalahi, a former KPPU commissioner, based on the ownership tree Temasek indirectly owns 30.6 percent of Indosat and 18.9 percent of Telkomsel.

This clearly shows that Temasek does not own majority stakes in Indosat or Telkomsel.
On the other hand, the Indonesian government owns 14.30 percent of Indosat, including a golden share which gives it special rights, and indirectly holds (through PT Telkom) nearly 33.30 percent of Telkomsel.

The government also regulates the main components of telecoms tariffs through decrees from the minister of information and communications.

There are also now simply too many players and too many technology choices in the mobile telecom business to allow for a monopoly. If both Indosat and Telkomsel still dominate the market, that is because they enjoyed such a long lead time within the industry.

The question then is how could Temasek have ordered both Indosat and Telkomsel to conspire in price fixing or other cartel-like practices? What about the government representatives who make up the majority of both the boards of directors and commissioners of Indosat and Telkomsel?
Then why has the KPPU not included the Indonesian government as a co-defendant in the price-fixing charges against Indosat and Telkomsel?

These issues only add to the doubts over the motive behind the KPPU investigation of Temasek.
A recent study by a team headed by Pande concluded that viewed from the operating-income perspective, Temasek's market share in the mobile telecommunications industry amounted only to around 20.12 percent in 2006, down from 21.11 percent in 2005 and 21.56 percent in 2004. The government market share in the same period totaled 24.85 percent, 24.20 percent and 23.05 percent.

In terms of gross value added, which includes such variables as employee salaries, Temasek's market share declined steadily to 19.80 percent in 2006 from 21.32 percent in 2005 and 21.84 percent in 2004.

These market share developments raise another question: If Temasek was able to order Indosat and Telkomsel to collude in price-fixing, why did its market share fall.

Why would Temasek or ST Telemedia or the SingTel Group risk their international reputations by engaging in cartel-like practices that instead of expanding, eroded their market share?

Even in terms of the number of customers, Pande said, Temasek, through ST Telemedia and SingTel, controlled only about 19.20 percent of the mobile telecom market.
The objective of the KPPU investigation seems to never have been about pinning guilt, whether real or imagined, on Indosat or Temasek.

Rather, it might have been part of a political and public opinion campaign designed to make the Singapore investors sell their stake in Indonesia's telecoms industry below market prices.

There are certainly many other domestic and foreign investors, among them Russia's Altim, waiting on the sidelines ready to snap up the Indosat stake. After all, mobile telecommunications service is one of the most promising businesses in the world's largest archipelagic country.

Last June, several politicians accused Indosat of making scandalous hedging transactions to evade taxes. These allegations were laughable, given the impeccable corporate integrity of Indosat -- a blue-chip company on the Jakarta Stock Exchange -- and seemed designed solely to smear the company to make Temasek restless.

Both the capital market watchdog and the taxation directorate general stated after examinations that the allegations of tax evasion and fictive derivative transactions were completely groundless.

The senior politicians, themselves seasoned business analysts, should have realized that the damage done to Indosat is not so much a ruined reputation as the uncertainty looming over foreign investors in Indonesia, and doubts about the integrity and technical competence of the KPPU as the watchdog of fair business competition.

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Bank BNI sale reinvigorates privatization program

Thursday, August 02, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The government's decision to push ahead with Bank BNI's secondary offering of 3.95 billion shares despite the global rout that hit Asian stocks last Friday was the right move to reinvigorate the privatization of state companies.

Even though the stocks gained only the lowest end of the target price of Rp 2,050-2,700 a share, the positive response from domestic and foreign investors indicates the bright economic outlook.

Yet more encouraging was that almost half of the shares offered were taken up by foreign investors.

The July 26 steep falls in European and American stock markets, whereby the Dow Jones Industrial Average was down 3.2 percent, and the sell-off in Asian stock markets, including the Jakarta stock exchange on the following day, had initially set in a bearish sentiment on the Jakarta Stock Exchange (JSX). But the rosy economic prospects made the bank shares highly attractive to long-term investors.

Stronger economic growth predicted by most analysts for this year and next (6.2-6.5 percent) helped improved the market sentiment in the BNI share offering after the temporary fall last week because there was a positive correlation between economic expansion and the growth prospects of the banking industry.

The country's economy has indeed been growing robustly, especially since early this year, as consumer confidence has been strengthening and investments began to pick up amid weakening inflationary pressures and a bullish stock market.

For example, PT Astra International, the country's largest automobile group, on Tuesday announced its first half semester performance with a 41 percent increase in net profits built largely on the back of a 156 percent rise in net income from car sales.

Even much more meaningful than the Rp 8.1 trillion (US$885 million) raised by what has been dubbed the single largest stock offering on the JSX, is the greatly positive impact the transaction will generate on the supply side of the capital market, investor sentiment in the general outlook of the economy and the prospects of IPOs by state companies.

Amid the high flow of foreign portfolio capital to Indonesia since last year, investors have been complaining about the lack of new share issues available on the JSX.

A positive investor response to the share offering that reduced the government's stake in Bank BNI, the country's third largest financial service company, from 99.1 percent to 73.3 percent, would be a boon to the upcoming initial public offerings by three other state companies: Toll road operator and developer PT Jasa Marga and construction companies PT Wijaya Karya and PT Adhi Karya.

Minister for State Enterprises Sofyan Djalil rightly decided, immediately after his appointment as the minister for state companies in May, to privatize state firms mostly through the capital market instead of strategic sales, which are vulnerable to the collusion of vested interests.

A public listing on the JSX could be one of the most effective ways of developing good corporate governance at state firms in view of the stringent requirements of financial disclosure and high standards of accountability and audit imposed on publicly-traded companies.

Public listings also will help empower state company managements dealing with vested interests within the government and politicians who want to maintain state firms as their cash cows.

Of the nearly 140 companies that are majority owned by the government only 12 have been listed on the JSX but accounted for about 36 percent of the US$166.3 billion total market capitalization as of June.

Given the bullish market sentiment -- the JSX composite index has risen by 27 percent to almost 2,350, compared to January -- it is indeed the right time now to raise funds through share issues and at the same time increase the depth and breadth of the JSX.

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tale of mistakes piled atop errors

Monday, July 23, 2007 Vincent Lingga, The Jakarta Post

In early July 1997, when the Thai baht crashed and lost more than 50 percent of its value against the dollar immediately after the Bank of Thailand floated the local unit, Indonesia was an innocent, unaffected bystander, its rupiah stable at around Rp 2,500 to the dollar.

However, what was initially perceived simply to be a baht crisis quickly spread to Indonesia, Malaysia, the Philippines and South Korea, stripping bare their economic and political weaknesses and causing Indonesia to suffer the deepest ever plunge in the value of its currency and the most massive wealth destruction any country had seen since the early 1940s.

Foreign portfolio investors and creditors who got burned in Thailand and suffered from asset inflation, misallocated capital and inadequate regulation of the financial services industry reassessed Indonesian economic prospects against the lessons they learned in Thailand.

The Indonesian rupiah came under strong speculative attack immediately after investors and analysts found that Indonesia's economy had shared most of the diseases that led to the financial debacle in Thailand.

Bank Indonesia initially defended the rupiah by direct market intervention, dipping into its foreign reserves and raising interest rates to tighten money supply.

However, as the demand for dollar did not decrease and the attacks on the rupiah became even stronger after the Philippine peso and the Malaysian ringgit were devalued, Bank Indonesia decided to float the rupiah on Aug. 14.

The float did take pressure off the central bank's foreign reserves, but the drastic move left the currency fully exposed to the negative market sentiment, causing panic among most national businesspeople who had been comfortable for decades with the "crawling" peg of the rupiah, with an annual depreciation of 3 to 5 percent.

Within less than two weeks, amid the scramble for dollars by companies that wanted to retire their foreign debts, the rupiah tumbled to Rp 3,000 and the Jakarta stock market lost a staggering 35 percent from its peak in early July.

Hundreds of companies with unhedged foreign debts but with revenues mostly in rupiah were threatened with insolvency. The central bank's tight money policy -- interest rate rose to as high as 30 percent -- to encourage investors to hold the local unit made things even worse as Bank Indonesia was completely in the dark about the magnitude of corporate foreign debts.

As the financial condition of most companies and consequently commercial banks worsened, international banks were unwilling to do business with domestic banks, even refusing to accept letters of credit from most Indonesian banks.

The El Nino impact of a prolonged drought in the second semester of 1997 that damaged food crops and plantation commodities compounded the economic woes, thereby setting off a vicious cycle of pessimism and massive capital flight.

The steady rise in interest rates and the steady weakening of the rupiah also revealed the critical weaknesses of corruption, collusion and nepotism -- in which most business was done.

In early October, as the rupiah had lost more than 30 percent of its value to hover at Rp 3,800, the government invited in the International Monetary Fund. But the US$43 billion rescue package concluded with the IMF at the end of October failed to improve investor confidence.

In a drastic move that the IMF eventually admitted as a grave mistake, the multilateral institution recommended the closing of 16 insolvent banks, including several owned by members of the Soeharto family.

In the absence of any kind of deposit insurance program, the bank closure panicked depositors and prompted massive deposit withdrawals from most other private banks.

Then president Soeharto instructed the central bank, in contravention of its tight money policy, to inject liquidity (emergency liquidity credit) into troubled and cash-trapped banks in a bid to contain the panic. However, bank runs and capital flight continued.

Bank Indonesia reports showed that from October 1997 to January 1998, cash in circulation increased by a staggering 50 percent and the supply of base money (M1) expanded by almost 40 percent.

The two contradictory policies -- massive money expansion and punitively high interest rates at over 60 percent -- further damaged the economy, causing the rupiah to fall even lower and consequently doubling consumer prices.

Bank Indonesia reports showed that around Rp 145 trillion in emergency liquidity credits were injected into private banks between October 1997 and March 1998.

But eventual audits found that only about one-third of that amount was paid to depositors as the bulk of the credit was abused by bankers and bank owners to buy foreign exchange and shift assets overseas, to repay subordinated loans of the majority shareholders and to settle derivative contracts.

Hence, much of the ballooning quantity of the rupiah wound up being sold for dollars on the open market and shifted to Singapore and Hong Kong and other offshore locations by Indonesians desperate to get their money out of the country.

The collapsing rupiah and the bankruptcy of most banks and big business groups began to erode Soeharto's political legitimacy.

As 1997 closed, the rupiah had lost almost 75 percent of its value and the stock exchange 80 percent of its market capitalization as many companies and banks simply went bankrupt, millions of people were thrown out of jobs and the severe drought caused fears of food shortages.

The beleaguered Soeharto defied market sentiment and announced in early January 1998 a new state budget that was seen by the market as grossly unrealistic, causing the rupiah to crash through the Rp 10,000 level.

Panicked people rushed to strip supermarkets and grocery stalls bare of rice, cooking oil, noodles, flour, sugar and biscuits.

Soon after, a high-powered IMF team arrived in Jakarta and, in cooperation with the World Bank, revised its rescue package with bolder and painful reform measures.

However, the market reacted negatively to the IMF-World Bank rescue package of Jan. 15, apparently skeptical that Soeharto would implement all the reform measures.

Soeharto again stunned the nation and the international market on Jan. 20, 1998, when he unveiled then big spender minister of research and technology B. J. Habibie as his surprise choice for vice president for the March 1998-2003 term.

The rupiah fell through the Rp 17,000 point on Jan.23.

Market sentiment was further damaged when Soeharto, fresh from being reappointed to the 1998-2003 term in mid-March, announced a crony Cabinet lineup that included his eldest daughter and notorious businessman Muhammad Bob Hasan.

The president incited massive street protests when on May 5 he went ahead with raising fuel prices by more than 70 percent as part of the reform measures agreed to with the IMF.

Street demonstrations and rioting which started immediately in Medan, North Sumatra, quickly spread to cities in Java and exploded into a bloody incident in Jakarta on May 12, with four students from Trisakti University killed by troops.

This tragedy set off massive rioting and looting in Jakarta on May 14 and 15 and eventually led to the fall of Soeharto on May 21, 1998.

The Indonesian crisis is thus a tale of mistakes piled atop mistakes, misjudgments by the IMF and the Indonesian government, and bureaucratic wrangling between the IMF and the World Bank.

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Reaffirming the ten commandments for businesses

Monday, July 09, 2007 Vincent Lingga, The Jakarta Post, Geneva

Business leaders from developing and developed countries have reaffirmed their strong commitments to conducting responsible business practices based on the UN Global Compact's ten principles in human rights, labor, environment and anti-corruption.

The leaders stated in a declaration at the end of the Global Compact Leaders Summit here Friday, that only through responsible business practices can a more sustainable and inclusive global economy be realized.

The ten principles, which have been promoted by the UN Global Compact initiative since 2000, are in essence the core values of what is now well-known as the "corporate social responsibility" (CSR) concept.

But the basic question is: Are the codes of conduct worth more than the paper they are written on? Will voluntary initiatives such as the Global Compact lead to the types of changes needed to contribute to a cleaner environment, better working conditions, more humanitarian development and the curbing of corruption?

This was one of the toughest questions raised during the summit by the representatives of civil society organizations and business leaders who questioned the reputation of several companies attending the meeting.

However, the Global Compact is not a regulatory instrument. There is no enforcement mechanism beyond public scrutiny and the requirement for participants to report annually on progress in meeting commitments to the ten principles.

Rather, the Global Compact relies on public accountability, transparency and the enlightened self-interest of companies, labor and civil society to initiate and share substantive action in pursuing the ten principles.

Some stakeholders are skeptical.

Whatever goals a company pledges to reach, or standards to obey, such as fair working conditions and the protection of human rights, there must be a specific, practical application. Without this, codes will set only the overall ground rules for corporate conduct.

Critics attack the notion that voluntary codes can serve as a method of corporate accountability because corporations can simply use their participation as a substitute for real progress, distracting the public from the continuing violation of human rights, labor rights or environmental standards.

UN Secretary General Ban Ki-Moon, who opened the summit, acknowledged these weaknesses, stressing that companies which fail to meet their commitments within two years will be delisted from the UN Global Compact.

In fact, according to Global Compact Executive Director Georg Kell, 335 companies were delisted from the network last year for failing to report significant progress in implementing the ten principles.

Business executives, however, who have been observing the impact of the CSR campaign as the concerted effort, have kept a spotlight on undesirable practices. At various times, companies have stopped doing business with overseas contractors who disregarded standards.

Often companies lead the way to improvement. For example, a decision by Reebok not to sell soccer balls made through child labor practices was swiftly followed by similar commitments from other companies. This happened despite the (short-term) costs such commitments entailed.

"Our foreign buyers have always scrutinized our operations to ascertain whether our pulp and paper are derived from sustainable plantations," said A. J. Devanesan, president of Asia Pacific Resources International Holdings (APRIL), which operates a two-million ton capacity pulp industry in Riau.

In fact, pulp which is certified as sourced from sustainable managed forests or plantations commands higher prices than uncertified product, added Devanesan, who attended the summit meeting.

The summit urged the Global Compact's 4,000 members to encourage their supply-chain partners and other organizations they do business with to integrate the core values of human rights, environment, labor and anti-corruption into their operations.

Good corporate practices bring commercial benefits too. They help firms achieve a variety of goals: Protect their corporate reputation, improve employee morale, enhance consumer and client loyalty, and avoid costly criminal and civil proceedings.

Even mainstream investors are now paying more attention.

Recent studies by McKinsey & Company consultants conclude that while the capital markets have not yet mainstreamed environmental, social and good governance norms, there have been many investor initiatives which encourage socially responsible, ethically right and environmentally friendly investment.

The consulting company estimated there are now more than US$8 trillion investment funds managed by firms which factor environmental, social and governance issues into their investment analyses and decision-making processes.

So, while some stakeholders feel many companies just pay lip service to standards, these codes do in fact have bite. Companies who do not practice what they pledge risk adverse publicity and customer loss, even black-listing.

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Biz leaders commit to sustainable development

Friday, July 06, 2007 Vincent Lingga, The Jakarta Post, Geneva

The overarching message of the Global Compact business leaders summit here is loud and clear: It is no longer sufficient for companies to make profits and comply with the laws if they are really serious about sustainable development in the long term.

The world is now undergoing a period of unprecedented change and it is becoming clear that the current market mechanism and the political system cannot by itself resolve such major issues as climate change, persistent poverty and abuse of human rights.

"For markets to expand in a sustainable way, we must provide those currently excluded with better and more opportunities to improve their livelihoods," United Nations Secretary General Ban-Ki-moon said Thursday when opening the two-summit.

The UN chief called the meeting, which is being attended by more than 800 business leaders and representatives of civil society organizations and academic communities, the largest event the UN has ever convened on the topic of corporate citizenship.

Indeed, the survival and success of companies, notably big multinational groups, depends on the complex global system of three interdependent sub-systems -- the natural environment, the social and political system, and the global economy.

Formed in 2000 in response to major anti-globalization protests at a WTO meeting in Seattle, the Global Compact brings companies together with UN agencies and civil society groups to promote universal human rights, labor, environment and anticorruption principles.

The Global Compact's ten principles cover the areas of human rights, labor, the environment and anticorruption.

The Global Compact, which now has around 4,000 members, asks companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labor standards, the environment, and anticorruption.

"You can be a good company simply by making profits and obeying the law, but you never become a great corporation without strong corporate social responsibility," noted Neville Isdell, chairman of the Coca-Cola Company, at a news conference on the sidelines of the conference.

Rudy Fajar, president of PT Riau Andalan Pulp and Paper (RAPP), who is also attending the conference, concurred, saying that there had been increasing pressures for companies to invest in a way that was socially responsible, ethically right and environment-friendly.

RAPP, which is developing almost 160,000 hectares of pulp plantations in Riau province to support its giant pulp plant with an annual capacity of two million tons, is a unit of the Singapore-registered Asia Pacific Resources International Holdings Ltd. (APRIL).

APRIL joined the Global Compact during the summit meeting, pledging a strong commitment to implementing its ten principles.

The summit is due Friday to issue the Geneva Declaration on the commitment of companies to sustainable development, including stronger cooperation in coping with climate change and corruption, which Huguette Labelle, chair of the Berlin-based Transparency International, called a very serious problem.

"The World Bank estimates that 5 percent of global gross domestic product is lost to corruption. This means a waste of almost S$2.5 trillion a year which could have been used to lift tens of millions of people out of absolute poverty," Labelle noted at a news conference.

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