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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