Fiscal stimulus key for economy

Monday, December 22, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Government and private sector analysts have a consensus prognosis: Indonesia's economic growth will markedly slow down next year because of the international credit crunch and the deep recession in the United States, Europe and Japan.

However, with the news on the global economy getting worse every week, they differ on the extent of the downturn. The government, the central bank, the World Bank, the International Monetary Fund and the Asian Development Bank still expect the gross domestic product (GDP) to grow by between 4.5 and 5 percent, while private sector analysts forecast an expansion ranging from 2.5 to 4.5 percent.

Depressed demand in the world's economic powerhouses has begun to hit Indonesian exports, pushing down commodity prices and forcing manufacturing companies to reduce employment. In the third quarter the economy grew 6.1 percent -- the slowest in the past six quarters -- as declining prices for palm oil, rubber and coal slashed the value of exports.

Growth in the last quarter could be less than 6 percent with the second round impact of the global economic downturn hitting all sectors of the economy harder.

Although overall growth for the whole year could still hover at 6 percent thanks to robust expansion in the first half, the economic landscape next year will be bumpy and jagged.

Private consumption, which accounts for 65 percent of growth, will slacken because of steep falls in commodity prices and the erosion of consumer purchasing power by the estimated 11.30 percent inflation this year and the 20 percent depreciation of the rupiah over the past two months alone.

Exports, already hurt by depressed demand in the developed world, will further be hindered by the tighter credit markets, making it more difficult for companies to secure working capital and payments for international shipments.

This is different from the 1997-1998 economic crisis when export-oriented businesses continued to do very well. Companies depending largely on export markets will suffer because of the recession in the developed economies.

In fact, manufacturers have begun feeling the pinch, as evidenced by the wave of employee layoffs that started last month and which, it is feared, will escalate next year as the full impact of the global crisis makes itself felt.

Political spending during the parliamentary elections in April and the following presidential election will be an additional boost to private consumption but surely not as strong as in the 2004 elections because of the negative impact of massive wealth destruction on the Jakarta stock market in October.

According to the Central Statistics Agency, between July and September, the contribution of foreign trade (exports and imports) to economic growth was virtually negligible.

Even though the country is not largely dependent on foreign trade (which contributes only about 20 percent of GDP), given the size of the economy ($400 billion), it will still feel the brunt of the global downturn via the financial channels -- both from higher risk aversion on the part of investors as well as extremely tight liquidity conditions (due to the credit crunch).

The crash of the Jakarta stock market in October, which shaved off almost 60 percent of market capitalization as the composite index collapsed from 2,800 early this year to as low as 1,100, reflected the withdrawal of foreign portfolio capital and at the same time spelled the end of the investment boom.

This also means that the nearly 400 listed companies can no longer rely on the stock market for long-term funds. Consequently, they will slash capital expenditure, thereby reducing the possibilities for investment and job creation.

The only good news is moderate inflation, probably controlled at 6 percent for the whole of next year.

But even though inflationary pressures have eased because of the falling prices of food and fuel, there is not much leeway for Bank Indonesia (BI) to ease its monetary policy substantially.

So don't expect a significant lowering of the BI rate from its current level of 9.25 percent because of the international financial volatility and the vulnerability of the rupiah to speculative attacks.

The high interest rates will further hit consumer spending and new investment.
Weaker domestic demand and an expected slowdown in manufacturing exports will reduce imports, but the risk of imported inflation will remain high if the rupiah remains highly vulnerable to speculative attacks.

The biggest challenge for both the government and the central bank, therefore, is maintaining public confidence in the rupiah. With an 8.25 percentage-point differential with the U.S. funds rate, rupiah financial assets are still attractive for depositors and investors.

But given all the volatility and the uncertainty in the international financial market and the risk of the crisis taking a sudden turn for the worse, the rupiah could be severely hit as people may lose confidence in it.

In such circumstances, the interest rate differential would become less meaningful as depositors and investors may simply move their money to safer places (flight to safety).
Here lies the issue of the government guarantee for bank deposits, which is still limited to Rp 2 billion ($165,000) per account compared with the blanket 100 percent guarantee available in Hong Kong, Singapore and Malaysia.

But this issue is also directly related to the condition of the banking industry.
The Finance Ministry, which oversees the Deposit Insurance Corporation, seems not fully comfortable yet with the quality of the central bank's supervision of the 125 city-based banks and hundreds of secondary (rural) banks.

Introducing a blanket guarantee without strong supervision of the banking industry could put taxpayers at risk of having to pay out for another huge bailout as they did after the 1997-1998 banking crisis.

Banks will also have to brace for a new wave of nonperforming loans (NPLs), especially in areas such as plantations and mining, due to the steep fall in commodity prices between August and October.

This risk could slow down the pace of new bank lending, but not to the point of a severe credit crunch.

Given the grim prospects for private consumption and investment, government spending should take up the role of the locomotive of growth. An aggressive fiscal stimulus package must take up the slack, or the economy will plunge into the worst-case scenario of growth below 4 percent.

Fortunately, the government has fully understood the urgent need for pump priming to offset the anticipated sharp decrease in the growth of private consumption and investment.

The Finance Ministry has been accelerating the implementation of its investment program in labor-intensive projects such as infrastructure (for example, highways and rural infrastructure), with total spending expected to reach Rp 200 trillion within the next two months alone.

Most analysts agree that with a government debt-to-GDP ratio of less than 30 percent -- compared with more than 100 percent at the height of the crisis in 1998 -- and with a fiscal deficit of just around 1 percent of GDP, the government has a lot of leeway to increase its deficit spending next year.


Larger budget spending is needed not only for the construction of infrastructure but also for expanding the social safety net into public-employment works and providing assistance to financially distressed businesses in anticipation of a sharp economic downturn.

The problem is that almost half of the country's population of 227 million still lives on less than US$2 per day (the international poverty line). They live on the edge of the absolute poverty line, so that even a slight downturn in the economy could plunge a hundred million poor into abject poverty.


Given the tight international and domestic liquidity conditions, which make borrowing costs punitively high, the government made the right move in approaching the World Bank, Asian

Development Bank and bilateral sovereign creditors such as Japan and Australia for larger standby loans.


All in all, the economy will muddle through at a much slower pace next year. Growth could still hover at more than 4 percent if the government succeeds in implementing its pump priming measures and takes forceful and credible steps to maintain stability in the banking industry and the rupiah exchange rate.

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Commentary: Distrust among banks the cause of liquidity problem

Vincent Lingga , The Jakarta Post , Jakarta Tue, 11/25/2008 7:14 AM Headlines

Almost one week after Sinar Mas Multi Artha, the financial unit of the powerful Sinar Mas business group, signed a preliminary agreement to acquire 70 percent of Bank Century, this small bank remained in a liquidity crisis, forcing the central bank to put it under the control of the state-owned Deposit Insurance Corporation last Friday.

Sinar Mas’ commitment to take control of Bank Century should have reignited market confidence in this small bank and enable it to get access to interbank loans. But it didn’t.

The big question is then: Is liquidity in the banking industry so tight that this publicly listed bank was unable to secure interbank loans to resolve its illiquidity even with the strong support of the Sinar Mas Group?

The answer is a resounding “No”.

Analysts and bankers estimate that Bank Indonesia’s lowering of the minimum reserve requirement at banks last month from 9.5 percent to 7.5 percent unleashed between Rp 50 trillion (US$4.5 billion) and Rp 70 trillion in new lending resources. Moreover, the pace of bank lending has slowed down from its annualized rate of 35 percent in the first three quarters.

But why are many banks still complaining about tight liquidity and businesses groaning over what they claim to be a tightening of credit?

“The problem is not liquidity because industry-wide the level of liquidity is adequate. But banks awash with liquidity are reluctant to lend to others out of fear their money will not be repaid,” Bank Indonesia’s research and regulatory director Halim Alamsyah said.

He revealed there had been suspicions among money market players, notably between small banks, as one bank did not trust the soundness of another bank, hindering interbank lending.“That is why we (Bank Indonesia) have recommended that the government introduce a blanket guarantee on all liabilities of banks, including interbank loans and letters of credit,” Bank

Indonesia Deputy Governor Hartadi Sarwono said.

There seems to be information asymmetry within the banking industry.

Theoretically, banks that are not under the special surveillance of Bank Indonesia (the central bank) are assumed to be sound.

But the suspicions between banks have spread widely. This condition is, to a limited extent, similar to the environment in the financial market in the United States since September, when the financial crisis turned into a total crash following the bankruptcy of the Lehman Brothers investment bank.

Such mutual distrust should not have hit banks in Indonesia because they do not own, or have not bought, the toxic assets (subprime mortgages and derivatives) that fueled the U.S. financial crisis.

Several bankers said the segmentation within the banking industry has widened to the point where big banks are increasingly uncertain about the quality of small banks’ assets.

Faced with huge difficulties of their own, banks have tightened their purse strings, lending less and driving up the cost of credit to consumers and corporations — thus compounding the already grim outlook for the world economy.

Uncertainty about the depth and length of the global slowdown is making things much murkier. But the combination of a battered banking system and shell-shocked consumers suggests things could get particularly tough for many businesses. So banks prefer to secure as much cash as they can now to make sure they can see their operations through the downturn.

Many bankers also are nervous that borrowers who look solid today may turn out not to be so solid within the next few weeks or months. In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending them short-term credit.

Doesn’t this mean a distrust in the quality of banks under the supervision of the central bank?Certainly a blanket guarantee, as recommended by the central bank and most businesspeople, will with one stroke remove the clog within inter-bank lending.

But this may simply encourage reckless lending practices and bad bank governance practices, further exposing taxpayers to the risk of having to pay for another big bailout.

However, if banks fully trust the integrity and reliability of Bank Indonesia’s bank oversight, it should be possible and easier for them to better identify which banks are reliable.

In normal times, banks have several mechanisms for providing the necessary information, such as accounting disclosures, quarterly balance sheets and credit rating agencies. But the financial situation now is irrational and volatile.

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Special Report: Commodities boom ends as speculative bubbles evaporate

Vincent Lingga , The Jakarta Post , Jakarta Fri, 11/14/2008 11:02 AM Business

Indonesia benefited greatly from the boom in the prices of primary commodities since the middle of last year as palm oil, rubber, coffee and cocoa as well as coal, pushed up the Jakarta stock market index to its peak of over 2,800 in April, 2008, bolstering exports and generating greater purchasing power for millions of smallholders in Sumatra, Kalimantan and Sulawesi.

However, the boom cycle abruptly ended last August after the United States financial crisis turned into a crash, setting off a global credit crunch and driving the global economy into a recession-led economic downturn, bringing down the Indonesian (IDX) stock index at one point to below 1,100.

The prices of most commodities collapsed to as low as one third of their market quotations only three months before. Crude palm oil tumbled down from its peak of US$1,300/ton to below $400 last month, rubber from $0.33/kilogram to $0.15, coffee from $2.54/kg to $1.5 and cocoa from almost $3/kg to $1.8.


This development validated analysts' views that what had so far been dubbed as speculative bubbles did play a big part in the earlier sky-high prices of commodities.

Growing global demand probably was the reason for the gradual rise in palm oil prices from an average $470/ton in 2006 to $780 in 2007, but speculative bubbles fueled the rise up to the range of $1,000-1,300 between January and July this year.


The fundamentals of the supply and demand equation were also responsible for the gradual rise in crude oil prices from $20 a barrel to US$40 earlier in the 1990s, and even up to US$60 by mid-2005, but speculative sentiments helped fuel the steep increase to as high as $147/barrel last July before falling steeply to below $60 now.


Even such high-growth emerging economies as India and China with a combined population of more than 2.3 billion people could not have all of a sudden gobbled up enough palm oil, rubber, coal and other commodities to generate such steep price rises in the first half of this year.

The problem is that the price elasticity of both demand and supply is low for commodities like palm oil, cocoa, coffee and rubber. Put another way, neither the underlying supply nor the demand for such commodities could have changed so quickly. Consumers will still drink one or two cups of coffee even if its price rises sharply, but will not suddenly take ten cups when its price falls. Likewise, people do not abruptly stop frying food even if the price of palm oil skyrockets.


As debt instruments suddenly became illiquid and risky, investors sought safety in commodities. That surge of cash created a new bubble which has recently burst.

Investors such as hedge funds and even such solid institutions as pension funds made speculative purchases as they diversified into alternative investments away from the uncertainties in the financial market.


The sub-prime mortgage crisis started raising its ugly head in the United States in early 2007.
Analysts observed the flood of money from investors into the commodity futures markets, thereby distorting spot markets for physical commodities.


However, speculation by investors to avoid the uncertainty within the financial market was not the only factor behind the one year boom-cycle.The fundamentals of the supply-demand equation also played a part as the global economy enjoyed one of its high growth periods.


According to the International Monetary Fund, the world economy grew faster, expanding by an average 4.5 percent, 50 basis points higher than most analysts had forecast earlier.

As most analysts have often noted, global economic expansion had been driven mainly by major emerging economies, notably China and India, which grew at an annual average rate of nearly 10
percent for several consecutive years. Given their large populations, this development generated a dramatic rise in demand, particularly for natural commodities.





Government-induced distortions have also blunted price signals. In many emerging economies, including Indonesia, governments control the prices of important fuels such as gasoline and food staples.



Even though several countries have removed such price distortions, many others, notably major producers, kept prices fixed, thereby blocking the transmission of market reactions from higher prices to weaker demand.To reduce carbon emissions, the U.S. government encouraged biofuel production by subsidizing these fuels. Consequently, the demand for biofuel feedstocks such as maize and vegetable oils exploded.


The World Bank estimated biofuel demand was the biggest single reason why food prices soared in the past two years.

Hence, all in all, demand shocks caused by speculative bubbles, higher-than-estimated economic growth and misguided government policies combined together to fuel the commodities boom in the first half of this year.

But now, the world economy is suddenly accelerating into a recession-led downturn and the financial market has crashed, leaving behind a liquidity crunch which has consequently removed the demand shocks caused by previous robust economic growth and speculative bubbles.

The strongest message of this roller-coaster market development is that only the fundamentals of supply and demand are able to generate sustainable price trends in primary commodities.

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Commentary: Sri Mulyani, the bedrock of SBY’s economic management

Vincent Lingga , The Jakarta Post , Jakarta Tue, 11/11/2008 7:13 AM Headlines

President Susilo Bambang Yudhoyono’s political debts from his 2004 presidential election campaign seem to be haunting him still, even to the point of occasionally impairing his economic judgment. Yudhoyono was warned of the big risk of conflicts of interest within his Cabinet when he appointed Aburizal Bakrie, then chairman of the Bakrie conglomerate, as the chief economic minister at the outset of his administration in October 2004.


Aburizal remains in the Cabinet, although now with largely diluted power as the coordinating minister for the public welfare. However, his presence in the executive power center continues to cast a shadow over the credibility of the government’s policymaking.

The government’s flip-flop handling of the trading suspension on the Bakrie Group’s Bumi Resources coal mining company since early last month is only the latest example of how the integrity of the government’s economic management has sometimes been compromised to protect the Bakrie interests.


Given the legislative and presidential elections next year, there are now increasing concerns not only about who is really managing the economy with Yudhoyono and Vice President Jusuf Kalla both gearing up for their campaigning. There are also major concerns over the integrity of the economic management itself.

Fortunately, as with the situation in the 2004 election year, when we had Boediono as the finance minister and the vanguard of economic management under then president Megawati Soekarnoputri’s administration, now we have the “iron lady” Sri Mulyani Indrawati as both the finance minister since late 2005 and the acting chief economic minister since June.

Boediono, who is highly respected in both international and domestic circles, was then more than any other person responsible for restoring and maintaining our macroeconomic stability between 2001 and 2004.


Likewise, Mulyani’s integrity, competence and courage to stand up to pressure from vested interests, even from such a politically well-connected conglomerate as the Bakrie Group, serve as the bedrock of the credibility of the government’s economic management.

At a time when Yudhoyono, Kalla and several other Cabinet members from various political parties are busy with their political posturing for next year’s elections, Mulyani and Boediono, currently the governor of Bank Indonesia, make up the automatic pilot of the country’s economic management. 


The rumors last week that Mulyani and her core team at the Finance Ministry threatened to resign over the powerful political pressure on her to compromise economic policies simply revealed her true character, her courage to stand up even against her boss when it came to the principle of sound economic management.

Earlier rumors of a strong conspiracy and various forms of subterfuge to oust her from the Cabinet further reflected the determination of the award-winning finance minister in fighting corruption.

Soon after her appointment to the Finance Ministry, the former executive director of the International Monetary Fund acted immediately, against strong opposition from vested interest groups, to clean up Jakarta’s main tax and customs offices from corrupt officials.

Mulyani also dealt firmly with the largest coal and palm oil producers over underpaid royalties and taxes and imposed travel bans on businesspeople who owed the government overdue taxes.

No wonder, then, that for two years in a row she has been named Finance Minister of the Year by specialist magazines Euromoney (2006) and The Banker (2007). Forbes magazine last August honored Mulyani as the 23rd Most Influential Woman in the World, a position that also put her at number three on the list of Asia’s most powerful woman.

At a time when we are highly vulnerable to the fallout from the global financial crisis and economic recession and when market confidence, rather economic fundamentals, is the main issue, Mulyani’s competence and courage, consistency and impeccable integrity in treading the messy politics of policymaking are both the anchor and the lightning rod of the government’s economic management.


Yudhoyono’s alleged tussle with Mulyani over the covert attempt to bail out the Bakrie business group should be the last spat over policymaking — otherwise he may lose her altogether at the risk of devastating damage to his government’s credibility. The President should see to it that Mulyani, as the acting chief economic minister and finance minister, is really and fully in charge of making and directing economic policies based on the strategy set by the government and the parliament.


Having said all that we don’t mean to say that Mulyani can perform miracles. She can’t, given the uphill challenges ahead with the global financial crisis and economic recession.

But her impeccable integrity, credibility and competence will help strengthen the credibility and consistency of the government’s economic policymaking, especially in view of the legislative and presidential elections next year.

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Special Report: Lessons from Citibank Indonesia: Customers get burned

Vincent Lingga , The Jakarta Post Wed, 10/15/2008 10:27 AM Headlines

Citbank Indonesia customers that lost a lot -- in my case, most of my savings -- after the collapse of American investment bank Lehman Brothers last month need not be ashamed of admitting how low and utterly poor their financial literacy turned out to be.

Many investors in Hong Kong vowed last week to fight for a full refund of their Lehman products, alleging that the banks who sold them the investment instruments had not fully explained the risks associated with the financial derivatives.

In the current era of globalized financial markets, it is almost impossible for us, including me, an economics reporter for the last three decades, to have the financial literacy necessary to understand complex investment securities like the Lehman's market-linked notes peddled by Citibank Indonesia.

Robert Reich, a former U.S. secretary of labor and now an economic advisor to presidential candidate Senator Barack Obama, recently wrote in the International Herald Tribune about the U.S. financial crisis "I once asked a hedge fund manager to describe the assets in his fund. He laughed and said he had no idea."

Financial markets trade in promises that assets have a certain value. With so many derivatives in world financial markets, there is virtually no limit to what can be promised.

I, along with other Citigold customers I talked to, painfully realized only recently we had no idea what we bought in mid-2007 through our Citigold executives.

In another shocking information sheet sent one week after Lehman went bankrupt, Citibank revealed that the holders of Lehman notes in Indonesia were unsecured creditors.

For many banks, private banking or wealth-management services have become a significant source of fee-based incomes. But as it now turns out, such services have become wealth-destruction centers for a number of Citigold clients due to the unprecedented pace in which the U.S. financial crisis turned into a crash.

Hence, the first lesson from the debacle of the Citigold customers is don't ever touch offshore, sophisticated investment securities. There are now so many derivatives, hedge funds, structured vehicles and swaps offered on the international market.

We are glad to know, though, that after several days of denial, both Bank Indonesia and the capital market watchdog (Bapepam) late last month said they were preparing regulations on the trading of offshore investment securities to protect consumers.

"We should have set up an oversight mechanism years ago," Bank Indonesia's Deputy Governor Muliaman Hadad said Sept. 26, as quoted by newspapers.

Singapore is doing the same.

According to the Straits Times on Oct 3., the Monetary Authority of Singapore will soon review the way structured investment products are marketed to retail investors as thousands of investors in Lehman Brothers products stand to lose most of their money.

Lacking adequate oversight of offshore investment securities sales in Indonesia puts many consumers, notably big depositors, at a high risk of big losses.

The second lesson is don't ever rely your investment decisions on the offers, recommendations or information given even by such highly reputed financial institutions as Citibank Indonesia and its Citigold wealth-management centers.

In so far as the risks of your investment are concerned Citigold executives mean nothing for you. They work primarily to massage the ego of big depositors to keep their accounts at the bank.

Relationship managers at Citigold could simply overlook their clients' risk profile, caring more about their annual sales bonuses.

The third lesson is read carefully each word of any investment contract documents given by Citigold staff with the assistance of a respected lawyer before you sign them.

It was stupid and careless of me (and many other victims) to only skim my investment subscription form, signing the 11-page document in good faith, trusting Citibank's competence and reputation.

Most of the clauses in my contract turned out to have been designed to protect Citibank as the seller and its employees, and for them to avoid any fiduciary responsibility for the investment products they peddled.

I, quite painfully, only discovered three weeks ago that one of the clauses states, "I/We (investors) did not obtain any legal, tax or accounting advice or advice in relation to the suitability or profitability of any Notes from Citibank N.A or Citigroup or any of their employees. I/We made My/Our own judgment and decision regarding the transaction independently."

Although I knew about Lehman market-linked notes only from the sales offer and the scant information provided to me by my Citigold relationship manager, I signed in the subscription document of never having obtained advice or information from Citibank or its employees regarding the notes.

Was this the way of selling financial products in good faith?

On Sept. 26, or around 15 months after I signed my investment order and ten days after Lehman went bankrupt, Citibank sent me the final terms on the Lehman notes dated July 4, 2007, contained in a 22-page English document.

The first page of this document, among others, states, "These notes are only suitable for highly sophisticated investors who are able to determine themselves the risk of an investment linked to an index."

I wondered why I was never given this document before.

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Herd mentality, short-term vision grip our stock market

Vincent Lingga, The Jakarta Post, Jakarta Thurs, 10/9/2008

The capital market management and regulator made the right decision Wednesday to halt share trading here after the benchmark index plunged by another 10 percent to close at 1,451 points, because that development was indeed rooted in an irrational market mechanism.

Letting the stock market (IDX) continue operating in such a chaotic situation would be like allowing a few rice sellers to freely set the price of the staple amid a massive, nationwide famine.

Stocks in such blue-chip companies as telecommunications firm Indosat, coal producer Adaro and automobile and plantations group Astra International should not have plunged between 19 and 23 percent Wednesday, had it not been for a herd mentality on the part of domestic retail and institutional investors.

The long-term outlook for telecommunications and our natural-resource-based companies remains bright and promising. Even though the prices of most primary commodities such as coal, palm oil and rubber have of late fallen steeply, they remain way above their 2006 levels.
The recent downward trend was even good for long-term stability, because the skyrocketing prices during the first semester were partly fueled by speculative sentiment. These prices are now seeking a new equilibrium.

Our domestic investor base should have been broad and diverse enough to shield the IDX from the abrupt changes in international investor sentiment.

The growing role of domestic institutional investors such as pensions funds, mutual funds and insurance companies should have contributed to broadening and diversifying the pool of investment in equities.

The long-term horizon of these institutional investors should have played a stabilizing role in our stock market. Basically, a diverse investor base, in relation to investment horizons and risk appetite, can contribute to financial stability by spreading risks more widely.

But as Wednesday's irrational market development showed, most domestic investor behavior was still controlled by a herd mentality, toeing the move of foreign portfolio investors.
What are the main determinants of share prices?

One of them is global factors, such as international liquidity and credit and market risk premiums. True, these factors are now all negative, as the impact of the financial crisis and panic in the United States and Europe sets in.

However, the strongest determinants of our equity prices -- the domestic or fundamental factors such as economic growth, the differential between domestic and global interest rates, the expected forward exchange rate, the inflation differentials -- remain fairly positive.

In fact, after Bank Indonesia's move on Tuesday to raise its benchmark interest rate by another 25 basis points to 9.50 percent, our interest rate differential with the U.S. Fed funds became 8 percentage points.

I don't think the amount of foreign portfolio money still playing in our stock market remained at such a level because it was still able to heavily influence the market trend.

Most of this hot money had flown out a few weeks ago as these skittish investors became highly risk-averse and tended to generalize things.

The steep fall in our stock market Wednesday was therefore exacerbated by the herd mentality and short-term-oriented stance not only of our individual (retail) but also institutional investors.

Hence, as BI Governor Boediono and chief economics minister Sri Mulyani Indrawati said Sunday, if we really care about protecting our own house from the fallout of the international financial crisis, then we all, in our respective roles, should help contribute to maintain calm.

This calls for domestic retail and institutional investors to get rid of their herd mentality and adopt a more long-term view in order to contribute to building up a financially stable base for our equity market.

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Audits could curb illegal logging

Vincent Lingga , Jakarta Tue, 10/07/2008 9:58 AM Opinion

The Indonesian Forestry Ministry's bold move to require forestry companies to have their wood stocks audited throughout the supply chain to ensure the wood is derived from sustainably managed forests could go a long way in reducing illegal logging in the country.

Hadi Pasaribu, the Forestry Ministry's director general for the management of forestry production, who revealed the new policy recently, did not elaborate as to when the audit -- internationally known as forest certification scheme -- would be mandatory for wood-based companies.

But surely the new measure needs thorough preparation because the audit or certification process requires independent certifiers who must be accredited according to the international standards as those applied by the Bonn-based Forest Stewardship Council.

It is international market forces (consumers and traders) united into a global green consumer campaign that have forced wood-based companies to have their wood certified as green by independent certifying companies.

Hence, whatever the system used by the Forestry Ministry for the wood audit, an inspection or certification scheme, it must be based on international standards to gain international recognition.

Wood audit for forest certification aims at verifying that a particular wood is derived from sustainably managed forests. This process requires companies in the whole wood supply chain to hold chain-of-custody certificates so that the label or bar-code can follow the word from the forests to the finished product.

The chain of custody itself is the process of wood harvesting, primary and secondary processing, manufacturing, distribution and sales. The wood audit, as referred to by Pasaribu, inspects each of these processing steps to ensure that the timber or wood originated from forests which are being managed in accordance with social, environmental and economic aspects of sustainable forest management.

Hence, for example, a buyer of a wood cupboard from a furniture store in Denmark which sells certified green products is able to ascertain that the product he or she is purchasing was made from timber derived from sustainably managed forests in a particular area in a specified country.

The current wood or timber inspection carried out by the Forestry Industry Revitalization Agency, besides being ineffective and vulnerable to corruption and abuse, inspects only legal documents from forestry offices which can easily be forged or falsified.

No wonder Indonesia is on the losing side in a battle against illegal logging, despite an intense crackdown by authorities.

The government has enacted laws on environmental protection and has issued myriads of regulations and rulings to protect forests and erected non-tariff barriers to prevent the trading of illegally-cut wood.

However, illegal logging continues on a massive scale.
But the new wood audit scheme, called Wood Legality Verification System, will involve independent certifiers such as environmental NGOs which have been accredited to conduct such certification, according to Pasaribu.

Since forest certification involves the employment of multidisciplinary teams consisting of various specialists such as forest engineers, ecologists and sociologists to evaluate the various aspects of forest management, the audit or certification process could be quite costly.

Therefore market incentives are necessary to make wood audit or forest certification attractive to wood-based companies. Certainly, the best incentives are premium prices paid to wood products derived from certified forests.

Even though premium prices gained by certified wood today do not seem to be high enough to spark a rush by wood companies to certify, neither the government nor companies can wait much longer.

Market forces have become much stronger now and can force companies to certify the origin of the wood they use. Five European Union governments, including Britain's, have adopted procurement policies that would oblige state-funded construction projects to use certified wood.

Certainly, countries cannot demand that all wood entering their territories be certified, since that would break the rules of the World Trade Organization. But more consumer organizations, especially in major developed countries, have pressured suppliers of wooden products to certify, otherwise they will face massive boycotts.

The concept of forest certification thus uses market forces to curb illegal logging through demand-side and supply-side approaches, mobilizing consumers and traders to shun forest products that are not certified according to internationally recognized standards of sustainable forest management.

Such threats of boycott from powerful consumer organizations and environmental NGOs could force forest-based companies (producers) to have their operations and products certified by accredited, independent forest certifying bodies.

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OECD growth ideas and our national remedies

Thursday, July 31, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Some analysts and many politicians in Parliament may reject the Organisation for Economic Cooperation and Development (OECD) economic policy recommendations for the Indonesian government last week as another one-size-fits-all formula, simply a copy of the "infamous" list of dos and don'ts within the Washington consensus on the virtues of liberalization, deregulation, privatization and free markets.

Even without the upcoming parliamentary and presidential elections next year, the OECD reform recommendations -- which include a further easing of restrictions on foreign investment, further market liberalization, more flexible labor regulations to make it easier for companies to lay off workers, and privatization of state companies -- have always been difficult.

The tone and central theme of the first Economic Assessment of Indonesia by the Paris-based OECD feel very much like the annual report on the Indonesian economy the World Bank used to prepare for the now defunct Consultative Group on Indonesia creditor consortium.

The OECD study seems still too focused on the common formulae and strategy across widely differing developing country conditions, acutely short of country and context-specific solutions.
Having said all that, this doesn't mean the OECD policy options, including those on the need for bigger investment in infrastructure, health and education, are irrelevant to our economy.
On the contrary, evidence has shown that successful economies -- those which are able to post high growth for a long period -- have pursued almost all the policies recommended by the OECD.
They have by and large been implemented by such successful emerging economies as South Korea, China, Thailand, Singapore, Malaysia, Vietnam, India and, to a certain extent, even Indonesia.

These successful economies have many things in common: macroeconomic stability, fiscal discipline, fairly effective government, market-based incentives, adequate investment in infrastructure, health and education and engagement with the global economy.

The main issue for our government is how to sequence and set priorities of the needed reforms so as to make them economically feasible and socially and politically acceptable.
The biggest challenge for the government is to focus on narrowly targeted reforms, proceeding step by step, to discover local solutions.

Several economists cited the gradual reform approach launched by China's Deng Xiaoping in 1978 -- crossing the river by feeling for the stones -- which created the most spectacular period of steady, high economic growth and poverty reduction.

It is the job of both the government and Parliament to devise the right recipe, the right growth concept and strategy most suitable to our economic condition and political complications, using the policy recommendations of the OECD only as the ingredients.

Take for example the recommendation for the easing of labor regulations, one of the reform measures all foreign investors have asked for since 2003 because the labor code has been seen as too rigid, hindering new investment and consequently job creation.

In the absence of an adequate social safety net and unemployment insurance system, however, the government should tread carefully in easing the labor regulations, otherwise the pace of job destruction will exceed job creation.

The gradual reform of the labor code should be designed, however, to protect people, not jobs. This requires measures to make it easier for workers to acquire new skills and enter new trades.
Put another way, labor reform should include programs designed to increase labor mobility across the various sectors of the economy. Most important is that the necessary rules and institutions are well placed to safeguard the basic rights of labor and defend workers against exploitation, abuse, underage employment and unsafe working conditions.

Likewise, the OECD view on the importance of foreign direct investment (FDI) is quite legitimate. An adequate inflow of FDI is vital not only because of the financial capital it brings but, sometimes more important, the concurrent transfer of skills, innovation and ideas to the national economy. FDI brings in knowledge about foreign production techniques, foreign markets and international supply chains.

Just look how our banking industry as a whole has benefited from local bankers who once worked for foreign banks such as Citibank, Standard Chartered, ABN Amro, HSBC, etc.

Then again, the main challenge here is how to strike the right balance between national interests and the need for foreign capital and expertise and for the exposure of national businesses to international competition. The government needs to put the demand it puts on foreign investors in balance with the alternatives provided by other countries competing for foreign capital and expertise.

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Tourism industry mired in poor regulation, infrastructure

Tuesday, August 12, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Although tourist arrivals in Indonesia increased by a respectable rate of almost 12 percent in the first half of the year to 2.9 million, that record is still far from the target of 7 million visitors set for the Visit Indonesia 2008 campaign.

The performance is even poorer compared with our neighbors: Singapore last year welcomed 10.3 million tourists, Thailand 14.5 million and Malaysia nearly 21 million.

Even Vietnam, a relatively new player in the international travel and tourism industry, has already received more than 4 million arrivals, compared with Indonesia's 5.5 million last year.
Our record is even more miserable if it is set against the fact that our country, the world's largest archipelago, is richer in terms of culture, natural attractions and historical heritage than most other ASEAN countries.

Richly endowed with a vast variety of natural resources, several World Heritage listed natural sites and varied fauna, and supplemented with strong price competitiveness, Indonesia should be a major destination for tourists from around the world, offering a lot of incentives for repeat visits.

Travelers can visit Indonesia every year without having to return to the same destination because there are dozens of accessible tourist attractions in Java, Sumatra, Kalimantan, Sulawesi, the Maluku Islands and Papua, in addition to the world-famous Bali.
But these strengths, although considered the main pillars of the travel and tourism industry, are not enough to woo tourists.

In fact, as our tourist arrival records have testified, those advantages have been held back by major weaknesses in other pillars -- regulatory and basic infrastructure, including air and ground transport.

Our regulatory infrastructure worsened after the government, displaying tragic ignorance of the vital role the tourism industry has for our economy, sharply cut the number of countries entitled to visa-free entry for the sake of national interest and national pride.
But it is hard to understand how our national pride is served by restricting foreign tourists from spending their money in our country. This measure has instead hindered inbound visitors.
What a loss to our economic development.

As a nature and culture-based industry, tourism is one of the most suitable businesses for Indonesia to develop because of the multiplier effect and labor-intensive nature of its operations. Travel-related businesses such as hotels, restaurants, transportation, and handicraft and cultural shows are all labor-intensive, exactly the kind of businesses needed to absorb the huge pool of job seekers.

And as for the risk of the visa-free privilege being abused for -- drug trafficking and illegal employment here-- are not so big yet that it hardly warranted that drastic, sweeping measure to abolish the privilege for citizens of so many countries.

We should magnanimously acknowledge that our immigration officials, like most other civil servants in the country, are not known for providing swift services such as the processing of visa-on-arrival.

We also perform poorly with regard to the other pillar of the tourism industry -- basic infrastructure. Our airplanes are still banned from European skies and our road safety standards are infamously low.

Even though our security has significantly improved, the other components of our infrastructure -- health and hygiene -- are in a poorer condition than in neighboring countries because of the inadequate supply of hospital beds and physicians in most cities and poor access to good sanitation and drinking water.

The Culture and Tourism Ministry said it had allocated US$108 million for tourism promotion during the Visit Indonesia 2008 program. That is good. Promotion is one of the most effective tools to market our tourist attractions.

However, as the experiences of most popular tourist destinations have shown, tourism promotion should be supported by a conducive business and regulatory framework as well as international-standard transport infrastructure and bureaucratic services related to foreign visitors.

Just a simple example. Smooth, expedient visa processing and customs inspection services at the airport are more effective in wooing tourists than the distribution of tourist booklets. But these services are not under the jurisdiction of the tourism ministry.

In fact, the Culture and Tourism Ministry handles only one aspect of tourist development and marketing and, unfortunately, not the most important one.

The more important pillars of the travel and tourism industry such as transport infrastructure, health and hygiene, security and regulatory requirements are completely beyond its control as they lie under the jurisdiction of other ministries.

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Enforcing budgetary discipline for oil contractors

Thursday, July 03, 2008 Vincent Lingga, The Jakarta Post, Jakarta

We find it hard to understand why it has taken more than two years for the Indonesian government to enforce strong budgetary discipline on its oil and gas production-sharing contractors as its own fiscal situation has rapidly deteriorated.

We badly need new investment to develop our hydrocarbon resources and to increase proven reserves, and most of the investment is expected to come from foreign oil companies. But this should not mean giving them a blank check.

Energy and Mineral Resources Minister Purnomo Yusgiantoro confirmed Monday the government will soon impose stronger spending discipline on oil and natural gas companies by revising their cost-recovery mechanism and the classification of expenses they can book as costs.
The Supreme Audit Agency's (BPK) auditing of several major oil contractors in 2004-2005 found almost US$1.5 billion in potential losses to the state caused by what its auditors called excessive cost accounting.

Finance Minister Sri Mulyani Indrawati had alleged as early as October 2006 that oil production-sharing contractors used cost-recovery accounts as a dumping ground for expenses, irrespective of their relevance to exploration or production costs.

As the minister in charge of state revenue, Sri Mulyani should have been worried by reports from tax officials that the government's split of each barrel of oil pumped by contractors had declined steadily over the past three years because of the steady, unusually high increase in production costs.

But Purnomo and the upstream oil and gas regulatory body, BP Migas, which oversees oil contractors and approves their annual work plans and budgets, and gives authorization for every item of their expenditures, seemed unaware of the urgency of the problem.

According to the minister of energy and mineral resources, the new regulation will specify in detail those activities that can and cannot be refunded under the cost-recovery program.
As reported earlier, the BPK found that in 2005, oil and gas contractors claimed expenses under the scheme for such goods and services as DVDs, parties, dance courses, charities and haj pilgrimages to Saudi Arabia.

Many expenditures the new regulation will no longer classify as recoverable costs are simply strange and unreasonable, such as public relations and community development costs, technical training for expatriates, personal income taxes, long-term incentive plans, hiring legal consultants for unrelated legal matters, tax consultation fees, borrowing costs and others.

These expenditures have so far been borne by Indonesian taxpayers because they are always deducted from the oil output before it is split between the contractors and the government.
Public relations and community development costs should not have been counted as a component of production or operating costs by oil contractors because they are part of their corporate social responsibility (CSR).

CSR activities reflect a profit sharing by a company. If such expenditures are accounted as costs, thereby deductible from taxable income, that is no longer an act of CSR, which basically means the sharing of profits with the community, but simply the practice of sharing the costs with taxpayers.

A company that spends on CSR activities but deducts these expenditures from its taxable income simply usurps the government's right to decide on where to spend its taxpayers' money.
Likewise, the costs of technical training for expatriates do not make any sense. Why, after all, would a company hire expatriates if they still require additional technical training? The case would be different if the training was for locals.

The removal of 14 other categories of expenditures from the new cost-recovery mechanism also makes sense under the standard oil and natural gas production-sharing contract.
Oil firms will not abandon Indonesia because of the tighter spending regulation. Nor will the new cost-recovery mechanism make the country's hydrocarbon resources less attractive to oil companies.

Like a good manager that detects a steady decline in income due to higher production costs, the government needs to make a comprehensive review of the structure of exploration and production costs, as accounted by mining contractors, to ascertain as to whether they are reasonable.

The rationale is that the government's take (share) of the oil or natural gas from a production field is based on output after the costs are recovered. Of greatest importance is that the new regulation should clearly define the terms of reference or directives on what expenses oil contractors can claim as exploration or production costs. Oil companies simply need certainty as regards the accounting of expenses.

Unclear provisions on recoverable costs would leave oil contractors constantly embroiled in disputes with auditors from BP Migas and the tax office. Such bickering would only slow production and discourage new exploration.

Given the specific characteristics of hydrocarbon prospecting and development, the new cost-recovery mechanism should be commercially viable for the petroleum industry, but should not cause additional bureaucratic harassment of oil contractors.

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Commentary: STT divestment clears pebble from Temasek's shoe

Vincent Lingga , The Jakarta Post , Jakarta Wed, 06/18/2008 10:44 AM Headlines

It was visionary business acumen on the part of Singapore government-owned Temasek Holdings when its subsidiary, ST Telemedia (STT), acquired, through an international competitive bid, around 40 percent of state-owned PT Indosat telecommunications company, at a premium price of more than 51 percent in late 2002.

It was similarly clever of STT when it decided on June 7 to divest its entire Indosat stake and sell the asset to Qatar Telecom at a price of US$1.8 billion, thereby booking a hefty profit of more than $1 billion.

Yet most important is that in one stroke, Temasek and its subsidiary removed the single root cause of the messy legal and political debacle and the harassment they had encountered over the past two years--cross-ownership in Indosat and Telkomsel.

The deal was a normal corporate action by a wise management to protect the interests of shareholders, in this case the Singapore people. Making a divestment under duress or under the force of a court ruling certainly would not be in the best interests of the Singapore taxpayers who own Temasek.

Selling the stake to Qatar Telecom also was simultaneously a clever business and political decision.

It was politically a shrewd move because Indonesia has been going all out to woo investment from countries in the Middle East, which have enjoyed windfall profits from skyrocketing oil prices. Qatar Telecom's experiences with the Indosat deal could influence other investors from the Gulf with regard to investment environment in Indonesia.

The deal fits well with Qatar Telecom's investment agenda as this company has been eagerly eyeing opportunities in Indonesia's high-growth, lucrative telecommunications business.

Little wonder Qatar Telecom was willing to pay a premium price of almost 31 percent for the Indosat shares despite the ongoing litigation process. But the high-value deal also shows how Indosat, which in 2002 grappled with a steeply declining market share, has become a jewel over the past six years.

Qatar Telecom is the second Gulf investor in Indonesia's telecommunications industry after Saudi Telecom, which holds a significant stake in Axis mobile operator, a new player in the cellular market.

STT made the divestment move one month after the Central Jakarta District Court decided to uphold the November 2007 ruling of the Business Competition Supervisory Commission (KPPU), which ordered Temasek and its subsidiaries to divest their entire stake in either Indosat or PT Telkomsel.

Temasek owns indirectly, through its subsidiary, Singapore Telecommunications Ltd., 35 percent of state-controlled Telkomsel.

The KPPU ruling was based on Temasek's indirect cross-ownership at both Indosat and Telkomsel, which, the competition watchdog said, led to unfair business practices such as price-fixing to control the mobile phone market.

Even though both Temasek and STT denied the divestment had anything to do with the court ruling, the confusing logic and illogical grounds of the court's decision understandably horrified the Singapore companies about the future of their investments in both telecom companies.
The KPPU certainly was upset by the divestment, calling the transaction an insult to legal procedures in Indonesia because the case is still pending at the Supreme Court.

Temasek and its subsidiaries appealed the lower court rulings, but the political and public opinion harassment they have endured over the past two years, and their bizarre experiences with the court system here, gave them second thoughts about the due legal process at the Supreme Court.

The Singapore companies simply felt trapped in a legal black hole. Hence, their decision to divest and sell their Indosat stake to Qatar Telecom is understandable.

The critics who from the outset opposed Temasek's indirect ownership in Indosat may consider its profit from the divestment as coming at the expense of Indonesian interests.

But we see it simply as just reward for a long-term, visionary investor. It was a bold decision for Temasek and its subsidiaries to take the plunge in 2002, investing $630 million (the acquisition price) in Indonesia when most foreign investors were still shunning the country, given its political and business risks amid the messy transition to democracy.

It is thus not a business sin for Temasek and its subsidiary to rake in a profit of $1 billion from an investment made six years ago in an extremely risky environment.

Analogous with the Temasek investment in 2002 was the move by state-owned Malaysian firm Guthrie to acquire for $350 million around 200,000 hectares of oil palm plantations, spread out over several provinces,in mid-2001.

The acquisition, made from the Indonesian Bank Restructuring Agency, was also criticized by analysts as a major gamble.

That was because the acquisition was made when world palm oil prices were at an eight-year low and when many natural resource-based companies were mired in imbroglios as a result of the excesses of regional autonomy, which was introduced in January 2001.

But no one can blame Guthrie for reaping huge profits since late 2006 as a result of skyrocketing palm oil prices. And if Guthrie were to divest its plantation investments now, it could well make a killing, pocketing several billion dollars in profit.

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Russian Uraltrac equipment to enter Indonesia

Minang Jordanindo, an Indonesian-Jordanian joint venture company, invited a group of Indonesian journalists, including The Jakarta Post's Vincent Lingga, to witness the signing of its business deals and visit the the 220-hectare Uraltrac industrial complex in Chelyabinsk in the last week of May on the occasion of Uraltrac's 75th anniversary celebration on June 1.

ChTZ Uraltrac Ltd, one of Russia's largest manufacturers of tractors, bulldozers, pipelayers and engines, will soon enter Indonesia in an attempt to break into the heavy equipment market, which is now dominated by Komatsu, Caterpillar and Hitachi.

Uraltrac's 10-ton capacity B10MB bulldozer is now on its way to Sangata, Kutai Timur regency, in East Kalimantan. The 25-ton capacity D320 and 106-ton T-800 bulldozers will follow a few months later to meet the demand boom fueled by sky-high commodity prices.

The units will form the first batch of heavy equipment ordered by PT Minang Jordanindo, which also plans to eventually assemble several types of Uraltrac equipment in E. Kalimantan that has now become one of the world's largest coal producers and a major oil palm plantation center.

The following is his report:

The mining and agricultural commodity market boom since the second half of 2006, combined with massive infrastructure development projects, started it all.
The demand for heavy equipment has become so strong that buyers often wait up to one year for delivery from traditional suppliers in the United States and Japan, but have to pay in advance to secure delivery.

This was the opportunity that prompted Minang Jordanindo, which has a long experience in reconditioning and selling used heavy equipment, to seek new suppliers.
Hence, emerged Uraltrac, virtually unknown in Indonesia, but one of Russia's largest manufacturers of heavy equipment and a long-time major supplier in East Europe, Africa, the Middle East and several Asian and Latin American countries.

"I realize it is an uphill challenge to bring in this new brand to our highly competitive market, but I see a great opportunity not only because Uraltrac guarantees deliveries within three to four months but most importantly due to its strong commitment to transfer technology," said Bonny Z. Minang, chairman of Minang Jordanindo.

The contract between Uraltrac and Minang Jordanindo was one of the four trade and investment deals between Russian and Indonesian companies signed in Jakarta early last September in the presence of then President Vladimir Putin and President Susilo Bambang Yudhoyono.

So highly confident have been Minang Jordanindo and Uraltrac that they have even started planning a joint-venture assembly plant despite having yet to make the first equipment delivery.
"In so far as our relationships with Uraltrac are concerned, Minang Jordanindo is not a mere dealer in the real sense of the word. We have gained Uraltrac's commitment to transfer technology through training and investment right from the outset of our talks," Bonny added.

He said Minang Jordanindo had prepared a 30-hectare plot of land on the bank of the Mahakam river in Kutai for its assembly plant and training center complex.

Uraltrac's chief executive officer Valeriy Platonov acknowledged that ChTZ brand name was still unknown in Indonesia's heavy equipment market, but he asserted his products have been quite popular in more than 30 countries for their high technical performance, relatively low prices and the reliability of repair service support and availability of spare parts.

"We are the first to manufacture diesel-electric tractors, which can secure a high technical performance and guarantee a steady, continuous power supply. Yet, most important, we always commit to excellence in all our products ," Platonov said.

"Don't' ask me about the performance of our tractors, but talk to our dealers who are here for our 75th anniversary," added Uraltrac's deputy director for international marketing Vladimir O. Klein.
Uraltrac, which has an annual production capacity of 4,000 units of various types of tractors, bulldozers, pipe-layers and engines, invited 90 dealers from Russia and foreign countries to the anniversary celebration and to look at its new products.

Indonesia's ambassador designate to Russia Hamid Awaludin considered the Minang Jordanindo-Uraltrac business deal a visionary agreement because it involved not only trading but, most importantly, the transfer of technology and expertise to Indonesia.

"Russia has high a technology capability, expertise and a huge sum of international reserves to invest overseas, and Indonesia needs a lot of capital and heavy machinery to explore and develop its rich natural resources. This is a strategic synergy," added Hamid, who also attended Uraltrac's anniversary celebration and visited its product exhibition in Chelyabinsk.

Hamid said economic relations therefore would be the focus of his attention in Russia as both countries have all the fundamental prerequisites for mutually beneficial relationships.
Uraltrac, which operates foundry, forging press, welding, machining, coating and thermal and galvanic production units, paraded and displayed several of its products, including its first tractor called Stalinets 60 made in 1933 and a Stalinets-2 military tank made in 1939, both of which ran well.

Alexander C. Setjadi, senior vice president for asset-based finance at Bank Danamon, one of the largest lenders to heavy equipment users in Indonesia, emphasized the crucial role of high technical performance, reliability and after-sales service in the marketing of heavy equipment.

Since the price tags of heavy equipment range from US$100,000 to $2.5 million per unit, credit financing is always an integrated part of the transaction. Banks or finance companies will not be willing to finance equipment that cannot show high technical performance, Setjadi added.

"Certainly banks will not finance a machinery that has a lot of down time because that will affect the commercial viability of the whole project," he said, adding that the first batch of Uraltrac bulldozers to enter Indonesia should be able to demonstrate excellent performance to gain user confidence.
Setjadi and Bank Mega's credit officer Michael A attended Uraltrac's 75th anniversary celebration in light of exploring lending opportunities generated by the Russian company's entrance to the Indonesian market.

PT Kutai Timur Energy, a general trading and mining company owned by the Kutai Timur regency administration, will be the first operator of the first three Uraltrac bulldozers.
Quick delivery, competitive prices and a firm guarantee of after sales service are the main factors that have prompted Kutai Timur Energy to make the plunge to buy Uraltract's bulldozers from Minang Jordanindo.

The waiting time for new purchases now often takes up to one year while "we need many of them urgently for our natural resource development projects," Kutai Timur Energy's president Anung Nugroho said.

Anung expressed high confidence in Uraltrac's competitive advantage in the Indonesian market after inspecting its production and quality-control process.

"I am especially optimistic because all of the equipment I ordered will be supported by a comprehensive technical assistance package directly from Uraltrac," Anung added.
Setjadi pointed to the dramatic growth in Indonesia's heavy equipment market due to the massive expansion in oil plantations in various provinces and coal mining in Kalimantan.

"I think our heavy-machinery market will expand this year to around 10,000 units from about 7,000 to 8,000 units last year due to the big increase in demand from the mining, plantation and infrastructure development sectors. Our oil palm and pulp plantations alone will expand by around 1.2 million hectares this year."

Setjadi said Bank Danamon expected to increase its lending portfolio in heavy equipment and other asset-based financing this year to Rp 4 trillion from Rp 3 trillion last year.
The market is almost 70 percent controlled by Komatsu and Caterpillar with the remainder shared by many other brands from South Korea and China.

But Bonny was highly confident about making a significant dent on the market, especially as the domestic demand for heavy machinery will continue to expand and the prices of Uraltrac's equipment are on average 30 percent lower than those of its competitors in Japan and the United States.

"Uraltract's strong commitment to transfer of technology to Minang Jordanindo through technical assistance and eventual joint-venture assembling and manufacturing will make our business deal outstandingly different from our traditional heavy equipment suppliers," Bonny added.

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News Analysis: Local governments: From rent-seekers to business partners

Vincent Lingga , The Jakarta Post , Jakarta Mon, 05/26/2008 10:13 AM Headlines

Provincial, regency and municipal administrations are competing with each other to offer multibillion dollar development projects to domestic and foreign investors at the Regional Investment Forum opening here today.

They are promoting a wide variety of projects in agribusiness, mining, infrastructure, property and tourism worth between about US$145,000 and $780 million.

They include a railway project in Riau, tree-crop plantations in various provinces, a toll road and an international seaport in Banten province, industrial estates and integrated farming in Central Java. What an encouraging development.

This is strikingly different from the mind-set of regional administrations during the first two years of regional autonomy from 2001 when regional chiefs and legislators, excited by their newly acquired authority, rushed to enact bylaws aimed mostly at collecting additional rents from businesses.

Many regional administrations, euphoric about their newly gained power, flexed their muscles to grab a larger share of the wealth from natural resources. They resorted to the easy, unsustainable ways of raising revenue by squeezing companies with additional taxes and levies.

They did not realize that this rent-seeking attitude would sooner or later kill the goose that laid the golden eggs.

The Home and Finance Ministries were forced to revoke almost 1,000 regional bylaws contravening national laws.

Nevertheless, the mind-set of most regional administrations has changed over the past three to four years, especially after the introduction of direct elections for regional chiefs.

As provincial governors, regents and mayors compete in direct elections, economic performance directly benefiting the people becomes the most effective means of gaining voter support.

Thus, job creation has become an important performance measure of a regional chief executive.
Hence, regional chiefs must be friendly to the business community, but not corrupt, and establish sound business partnerships.

This new paradigm requires regional chiefs to put pro-business policies at the top of their economic agendas because it is investors who generate jobs. This in turn fuels purchasing power and spurs consumer demand for various goods and services from which local administrations can raise levies.

The virtuous circle generated by investment goes on and on, raising the value of property and consequently increasing property tax receipts, of which 90 percent goes directly to regional administrations.

Within the national context, business-friendly local administrations can contribute greatly to economic growth because most of the country's abundant natural resources, such as forests, agriculture, fisheries, mining and tourist attractions, are located in the provinces and regencies.

Certainly, the enthusiasm and aggressiveness with which regional administrations woo investment are not the same. Several provincial administrations, for example, send teams on investment missions in nearby countries such as Singapore, where most global investors set up their regional offices.

Several regencies have hired professional consultants to help them plan, design and implement investment promotion programs. Many others woo investment by expediting business licenses.
Others have not been as aggressively implementing pro-business policies due to inadequate institutional capacities and a lack of financial and natural resources.

However, provinces or regencies with poor natural endowments should not be put off as investors often see policy variables as the main factors influencing their decisions to set up business in a particular area.

Policy variables -- including legal certainty, policy consistency and predictability, public services and local regulations -- often weigh heavier for investors than physical infrastructure, labor supply and productivity.

The second regional investment forum is a good opportunity for regional administrations to learn how to promote investment projects, what investors really want and how to attract more businesses to their areas.

The success of this forum should not be calculated by the value of investment deals closed but, more importantly, seen through the ongoing attitudinal changes of regional administrations toward the private sector, not only as taxpayers, but also as the driver of economic growth.
Furthermore, business-friendly local administrations will be greatly conducive to the development of small enterprises and cooperatives in rural areas across the country.

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Small fuel price hike will trigger new uncertainty

Vincent Lingga , The Jakarta Post , Jakarta Fri, 05/23/2008 10:53 AM Headlines

President Susilo Bambang Yudhoyono eased market concerns about the government's fiscal sustainability when, after several months of indecision, he made up his mind earlier this month about the urgent need to raise fuel prices.

The financial market was buoyed by this, even though questions on the amount of the rise and the date it would take effect were left unanswered.

The government on Wednesday removed an element of uncertainty within the fuel reform plan by fixing the size of the upcoming price increase at 28.70 percent but, in keeping with Yudhoyono's characteristic indecisiveness, still did not address the question of "when".

Yet more worrisome is the size of the price hike seems so small that, even on the basis of the prevailing international prices (which will likely continue to increase), there will still be a disparity of 40 percent or more with market prices.

This is still quite a lucrative margin for smugglers to take advantage of. Such a big difference leaves great temptation for misuse by industrial users.

Since international oil prices will likely continue their upward trend and the domestic-to-world price ratio will increase steadily, this otherwise bold measure will be made less credible. It will instead cause a new element of uncertainty as the market perceives the measure as merely temporary.

Despite government assurances there will not be any further price increases this year, the market is still asking when the next one will occur, because the proposed 28.70 percent rise would not even bring domestic prices close to 70 percent of international levels like the October 2005 fuel price rise did.

The market would likely reject the price adjustment as inadequate in making a big positive impact on the government's fiscal position. The new fuel prices will neither remove the incentives for smuggling overseas, nor provide the right market signal for fuel conservation, efficiency and investment in alternative, renewable energy sources.

We find it hard to understand why the government did not follow up on its bold move in 2005 when it increased fuel prices by 30 percent in March and again by 125 percent in October.

The economy underwent a virtuous circle within one week following the fuel reform in October 2005: the stock market rose, the rupiah strengthened and consequently reduced inflationary pressures. The market even shrugged off the impact of another terrorist bomb attack in Bali which took place almost on the same day the government more than doubled fuel prices.

Any move to raise fuel prices, irrespective of the amount, will always trigger street demonstrations. Anyway, almost any issue will give rise to protests under our present democratic system. Any measure to increase energy prices will always fuel inflationary pressures.

But with good coordination between fiscal and monetary authorities, and well managed cash transfers and other poverty programs for the poor the inflationary impact can be contained, the panic reaction minimized and poor families protected from an adverse impact.

But raising fuel prices in little increments would only prolong the pains of the reform, planting a "new time bomb" which would likely explode six months or one year from now.

Thus the fuel price policy the government will announce within the next few days should be supplemented with an additional fixed schedule for a gradual phasing out of fuel subsidies for private cars until the prices are automatically floated on Mid Oil Platts Singapore (MOPS) quotations and the rupiah's exchange rate, such as those already imposed on industrial users.

Such flotation will allow for an automatic monthly price adjustment, thereby providing policy predictability for the general public, protecting the economy from shocking inflationary pressures and sparing the government the wasteful political bickering with the parliament that occurs each time international oil prices fluctuate wildly.

It's a technical matter how such a fuel price flotation should be implemented to prevent shocking inflationary pressures. After all, we have been on that road once before in 2002.

We don't foresee any major problems in managing fuel distribution under the two-tier price scheme because state-owned oil company Pertamina, the monopoly of subsidized fuels, has built up enough expertise to minimize misuse.

What is most important is floating domestic fuel prices on international levels will free the government from enslavement to the wildly volatile international oil market, remove the fuel subsidy "time bomb" from its fiscal management and forces fuel efficiency and conservation and encourages investment in alternative renewable energy.

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