The politicking behind Krakatau Steel's planned sale

Wednesday, May 14, 2008 Vincent Lingga, The Jakarta Post, Jakarta

It is unlikely anything will come of the media hype over the past few weeks about the keen competition between four global steel giants to acquire up to a 40 percent stake in state-owned

PT Krakatau Steel, Indonesia's largest steel producer with annual capacity of 2.5 million tons.

The headlines began after global steel giants ArcelorMittal, Tata Steel and Essar, all from India, and BlueScope Steel of Australia separately notified Indonesia's ministries of industry and state enterprises of their interest in acquiring up to 40 percent of Krakatau Steel.

But even before serious negotiations began and the potential investors submitted their business plans, politicking and controversy have been heating up.

Vested interests within Krakatau Steel's boards of directors and commissioners and trade union immediately came out in opposition to the sales plan, arguing the steel company was too strategic for the country's economic interests to be sold to foreigners.

The legal aspects of the privatization of state companies are entirely under the jurisdiction of the state enterprises minister, and such a transaction can be conducted only with prior permits from the inter-ministerial Privatization Commission and parliament.

But the potential investors did nothing wrong in also consulting the ministry of industry, which is fully in charge of the regulatory and policy framework of the steel industry, before submitting their business plans to Djalil.

As with the controversy over previous privatizations of state companies, the vested interests, including politicians in the parliament, would likely gang up in flaunting national interests as the main reason for their opposition, whipping up xenophobia.

But what they really want is to maintain state companies as their cash cows.
The defense ministry also joined the fray, trying to shoot down the privatization idea by asserting that Krakatau Steel is strategic to the country's defense industry.
True, steel is a strategic commodity. But what is strategic about Krakatau Steel if it remains grossly inefficient and small.

Ten years ago, the House of Representatives blocked an attempt by Lakshmi Mittal, ArcelorMittal's chief executive officer, to buy a stake in Krakatau Steel, even after then minister of state enterprises Tanri Abeng, impatient with the inefficiency of the state company, consented to the deal.

Strategic sales should theoretically be the best way for Krakatau Steel to improve its competitiveness and expand its production capacity, because it needs not only fresh capital but, most importantly, a strategic partner that can provide the capital, technology and managerial expertise.

Economies of scale and high technology are key to the market competitiveness of a steel producer. Without a synergy with a strategic partner, Krakatau Steel will remain tiny as it has been since its establishment over 30 years ago.

An initial public offering on the Indonesian Stock Exchange -- the option initially planned for Krakatau Steel's privatization this year -- is not favorable now, given the bearish market sentiment caused by uncertainty in the global financial market and a weakening global economy.

It is not Krakatau Steel itself that has attracted the four steel giants but the huge potential Indonesia offers as a major production base for steel. The company itself, like most other state firms not traded on the stock exchange, is inefficient, burdened with excess baggage from decades of mismanagement during Soeharto's authoritarian rule and highly vulnerable to corruption by the management and "poaching" by senior officials and politicians.

The four potential investors have a long-term horizon, looking into the future of the Indonesian economy. The country now needs more than 6 million tons of steel, of which 2 million tons have to be imported, and the domestic market will certainly grow steadily as the economy expands.

But strategic sales of state companies have always been difficult and vulnerable to "political turbulence" because the government has yet to develop standard operational procedures, the step-by-step process to secure transparency and accountability and to close any loopholes that could be exploited by corrupt officials.

Given the slippery political road ahead, here is some free advice for the potential investors: tread very carefully at every step of the long, slippery process, otherwise you may be caught in an imbroglio engineered by the vested interest groups within Krakatau Steel, parliament or other ministries.

Look what happened to Mexico's Cemex cement group, which quit sate-owned PT Semen Gresik last year after almost 10 years of legal and political harassment, or Singapore's Temasek, which is now trapped in a messy litigation for its investments in state-controlled PT Indosat and PT Telkomsel.

This is just to mention a few of the foreign investors who have suffered from attacks by vested interests eager to maintain state companies as cash cows.

Minister Djalil is well advised to realize that privatization, if well managed with high standards of transparency and accountability, is greatly effective in improving macroeconomic efficiency through the promotion of a more competitive market and more efficient and consequently more profitable enterprises, bringing in larger tax revenue for the state.

It is simply much better to put state firms in the hands of private investors who can develop the assets into profitable businesses, which create more jobs and pay more taxes, rather than maintaining them as state assets that are easily plundered by senior officials and politicians.

More efficient and competitive state companies, especially those operating in upstream industries like Krakatau Steel, have multiplier impacts on downstream industries. The great concern about a minority foreign shareholder in Krakatau Steel is therefore rather strange.

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Court ruling on Temasek reveals govt mismanagement

Tuesday, May 13, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Legal matters, however complex and technical, should also follow commonsense logic.
To the laymen, the Central Jakarta District Court's ruling Friday that the Singapore government-owned Temasek holdings and its subsidiaries breached anti-competition laws through minority cross-ownerships in PT Indosat and PT Telkomsel is both a worrisome and confusing logic.

Consider the following facts:
Fact I: The Indonesian government-controlled PT Telkom owns 65 percent of Telkomsel and holds almost 15 percent of Indosat and a golden share that gives it special veto rights over corporate action, while Temasek indirectly holds only 35 percent of Telkomsel and almost 31 percent of Indosat. Yet the court upheld the ruling by the Business Competition Supervisory Commission (KPPU) last November declaring Temasek guilty of violating article 27 of the anti-trust law which prohibits a business group from owning majority stakes in companies operating in the same business activities which result in the control of more than 50 percent of the market.
Temasek therefore was ordered to sell all its stake in either Indosat or Telkomsel or halve its holdings in both cellular companies within 12 months.

Fact II: The boards of Indosat and Telkomsel include representatives of the Indonesian government and many prominent Indonesian businessmen who would have been aware of the operational and business issues at the respective cellular phone operators. The majority of Indosat's directors, including the chief executive officer, and the majority of Telkomsel's directors and commissioners, are nominated by the Indonesian government. Yet the court decided that Temasek, through its cross-ownerships at both Indosat and Telkomsel, had controlled business decisions and corporate actions at both cellular operators.

Fact III: Both Telkomsel and Indosat are regulated businesses, operating within the guidelines of the Telecommunications Regulatory Authority. Yet the court also upheld the KPPU ruling that Temasek and subsidiaries were guilty of monopolistic price fixing (article 17 of the anti-trust law). The mind-boggling question then is this: Have the government, the regulatory body and Minister of State Enterprises Sofyan Djalil been so ignorant or pathetic as to have allowed

Temasek to commit all the anti-monopoly practices cited by the KPPU and the district court despite its minority shareholdings at both Indosat and Telkomsel?

If Temasek, despite its minority shareholdings, was able to commit all the business sins as concluded by the court and the KPPU, that should raise big questions over the management of dozens of other state companies which have foreign or domestic investors as minority shareholders.

Further down the line, if the poor management and inadequate oversight of Indosat and Telkomsel, as revealed by the KPPU and the court rulings, is typical of the way the government treats state companies, then the Parliament should oppose the planned strategic sale of state-owned PT Krakatau Steel to either one of the four global steel giants -- ArcelorMittal, Tata Steel and Essar, all from India, and Australia's BlueScope Steel, which have been eying a stake of up to 40 percent in the country's largest steel company.

Temasek will certainly appeal against the decisions at the Supreme Court. Since the court also ordered divestment, the government should brace for a long legal battle as Temasek may bring up the case with the World Bank's arbitration body, the International Center for the Settlement of Investment Dispute, in Washington.

Simply throwing in the towel out of frustration with the court system here could be interpreted by the market as Temasek's admission of business sins at the expense of its reputation all over the world.

A ruined reputation would adversely affect Temasek investment operations overseas, investments on which this government's investment holdings have relied increasingly for income growth.

Hence, there is no other alternative for Temasek but to fight it out up to the Supreme Court even in spite of all the risks and uncertainty about the legal proceedings and final results.

Until a credible appeal verdict -- favoring either side -- is issued, the case will continue to cast a long shadow over Indonesia's legal system and the KPPU as an independent body responsible for enforcing the 1999 competition law, which serves as the constitution of the market mechanism.

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Sky-high rice prices require redesign of food security

Friday, May 02, 2008 ,Vincent Lingga, The Jakarta Post, Jakarta

Contingency measures to increase food buffer stocks and improve price stabilization are necessary but not enough to address the skyrocketing price of rice in the international market.

The most outstanding change in food grain markets since early 2007 is that sky-high food prices have been taking place amid relative abundance, not at a time of severe scarcity caused by crop failure. That means the steep price hikes have been driven mostly by demand.

Most analysts agree that the present upward price trend will likely be a permanent development due to the cascading impact of the following factors: climate uncertainty, steady rise in demand, high oil prices that make fertilizer much more costly, farmland conversion into other industrial uses and the misguided subsidized biofuel craze in the United States and Europe.
No wonder the clearest message of this trend is that, like oil, the era of cheap food has ended.
The steep price hikes to as high as US$1,000/metric ton last week should therefore prompt the Indonesian government to redesign the concept of its food security which has thus far focused on ensuring an adequate supply of rice at affordable prices to all people at all times.

The government should not let itself be misled into past grave mistakes of going all out at all costs to achieve rice self-sufficiency.

It is rather impossible for such a vast archipelago state with a population of around 230 million and an annual national rice consumption of 32 million tons -- which will keep growing -- to secure rice self-sufficiency.

Indonesia did achieve rice self-sufficiency in the mid-1980s but only for one or two years. Even this unsustainable achievement was the culmination of more than 15 years of huge investment in irrigation, agricultural extension services and studies, generous subsidies for fertilizer, pesticides and farm loans and the work of the National Logistics Agency (Bulog) to manage buffer stocks and a price stabilization mechanism.

The oil windfall that made all these huge investments possible has dried up as the country has instead become a net oil importer.

In the absence of new technology breakthroughs and of any significant expansion in rice land outside Java due to lack of irrigation networks, there seems to be few better alternative policies for the government than to step up food crop diversification programs through integrated agriculture development.

Even irrigation networks in Java, which accounts for more than 70 percent of the national rice output, have been crumbling due to lack of maintenance, Pantjar Simatupang of the Centre for Agro-Socioeconomic Research told a seminar at the Centre for Strategic and International Studies last Thursday.

However vital rice is, the blunt reality is that rice growers never find themselves among the highest earners in the rural areas, especially in Java where most farmers till less than 0.5 hectares of land. Moreover, more than 80 percent of the whole population are net rice consumers.

Food security therefore should only be part of a broad-based agriculture development program with the ultimate objective of increasing rural household incomes both from farm and off-farm activities.

The concept thus aims at empowering the farmers' economy and the rural community through the development of rural and farm infrastructure. This is quite strategic as more than 55 percent of the total population still lives off farming in rural areas.

The focus of the program should be on farmers' income, which needs a good balancing act of securing food security and a steady rise in farmers' earnings. Better earnings will enable people and the farmers to diversify their diets away from rice.

Bayu Krisnamurthi, deputy of the coordinating minister of the economy for agriculture and marine affairs, was right in observing last week that the clear and present danger now was not an acute food shortage. The real problem is the weak purchasing power of many people who have to spend as much as 25 percent of their income on rice alone.

Krisnamurthi said the per-capita supply of all carbohydrate-rich food commodities (rice, cassava, tubers, maize, sago, etc.) amounts to about 1.2 kilograms/per capita per day while a balanced daily diet only calls for 300 grams/capita.

The problem, though, is that misguided diversification programs have succeeded only in making wheat (bread and noodles), which is not grown locally, the second-most widely consumed staple after rice.

The vulnerable food situation is similar to what the country is now facing in the energy sector. Decades of misguided energy policy made the nation dependent mostly on fossil fuels despite the availability of other energy sources such as geothermal, coal and solar power.

Too much emphasis on rice no longer provides much room for additional employment and income growth because productivity gains in this food grain have diminished, especially in Java.

The government should instead accelerate integrated agricultural development by pouring more investment into such basic rural and farm infrastructure as roads, market places, transportation and processing facilities, financial networks and research stations designed to meet area-specific conditions as well as farm technical extension services.

Better farm and rural infrastructure will enable farmers to diversify their crops into higher value commodities such as horticulture, fruits and other perennial crops.

If the government is really serious about revitalizing the agriculture sector that still employs more than 50 percent of the labor force, it is the rural and farm infrastructure that should become the focus of its investment.

The Rp 20 trillion ($20 billion) allocated in subsidies for farm loans, fertilizers and seedlings this year is paltry compared to the almost Rp 200 trillion appropriated for wasteful subsidies for fuel and electricity.

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