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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