Economic rise snags on political turbulence

Vincent Lingga , Jakarta Mon, 12/21/2009 11:28 AM Review & Outlook

It is impossible to chart the economic outlook for 2010 without factoring the Bank Century debacle into the equation.

The nationwide controversy over the Nov. 21, 2008, bank bailout is not simply a temporary distraction, as several analysts say, insofar as the economic prospects for next year are concerned.

The manner and speed in which the parliamentary inquiry committee will complete its investigation will determine the magnitude of the political and financial market turbulence facing the nation within the next few weeks or even months.

Even more worrisome is that whatever the conclusions and recommendations from the committee, they will have an adverse impact on the economy, the government’s economic team and its policymaking credibility.

What an unfortunate development it was. Instead of riding on his landslide re-election with stronger confidence, President Susilo Bambang Yudhoyono has remained a diffident and indecisive president unwilling to take firm action.

He allowed his administration to be besieged by the tussle between the police and the Corruption Eradication Commission (KPK) for nearly 50 days before he finally decided to intervene with some recommendations, however weak they seemed.

The public’s attention and the national media will again be consumed by the parliamentary investigation over the next six weeks when vice president Boediono several ministers, the central bank governor and scores of other senior central bank and government officials and expert witnesses will be summoned to testify.

This political furor and the intermittent wave of street demonstrations set off by the findings of the political inquiry will continue until February, when the committee is scheduled to submit its conclusions and recommendations to the President.

This means Yudhoyono’s government has virtually lost or wasted the golden chance during what was supposed to have been the political honeymoon period for his second administration to take painful reform measures that are badly needed to kick-start new investment and the construction of badly needed infrastructure.

Put another way, the government simply did not take any benefit early on from the almost 61 percent of votes garnered by Yudhoyono in his re-election last July.

The President instead came out weaker from the legal tussle between the corruption busters and the police. His position could become even more beleaguered by the bank debacle, and his coalition government much weaker.

The worst impact on the economy is the huge erosion of the government’s policymaking capacity and credibility, resulting in a very slow pace of reform sorely needed to overcome obstacles to investment, without which the economy will never be able grow robustly.

Due to the impact of the two big cases, the Yudhoyono administration now has neither the mandate nor the capacity to fix quickly the problems caused by corruption, regulatory risks and weak legal framework (civil service and legal reforms).

The government is scheduled to launch several bold programs during its first 100 days, including a stronger legal framework for expediting land acquisition for infrastructure, streamlining investment licensing and comprehensive bureaucratic and legal structural reforms.

But all these top-priority programs will likely fall behind schedule because it is now extremely difficult to have the Yudhoyono Cabinet, dominated by political representatives from his coalition partners, to work strongly in a united and well-coordinated manner.

Likewise, the government coalition in parliament seems in disarray now due to different stances regarding the legal and policy issues related to the bank bailout.

True, the controversy over the Century bailout is the only cloud looming over political and macroeconomic stability next year, but this cloud could turn into a devastating storm.

Putting aside what is now often referred to as “Century gate” and its adverse impact on the economy next year, Indonesia’s medium- and long-term economic outlook is bright.

The country posted a fast, strong recovery this year, and is internationally praised as the third-highest growing economy after China and India, with an estimated expansion of 4.3 percent.

The US$500 billion economy, supported by the steady improvement in the financial and banking system and the green shoots in the world economy, could accelerate to a growth of 5.5 to 6 percent next year.

The country has a sound fiscal policy, strong balance of payments and sharply declining government debt to as low as 30 percent of gross domestic product.

But again all the estimates for next year will depend on the magnitude of the political and financial turbulence caused by the political process of resolving the bank debacle, notably the fate of Finance Minister Sri Mulyani Indrawati and Vice President Boediono, both nationally and internationally respected as icons of reform.

Barring any immediate devastating fallout from the parliamentary inquiry into the bank debacle, the Jakarta stock exchange will likely end the year with growth of more than 85 percent, the rupiah gaining an appreciation of 15 percent and inflation staying below 3 percent.

The low inflation rate will enable Bank Indonesia to keep its benchmark interest rate low, currently at 6.5 percent, and this in turn will bring down borrowing costs for businesses and consumers.

But whether the central bank will be able to check inflation next year will depend on the rupiah’s stability and improvements in infrastructure.

Significant improvements in infrastructure are essential because unusually high logistics costs — caused by inadequate infrastructure, regulatory barriers, bureaucratic inertia and corruption — are one of the main causes of the economic inefficiency.

Inflation will be manageable next year, within the target range of 4 to 6 percent, if the expansion on the demand side of the economy is accompanied by adequate expansion in the domestic capacity on the supply side.

Domestic consumption will continue to be the main driver of growth, as investment and exports are expected to expand only modestly at 5 percent.

Direct investment, which this year remains cautious despite the resilience of the overall economy, is expected to accelerate next year, but a slower-than-expected pace of reforms to remove major barriers to businesses may stand in the way of robust investment.

Foreign capital turned in big inflows, increasing the foreign reserve holding of the central bank to more than $65 billion or more than five months of imports.

But instead of helping bolster the economy’s real sector, this short-term hot money makes the country vulnerable to sudden shocks as capital flight could happen at the slightest hint of trouble.

This vulnerability should cause great concern in view of the political turbulence likely to be set off by the finding of the parliamentary inquiry into the bank bailout.

Given the downside, at best the economy will likely muddle through the political turbulence with growth of 5 percent next year.

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SBY economic team may lose trust and market confidence

Vincent Lingga , Jakarta Thu, 12/03/2009 12:22 PM

Who in the government can we trust if then Bank Indonesia governor Boediono and Finance Minister Sri Mulyani Indrawati turn out to have compromised their policy decisions in bailing out Bank Century in late November 2008?

That was one of the great concerns expressed by most businessmen I talked to during an Indonesian-Australian business conference in Yogyakarta last week.

They were worried about all the possible findings or conclusions of the investigation into the medium-size bank’s rescue to be made by the House of Representatives and the Corruption Eradication Commission (KPK), not to mention the political and financial market turbulence arising during the process.

The Supreme Audit Agency (BPK) already issued early last week a very damaging report after an investigative audit that lasted more than three months, blaming the central bank and the now-defunct Financial System Stability Committee, chaired by Mulyani, for negligence and incompetence in deciding on the bailout.

The more devastating impact would be if the upcoming investigation by the House concluded that Boediono (now the Vice President) or Mulyani, or both — though quite a remote possibility — had deliberately compromised their policy decisions for political gain.

Another possible compromise solution would see Boediono and Mulyani made the scapegoats, taking the fall for the sake of political stability but at the risk of causing suspicions about the implication of Yudhoyono and/or members of his family in the bank debacle.

Whatever the final outcome, it will adversely affect the public’s trust and market confidence in the government, especially its economic team.

Many, if not most, remain in great doubt that either technocrat, with such impeccable integrity and high financial competence, would have risked their reputations for financial or political gain by deciding on a bank bailout that was not necessary.

Boediono, in his capacity as chief economics minister and later the BI governor, and Mulyani as the minister of finance, made up the bedrock of President Yudhoyono’s economic management during his first term in office.

They had been perceived nationally and internationally as personalities who had the courage to stand up to even the President when it came to maintaining policy-making credibility.

If the verdict of the House inquiry is policy incompetence, both Boediono and Mulyani — the leaders of the economic reform — must resign for moral and ethical reasons, even though their “honest mistake” was caused by wrong or incomplete input from their subordinates.

There is an inherent risk of an honest mistake being made in a bank bailout, given the time pressures and rapidly worsening problem, even after all the standard procedures for decision making have been fulfilled, as Boediono and Mulyani claim to have done for Bank Century.
That is because different from other businesses, banks may sometimes — often based on nothing more than rumor — face a run. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor is false.

Bank runs can also be contagious as depositors at other banks are likely to get nervous too, setting off a chain reaction like that in 1997-1998.

But the caveat of debating now whether Bank Century then (November 2008) posed a systemic risk to the whole banking industry or not is the big difficulty in reconstructing the precise national and international economic and financial condition prevailing when the bailout was decided.

True, Indonesia’s financial sector was rather fragile between September and December last year due to the fallout from the global financial crisis, which was triggered by the bankruptcy of Lehman Brothers investment bank in the US.

Some of the indicators:
• In early October 2008, the capital market management and regulator stopped trading at the Jakarta stock exchange for a few days after the benchmark index, which had fallen steeply since September, crashed to 1,451, losing almost 50 percent of its capitalization from early that year.
• Even when the central bank kept reassuring the people that our banking system was sound and its fundamentals were much stronger than back in 1997, the government decided on Oct. 12 to increase the ceiling amount of bank deposits covered by the Deposit Insurance Agency 20 times, from Rp 100 million (US$10,000) to Rp 2 billion.
• Three days later, the government proposed to the House a regulation-in-lieu-of-law on the establishment of the framework of a financial safety net that would authorize the finance minister to lead the management of a financial crisis, indicating an emergency condition.
• The problem was then made more difficult by the virtual stoppage of inter-bank lending as big banks, awash with liquidity, were reluctant to lend to others on fear that their money would not be repaid.

However Boediono’s and Mulyani’s points of argument for defending the Bank Century rescue were made very weak after the discovery of the massive cost overruns, the questionable massive withdrawal of deposits a few days before and after the bailout, and the discovery of banking crimes by the bank’s owners and management.

All this led critics to suspect that both Boediono and Mulyani had put aside their professional judgment in assessing the systemic risks posed by Bank Century

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Bank Century debacle: The investing public lose their shirts

Vincent Lingga , The Jakarta Post , Jakarta Thu, 09/17/2009 2:33 PM Headlines 

The hotly debated, US$670 million bailout of Bank Century last November did at least one big thing right: The move didn't save the bankers and the shareholders. In fact, one of its former major shareholders, Robert Tantular, and its former deputy president, Hermanus Hasan Muslim, have been punished, though very lightly, with four years and three years in jail respectively.

The big problem, though, is that before the bailout of the publicly traded Bank Century, the bank was majority-owned by the investing public, with 57.16 percent equity holding. These shareholders were institutional and individual investors who each held less than 5 percent.
It is a big irony then that while the investing public lost their shirts after the central bank classified Bank Century as an insolvent and failed bank and immediately transferred it to the state-owned Deposit Insurance Agency (LPS), the money of the bank's depositors has remained safe.

Even if the bank had not been bailed out, its depositors would still have gotten back their deposits of up to Rp 2 billion ($200,000) per account - the maximum amount insured by the LPS.

The business rationale is that since the bank's capital equity was already negative (-35 percent) when it failed, the bank's shares automatically became valueless.

Article 40 of Law No. 24/2004 on the LPS also stipulates that once the LPS bails out a failed bank, it automatically wholly owns the bank, and that if the bank's equity capital is already negative when it is taken over by LPS, the old shareholders are not entitled to any proceeds from the eventual sales of the bank after restructuring.

However, this provision is not fair for Bank Century's investing public, especially because more evidence has surfaced indicating that it was largely Bank Indonesia's inadequate supervision and incompetent examiners that let the poorly managed Bank Century remain in operations until last November.

Proper enforcement of banking regulations should have seen Bank Century closed down or at least forced to be acquired or merged with a bigger bank as early as three years ago. Bank Indonesia's decision to let the bank in operations much longer thus amounted to a gross ignorance of toxic assets traded on the stock market.

Preliminary audits found it was major shareholders Robert Tantular and his relatives, with 22.13 percent, and two other individual investors - one from Saudi Arabia and the other one from the UK, with 20.70 percent - who controlled the bank management and allegedly robbed the bank. The two major foreign shareholders remain at large.

Simply put, the central bank's incompetent supervision put the investing public in the dark about the real condition of the bank. Had Bank Indonesia's examiners and the stock market watchdog (Bapepam) done their job properly, the investing public could have salvaged their investment or at least cut their losses by unloading their shares on the market long before the bank was put by the central bank under its special oversight on Nov. 6, 2008, or about two weeks before it went belly-up.

True, as the Companies Act stipulates, in the case of a company going bankrupt and eventually being liquidated, shareholders are the last entitled to make claims on any proceeds from the eventual sales of the bankrupt firm's carcass.

But since Bank Century has not been liquidated, the question then is, is it fair to let Bank Century's investing public lose every cent of their investment in the bank?
It is most urgent and imperative for the government to resolve this issue. Otherwise, no investors will again touch shares in mid-size banks on the stock market.

If this problem is not resolved once and for all, Bank Century will face a big risk of an endless string of lawsuits from investors, messy litigation that will adversely affect the restructuring of the bank and the LPS's plan to divest of its investment in the bank within three to five years, as required by law.

Bank Century, which had been beleaguered by negative publicity over the past weeks due to the controversy of its bailout last November, cannot bear another wave of bad news, let alone another bout of litigation.

Because Bank Century is already mired in lawsuits brought by several of its big depositors in relation to their purchases of Antaboga discretionary funds worth Rp 1.3 trillion ($130 million), which were marketed through the bank. The depositors have not been able to redeem Antaboga funds - issued by PT Antaboga Delta Securitas, formerly one of Bank Century's major shareholders, with a 7.50 percent holding - because the funds had allegedly defaulted.

It was in fact the default of the Antaboga funds that triggered the massive deposit withdrawals and precipitated Bank Century's severe liquidity crisis in early November, which eventually led to its insolvency on Nov. 20.

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Resolving worrisome questions around Bank Century's bailout

Vincent Lingga , The Jakarta Post , Jakarta Wed, 09/02/2009 1:11 PM Headlines

 

The Finance Ministry and Bank Indonesia, responsible for the bailout of Bank Century last November, steadfastly defended the urgency and legitimacy of the rescue, citing the financial uncertainty, severe liquidity problems at 23 other mid-size banks and weakening rupiah at the time.

They kept saying they had no choice, as though a gun had been pointed at their heads. Without the bailout, things would have been much worse in the banking industry and losses to the economy could have been more devastating.

The Indonesian financial system during the last quarter of last year indeed faced adversity from the impact of the global financial crisis since September, and letting the financially distressed Bank Century go down could have triggered a massive run on many other banks.

True, a panic was prevented within the banking industry. But the argument about the systemic risk is now heatedly debated, even though such debate now seems a no-brainer because it is impossible now to reconstruct the kind of vulnerable conditions our banking industry was mired in last November for counter analysis.

As details about the bailout were revealed to the public and the cost of the rescue turned out to be many times more than the preliminary assessment, we cannot help but cry out the fault. The move simply threw out two of the basic principles of a bailout program: transparency, and least cost to the taxpayer.

True, banks differ from other commercial firms. The failure of a bank results in particular hardship to depositors and can lead to broader problems in the economy through multiple transactions.

These are among the reasons the government has provided deposit insurance through the Deposit Insurance Agency (LPS). But this means that when a bank fails, as Bank Century did on Nov. 21, the government comes in to pick up the pieces.

However, past experience has taught us that when banks are at risk of failure, their managers and shareholders often engage in behavior that risks losing even more taxpayer money.
This, we think, was what may have happened at Bank Century between November and December 2008, when the bank lost Rp 5.6 trillion (US$560 million) in deposit withdrawals.

Bank Indonesia had injected a Rp 700 billion emergency liquidity loan into Bank Century around mid-November and put it under its intensive and then special surveillance, before deciding to throw in the towel and ask the government (the Finance Ministry) and the LPS to take over.

But the developments, which followed what was then hailed as a strategic decision to maintain stability within the financial sector, left behind several worrisome questions about the integrity and competence of the central bank's supervision and the auditors of the publicly listed Bank Century, and the enforcement of disclosure requirements by the stock market watchdog (Bapepam) upon publicly listed companies.

How could a bank with total assets of Rp 15.2 trillion ($1.2 billion), net nonperforming loans of only 2.71 percent - lower than the average 3.90 percent within the industry - and capital adequacy ratio of 14.76 percent - much higher than the minimum 8 percent - as of September 2008 flirted with bankruptcy just six weeks later?

How could the value of Bank Century's assets have fallen so steeply within such a short time so as to have eroded its capital standard far below the minimum 8 percent?

Why did the preliminary agreement signed by Bank Sinar Mas Multi Artha, a subsidiary of the big Sinar Mas conglomerate, on Nov. 16 to acquire 70 percent of Bank Century fail to restore confidence in the problem bank?

Was the Sinar Mas Group able to sneeze time bombs of toxic assets in Bank Century, which Bank Indonesia examiners failed to detect?

How could we have been kept in the dark about a publicly listed bank that is supposed to be subject to stringent disclosure requirements?

These questions, we think, are some of the worrisome puzzles the Supreme Audit Agency should answer through its investigative audit in order to resolve once and for all the problems surrounding the bailout of Bank Century.

A forensic audit would be able to find more evidence of banking fraud, either by shareholders, management or big depositors.

This could have been the main reason why the capital injection by the LPS to rescue the bank ultimately ballooned to Rp 6.76 trillion, almost three times the central bank's preliminary assessment. The new wave of bad publicity will certainly make it much more difficult for the LPS to restructure the bank.

But it is much better now to raise and resolve all the questions, so that when the LPS eventually divests Bank Century within the next three to five years, as required by the law, the potential buyer will not uncover a time bomb, as encountered by Standard Chartered during a due diligence of Bank Bali in 1999, in light of a planned acquisition.

Standard Chartered uncovered that Bank Bali had paid about $78 million in bribes to brokers to have its inter-bank claims settled by the then Indonesian Bank Restructuring Agency under the deposit insurance scheme.

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A more politically confident SBY to propose his 2010 budget plan

Vincent Lingga , THE JAKARTA POST , JAKARTA Fri, 07/31/2009 1:45 PM Headlines

There are at least two positive factors that will make the 2010 budget proposal President Susilo Bambang Yudhoyono will submit to the House of Representatives on Monday more politically and fiscally credible. His re-election for the 2009-2014 period will provide his budget plan with a stronger political certitude, different from the political situation when then president Megawati Soekarnoputri proposed the 2005 draft state budget in mid-August 2004, two months before the installation of President Yudhoyono's government.


The green shoots that have begun to sprout in some developed economies and the stabilizing global financial market certainly help the government draw more reliable macroeconomic assumptions for aggregate revenue and spending estimates.
Putting it briefly, the external factor for next year's budget implementation will not be as adverse as this year.


That is strikingly different from the turbulent period for the preparations of the current 2009 budget last August, when the global financial crisis peaked, forcing the government to amend the budget plan several times even before it began to be implemented in January.

Internally, the 4.4 percent economic growth in the first quarter, compared to deep contraction in most other countries, is a confidence-building block for the economy, especially investors.
Yet another positive factor is that the upcoming spending plan is designed by a politically more confident President who will run his second and last term with much less political debt to the various parties in parliament.


Despite all these positive developments, though, we cannot expect the 2010 budget to be significantly more expansive than the current one, because economic improvements around the world next year will be incremental at best.

The total spending will most likely remain in the neighborhood of US$100 billion.
Most analysts foresee the economy to expand within the range of 5 percent to 5.5 percent next year, up slightly from an estimated 4.5 percent this year, driven primarily by private and government consumption. Hence there will not be much space for pump priming, let alone for public-sector investment, because tax revenues will not be able to increase significantly amid the sluggish real sector of the economy and weak commodity prices.


Deficit spending may increase to as much as 2.5 percent of gross domestic product (GDP), but this will not provide any boost to economic activities if bureaucratic inertia and inadequate institutional capacity remain the biggest hurdle to budget disbursement as they are this year.

The fiscal policy must therefore take into account the need to ensure the timely flow of funds to programs and projects by removing differences in outlook between budget personnel and program and planning staff related to background, values and functions.


With all the severe limitations within the budget financing, the government should design its spending programs according to policy priorities of alleviating poverty and unemployment through programs targeted to micro-, small- and medium-scale businesses and others to reinvigorate labor-intensive manufacturing operations.
Given the persistently big debt-servicing burdens, the government will not be able to significantly increase appropriations for investment.


However, larger investment spending, notably for infrastructure, would still be possible should a more confident President Yudhoyono have the courage to reduce fuel and electricity subsidies, which have been the biggest barrier to energy efficiency and conservation in the country.

All in all, the 2010 budget will not be an expansive, nor pump-priming one.
But since the budget plan is a communication system, conveying signals about behavior, prices, priorities, intentions and commitments, it can still play a catalytic role for buoying the financial market and the investment climate.


A realistic budget and a prudent fiscal system will be able to reinvigorate the pace of private investment, the third engine of growth that has run very slowly over the past few years.
A budget system, however fiscally viable, is not self-contained as it is influenced by multiple, converging uncertainties, entrenched patterns of expenditure, inflation and structural imbalances between expectations and resources.


The 2010 budget must be designed to cope with these realities, while being aware of self-inflicted uncertainties or rigidities associated with oil prices and financial markets.

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Reformer Sri Mulyani set to lead graft-tainted central bank

Vincent Lingga , The Jakarta Post , Jakarta Tue, 06/30/2009 10:54 AM Headlines 

With two of its former governors and four of its deputy governors now in jail for corruption, a good reputation, more than anything else, is what Bank Indonesia, the main plank for our monetary management, badly needs.

That need can surely be met by Sri Mulyani Indrawati, currently finance minister and acting coordinating minister for the economy. Hence, her nomination to be the new chief of the central bank by President Susilo Bambang Yudhoyono should be greatly welcomed.

Sri Mulyani, more than anyone else, is the best candidate for the post after Boediono, who took over the central bank's leadership in April last year, resigned recently due to his being selected as Yudhoyono's running mate for the July 8 presidential election.

Her knowledge and track record of experience - formerly as minister of national development planning and in her current key economic and financial role - is very appropriate, especially now that fiscal and monetary authorities have to strengthen their cooperation and coordination to cope with the fall out from the global financial crisis.

Her more fundamental asset is that she commands great authority due to her impeccable integrity and competence and is highly respected both in international - she was formerly an executive director of the International Monetary Fund - and domestic circles.

All this will significantly strengthen the integrity and credibility of the central bank which had been beset and beleaguered by several corruption cases.

Yet most importantly, she has built a robust reputation as a reformer, winning high praise for her courage and concerted campaigning to weed out ingrained corruption at the finance ministry, especially in the directorates general for tax and customs.

Her steadfastness in standing up against political pressures and interventions from vested-interests - she is known to have engaged in a number of bruising political battles to push reforms through - represents another pre-requisite asset for a Bank of Indonesia which should increasingly be projecting its political independence.

But, however welcome Sri Mulyani would be at Bank Indonesia, her nomination to the central bank would leave a big gap at the finance ministry which has yet to complete its sweeping reforms.

President Yudhoyono will face a tough job in selecting an equally capable person to lead the finance ministry.

The House of Representatives has yet to confirm Sri Mulyani's nomination, and in view of the July 8 presidential election and given the probability of a run off to select a new president, we don't think the other two presidential hopefuls would allow the incumbent president Yudhoyono to select the new central bank chief before the whole presidential election process is completed.

The central bank governor plays a very important role in macroeconomic management and a president always wants to have that position filled by someone he or she can count on to implement his or her economic framework as promoted during the election campaign.

Presidential aspirants Jusuf Kalla and Megawati Soekarnoputri, who command major factions at the House, would most likely block Yudhoyono's move to change the top management of the central bank at least until the whole process of the presidential election is completed and the new head of government is appointed.

Given the political uncertainty about the selection process, there is actually not any urgency at all to nominate a successor to Boediono at Bank Indonesia now.

After all, Darmin Nasution, another tough reformer and trusted aide of Sri Mulyani, who pulled off remarkable achievements in reforming the highly corrupt directorate general of taxation, will enter the central bank later next month as the new senior deputy governor to replace Miranda Goeltom.

Nasution, currently director general of taxation, and formerly chief of the stock market watchdog, will serve as acting governor of the central bank until the appointment of the new governor.

Darmin is expected to jumpstart preparations for the establishment of the Financial Service Authority which will take over the bank supervisory function from the central bank in early 2011, as mandated by the central bank law.

Given the acute shortage of tough reformers with impeccable reputation within the government bureaucracy, having both Nasution and Sri Mulyani simultaneously in the same institution would rather be a case of squandering severely limited high-caliber resources.

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Commentary: The poor, the unemployed and the inflated promises

Vincent Lingga , THE JAKARTA POST , JAKARTA Fri, 06/26/2009 1:05 PM Headlines

The second round of presidential debates Thursday evening presented a slightly livelier exchange of views, especially between Jusuf Kalla and incumbent president Susilo Bambang Yudhoyono, concerning what they would do to alleviate poverty and unemployment.

While Megawati Soekarnoputri continued to spout ideological rhetoric but didn't say anything substantial about job creation and poverty reduction, both Kalla and Yudhoyono demonstrated their mastery of the problems, succinctly articulating the connection between investment, economic growth, employment, purchasing power.

Like in the first round of debates, Megawati in her opening statement of vision and mission, haphazardly rambled from one subject to another, citing the importance of the traditional mutual-assistance spirit (gotong royong), then jumping to the problem of water, food imports, food sovereignty and the need for farmers to keep informed about weather forecasts.

Though her campaign slogans centered on what she called people-based economy, she didn't present any concrete policy measures on how she would cope with the problems of poverty and unemployment, failing miserably to show the vital role of economic expansion to create jobs and generate purchasing power.

Megawati failed to answer directly the moderator's questions about income, inflation, fuel subsidies. She repeatedly asserted the vital role of mutual-assistance spirit in attacking poverty and unemployment but failed to explain how. But both Yudhoyono and Kalla candidly enlightened the public on how poverty would never be reduced without fairly high economic growth, emphasizing the crucial importance of stimulating private investment through a better business climate.

As the incumbent president, Yudhoyono enjoyed the advantage of being able to articulate what his government has been doing and his achievements over the last five years.

Encouraging also was that both Yudhoyono and Kalla realized the need for multi-pronged policies in addressing poverty and unemployment, combining pro-growth policies with government intervention through populist programs specifically targeted at the impoverished people.

Economist Aviliani, who moderated the debates, deserved credit for her probing questions to each of the candidates, prodding them to debate each other's views.

According to the school of thoughts of Yudhoyono and Kalla, the fundamental goals of poverty and unemployment reduction strategy are to increase the opportunities available to poor families, reduce their vulnerability to economic shocks and empower them to address their own specific problems.

"We should not only provide them with fish, fishing hook and canoe but we should also produce fishing rods and canoes," Kalla said in emphasizing the importance of national economic resilience and minimizing dependence on imports.

According to Kalla, economic growth should reach at least 8 percent a year to reduce the poverty rate (currently 15.4 percent) by 150 basis points (1.5 percentage points) a year.

The three candidates, however, failed to present a clearly firm stance on whether they would be willing to raise fuel prices according to international price levels.
Nor did they reply explicitly to the moderator's questions about whether they would ask for foreign debt reduction or restructuring.

"I will increase tax receipts, improve austerity and efficiency to plug the budget deficit. But I will not sell or privatize state companies," Yudhoyono said, apparently in teasing Megawati who sold several state firms during her 2001-2004 presidency. The three candidates shared the same view about the need to revise the 2003 labor law to make it more flexible in order to encourage new investment but none of them elaborated how they would achieve the badly-needed amendments.

"We also need to make our fiscal incentives for investment comparable to those offered by other ASEAN countries," Kalla pointed out. So all in all, don't expect any policy breakthroughs, whoever of the three candidates eventually win the July 8 presidential election.The basic policies will remain the mixture of market-based economic management to spur growth and government intervention through well-targeted programs for the impoverished people.

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Special Report: Reforms in place to root out rent seekers

Vincent Lingga , The Jakarta Post , Jakarta Tue, 04/28/2009 12:54 PM Headlines

 

Limited financial resources and inadequate institutional capacity have forced the government to go slow in reforming the civil service.

Since bureaucratic reform is also about abolishing or reducing rent, it faces strong opposition from those whose rents are at risk.

Given its complexity, civil service reform therefore requires a long, tedious and modest implementation in several small steps, in which the correct sequencing of reform is crucial.

No wonder, then, that the structure, work attitude and values of most civil servants seem to have remained largely unchanged despite the introduction of the new civil service law 10 years ago and the decentralization of more than two-thirds of civil servants from the central government to regional administrations under the 2001 local autonomy law.

World Bank reports and studies by various other international agencies have cited unpredictable and low-quality services from civil servants and arduous licensing processes as some of the main barriers to doing business in the country.

However, the situation is not so hopeless. The big bang reform, launched in 2007 by building "islands of integrity and competence" at three institutions - the Finance Ministry, the Supreme Court and the Supreme Audit Agency (BPK) - has produced fairly impressive results.

These institutions were selected for their strategic roles in law enforcement and in safeguarding state revenue, minimizing state losses. Most of these strategic functions happen to fall with the Finance Ministry, such as tax, customs and excise duty collection, budget allocations, treasury management and the oversight of the capital market and non-bank financial service industry.

But why does the civil service reform cost so much?

Most studies have concluded one of the main causes of the bureaucratic problems and inertia is gross underpayment. Civil servants always point out their rock-bottom salaries as an excuse for their poor performance, corrupt practices or absenteeism.

Therefore the redesigning of the civil service system with modern personnel management requires exponential increases in their pay, often by as much as five times, to make their living conditions comfortable enough to resist the temptation of corruption.

The reform at the three institutions alone, for instance, cost about US$5 billion.
But the state budget cannot at once afford massive, across-the-board large pay increases for all civil servants. Hence the incremental approach for the bureaucratic reform.

The generous pay introduced under the reform is nevertheless worthwhile, as it are based on a comprehensive personnel management system with clear-cut job classification, job descriptions for key positions and guidelines for recruitment, firing and promotion based on clear-cut performance criteria.

The recruitment system in most other institutions now is largely flawed and corrupt, requiring bribes to enter the civil service or get promoted. The pay system is devoid of any built-in performance criteria.

Riding confidently on the success of the three pilot projects, the administrative reform ministry is now extending the islands of integrity and competence to the President's Office, the National Police, the Indonesian Military and the Attorney General's Office.

Bureaucratic reform, however, has been taking place not only in the central government.
The 2001 regional autonomy law, which requires the direct election of governors, regents and mayors, has forced an increasing number of regional administrations to implement wholesale reform of their civil service and set up one-stop licensing centers for businesses to woo investors.

Reform-minded regional administrations realize businesses create jobs, which in turn provide wages, which in turn generate purchasing power to fuel local economies.
Regional chiefs have increasingly realized that natural-resource endowments, though important, are not the only key assets to attract investors.

A conducive investment climate, including the ease of doing business, is no less important for wooing businesses. And a good portion of a good business atmosphere is related to the public administration service.

As regional competition for investment has now become much more fierce, more regional administrations have issued pro-business policies.

At present, more than 50 district and municipal administrations, or 10 percent of the total, have set up one-stop service centers for business licensing as the competition for new investment grows keener.

The main question, though, in view of the false starts of similar reforms in the 1970s, is how to make the civil service reform sustainable - how to extend the islands of integrity and competence into an archipelago of best governance practices amid the succession of government every five years.

Previous attempts to reform the civil service failed because the initiative and drive depended mainly on the heads of the institutions concerned. And when the reform-minded heads were replaced, it was again back to business as usual.

Here lies the importance of establishing a politically independent National Civil Service Commission, as called for by the 1999 Civil Service Law. The National Civil Service Agency, in charge of managing government personnel, also needs further empowering.

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SG’s misguided investment

Vincent Lingga , JAKARTA Tue, 03/24/2009 10:00 AM Opinion

The failure of state-owned PT Semen Gresik (SG), the country’s largest cement maker, to control its “renegade” PT Semen Padang subsidiary should be blamed partly for the flight of almost US$340 million capital when Mexico’s Cemex cement group quit Indonesia in 2006.

Cemex, the world’s third largest cement group, was so fed up with years of political, legal and business harassment by Semen Padang that it finally decided in late 2006 to sell its 25 percent holding in SG for around $340 million to the Rajawali Group, a domestic conglomerate.

The publicly-listed SG, riding high on the back of a 42 percent increase in net profits and a cash balance of around $250 million last year, is again moving to take hundreds of millions dollars of much-needed capital out of the country.

SG Vice President Heru Adiningrat said last Tuesday that the company had hired Credit Suisse Group as an adviser for its plan to acquire a 40 percent stake in a cement company that operates in Malaysia, Vietnam or the Philippines in a bid to maintain its revenue growth amid the expected slump in cement demand due to the global economic crisis. 

But given the global credit crunch, the thin margin generated by cement exports and Indonesia’s hunger for new foreign direct investment, this corporate move is misguided. Why a state company is initiating a move that will result in such a large amount of capital flight at a time when new foreign direct investment in Indonesia is getting harder to come by is mind-boggling.

It is hard to comprehend how by holding a 40 percent stake in a cement company that operates in one of the three target countries SG would be more profitable than if it invested in resource-based ventures in Indonesia, especially because the investment will partly be funded by costly borrowing from the capital market (bonds) or banks.

Yet what is even more questionable is how such an investment could contribute to SG’s synergy. After all, its brand-name is relatively unknown internationally, while the giant world-class cement groups have long operated in the three target countries.

Another big question is how SG’s 40 percent holding in a cement company would contribute to strengthening its competitiveness against its two strongest competitors in the domestic market: Heidelberger-controlled PT Indocement and Holcim-controlled PT Semen Cibinong.

The blunt fact is that although it already utilizes 98 percent of its designed production capacity of 18.5 million tons and controls 44 percent of the domestic market, SG is not the most efficient cement producer in the country.

Why doesn’t SG simply focus its resources on implementing its long-delayed $785 million plan to build two new cement plants with a combined capacity of 2.5 million tons in C. Java and S. Sulawesi?

These investment projects would be timely and quite promising because by the time the domestic economy returns to its usual robustness, expected in 2011, SG’s new units would be on stream to meet the increased demand for building materials. 

SG’s plan to invest hundreds of millions of dollars in a cement company in another ASEAN country looks strange, because Indonesia, as Southeast Asia’s largest economy, will remain the region’s largest market for cement and its derivative products.

By initiating an investment overseas, a domestic company could create the impression that Indonesia, endowed with such a rich variety of natural resources and potential market of over 235 million people, no longer offers viable business opportunities.

This is irrespective of how cheap the prices of cement companies in Southeast Asia might be, as SG CEO Dwi Soetjipto touted last week.

Minister for State Companies Sofyan Djalil, who, with a 51 percent holding, is the government nominee shareholder at SG, as well as the investing public, which has a 25 percent stake, should oppose the overseas investment plan which the SG management will propose at a shareholders meeting scheduled this May.

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Karen should be as brave and no-nonsense a leader as Sri Mulyani

Wednesday, February 11, 2009 Vincent Lingga, The Jakarta Post, Jakarta

Only time will tell whether the government is really serious about reforming Pertamina by giving its new CEO Karen Agustiawan full mandate to run the country's largest state company.
But it is good to know that Karen herself has pledged from the outset of her tenure she will reject, at any cost, any undue political intervention that could harm the US$28 billion oil firm.

This means the 50-year-old oil mining technology expert could choose to resign from her post rather than succumb to meddling from vested interest groups and rent seekers within the government and political parties.

But that is much easier said than done.

Karen must be as brave and no-nonsense a leader as Finance Minister Sri Mulyani Indrawati, "the Iron Lady" who has launched a big-bang reform to remove leeches from the customs and taxation offices, long perceived to be one of the most corrupt public institutions in Indonesia.

Political intervention and corruption and collusive practices by rent-seekers who want to make Pertamina their cash cow have always been among the oil company's biggest enemies, even after the fall of Soeharto's authoritarian government in May 1998.

In fact, Karen's appointment last Thursday to abruptly replace Ari Soemarno, who had only been at Pertamina's helm for less than three years, was not free from political meddling, as Sofyan Djalil, the minister of state enterprises, himself admitted that Soemarno's firing had nothing to do with his performance.

Soemarno, the fifth CEO at Pertamina in the past 10 years, had brought about significant improvement in the corruption-riddled domestic and foreign logistics departments of the company's upstream and downstream oil operations.

But he ran into bad luck.

He incited President Susilo Bambang Yudhoyono's ire, after temporary shortages, though not pervasive, of liquefied petroleum gas (LPG) and gasoline in several areas over the past few months occurred at a time when long lines of people at gasoline stations were scenes mostly despised by a president facing an election.

Judging from her decades of experiences working at Mobil Oil (now ExxonMobil) and the Halliburton oil service company, Karen seems to possess the basic character of a person able to stand up against undue intervention, even at the cost of her highly rewarding, yet "hot" corporate position.

Her high technical competence and integrity gives her the advantage of being able to forfeit her corporate position, instead of compromising on good corporate governance principles.
Karen rightly listed securing smooth distribution of fuel and LPG and further development of upstream operations as her top priority programs.

Downstream operations, notably domestic fuel marketing, are a piece of cake. Despite the liberalization of the oil industry and market, Pertamina still virtually holds a monopoly over the downstream operations, due to the advantages of the nationwide network of storage, haulage and refining facilities it has developed over the past five decades.

However, as Soemarno's bitter experiences have shown, fuel distribution is so socially and politically sensitive that it can make or break the career of the Pertamina chief.

The government seemed to pin high hopes on Karen to bolster Pertamina's upstream operations as the state company remains a small player with a daily output of 150,000 barrels, or just around 15 percent of the national production.

The rationale is that Pertamina's survival as a commercially viable company depends largely on its upstream operations, because oil refining and distribution generate only very thin profit margins.

However, increasing oil production is not only a highly risky business that needs a lot of investment and high technology, but also has a long payback period because the time lag between exploration and production, if any commercially feasible volume of oil reserves can be discovered, often takes more than five years.

Hence, as higher oil output was set as one of the key parameters to assess Karen's performance, she and her board of directors should be given a secured term of office at least of five years.

But a secured term of office will not mean much if the cash-strapped government continues squeezing Pertamina by demanding an annual dividend payout of more than 50 percent, as it did over the past few years.

Dividend payouts of more than 30 percent will adversely affect Pertamina's capacity to finance upstream operations.

Unless there is real commitment by the government to give a full mandate to Karen, then all the talk of transforming Pertamina into an internationally competitive oil company like Malaysia's state-owned Petronas is only hot air and Karen's tenure will simply depend on the outcome of the upcoming presidential election.

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Tax cuts the most sensible component of the stimulus package

Monday, February 02, 2009 Vincent Lingga, The Jakarta Post, Jakarta

Of all components of the Rp 71.3 trillion (US$6.5 billion) fiscal stimulus package Finance Minister Sri Mulyani Indrawati reported to the parliament last week, tax cuts and waiving of payroll taxes make the most sense as long as they are designed for those who will most likely spend, rather than, save.

Different from the other component of the stimulus-the Rp 10.2 trillion in additional infrastructure spending, which will take far longer to implement as the tendering process alone sometimes takes as long as one or two months - tax cuts can be put to work within weeks.
Their effects also can percolate into the economy much quicker.

Many businesses may not realize it and those that are aware of it may be reluctant about acknowledging that they are actually enjoying the fiscal stimulus in the form of tax cuts resulting from the enforcement of the 2008 Income Tax Law starting last month.

In fact, I assume the Rp 43 trillion (US$3.6 billion) in tax savings, or 60 percent of the Rp 71.3 trillion pump priming package, will be derived from tax cuts brought about by the new income tax law throughout this year.

The new income tax law reduces tax rates for individuals from five to four layers, with the highest level down from 35 percent to 30 percent, and sets a flat rate of 28 percent for businesses for 2009 and 25 percent in subsequent years, down from the highest rate of 30 percent under the old law.

The new law also increases tax allowances for low-income earners by more than 15 percent by raising the maximum income exempted from tax from Rp 13.2 million to Rp 15.8 million a year for a single taxpayer and from Rp 18 million to Rp 21.04 million a year for a married taxpayer.


The tax cuts resulting from the new income tax law take effect immediately and permanently because they apply to each additional rupiah of income that an individual or company earns.

Likewise, the Rp 6.5 trillion in waived payroll taxes to be provided also as part of the Rp 71.3 trillion stimulus will help bolster businesses as they will inject more income into the corporate system by reducing the employer contribution to employees' income taxes.


These payroll tax cuts and the other Rp 6 trillion-worth of waived value-added taxes and import duties to be granted to selected businesses will immediately cut the operating or production costs of enterprises and increase their income.

Further down the road, the cost of labor will decline, thereby encouraging hiring, and profits will encourage businesses to expand.

Unfortunately, as Sri Mulyani said last Wednesday, her ministry was still working on the technical details over which companies in which sectors will be eligible for the Rp 6.5 trillion cuts in payroll taxes and the Rp 6 trillion in waived value-added taxes and import duties on basic materials and capital goods.

It is regrettable, though, as to why the distribution mechanism for the payroll tax cuts and import duty relief has not yet been set up, whereas the government has been talking about the stimulus package since last October.


The finance minister demonstrated the government's full understanding of the uphill challenges the economy is facing when she said after the House's approval of the 2009 state budget last October that the stimulus would be extended in the form of tax cuts and import duty relief and much bigger spending on basic infrastructure and poverty alleviation programs.

Put briefly, the stimulus is rightly designed to increase people's purchasing power and the competitiveness of businesses facing the economic downturn.


All this is needed because the global downturn is adversely affecting Indonesia's economy on all fronts, from slumping demand for exports and slowing down flows of investment, to weakening consumer purchasing power.


The government pump priming, therefore, would take up the slack, otherwise private investment and the economy as a whole will plunge even more.

But almost four months later, the operational mechanism of the stimulus package remains on the drawing board. What a sense of urgency to cope with the sharp global downturn that is already hitting hard on our economy!

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