Commentary: Bank Indonesia bows to political pressure on DBS-Danamon deal

Vincent Lingga, The Jakarta Post | Commentary | Mon, December 03 2012, 10:08 AM

Paper Edition | Page: 2

Bank Indonesia (BI), the nation’s central bank and ostensibly an independent institution, effectively said on Friday that it had succumbed to political pressure when evaluating the application filed in April by DBS Bank in Singapore to acquire almost a 67.5 percent stake in Bank Danamon, Indonesia’s sixth-largest bank.

 BI Governor Darmin Nasution told reporters that the purchase, which has an estimated price tag of US$7.2 billion, had become a political issue and that the bank needed more consultations with the Singaporean central bank, the Monetary Authority of Singapore (MAS).

Nasution’s remarks, strange though not unexpected, indicate that he does not have the stomach to face a mounting nationalistic sentiment in the House of Representatives and among the nation’s largest domestic banks.

It is the job of politicians to set Bank Indonesia’s goals, one of which is the development of a strong banking sector. However, politicians should keep their noses out of the business of banks and leave BI, with its large pool of technocrats, to choose the tools it needs to achieve its goals.

What has happened has been quite different. Immediately after DBS chief Piyush Gupta, for the sake of transparency, revealed the planned acquisition in early April, state-owned Bank Mandiri and BNI, supported by narrow-minded lawmakers, exhorted Bank Indonesia to link its decision on the deal to concessions from MAS to allow freer expansion by Indonesian banks in Singapore.

True, for DBS, Southeast Asia’s largest bank, the acquisition represents a once-in-a-lifetime opportunity that is not available elsewhere in the region. DBS, faced with a mature market at home, needs to expand in Indonesia, Southeast Asia’s largest economy.

DBS will never be able to become a leading bank in Asia without having strong legs in Indonesia, India and Hong Kong. For DBS, the acquisition would give it access to Danamon’s 3,000-branch network that serves six million customers, which is larger than the entire population of Singapore.

In terms of ownership, the transaction will not bring about any fundamental changes, as both DBS and Danamon are by and large controlled by the Singaporean government investment company Temasek through subsidiaries.

BI did announce in July new regulations that limit single ownership of local banks to 40 percent for financial service companies, but the central bank still retained discretionary power to waive the general ownership caps if the acquiring banks have high levels of corporate governance and are in strong financial health.

If the central bank held to the objective of the new ownership cap rules — strengthening good governance at banks — then the DBS-Bank Danamon deal should have been approved, because both banks met the basic requirements.

However, it is regrettable that BI has not been sufficiently transparent about the benefits of the DBS-Danamon merger for improving competition in the banking market, which seems to have been gripped by an oligopoly of the nation’s five largest banks, three of which are state banks.

The central bank should have made clear the economic logic of the deal to politicians and the general public, and educated people as to how the merger would contribute to strengthening the banking sector and invigorating Indonesia’s economy, which is still largely under-banked.

Such transparency and public education would have helped improve public opinion and protected the central bank from political meddling.

Indonesia, especially its banking industry, will benefit greatly from the transfer of skills from the merger, not to mention from the external expertise in risk management and other best practices of good governance and access to a new big source of international financing.

Such strategic investors and owners as DBS, with good reputations and huge capital resources, would accelerate the operational restructuring of Bank Danamon to provide financial services, notably credit — the lifeblood of the economy — across the archipelago.

Even Thailand, South Korea and Malaysia, which like Indonesia were hit by the financial crisis in 1997, have acknowledged the immense potential benefits to the rehabilitation and development of their financial industry from the local entry of major international banks, with their solid reputations and strong capital.

Unfortunately, BI seemed to succumb to political noise about the issue of reciprocity, which sounds confusing.

Suppose Bank Mandiri, BNI or Bank Rakyat Indonesia were assessed by the MAS as qualified for receiving full banking licenses. Would it then be commercially feasible for them to open dozens of branches and an ATM network across Singapore?

Certainly not, because that does not make any sense at all. They would find it extremely difficult to gain a broad depositor base in such a mature market.

We welcome the recent package of BI regulations that tie domestic and foreign bank licenses and operation expansions in Indonesia to higher standards of capital and good corporate governance.

The regulations, which require foreign banks to gradually allocate at least 20 percent of their loan portfolios to small- and medium-scale enterprises within the next five years, will be a boon to the
economy.

However, blocking the inflow of fresh capital, technology and expertise to the banking industry — the heart of the economy — mainly for reason of reciprocity seems a highly emotional and political decision.

We don’t think that the MAS would lower its standards and soften the terms and conditions it has imposed on foreign banks simply as a quid-pro-quo for BI to approve the DBS-Danamon deal.

Such a compromise would smack of discrimination.

Similarly, BI would not soften its terms and conditions and lower its capital and governance standards so that banks from Laos, Cambodia or Myanmar, for example, could be issued operational licenses in
Indonesia.

It is still less than 15 months away from the legislative and presidential elections in 2014. However, BI, a supposedly politically independent body, is already showing weakness when facing political pressure.

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The week in review: Deadly intolerance

Vincent Lingga, The Jakarta Post | Editorial | Sun, September 02 2012, 10:20 AM

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The Idul Fitri celebrations are supposed to be a week of mutual forgiveness and social reconciliation, but brutal attacks last Sunday claimed the lives of two members of a Shiite community, damaged dozens of houses and forced hundreds of people to flee and live in fear in Sampang on East Java’s Madura island, adding further evidence to claims that Indonesia is in danger of becoming a failed state.

It was quite ironic that the government seemed to only sit idly and watch violence against minorities continue, casting doubt over the sustainability of Indonesia’s pluralism.

Yet more tragically, was the blame game that soon followed the violence. President Susilo Bambang Yudhoyono blamed the intelligence community for its failure to detect the assault and criticized law enforcement for its weakness. Lawmakers lambasted the police’s inability to prevent such mob violence, while ministers criticized local leaders for their failure to maintain peace between their followers.

In the meantime, the victims now live miserably in makeshift shelters, uncertain about how they will be able to rebuild their homes. But as in most earlier instances of mob, communal and religious violence, the most offensive fact of the matter was the failure of the state and the ignorance of law enforcers to do their duty to protect citizens.

What made Sunday’s violence more absurd was that only last December, the same Shiite community in Sampang was brutally attacked, and while the perpetrator of the attack was eventually sentenced to three months in jail, the leader of the Shiite community was convicted on charges of blasphemy and sentenced to two years in prison.

In fact, human rights activist Usman Hamid quoted victims who confirmed that last Sunday’s attackers were the same people responsible for the violence last December.

Sadly, this is not the first instance of a weak government response to those who commit violence under the pretext of religious values and beliefs. We may still clearly remember the widely-shown video footage of the ruthless killing of three Ahmadiyah members at Cikeusik, Banten province, in February 2011. The killers were each only sentenced to between three and six months in jail, while Deden Sudjana, the Ahmadiyah security coordinator who almost lost his hand in the attack, was failed for six months for inciting the violence.

The recurrence of such an incident points to a darker context beyond weak leadership, widespread indifference to and the protection of minorities.

In another tragically strange move that may lead to further discrimination against Shia followers in Sampang, the government is considering a plan to relocate the group, saying that the move could prevent future attacks from the majority Sunni community.

It may not be an exaggeration to say that Indonesia’s pluralism is now facing a serious threat. The intrusion of radical ideologies has polarized and segregated society, as also evident in the Jakarta gubernatorial elections, where several prominent public figures have openly attacked candidates on the basis of religion and ethnicity.

The National Commission for Human Rights (Komnas HAM) said on Thursday that as many as 70 members of the Shiite community in Sampang were still missing and dozens of people were still hiding in the surrounding jungle.

Some 340 Shiites seeking refuge at Sampang Wijaya’s Kusuma Stadium were living in squalid conditions, packed like sardines, with poor sanitation and food, the commission added.

***

In another outburst of violence, one man was killed and another was left in a critical condition after a gangland brawl erupted over a disputed plot of land in West Jakarta on Wednesday. The conflict broke out as a group of men attempted to enter a plot of land and lay claim to it, setting off a clash with the gang entrusted to guard the plot. After a negotiated settlement fell apart, police officers shot two men who attempted to evade police capture as they raided the area.

The West Jakarta Police said 98 of more than 104 gang members arrested had been declared suspects.

***

Returning from their Idul Fitri vacation, House of Representatives lawmakers failed to live up to the basic value of the Islamic holiday and reform bad habits. Low turnout marked the first plenary session after a long recess on Wednesday, with only 315 out of 560 lawmakers in attendance. Prevalent absenteeism, which has come to characterize members of the House, was ironically clear as they celebrated the 67th anniversary of the legislative body.

So many times, the honorable, well-paid lawmakers have come under fire for their acute absenteeism, which has slowed the legislative process to a sluggish pace, but the criticism, if not chastisement, always falls on deaf ears.

The House also sparked a controversy this week with its deliberate procrastination in selecting new members of the Komnas HAM. The House’s failure to arrange candidate interviews as part of the selection process has forced the President to extend the term of office of the current commissioners. It may be premature to conclude that the House lacks a commitment to human rights, but its silence on a series of rights abuses plaguing the country recently says otherwise.

However, lawmakers deserve credit for unanimously passing the bill on the special status of Yogyakarta on Thursday. The endorsement marked an end to 11 years of uncertainty and polemics that soured ties between Jakarta and the sultanate city.

The bill reaffirms the role of the sultan as both the guardian of local culture and the governor without having to undergo the long, acrimonious and expensive process of running for office. The sultan’s eligibility to govern, however, must be verified by the provincial legislative council to uphold a system of checks and balances.

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The descent from developmental state into predatory state

Vincent Lingga, The Jakarta Post, Jakarta | Feature | Sun, August 12 2012, 12:18 PM

Paper Edition | Page: 6

Indonesia’s two longest-serving presidents, Sukarno and Soeharto, were both authoritarian and were both brought down by economic crises.

Bankrupt economies caused severe economic contraction and eventually led to political crisis and the ignominious downfall of Sukarno in 1966 after 21 years in power and Soeharto in 1998 after a reign of almost 32 years.

The difference, however, was that the mid-1960s crisis was caused by internal factors — gross economic mismanagement which led to an utter neglect of sound policies — while the crisis that started in late 1997 was precipitated by external factors — a sudden reversal in foreign investor sentiment wich triggered panic and massive capital flight.

These are some of the points from Indonesia’s Economy Since Independence, the latest book written by Thee Kian Wie, a senior economist at the Economic Research Center of the Indonesian Institute of Sciences (LIPI).

Thee says the crises, though different in their origins and manifestations, show the absolute necessity of good governance and strong institutions to establish and enforce basic rules on the government and the private sector.

An economy which rests only on one unsustainable institution — a strong, authoritarian president — is quite vulnerable to internal and external shocks.

Even though the book does not provide a thematic account of Indonesia’s modern economic history but is rather a short historical overview of Indonesia’s economy since independence, the 14 essays in the book still serve as a highly valuable record of Indonesia’s economic development process from independence to 2008.

This book should serve as a good reference for policy makers, analysts and economics students because the 14 papers form a condensed analytical record of Indonesia’s macro-economic and manufacturing development, pinpointing policy successes and failures over the past six decades.

 Thee shows how the affirmative (Benteng program) policy, launched soon after the nationalization of Dutch enterprises in 1950, to empower indigenous businesses with preferential treatment such as special import licenses and credits and foreign exchange at special rates, failed miserably due to corruption, collusion and nepotism.

He credits the 25 years of rapid and sustained growth during Soeharto’s administration to the ability of the economic technocrats to make use of the strong mandate they received from Soeharto to maintain macroeconomic stability through strict fiscal discipline.

But as the role and influence of the technocrats waned, fiscal discipline weakened under what Thee called the descent from developmental state into predatory state, mired once again in pervasive corruption, collusion and nepotism.

Indonesia, the book says, suffers from the natural-resource curse which also affected many other resource-rich countries such as the Netherlands.

The exploitation of natural-resource wealth encourages rent-seeking activities and reduces the return on human capital, thus diminishing incentives for educational attainment.

Resources, Thee argues, also promote the ascendance of a predatory state over the developmental state either through corruption related to resource rents or decline in the efficiency of policy and administration.

Half of the 307-page book is devoted to analyzing the policies of developing manufacturing industry and case studies on the process of technology transfers and the development of the wood, textile and garment and automobile parts industries.

 Thee traces the changes in the policies of manufacturing development from import substitution industries to meet the rapidly expanding domestic demand fueled by the oil booms of the 1970s into export-oriented industries to broaden the base of non-oil exports as oil exports declined.

 However, the global competitive environment for Indonesia’s manufacturing industries changed in the early 2000s after China’s dramatic rise as a formidable competitor in the world markets for manufactured exports and as an attractive place for foreign direct investment (FDI) and the emergence of global contract manufacturers in Singapore, Malaysia and Thailand.

 Thee sees the crucial role of FDI and visiting foreign buying agents in the transfer of technology to the manufacturing industry. The garment industry in Bali benefitted greatly from visiting foreign buying agents who provided advice and technical assistance in quality control and designs to meet consumer preferences overseas.

 However, Indonesia’s acute lack of absorptive capacity, notably the shortage of adequately trained and skilled manpower able to comprehend and master technologies has hampered the efficient transfer of technology through FDI to the country’s manufacturing industry.

The frequent changes in policy toward foreign investment also show that Indonesian policy makers have not had a clear idea of what they specifically expected from FDI.

The last chapter of the book on the development of the auto parts industry since 1974 should make for interesting reading by policy makers, analysts and economic students who have recently heard so much about the great enthusiasm for developing a national automobile.

This chapter analyzes why the policies for developing the automobile industry through the deletion program for commercial cars failed despite the fiscal incentives given to assembled cars with high local content.

 The low import tariffs and value-added tax imposed on components required for commercial vehicles failed to develop a local manufacturing base because there were too many car makes and models competiting in the limited domestic market while car manufacturing requires large economies of scale.

The government tried in 1981 to rationalize the industry by requiring car assemblers to reduce the number of makes and models locally assembled but this policy was strongly opposed by vested interests in the industry, thereby hindering the development of auto parts and components.

Car assemblers hesitated to develop long-term subcontracting relationships with auto parts suppliers because these suppliers, facing a segmented and relatively small domestic car market, were forced to supply several car assemblers in order to achieve economies of scale.

Indonesia’s economy since independence
Thee Kian Wie
ISEAS Publishing, 2012
307 pages

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Editorial: Bridge hangs in the balance

Vincent Lingga, The Jakarta Post | Editorial | Tue, August 07 2012, 7:49 AM

Paper Edition | Page: 6

We know that being indecisive has been one of the main hallmarks of Susilo Bambang Yudhoyono’s presidency.

Yet it is mind-boggling to observe Yudhoyono idly standing by, letting his ministers squabble in public over his decree on such a vital piece of infrastructure as the 28-kilometer Sunda Strait Bridge, which is planned to connect Java and Sumatra, the most developed and populated islands in this, the world’s largest archipelago.

The President has often talked eloquently about how connectivity is crucial to developing a superb logistics system, to ease the movement of people and goods and build up efficient distribution networks.

Yudhoyono should have immediately raised in the Cabinet Finance Minister Agus Martowardojo’s reservations about Presidential Decree No. 86/2011 that serves as the legal foundation for the US$10 billion Sunda Strait Bridge project and the strategic development of the southernmost areas of Sumatra and westernmost areas of Java.

The decree has gone through long, comprehensive and critical deliberations, as can be seen in its 33 articles, and the 30 months Yudhoyono took to make his decision after the government officially received the pre-feasibility study report from the initiator of the project, PT Graha Banten Lampung Sejahtera (GBLS), the consortium of Tommy Winata’s Artha Graha group and the Banten and Lampung provincial governments.

But Agus’ dissenting opinions should also be appreciated because errors can happen, some important legal aspects might have been overlooked, especially with regard to such a huge project that will require government guarantees.

The President should have led the Cabinet in analyzing and cross-checking as to whether his decree on the bridge project fully complied with the three other decrees he made earlier in 2005, 2010 and 2011 regarding public-private partnership (PPP) schemes in infrastructure development.

Of utmost importance is ensuring that the President’s decree does not provide a blank check to the private investors who will develop and operate the bridge and the related strategic industrial zones.

Making necessary improvements to the presidential decree would not be the end of the world. Nor would such changes severely damage the institution of the presidency.

 Only five months ago the President also issued a decree on divestment for foreign investors in mining to improve his earlier decree on the same matter enacted in early 2010.

But for Agus to continue publicly airing his dissenting opinions about the 2011 Presidential decree is also a futile way of improving policies. Such a renegade attitude could amount to little more than hitting his head against a brick wall.

In general, we think, the decree is already quite elaborate as regards the need for good governance in the project because the regulation has been designed to build a powerful internal-control mechanism to oversee the whole project right from its planning to its development and operation.

The decree requires the President to set up a governing council in charge of laying out the direction, policies and strategy for the development of the Sunda Strait Bridge and the industrial zones at its respective ends.

The governing council comprises 21 Cabinet ministers, the Indonesian Military (TNI) commander in chief, the chairman of the Investment Coordinating Board (BKPM), the chiefs of the National Police and the National Land Agency as well as the governors of Lampung and Banten.

 It is the governing council who will appoint the Executive Board that will be charged with implementing all the policies on the project and dealing with private investors under the PPP scheme.

Whatever amendments the government makes to the regulation on the massive project, there are several basic points that have to be factored into consideration.

First, the project is vitally important, second it may take more than 10 years to build and over 35 years for investors to recoup their investment, third, the government simply cannot afford to finance the project and it should therefore be implemented under the PPP scheme, given the economic and political risks and its vital function as a public service and fourth, the bridge and the industrial zones at either end of the bridge should be bundled into a single package to make them more attractive for private investors and lenders.

Of more importance is that regulations on the project should not lead to overkill as very few companies will be technically and financially capable of implementing the infrastructure project, given its size, the huge investment, the high technology and the long-payback period required.

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The week in review: Summits, pledges and reality

Vincent Lingga |The Jakarta Post | Editorial | Sun, 06/24/2012 7:18 AM 

Leaders of the G20 have pledged to take action to boost weakening world economic growth and support moves by eurozone countries to move toward a banking union to restore stability to the financial system, but they offered little new concrete aid.


The communiqué issued earlier this week after two days of talks in the Mexican resort of Los Cabos appeared to herald a shift in favor of the need to stimulate growth and will now put the focus on the summit of EU leaders later next week.

The G20 leaders appeared to recognize the risk that eurozone fears could spark turmoil across financial markets in the coming months, pledging to inject an extra US$456 billion into the International Monetary Fund to act as a firewall against further financial contagion.

They voiced support for the eurozone to take steps toward greater financial integration of the 17-member single-currency bloc, such as banking supervision, bank resolution and recapitalization, and deposit insurance.

The leaders vowed not to erect new trade barriers until 2014 to foster global growth.

However, the International Chamber of Commerce (ICC) strongly criticized the G20 leaders, pointing out that while the world economy was experiencing the worst crisis of the last 60 years, multilateral talks had stalled and protectionist measures had proliferated.

ICC Secretary General Jean-Guy Carrier quoted a research report of the Global Trade Alert during the G20 Business Summit in Los Cabos on Monday showing that the world’s richest developed and emerging economies had added about 225 protectionist measures over the past two years alone.

The rise in protectionist measures was also amply documented in recent detailed reports, prepared jointly by the World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD) at the request of the G20.

Anyway, most analysts have from the outset not put too much importance on the G20. After its widely recognized success as a fire fighter at the time of the financial crisis about three years ago, many observers have criticized the G20 forum mostly as a talking shop to let policymakers understand what their counterparts elsewhere are up to and why.

But then while there is a gap in global economic governance at leadership level, the G20 is still seen as best-placed to fill that space, one structure that people look to for guidance.

No wonder, many did not expect much from the gathering this week of global leaders, development experts, bankers, academics and activists in Rio de Janeiro held immediately after the G20 summit to celebrate the anniversary of the landmark Earth Summit of 1992.

The conference tried to address the linked problems of poverty, hunger, energy shortages and environmental degradation but the big gathering seemed to be overshadowed by economic and political crises around the world.

There are few expectations for concrete action or pledges of new aid to developing countries. The absence of key leaders from developed countries dashed the hopes for more concrete results.

Delegates said the constraints of the still-faltering global economy had dampened hopes and refueled the conflict between industrialized and developing countries that had hobbled international development and environment talks for years.

But Indonesia’s President Susilo Bambang Yudhoyono, one of the leaders attending the meeting, seemed not to be discouraged by the skeptics. He was instead still optimistic that the Rio summit would come out with a lot of firm action programs.

Yudhoyono briefed delegates from more than 190 countries on Indonesia’s programs to stop deforestation through a two-year moratorium on new permits for logging and exploitation of peat land in cooperation with the Norwegian government that pledged $1 billion in funding.

“We also launched a nationwide campaign to plant trees, which in the last two years have resulted in 3.2 billion trees being planted. We did this out of our own volition, but we also expect the world to support our efforts beyond rhetoric and finger pointing,” he said.

However, most environmental NGOs in Indonesia criticized Indonesia’s poor progress in reforming its forestry sector as deforestation has continued, thereby jeopardizing its campaign to reduce carbon emissions by 26 percent by 2020.

Even Norway’s Environment Minister Bard Vegar Solhjell was quoted by Reuters as observing that the moratorium itself would not be sufficient to achieve Indonesia’s climate change mitigation.

The $1 billion Norway has promised under the deal is contingent on policy change and proven emissions reductions from the forestry sector.

The conference, formally titled the Conference on Sustainable Development, but more popularly known as Rio+20, tried tackling big questions such as protecting the world’s forests and fisheries, weaning the world off fossil fuels and encouraging farming and economic growth that does not destroy the natural environment.

As Indonesia participated in the two important summits abroad, the nation witnessed an Indonesian Air Force Fokker F-27 aircraft crashing into the ground at the Rajawali military housing complex, near the Halim Perdanakusuma Airbase in East Jakarta on Thursday afternoon. All seven crew members and three civilians on the ground died.

Also on Thursday, the West Jakarta District Court handed down a 20-year prison sentence to Umar Patek for illegal possession of firearms and explosive devices and chemicals, premeditated murder in the 2002 Bali bombing and the 2000 Christmas Eve church bombings in Jakarta.

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Floating regasification unit improves LNG supply, value chain

Vincent Lingga, Oslo | Fri, 06/15/2012 9:19 AM

Indonesia has been one of the world’s largest exporters of liquefied natural gas (LNG) since the mid-1970s, but the role of the clean-burning primary energy in the country’s electricity generation is still almost negligible.

The problem is that most of the big power generation stations are located in Java while most gas is produced on the outer islands, and Java does not have an onshore LNG receiving terminal, which costs hundreds of millions of dollars to build.

No wonder the two LNG plants at Arun in the northernmost province of Sumatra and in Bontang, East Kalimantan, have been tied to long-term (more than 25 years) contracts because the building of the loading and receiving terminals to handle LNG carriers require billions of dollars of investment.

But the launching last month of Indonesia’s first floating storage and regasification unit (FSRU) in Java bay will drastically change the supply and value chain of natural gas.

 The power generation station at Muara Karang, north of Jakarta, has begun taking in natural gas from as far as the Bontang plant because the short distance between the FSRU mooring in the Jakarta bay and the power stations can be covered by a submarine pipeline.

The FSRU takes deliveries of LNG from tankers and turns it back into gas (regasification) before pumping it to the power plant through the sub-sea pipeline.

The FSRU, named Nusantara Regas Satu, was built at the Sembawang yard in Singapore by converting an old LNG vessel owned by Golar LNG into floating regasification vessel-based LNG receiving unit.

The facility, which is also Asia’s first FSRU, is chartered by PT Nusantara Regas, a joint venture of two state companies — Pertamina oil and gas company and Perusahaan Gas Negara (PGN).

The FSRU with a storage capacity of 125,000 cubic meters enables the quick realization of gas purchases and obviates the need for shore-based LNG storage tanks and regasification facilities.

Later in 2013 or early 2014, the Nusantara Regas Satu will be joined by an even larger FSRU, with a storage capacity of 170,000 cubic meters, currently under construction at the South Korean Hyundai shipyard.

Earlier this year, PGN and Norway’s Hoegh LNG signed a 20-year contract, extendable by 10 years, under which the Norwegian fully-integrated LNG service company will provide PGN with an FSRU and mooring system offshore of Lampung, in southern Sumatra.

Different from the first FSRU in Java bay, which was converted from an old LNG tanker, the second facility will employ the first of Hoegh LNG’s new building regasification vessels.

“We have three FSRUs currently under construction at Hyundai and one of them will be moored offshore Lampung,” Hoegh LNG’s vice president Geimund Aasbo told The Jakarta Post in Oslo last week.

The project, scheduled to come on stream in early 2014, includes construction, lease and operation of an FSRU with an associated mooring system, a contract for pipeline and necessary infrastructure and a tie-in with an existing grid connected to the power station onshore.

“With more than 40 years of experience in LNG transportation services, Hoegh has been operating two FSRUs and five LNG vessels, all under long contracts, to energy companies in the global LNG value chain,” Aasbo added.

There are now 14 FSRUs operating worldwide with seven others, including the one destined for Indonesia, still under construction in South Korea.

The FSRU facility will greatly improve Indonesia’s energy security, especially because most of the hydrocarbon discoveries in recent years are gas, such as the Senoro and Matindok fields in Central Sulawesi with combined proven reserves of 2.4 trillion cubic feet, and the Masela block in the Arafura Sea, south of Papua, with reserves of 6.5 trillion cubic feet and the huge BP gas field at Tangguh in Papua.

 “I expect hydrocarbon discoveries in the eastern part of Indonesia will consist mostly of natural gas,” said Statoil Indonesia CEO Tor Fjaeran.

Though a newcomer in Indonesia’s petroleum industry, the Norwegian state oil company Statoil has been operating a deep-water Karama production sharing contract offshore West Sulawesi and has farmed into nine other concessions, all of which are offshore in the eastern region.

Natural gas is cleaner than other fossil fuels, and gas-fired power plants are relatively cheap to build, fueling a stronger demand for gas.

As LNG transportation has now been made much easier with the FSRU, it also allows LNG spot markets to expand.

The International Energy Agency (IEA), a watchdog for the developed countries, has estimated LNG trade to increase to more than 395 billion cubic meters in 2015.

Most LNG is still sold under long-term contracts that underpin the billions of dollars of investments required for liquefaction plants. But the massive expansion of regasification capacities has created bigger opportunities along the global LNG value chain.

We can imagine in the coming years a fleet of small tankers on regular runs across the country carrying LNG from Bontang, BP Tangguh plant in Papua, Shell’s Masela plant in the Arafura sea or Pertamina-Medco Senoro-Matindok’s plant in Central Sulawesi and supplying the gas to electricity plants, which are currently run on expensive diesel or fuel oil.

The FRSU infrastructure will make all that possible.

The author is a staff writer at The Jakarta Post.

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Norway geared up for ‘big bang’-style trade and investment in Indonesia

Vincent Lingga, The Jakarta Post, Oslo | Wed, 06/13/2012 11:27 AM

Gunn Ovesen (left) and Trond Giske: (Courtesy of Innovation Norway)

Oil and gas-rich Norway is gearing up to enter Indonesia’s economy in a “big bang kind of way” through investment and trade, focusing on the hydrocarbon industry, marine and maritime services, hydropower, health care and the environment.

While both countries are still negotiating a comprehensive, strategic economic partnership agreement, an increasing number of Norwegian companies, with the full support of their government, are preparing to enter Indonesia’s economy in a major way.

“Indonesia needs deep-water technology in oil mining and, being a vast archipelagic country, it also needs to develop its marine and maritime industry. My country has a very strong competitive edge in both industries,” said Norwegian Trade Minister Trond Giske.

But, why now?

Norway’s Deputy Trade and Industry Minister Jof Jeanette Moen pointed out that over the past few years Indonesia had been the third-fastest growing economy after China and India within the prestigious Group of 20 major economies (G20).

“I think the future of the world will also be shaped by what happens to Indonesia and we want to play a part in that development”, Moen added.

Both the trade and industry minister and his deputy were among the main keynote speakers at a seminar in Oslo last Thursday on business opportunities in Indonesia

The meeting also presented Suryo Sulisto, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), Indonesian Ambassador to Norway Esti Andayani and Ananda Idris, a consultant well experienced in dealing with Norwegian businesses.

The seminar, which was attended by about 50 businessmen from across Norway, some of whom already possess good experience of doing business in Indonesia, was part of a series of preparations for the vigorous campaign to enter Indonesia’s economy.

The next big step will be the opening of an Innovation Norway office in Jakarta in August, which will serve as the “man on the spot” in Indonesia to help Norwegian companies on how to market products and how to invest in Indonesia.

Innovation Norway, a state institution with offices in more than 30 countries, plays a unique role in promoting trade, investment, technology innovation and even tourism, serving as the spearhead to help Norwegian businesses market their products or set up investment ventures overseas.

As a state company funded by the central government and county administrations, Innovation Norway is able to hire highly competent professionals to produce market intelligence studies and provide advisory services and technical assistance.

“We can even provide financing services [both loans and equity capital] to businesses with highly promising prospects. Once we enter a company, we serve as the catalyst to attract other commercial banks into joining the financing” said Innovation Norway’s CEO, Gunn Ovesen.

Norway has always pursued a prudent economic vision. Even though it is one of the world’s largest producers of oil, producing more than 2.2 million barrels a day and more than 110 billion cubic meters of natural gas a year, the country generates more than 90 percent of its electricity from hydropower.

The government has been pouring a good portion of its oil and gas export earnings into what Norway’s Finance Ministry claims to be one of the largest sovereign-wealth funds in the world, with more than US$550 billion in reserves for investment both within the country and overseas.

“Norway is the world’s sixth-largest producer of hydropower in the world, supplying more than 95 percent of our domestic electricity consumption of over 250 terrawatt hours [TWh] last year,” said Geir Elsebutangen, managing director of INTPOW, a government research and development agency focusing on renewable energy.

Elsebutangen added that Norwegian companies had also developed advanced technology in tunneling work for hydropower generation stations and other basic infrastructure.

“For a few months every year, most of our rivers are frozen, yet our tunneling technology can guarantee a constant supply of water to our hydropower stations,” he sad.

Elsebutangen, who gained years of experience working with the ABB construction company in Indonesia and other Asian countries, sees many potential sites for hydropower plants in Indonesia, especially those of small capacity.

“Tinfos AS has completed a mini hydropower plant near Makassar, South Sulawesi, with a capacity of 10 megawatts [MW]. This plant can be a model for other areas to generate renewable energy, while serving as a showcase for the public to realize how vitally important it is to protect forests,” he added.

The “big bang” declaration of Norway’s entry into the Indonesian economy will be capped with a visit by a business delegation in late November during which Norwegian companies will show their competitive edge in hydrocarbon, marine and maritime services and hydropower, as they seek joint-venture partners.

Norway has a population of only around five million people, barely half the population of Jakarta, but with gross domestic product (GDP) of over $420 billion and per capita income of more than $55,000,
Norwegian consumers have strong purchasing power..

Unfortunately, however, Indonesia-Norway trade has not grown well and has so far failed to achieve its full potential. According to official data at the Trade and Industry Ministry in Oslo, bilateral trade totaled only about $260 million last year, down from $295 million in 2010, albeit up significantly from $195 million in 2009, mostly in Indonesia’s favor.

Indonesian exports to Norway have consisted mostly of garments and accessories, consumer electronic goods and wooden products, while imports have consisted primarily of machinery and fish.

But bilateral trade will increase substantially in the coming years as more Norwegian companies sell technology, marine and maritime services and equipment.

Last January, Norway’s Hoegh LNG, one of the world’s largest fully integrated floating liquefied natural gas companies, signed an agreement worth more than $250 million with state-owned PT Perusahaan Gas Negara (PGN) to provide PGN with a floating storage and regasification unit (FSRU) and mooring system in Lampung under a 20-year charter, which is due to begin operations in early 2014.

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Commentary: Bank consolidation should be top priority for central bank

Except for the plan to introduce multiple licenses for banks, we do not see how the forthcoming package of bank regulations, especially those relating to bank ownership cap, will fit into the banking architecture that Bank Indonesia launched in 2004.

The national banking architecture was designed to create a new bank landscape consisting of two to three banks of international class, three to five national anchor banks and 30 to 50 smaller banks with specialized services and thousands of rural or community banks by 2014.

The central bank has been trying persuasively since 2004 to speed bank consolidation in a bid to create fewer but stronger-capitalized banks because it is extremely difficult to effectively supervise so many banks.

But the number of full-service, city-based commercial banks remains quite high (about 120 now), yet most of them have a very low capital base.

But we greatly welcome the central bank’s plan to change the current system of a single license for a whole range of banking operations to a multiple-license system that will require banks to meet preset capital standards for obtaining a license for a particular kind of operations.

This multiple-licensing system should have been implemented immediately after the launch of the 2004 banking architecture to accelerate bank consolidation.

But instead of setting bank consolidation as the top priority for its regulatory framework, the central bank has been pronouncing, in bits and pieces, since April that it would soon restrict bank ownership by nationality and by category — finance and non-finance institutions and individuals.

We wonder why Bank Indonesia suddenly thinks it is now so urgent and imperative to shake up the ownership structure, while the biggest challenge facing the banking industry amid the increasingly globalized financial market should be good corporate governance and bigger capital base.

We do not have enough empirical evidence to prove that there are positive correlations between ownership cap by nationality, prudential bank management and good corporate governance, as long as the majority of owners are bank or non-bank financial institutions.

Look at how during the 1998–1999 banking crisis almost all the biggest local banks in the country had to be bailed out by the government, while only a few foreign-owned banks were plunged into severe financial distress.

Bank Indonesia may think, since the capital adequacy ratio (CAR) of all local banks is quite high now (over 16 percent), it is high time to tinker with ownership structures to curb the growth of foreign-owned banks.

But in the increasingly globalized financial market, the high CAR of our banks has little meaning because it is founded on very low capital base.

Indonesia is the largest economy in Southeast Asia, but its largest bank, Bank Mandiri, is still relatively unknown in the region and ranks only the sixth largest in the region in terms of assets.

The title of the largest bank is held by Singapore’s DBS financial service group, whose announcement of its plan to acquire Bank Danamon seemed to have prompted Bank Indonesia to hastily rewrite bank ownership rules.

Instead of restricting bank ownership by nationality and by the category of owners, the new set of regulations should focus on rules to ensure the highest standards of good governance and concerted efforts to accelerate bank consolidation.

Restricting bank ownership, even with a transition period of 10 to 20 years as some Bank Indonesia executives have hinted, could rock the banking industry because our financial market is not deep enough or big enough to absorb such massive divestment that has to be made by bank shareholders.

Ownership cap regulations would also give the wrong signal to investors, and such a negative perception is the last thing we need now in coping with the uncertainty of the international financial market due to the eurozone crisis.

Forcing banks to replenish their capital base should be the top agenda for Bank Indonesia because bigger capital is needed to absorb risks or shocks.

Politicians and analysts who demand severe restrictions on foreign banks should realize that our banking industry would not have recovered so quickly had it not been for the capital injection, the transfer of skill and expertise from foreign banks and foreign investors.

Even now the banking industry can still benefit greatly from the presence of strong, foreign banks with good reputation.

More importantly, though, is for the central bank to be able to direct foreign banks to support the top priority programs of our economic development through lending and other financial services, promote the best practices of good governance to local banks and companies and provide our economy with access to international finance.

Vincent Lingga, The Jakarta Post, Jakarta | Thu, 05/31/2012 7:30 AM

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Commentary: Planned DBS-Danamon deal puts Temasek in the spotlight again

Vincent Lingga, The Jakarta Post, Jakarta | Tue, 04/10/2012 9:45 AM

The planned US$7.3 billion acquisition by Singapore DBS Group Holding of publicly listed Bank Danamon should be one more confidence-building step in Indonesia’s long-term economic advance, but equally it could turn into an ugly political controversy.

DBS chief executive officer Piyush Gupta made the business plan fully transparent in line with the best practices of good corporate governance by announcing it at a news conference here last week, but he has unintentionally set off what could be weeks of pointless political debates, whipped up by inordinately nationalistic grandstanding.

The transaction will not lead to any fundamental changes in terms of ownership, as both DBS, Southeast Asia’s largest bank, and Bank Danamon, Indonesia’s sixth-biggest, are by and large controlled by Singapore government investment company Temasek through subsidiaries.

But several narrow-minded and seemingly xenophobic lawmakers have embarked on what could develop into a nasty public-opinion campaign to sabotage the planned transaction by whipping up jingoistic sentiment.

As it happens, Indonesia’s largest banks (state-owned) have long complained about what they see as the regulatory discrimination they face in building operations in Singapore.

Misguided lawmakers and narrow-minded analysts may exploit these grievances as ammunition to strengthen their campaign against Bank Indonesia’s approval of the transaction.

But as both Singapore and Indonesia have a great deal at stake in the business plan, both governments should see to it that the planned takeover runs smoothly according to existing laws and regulations.

Poor handling of the issue could harm both countries.

Since DBS, already the largest in Southeast Asia, will never achieve its goal of being a leading bank in Asia without having strong positions in Indonesia, India and Hong Kong, Singapore’s government is well advised not to allow the local bankers’ complaints to sabotage the merger.

Simply ignoring these grievances could unnecessarily expose the planned DBS acquisition to noisy political posturing and set off weeks or even months of pointless public debates hyped by excessively nationalistic sentiments.

Singapore’s government should pay heed to the lessons learned from the Temasek experiences between 2006 and 2008.

Temasek decided in June 2008 to divest its entire 40.8 percent stake in PT Indosat and sell the asset to Qatar Telecom after suffering more than two years of bashing by politicians and trade unions in state companies as well as messy lawsuits.

On the other hand, however, the Indonesian government would look bad in the eyes of international investors if Bank Indonesia, the central bank, which has yet to approve the DBS-Danamon deal, succumbed to political pressure by delaying indefinitely the approval of the transaction.

As there is no current law in Indonesia against the DBS-Danamon transaction, refusing to ratify the deal could scare off new investors at a time when the country should be benefiting greatly from the investment grade it recently gained after a lapse of 14 years.

Fundamentally, the planned DBS acquisition is simply a normal business transaction.

It is Temasek’s strategy to build synergy between DBS with its extensive experience and expertise in corporate banking such as infrastructure, project and trade financing and sharia banking and Danamon, which has 6 million customers and operates more than 3,000 branches and 3,000 ATMs in Indonesia.

The strategy is certainly linked to the increasingly important role Indonesia, Southeast Asia’s largest economy, plays in the global economy, and is part of the DBS effort to gear up for the ASEAN Economic Community in 2015.

Indonesia, especially its banking industry, will benefit greatly from the transfer of skills, expertise in risk management and other good governance practices, along with greater access to sources of international finance.

Banks serve as the heart of the economy. 

Strategic investors and owners such as DBS, with good reputations and huge capital resources, will accelerate the operational restructuring of Bank Danamon to provide comprehensive financial services, notably credit — the lifeblood of the economy.

Experiences in other countries such as Thailand, South Korea and even Malaysia, which like Indonesia were hit by the financial crisis in 1997, point to the great benefits derived from the entry of major international banks with strong reputations and vast capital to the development of a sound domestic financial sector.

The issue could be politically sensitive because a bank is not simply a business entity in an ordinary sense, given its fiduciary responsibilities, the multiplicity of transactions it is involved in and its key function within the economy. 

Banks are institutions of trust. That is why the principles for good corporate governance for banks are much more elaborate than those for other commercial entities. 

It is also why not everybody who can put up adequate capital is allowed to have a controlling ownership of a bank.

Those who want to become controlling owners and commissioners of a bank have to pass the fit-and-proper test set by the central bank to assess their technical competence and integrity.

However, what narrow-minded analysts or xenophobic lawmakers may forget is that whoever is the controlling owner of Bank Danamon, it, like every other bank, is still legally obliged to play by the rules made by Bank Indonesia.

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The week in review : $25b for artificial stability

Vincent Lingga, The Jakarta Post | Sun, 04/01/2012 12:43 PM

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The government, with its popularity eroded by corruption scandals, succumbed on Friday to popular outrage against its planned fuel-price increase by raising the amount allotted for fuel and power subsidies this year by almost 35 percent to Rp 225 trillion (US$25 billion).

The political compromise will further weaken the lame duck presidency of Susilo Bambang Yudhoyono and debilitate the policy-making capability of his government during its remaining 30 months in office.

The development is worrisome. Many more reforms are needed to strengthen the foundations of the nation to sustain high economic growth rates over the long term.

The nation has been gripped by increasingly rowdy political and economic debates and protests over fuel prices over the last three months, some of which turned violent with dozens of police officers and demonstrators injured and state and private property damaged. 

However, this costly exercise in democracy has served to only to strengthen the economy’s addiction to fossil fuels, thereby putting the state’s budget and its fiscal management as a whole at the mercy of highly volatile oil prices, which are entirely beyond our capacity to control.

This political decision will only create artificial stability at the expense of poverty alleviation, infrastructure development and renewable energy research.

The vigorous — yet pointless — debates and political bickering about the fuel-price issue miserably failed to enlighten the general public about the truth: Artificially low fuel prices will eventually lead us to a severe energy crisis through severe supply disruptions.

The issue is much broader than simply plugging the government’s deficit. There is a great concern about our deeper addiction to cheap fossil fuels that damage the environments and make the development of other renewable energy commercially unfeasible. 

We do not understand why the politicians of the opposition parties in the House — the Indonesian Democratic Party of Struggle (PDI-P), the Great Indonesia Movement Party (Gerindra) and the People’s Conscience Party (Hanura) — stubbornly refuse to acknowledge the severity of the nation’s fuel-subsidy problem.

More appalling was the utter shamelessness shown by the leaders of the PDI-P as they provoked their supporters to join street demonstrations over the last three days, fearing that the party would be on the losing side when the House voted on the fuel subsidy. 

It was a crass and pathetic politicking that marked a low for the nation’s developing democracy.

And even more flabbergasting were the number of economists and human right activists who, along with the PDI-P’s leaders, missed the point, alleging the fuel reform measure was only political grandstanding by the President.

The reality could not be more different. Yes, Yudhoyono could have appeased his critics and neutralized opposition by not adjusting the fuel subsidy and allowing the deficit to rise to an unmanageable level at the expense of economic stability.

However, the President’s conscience seemed to have forced him to stake his political legacy on proposing painful reforms for the long-term economic good.

Allowing the government’s deficit to exceed the ceiling of 3 percent of GDP set by law will increase Indonesia’s sovereign risks at a time when the government has been tapping the international bond market to finance the deficit.

Higher sovereign risks will increase the government’s borrowing costs. Worse still, the government might lose the investment-grade rating it only recently regained after a lapse of more than 14 years.

Yudhoyono’s biggest mistake — or rather his perpetual flaw — has been his indecisiveness and acute lack of courage to bite the political bullet, despite his term limits that will see him exit in 2014. He should have raised the fuel price last year, when he still had a strong political mandate and could have avoided bickering with the misguided lawmakers in the House.

The 2011 State Budget Law authorizes the President to adjust fuel prices whenever international oil prices rise by more than 10 percent over the average price assumed in the state budget.

Finance Minister Agus Martowardojo warned the public as early as last May that fuel subsidies had risen at an alarming rate along with the rising international oil price, urging the President to act immediately. 

We simply cannot understand how the government could have been so ignorant as to allow a stipulation written into the 2012 State Budget Law that prohibits the government from raising fuel prices. The President and his economic ministers should have realized the continuing unpredictability and volatility of international oil prices. 

In 2004, then president Megawati Soekarnoputri refused to raise fuel prices, despite steeply rising international prices — apparently in an attempt to gain more votes in that year’s presidential election.

Megawati was humiliatingly defeated by Yudhoyono, who was forced to raise fuel prices in March and again in 2005 to defuse the fiscal time bomb left behind by Megawati.

Yudhoyono, however, has apparently failed to learn from the political turbulence and massive protests he encountered when he raised fuel prices in 2005 and 2008.

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The week in review: The fuel-policy uncertainty

Vincent Lingga, The Jakarta Post | Sun, 01/22/2012 7:00 AM

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For such an important policy reform that has been on and off the national agenda since late 2007, the debates on the need to limit subsidized-fuel sales that dominated the nation’s attention this week seemed pointless and a waste of time and energy.

As early as December 2007 then chief economics minister Boediono, who is now the Vice President, announced after a Cabinet meeting that the government was preparing a program which would restrict the sales of subsidized gasoline only to public transport vehicles, motorbikes and fishermen, thereby forcing private cars to use fuel sold at the commercial rate.

But the program, which would have been phased in initially in Jakarta, West Java and Banten provinces, was eventually buried under the indecisiveness of the government and opposition from the House of Representatives.

Tens of billions of dollars of taxpayers’ money continue to be converted annually into carbon emissions by private car owners. The government revived the idea in June and again in October 2010 but the plan was again shelved in February 2011, two months before it was supposed to be implemented, due to what the government said were technical reasons.

That plan was indeed technically unfeasible as it would have caused chaos in fuel distribution due to the institutional incapacity of both the government and Pertamina to prevent abuse as well as a lack of infrastructure because not all filling stations were equipped with high-octane fuel supply tanks.

Faced with such technical difficulties, the government should have gradually raised fuel prices, a scheme that has often been implemented in the past without serious risks of abuse. But nothing was done due to the lack of leadership of the Susilo Bambang Yudhoyono administration, already notorious for its indecisiveness. The narrow-minded House also supported the misguided energy policy.

Hence, fuel and electricity subsidies ballooned to more than Rp 250 trillion (US$28 billion) last year, or over 30 percent higher than the original budget allocation, the bulk of this largesse was enjoyed by middle class and high income citizens.

The government and the House again revived the plan to reduce fuel subsidies during the debates on the draft 2012 budget in the second half of last year and stipulated in the 2012 State Budget Law that fuel subsidies should be limited at Rp 210 trillion and set 37.5 million kiloliters as the ceiling for subsidized fuel sales, down from over 40.4 million kl last year.

Alas, the pathetic government failed to learn from its failure of last year. The 2012 budget law only stipulates that the sales of subsidized fuel should be reduced through restrictions. The stipulation does not mention anything about price rises.

Hence, the government announced early this year that starting in April, the use of subsidized fuel would be limited to public transport vehicles, motorcycles and fishermen, while private passenger cars will have to use high-octane (nonsubsidized) fuel or liquefied natural gas for vehicles (LGV) or compressed natural gas (CNG).

No one in the government or the House seemed to be rational enough during the 2012 budget debates to realize that such a program would encounter even more complex technical problems related to the installation of converter kits to vehicles and the inadequate supply of such kits.

Moreover, even in Jakarta there are fewer than 16 gas stations selling LGV and CNG.

Minister of Mineral Resources and Energy Jero Wacik admitted on Wednesday that the fuel-restriction scheme would lead to technical complications, signaling that the government might opt for a much simpler scheme – raising the fuel prices.

The problem, though, is the alternative scheme first must be approved by the House because the law allows only for a reduction of fuel subsidies through restrictive use, not outright price rises.

Proposing an amendment to the law for such a painful reform would again plunge the government into a rowdy political fracas, pointless debates and even bouts of political turbulence.

But that is democracy. We nevertheless still think a gradual price rise, even at the risk of some social unrest, political turbulence and slightly higher inflation is still better than allowing this “fiscal cancer” to grow. 

The tens of billions of dollars burnt off on our streets every year have been a missed opportunity to invest in health, education and infrastructure.

This year also may be the last opportunity to usher in such a painful, yet badly needed, energy reform, because next year all politicians will start gearing up for the legislative and presidential elections in 2014.

Even amid the hurly burly of the debates about the fuel subsidy issue and the sharp criticism by most analysts of the government’s indecisiveness, Indonesia’s government credit rating got another boost on Wednesday as Moody’s Investors Service followed an earlier decision by Fitch Ratings in December to upgrade the country’s sovereign rating to investment grade.

The next the day, Investment Coordinating Board Chairman and Trade Minister Gita Wirjawan announced an 18.4 percent increase in realized foreign direct investment last year to $19.28 billion.

However the government should not allow the higher ratings go to its head because the country is still struggling with poor infrastructure, bad governance and corruption.

The biggest impact of the rating upgrade will be felt mostly in the financial market, not in the real sector such as manufacturing.

In fact, the government could have its rating downgraded again if fuel subsidies are not held at a manageable level because the key factor for the upgrade is prudent fiscal management. 

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