With weak oil market, time is ripe for managed floating fuel prices

Vincent Lingga, The Jakarta Post, Jakarta | Headline | Thur, December 17 2014.

Now that steadily declining international oil prices have hit a five-year low at US$60/ barrel, compared to the $105 average assumed for the 2015 fiscal year, the government has a great opportunity to slash, or even abolish, the wasteful spending on fuel subsidies that cost almost $20 billion annually over the last three years.

When subsidized fuel prices are on par with international levels, which analysts estimate can occur when oil prices fall to as low as $60/ barrel, the government could put fuel prices on a managed float mechanism where prices will adjust according to market rates, as Malaysia did earlier this month. This mechanism was adopted in early 2002 under Megawati Soekarnoputri’s administration.

It was called a “managed float”, not a “free-float” system because the mechanism was still tied to fixed-ceiling prices, whereby the government could intervene in retail-fuel prices if oil prices increased dramatically.

But President Joko “Jokowi” Widodo seems to favor a fixed-subsidy mechanism, a move campaigned for by former finance minister Chatib Basri over the past two years. But then president Susilo Bambang Yudhoyono and the House of Representatives didn’t support that idea.

The fixed-subsidy scheme will fix the rupiah price of fuel subsidy per liter, irrespective of oil-market price developments or rupiah-rate movements.

Under this regime, the price of fuel subsidies per liter will neither fluctuate alongside oil-market prices nor rupiah-rate quotations, as it will be the price of the subsidized fuels that must rise or fall monthly following the oil-market quotations.

But whichever of the two alternative policies the government chooses, the decision should be based on the real economic costs of domestically refined and imported fuels, calculated in a transparent and credible manner. As we now depend on imports for almost 60 percent of our daily fuel needs of 1.66 million barrels and because imports consist of both crude oil and refined oil products, the production costs can vary, depending on the sources.

The problem, though, is that independent analysts and the general public tend to question the reliability of the production-cost figures used as price references by the state oil company, Pertamina, to estimate the fuel subsidies.

Under the current fuel-subsidy regime, the prices of subsidized fuels are fixed at a certain level. However, the final amount of subsidies ultimately depends on the average oil-market price and the rupiah exchange rate. Since oil prices and the rupiah exchange rate tend to fluctuate wildly, the final amount of fuel subsidies also tends to increase dramatically.

The benefits of implementing a fuel-price floating system or a fixed-subsidy scheme are quite obvious: It will relieve the government from the burden of having to haggling with the House every time international oil prices rise sharply, and it will free the government from being held hostage to the wildly volatile international oil market.

Predicting oil prices is always a mug’s game, as prices are influenced by both economic and non-economic factors. In mid-2008, for example, international prices skyrocketed to a peak of almost $150/ barrel, but plunged to as low as $47 later in the same year.

Bringing fuel prices closer to their true costs will also remove the fuel-subsidy time bomb from the government’s fiscal management.

But even more importantly, abolishing subsidies will encourage the development of renewable energy, promote energy efficiency and energy conservation. It will also help stop fuel-export smuggling, which has been rampant due to the porous coastal borders of the world’s largest archipelago.

Energy reform will also cut Indonesia’s trade and, consequently, the current-account deficit, which has been exerting strong downward pressures on the rupiah exchange rate.

Our experience during the first year of the flotation policy in 2002 showed that by allowing for automatic monthly price adjustments, the government was able to provide policy predictability for the market and protect the economy from sharp price adjustments and their shocking inflationary pressures.

The price signals conveyed by this policy will serve as a guideline for companies to conduct in-house management of energy efficiency through maintenance. It will also encourage companies to take housekeeping measures and replace equipment, which could require additional investments or the modification of the entire manufacturing process — moves that may require large-scale investments.

Cheaper oil should also create the momentum needed for the government to gradually phase out the low-quality gasoline with RON (registered octane number) 88.

Most countries have shifted to fuel with RON levels above 90, which are cleaner burning, more efficient and make engines perform better. Malaysia, for example, has long used only RON 95 and RON 97 fuels. Before Malaysia fully floated its fuel prices earlier this month, RON 95 gasoline was sold at RM2.30 (Rp 9,200) per liter, carrying a subsidy of Rp 520/liter. RON 97 gasoline (non-subsidized) was sold at the equivalent of Rp 10,200.

It would technically be impossible to stop selling RON 88 gasoline (strangely called “premium” gasoline) immediately due to the limited capacity of domestic refineries. But technical preparations for a gradual phase-out of this low-quality fuel should be made as part of the overall fuel reform program.

Read full post »

View Point: Shaking up and cleansing the oil regulatory body

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, November 30 2014, 1:15 PM

The fastest pace and widest breadth of reform taking place under President Joko “Jokowi” Widodo’s 50-day-old government has taken place at the Ministry of Energy and Mineral Resources (ESDM) for the right reason.

The ministry administers, manages and oversees the development of natural resources (oil, natural gas and all other minerals) worth hundreds of billions of dollars in exports, import procurements, taxes and royalties every year.

In a country perceived as one of the most corrupt in the region, senior officials at the ministry and all other agencies under its jurisdiction, notably those with authority for supervision, licensing and procurement, are understandably vulnerable to corruption.

No wonder, Jero Wacik who was replaced last month by Sudirman Said, is now a corruption suspect and Rudi Rudiandini, the former chief of the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) is now in jail for graft.

 Jokowi’s first move in setting off reform at the ministry was appointing Sudirman, an anti-corruption activist and good-governance champion, as the new ESDM minister.

 Sudirman, an auditor by training, who also graduated from business management from George Washington University, has built years of experience in state and private oil companies and has demonstrated his managerial and leadership qualities in many institutions and organizations.

He was among the founders of the Indonesian Transparency Society antigraft movement and the Institute for Corporate Governance. Sudirman served for almost two years as a vice president at the state oil company Pertamina in charge of reforming its supply chains – Pertamina was at the time considered one of the most inefficient and most susceptible to corruption. But he quit in 2009, reportedly owing to intense lobbying by a strongly influential oil mafia.

 Sudirman rightly selected the oil and gas sector of the mining industry as the first target of his bureaucratic reforms, again for a strategic reason.

The hydrocarbon industry plays a central role in the economy as it is still the main source of primary energy (about 70 percent), contributing almost 6.5 percent of the gross domestic product, US$31 billion in revenues to the national budget (23 percent) and $22 billion in foreign investments a year, of which 60 percent is spent on local goods and services.

 Indonesia is already mired in an oil crisis with the supply-demand gap exceeding one million barrels a day. Crude oil and fuel imports, which last year totaled $42.1 billion, have been responsible mainly for the ballooning current-account deficit and downward pressures on the rupiah.

Worse, according to the Indonesian Petroleum Association (IPA), oil reserve replacement was at only 47 percent last year. The association estimates that annual investments in exploration alone should be tripled to over $11 billion within the next five to 10 years to prevent a widening oil deficit and another $30 billion a year investment in production development is needed, or otherwise the oil deficit could reach 2.5 million barrels per day.

But which investors would be willing to risk so huge a sum of capital if an oil company requires almost 70 types of permits from the national and regional governments, involving 284 processes and 17 agencies, and is subject to land and building tax even during the exploration stage?

According to IPA, the average time needed by oil companies to monetize proven reserves has increased from five years in the 1970s to more than 10 years in the late 1990s and 15 years in the 2000s mainly because of the arduous licensing system, bureaucratic inertia and corruption.

Thus Sudirman’s quick decision taken just a few days after his inauguration, to replace the director general of oil and gas and the chief of SKKMigas, is quite strategic.

He also immediately started preparations for the selection of officials for the levels of directors general and directors at his ministry through an open, competitive recruitment process.

The appointment of Amien Sunaryadi, a former deputy of the Corruption Eradication Commission (KPK), to head SKKMigas signals a massive shake up and reform within the regulatory body.

It plays a key role in the petroleum sector because this regulatory body oversees the management and business plans of all national and foreign companies operating in the hydrocarbon sector.

Sunaryadi’s previous experience as a senior operations officer for the Anti-Corruption Action Plan (ACAP), a cooperation program of the government and the World Bank’s Department of Institutional Integrity (DII), from 2009 to 2012, well equipped him with high managerial ability and technical competence to develop a strong institutional-integrity system at SKKMigas.

The DII has been well known for its success in establishing a strong integrity system within the multilateral development bank, which is constantly exposed to the risk of corruption and other forms of malfeasance as it operates in many developing countries.

The program was designed to build effective internal control mechanisms within projects or an institution able to explicitly identify governance-related risks to achieving project objectives, thus improving project-level governance.

The overall aim of ACAP is to improve management, monitoring and oversight within the Indonesian public sector.

Sunaryadi, an auditor by training, is believed to be able to disseminate within SKKMigas the expertise to audit business processes and eventually develop innovative ways to communicate with civil society organizations, soliciting public feedback on the quality of public services provided.

The reform of SKKMigas, combined with the recent slash of fuel subsidies to bring fuel prices closer to and eventually on par with the actual costs, would contribute greatly to mitigating the risk of corruption within the petroleum industry.

_______________

Read full post »

Finding the best path toward sustainable palm oil

 Vincent Lingga, The Jakarta Post, Kuala Lumpur | Opinion | Tue, November 25 2014, 8:43 AM

The world’s largest palm-oil companies gathered here last week, sharing the best practices of what is assessed as the model of sustainable oil-palm plantation development.

Several of them magnanimously admitted mistakes amid the mounting campaigns by consumer and environmental organizations, but then they have often been accused by international green NGOs of being the main drivers of deforestation.

The occasion was the 12th conference of the Roundtable on Sustainable Palm Oil (RSPO), a global body of plantation companies, refiners, consumers and green groups, which promotes the development of socially, environmentally and economically sustainable palm oil.

Indeed palm-oil companies are most likely the first to be blamed, with pulp producers next on the list of culprits, every time haze pollution caused by forest fires in Sumatra or Kalimantan hits Singapore or Malaysia.

But it also happens that Indonesia and Malaysia, which together account for more than 85 percent of global palm-oil production, are home to the biggest palm-oil and pulp and paper companies.

Indonesia, now the world’s largest palm-oil producer with more than 30 million tons of annual output, has often been notoriously cited as the third-biggest polluter globally as the country has allegedly expanded its oil-palm estates, currently estimated at almost 10 million hectares, by destroying its rain forests.

But international environmental NGOs and consumer organizations cannot simply tell Indonesia to stop expanding its oil-palm estates because this crop turns out to be the most productive among all vegetable oils, with yields more than nine times as high as soybean, rapeseed oil, peanut oil and sunflower oil, which are cultivated mostly in developed countries.

Indonesia’s palm-oil industry, according to the industry’s association, now directly employs more than 4.5 million workers and earns about US$20 billion in export earnings a year. Yet more significant to the economy is that 40 percent of the oil-palm plantations are owned by smallholders with acreages ranging from two to 20 ha.

According to the Rome-based Food and Agriculture Organization, palm oil accounts for almost 40 percent of global vegetable-oil production, estimated at 145 million tons last year, with soybean, rapeseed, peanut, corn and sunflower accounting for the remaining 60 percent.

Douglass Cress, a senior executive of the United Nations Environment Programme (UNEP), who attended the big gathering, acknowledged the paramount role of the RSPO as an independent promoter of sustainable palm oil as it included all the representatives of the whole spectrum of the industry.

______________

The causes of deforestation or forest fires are rooted in the most basic problem of poverty.

“I am impressed by the open and frank discussions in this forum where companies talk about their successes and failures within the palm-oil industry. It is really a brave thing to do,” Cress noted.

That is why UNEP had signed a cooperation agreement with the RSPO to jointly implement programs to enhance the sustainable development of palm oil, he said, hoping that RSPO would become a model for similar programs for other farm commodities.

But the representatives of environmental NGOs and smallholders still have a lot to complain about the RSPO’s performance, notably with regard to the still weak market reception for sustainably produced palm oil.

RSPO secretary-general Darrel Webber acknowledged that even though the capacity of RSPO-certified sustainable palm oil at present already accounts for 18 percent of global output, only about 50 percent of the sustainably produced palm oil has been taken up by the market.

Several European countries, including the United Kingdom, France, Germany, Sweden, the Netherlands, Norway, Denmark and Belgium, and major corporations such as Nestle, Unilever, Carrefour and Johnson & Johnson, have committed to 100-percent RSPO-certified sustainable palm oil in 2015.

But Europe takes only around 4 million tons from Indonesia, which exports over 20 million tons annually, and supplies more than 50 percent of the RSPO-certified palm oil.

The RSPO did boast more than 1,750 members representing the whole spectrum of the palm-oil supply-chain. But as long as the growth of market uptake remains slow and the premium price enjoyed by certified palm oil remains rather insignificant, market faith in the RSPO certification program could decline.

It is perhaps because of this low market uptake and the perpetual international criticism of the palm-oil industries in Indonesia and Malaysia that both countries have launched their own certification schemes: Indonesia Sustainable Palm Oil (ISPO) and Malaysia Sustainable Palm Oil (MSPO).

But the launch of the ISPO and MSPO should actually be welcomed as the result of the increasing awareness on the part of the governments of the vital importance of sustainable management of palm oil, not as competitors to the RSPO.

However, the operation of three different certifications of sustainability for the same commodity and toward the same goal seems a waste of resources. After all, the principles of sustainable management promoted and audited under the three schemes for their respective certification processes are by and large similar, covering such elements as transparency, legal and regulatory compliance, best production practices, environmental responsibility and commitment to local community development.

Now that UNEP has engaged with the RSPO, the UN body is expected to help develop synergy between the three sustainability-certification schemes, or else they could cause confusion and unnecessarily add to the production costs. Consumer or market pressures alone cannot make the campaign for of sustainability sustainable in the long term.

It would be counter-productive if foreign green NGOs and consumer organizations, which are among the most assertive members of the RSPO, try to intervene in implementing changes in Indonesia. There are rules which are already in place and numerous ministries and local government agencies that have to be brought into the process.

The causes of deforestation or forest fires are complex as they are rooted in the most basic problems of poverty, unemployment and weak law enforcement. The blunt fact is that poor farmers trees are usually worth much more dead than alive.

Put another way, land is worth more as cropland than as forests as the benefits from trees such as capturing carbon emissions and embodying biodiversity are hard to price. They are also intangible concepts for farmers who are preoccupied with the question of what to eat tomorrow.

It will be difficult to change the behavior of small farmers illegally cutting trees and burning degraded forest lands and peats if they remain gripped by dire poverty. 

________________

The writer is senior editor at The Jakarta Post.

Read full post »

The week in review: Jokowi and childish lawmakers

What a striking difference between the executive and legislative branches of the government. On one side, the House of Representatives has been wasting taxpayers’ money on protracted squabbles less than one month after its installation, with the coalition of opposition parties continuing to pursue the politics of vengeance for the losing presidendial candidate Prabowo Subianto.

Prabowo’s coalition of opposition parties and President Joko “Jokowi” Widodo’s supporting coalition remained deadlocked in a fight for the leadership positions of the working commissions at the House. On the other side, President Jokowi and his Working Cabinet immediately set themselves to work hard at fulfilling the needs of the people.

Vincent Lingga- The Jakarta Post | Editorial | Sun, November 09 2014, 12:49 PM

Early this week, Jokowi launched a newly-designed social assistance program to protect the most vulnerable groups of people from the inflationary impact of a series of painful reforms the government will soon launch to prevent the public sector from going into bankruptcy and to lay a stronger foundation for the economy. The social assistance program has been designed to shift the fuel subsidy from consumptive to productive use and at the same time to promote financial inclusion by using mobile-banking mechanisms to deliver compensation funds for almost 16 million poor households.

The concept is to move away from the commodity-based subsidy to a better targeted people-based subsidy focusing on the needs of poor farmers and fishermen.

Simply lowering the fuel-price subsidy by 40 percent would save billions of dollars that could be allocated for the expanded social protection programs and badly-needed infrastructure development.

Reform is usually difficult during good times when economic growth is robust and the financial market is optimistic because the government and politicians become complacent. This was the situation in Indonesia between 2010 and early 2013 when structural reforms virtually stalled.

But the economic conditions inherited by the government of Jokowi, although not critical yet, are already quite bad, with the state budget and current account being threatened by widening deficits caused by rising oil imports and weak commodity exports. 

Hence it is a good time now to bite the bullet and launch the long-delayed reforms. This is the momentum that the Jokowi government seized by launching the newly-designed social assistance programs to cushion the most vulnerable segments of the people from the short-term pains likely to be inflicted by the upcoming fuel-price increase. 

Earlier last week, only one day after installing his Cabinet, Jokowi launched a national campaign of bureaucratic reform initially focusing on the streamlining of business and investment licensing. He made an impromptu inspection of the Investment Coordinating Board (BKPM) to proclaim his commitment to making things quite easy for doing business in Indonesia.

Earlier this week, the President gathered all provincial governors in a joint working conference with the Cabinet, discussing the vital importance of private investment in reinvigorating the economy in view of the severely limited fiscal capacity.

Jokowi urged the governors to woo investment by establishing one-stop service centers for investment licensing and gave them one year to complete the reform, or face penalties in the form of smaller fund-transfers from the central government.

In the meantime, Coordinating Maritime Affairs Minister Indroyono Soesilo announced on Wednesday that the government would soon grant visa-free entrances for visitors from Australia, China, Japan, Russia and South Korea to woo more tourists to Indonesia. The government also is fine-tuning a government regulation to expedite the licensing process for yachts and international cruise ships to Indonesia to one or two days, also to attract more tourists to spend their money on boosting the Indonesian economy.

Likewise, Indroyono added, he is also reviewing the arduous licensing process in the fishing industry to enhance the role of Indonesian companies in the marine-resource industry and at the same time prevent illegal foreign poaching of the fishery resources. These programs will bolster tax and non-tax (license fees) revenues for the government for reinvestment in human resource and physical infrastructure development.

More funds for the provision of the people’s basic needs will be available immediately after the government launches its fuel-energy reform within the next two weeks. 

While we feel encouraged at seeing the high pace of the government program, it is quite discouraging to see how the process of selecting the leaders of the House and its commissions has led to a bitter division in the legislature into two seemingly irreconcilable camps. 

We had expected high-quality debates on government policy in the House after the opposition parties repeatedly affirmed their intention to play the role of an effective check-and-balance mechanism. 

What we instead observed is a misguided political fight between the party elites to maintain their privileged positions at the expense of the common people’s interests. The coalition of opposition parties seemed intent only to harass the Jokowi government. We are flabbergasted to see how the six parties within the opposition coalition have allowed themselves to be used for the egotistical agenda of their leaders.

Fortunately, though, the common people seem indifferent or simply cynical about the childish squabbles in the House. There is no similar sentiment at the grassroots level. The current conflict in the legislature has much to do with the immaturity of the leaders of the opposition parties.

Read full post »

Commentary: Cutting red tape will reduce business risks, bolster investment

Vincent Lingga, The Jakarta Post Jakarta, The Jakarta Post, | Fri, October 31 2014, 9:26 AM

President Joko “Jokowi” Widodo’s surprise inspection of the Investment Coordinating Board (BKPM) on Tuesday, only one day after he installed his Working Cabinet, will not immediately solve the business licensing problems that have been plaguing the country.

The impromptu visit is symbolic, providing the right, and a loud, signal to both government officials and the business community that cutting bureaucratic red tape and expediting business and investment licenses is at the top of Jokowi’s priority programs, as he promised in his election campaign.

But the new President must be fully aware that such reform is never easy because it will take away rents that have built up in the bureaucratic system for decades and therefore will trigger opposition from those who are at risk.

Surprise inspections of public offices and impromptu meetings with the common people, called blusukan in the Javanese dialect, were one of Jokowi’s main hallmarks when he was the mayor of Surakarta in Central Java and the governor of Jakarta. It was the consistent bureaucratic reform that built up Jokowi’s business-friendly credentials.

Jokowi has designed such inspections to keep civil servants on their toes and to enable him to have informal, straightforward communications with the people.

Reforming the business and investment licensing administration is the best thing he can immediately do to improve the business climate because Indonesia is notorious for arduous, overlapping, scattered, entangled and mammoth processes to get permits.

Jokowi does not need to navigate the political minefield of the House of Representatives, where his coalition of parties is the minority, to implement his bureaucratic reform. But simply reforming the licensing bureaucracy will go a long way to reducing business uncertainty, business risks and consequently lending costs.

Former acting chief economics minister Chairul Tanjung made a shocking revelation recently, pointing out that starting up a business in the upstream oil and gas sector alone required more than 70 types of permits from 17 different government offices, not including dozens of other licenses from regional governments.

The whole licensing process often takes up to two to four years before investors can start up operations, as Jokowi himself discovered.

Likewise, it takes almost three to four years to gain all the permits from the central and regional governments for investment projects in the manufacturing, plantation, transportation, construction and power generation sectors. This means, for example, that a major manufacturing plant could take up to six years (three years for licensing and three years for construction) to begin operations.

The problem, though, is that many of the permits imposed on business or investment projects often have nothing to do with ensuring compliance with the laws or regulations. The Corruption Eradication Commission (KPK), after a few months of research and survey in the mining sector, revealed in April massive tax evasion within the coal mining industry with potential state losses of US$2.2 billion annually as it found that almost 25 percent, or 725 of the 3,826 coal mining licenses issued by regional administrations (mostly in Kalimantan and Sumatra), did not have taxpayer registration numbers.

The business licensing red tape has been responsible for putting Indonesia in the ranks of the 30 lowest of almost 190 countries surveyed by the World Bank group for its annual ranking of the Ease of Doing Business. It is also the arduous licensing procedures and other bureaucratic red tape that have made the Indonesian economy among the least competitive, even in the ASEAN region.

As a common man, and formerly a small furniture businessman, Jokowi should have experienced the pains and frustration when dealing with government offices. He also is fully aware of the vital role of business, or private investment, in bolstering the economy as it is business enterprises, not the public administration, that generate jobs and tax receipts for the government.

It is jobs that generate wages and it is wages that generate purchasing power for the people to buy goods and services and propel the wheels of the economy.

Complicated licensing procedures also have been one of the biggest hurdles faced by micro and small enterprises (SMEs), which forces many of them to remain in the informal sector (unregistered), while the role of the estimated 25 to 35 million SMEs for employment is quite significant.

Cutting the licensing red tape will benefit the SME sector more than large businesses. Without special assistance or affirmation measures, micro and small enterprises will be unable to benefit from the business opportunities generated by economic development. Put briefly, these small players cannot, without special assistance, freely enter the market game.

Hence, if the Jokowi government is really serious about expediting business or investment licensing, it must first review the cumbersome procedures and reassess the real purpose or merit of the dozens of permits an entrepreneur is required to obtain before starting up a business.

Inter-ministerial coordination has always been the weakest point of the government, in spite of the creation of the coordinating economic minister in the Cabinet and the establishment of BKPM in the 1970s.

No wonder. Because within the perspective of the public administration, which has been perceived to be the most corrupt in East Asia, licensing authority means the power to collect rents. Hence, there will certainly be strong resistance from vested interests. Moreover, this reform also requires the streamlining of overlapping rules at various ministries.

But change is often disruptive and messy. And when it is made to run fast it may set off a backlash tearing the process apart. President Jokowi therefore should provide strong leadership to push through this bureaucratic reform.

Paper Edition | Page: 9

Read full post »

View Point: Smuggling makes fuel-subsidy cut even more imperative

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, September 28 2014, 1:37 PM

Several military (TNI) and police members were embroiled in a brawl at a housing complex on Batam Island near Singapore early this week after a police raid nearby on an alleged illegal storage house of subsidized fuel leaving four TNI non-commissioned officers with gunshot wounds.

A few days earlier, a low-ranking female civil servant, also in Batam, was arrested on charges of laundering Rp 1,300 billion (US$108 million) in cash allegedly derived from the illicit export of subsidized fuel. Four others, including an employee of state-owned oil company PT Pertamina and two temporary Navy employees, have also been implicated in the contraband fuel trade case.

Earlier this month, the Supreme Court almost doubled the sentence of former low-ranking police officer Labora Sitorus to 15 years’ imprisonment for fuel smuggling, illegal logging and money laundering worth about $103 million.

These are just a few of the dozens of cases of subsidized-fuel smuggling uncovered over the past 10 years.

It is common knowledge that a lot of subsidized fuel has always been smuggled overseas; the long coastlines of the world’s largest archipelagic nation provide great opportunities for such contraband trade.

Poorly-paid officials, police, members of the military and employees of state oil company Pertamina, the sole supplier of fuel oil, are all highly prone to corruption. Most importantly, the subsidized prices of domestic fuel oil are far — almost 50 percent — lower than in neighboring Singapore and Malaysia, which are only about 20 minutes by ship from Riau Islands, including Batam and Bintan.

The customs agency, the police and patrolling naval units do reveal from time to time the interception and foiling of oil smuggling, but this is simply a ploy to mislead the public into thinking that they are doing their best to prevent fuel being smuggled overseas.

The greatest credit for the latest uncovering of massive fuel smuggling should go to the Financial Transaction Report and Analysis Centre (PPATK), which in most other countries is called the financial intelligence unit.

It was the PPATK, which routinely scours financial records for signs of illegal activity and suspicious transactions through bank accounts, that discovered the fuel smuggling in Papua and Batam.

PPATK analysts realized that the billions of rupiah flowing weekly or monthly through the bank accounts of the low-ranking woman civil servant and former police officer Labora did not comply with their earning profiles, as their official salaries did not exceed Rp 4 million ($333) monthly.

The analysis and further police investigations finally traced the suspicious transactions to a ring of subsidized fuel smuggling that had been in operation for several years.

The rings of fuel smugglers in Riau Islands, Central and East Java, East Kalimantan, Papua and several other provinces that have been uncovered in recent years could not have occurred without collaboration with Pertamina officials or Navy members or seaport officials.

Pertamina still has the monopoly on the distribution of subsidized fuel throughout the country and it must know if a significant volume originally allocated for certain areas is diverted overseas.

Smuggling and other forms of malfeasance related to the misuse of subsidized fuel once again show how imperative and urgent it is now to bring domestic fuel prices closer to international levels. As long as domestic fuel prices remain at only 50 percent of international prices, the large margin is too much of a temptation for profiteers and corrupt officials to resist.

As the country now depends on imports for almost 60 percent of its oil needs and oil imports have become the main cause of the ballooning current account deficit and the sharp rupiah depreciation, subsidized fuel smuggling could be considered an act of economic subversion.

The government therefore should be deadly serious in investigating and dealing with the brains and leaders behind oil smuggling, unlike in past cases where only the “small fry” have ended up in court.

It is not exaggeration to say that the way the new government addresses the runaway fuel subsidy will be the litmus test of its economic management and policy-making capability.

President-elect Joko “Jokowi” Widodo promised in his election campaign to abolish fuel subsidies within four years. He should deliver this promise, but time the gradual phase-out wisely to minimize the impact on inflation. Most analysts consider November or April, which are the harvest seasons, as the most appropriate time to usher in the fuel subsidy cut.

Certainly, reforming the fuel subsidy system will inflict some short-term pain, as production costs and prices of goods and services will increase. Therefore the new government should conduct a nationwide information campaign to prime the public on the benefits of the fuel reform measure.

Many ideas have been touted on how to phase out the fuel subsidy. One reform scenario calls for the indexation of the subsidized fuel prices to an agreed threshold, thereby allowing the prices to move up and down on a monthly or quarterly basis.

The second idea sets a quarterly subsidy spending limit, then adjusts the prices in subsequent quarters when international market oil prices cause subsidies to breach the ceiling.

The fixed-subsidy scheme is attractive because the automatic monthly price adjustment provides policy predictability for the market and general public, as well as protecting the economy from sharp price adjustments and their shocking inflationary pressures.

Whichever policy the new government implements, the energy reform should from the outset clearly set out the fuel-policy direction for the next five years, instead of muddling through one-off price rises.

The writer is senior editor at The Jakarta Post.

Read full post »

The week in review: Past rhetoric, daunting tasks

The hot stories and the main topic of heated debates during the week after the Aug. 21 constitutional confirmation of Joko “Jokowi” Widodo as Indonesia’s new president beginning on Oct. 20 remain the complex and daunting economic challenges his government must immediately confront.

 Foremost among the tasks is the painful measure the new government has to immediately take to achieve fiscal sustainability, as it will be virtually impossible for Jokowi to deliver even a few of the promises he made to the poor segment of the population during his election campaign without slashing the huge fuel subsidy.

In fact, worries about the shortage of subsidized fuel have already hit many areas, prompting long lines of motorists at gasoline stations as the state oil and gas company Pertamina attempts to ensure that the use of subsidized fuel this year does not exceed its mandatory volume ceiling of 46 million kiloliters. 

The new government will indeed face a very austere budget. More than 85 percent of the 2015 state budget plan will be tied up by routine (operating) spending covering fixed expenditures mandated by specific laws on education, regional autonomy and health, as well as other inflexible expenditures for personnel, debt servicing and energy and non-energy subsidies.

Hence, Jokowi will either have to cut a portion of the Rp 364 trillion (US$31.14 billion) energy subsidy or step up tax collection to get more revenue to fund some of the top priority programs he promoted during the election campaign.

However, since economic growth in 2015 is expected to be stagnant at this year’s 5.3-5.5 percent range, it would be rather difficult to immediately increase tax revenues. Hence, cutting fuel subsidies could be the most feasible way of immediately generating savings to use for more productive programs.

When it comes to the huge, wasteful spending on fuel subsidies, Jokowi’s position is by and large similar to President Susilo Bambang Yudhoyono’s four months after his rise to power in October 2004, when his predecessor Megawati Soekarnoputri left behind a fuel-subsidy time bomb.

Consequently, Yudhoyono was forced to raise the price of subsidized fuel twice in early 2005 or face severe fiscal difficulties.

The dilemma is that the issue of fuel subsidies has always been socially and politically sensitive, causing street protests and political turbulence at the House of Representatives, despite it being public knowledge that more than 70 percent of the fuel subsidies are enjoyed by middle- and high-income citizens.

Yet more worrisome is the risk as to whether the new government will be able to gain House approval for a raise in subsidized fuel prices as the coalition of opposition parties still controls more than 52 percent of the seats at the House.

The biggest challenge in ushering in fuel-price reform (meaning raising prices) is related to how social safety net programs should be designed and structured to cushion the impact of the general price increase caused by higher fuel prices on low-income citizens, the most vulnerable members of society.

Even though the number of citizens living below the poverty line has decreased to less than 12 percent of the total population, the number of people living on the verge of the absolute poverty line has remained large. This highly vulnerable group could easily be plunged into dire poverty by even the slightest decline in the macroeconomic condition.

The other downside risk is that the commodity market will most likely remain weak next year due to the persistent decline in the economic growth of  China, Indonesia’s biggest trading partner. Meanwhile, Indonesia’s manufacturing sector is unable to offset the decrease in export earnings from natural resources because of an acute shortage in supply capacity and low competitiveness due to the high logistics costs caused by poor infrastructure.

Given these limitations, the new government should do its best to woo more inflows of portfolio capital to fill in the large current account deficit, as well as foreign direct capital to build new manufacturing plants and infrastructure.

The next top-priority initiative requires the incoming government to expedite negotiations with contractors in the general and oil and gas mining industries so that the pace of production and the speed of new investments can be immediately accelerated. The upstream oil industry needs a special boost because the large deficit in the international trade balance has been generated by oil imports that now account for more than 60 percent of national consumption.

The new government should go the extra mile to convince foreign investors that it is not influenced and misled by partisan resource nationalism, as the rhetoric during the past election campaign implied.

In view of the high expectations facing the new government and since bitter pills (painful measures) are included among the first action programs Jokowi must implement, it is of paramount importance for the new government to maintain the public trust by demonstrating high standards of governance and clean and efficient administration.

The first test for sustaining this confidence lies in Jokowi’s selection of the members of his Cabinet, especially his economic team. It would also help minimize the potential for protests if the new government channels the bulk of any savings from the fuel reform toward improving infrastructure in rural areas, rehabilitating wet (traditional) markets in urban centers and smoothing the distribution of goods to control the general price rise after the fuel reform.

— Vincent Lingga

Vincent Lingga - The Jakarta Post | Editorial | Sun, August 31 2014, 12:33 PM

Read full post »

Commentary: Jokowi’s transition team should prepare crisis-management center

President-elect Joko “Jokowi” Widodo describes the team set up under Rini Mariani Soemarno Soewandi as a transition team because its job is to prepare a smooth transfer of power from the outgoing President Susilo Bambang Yudhoyono administration later in October.

But a crisis-management center is perhaps a more fitting job description for Rini’s task force, given the uphill tasks ahead and the bold programs of action that need to be executed immediately to build confidence in the new government.

 However it is measured, the fiscal situation the Jokowi administration will inherit will be quite adverse due primarily to the huge fuel-subsidy burden to be left behind by the outgoing government.

The new administration will be trapped in a severe liquidity crisis, unable to make any meaningful investment if it does not act immediately to significantly cut fuel subsidies because more than 80 percent of the total budget will be
taken up by personnel costs, debt servicing and amortization, fuel subsidies and transfers to regional administrations.

 But cutting fuel subsidies without first putting in place a well-designed social safety-net program to protect the poor from the short-term, steep price rises could ignite widespread street protests and consequently social and political turbulence.

Hence, the first task of the Rini team is preparing a comprehensive social safety-net program within the draft 2015 state budget or implementation at the beginning of the 2015 fiscal year in January and building up a conducive public-opinion campaign for the painful energy reforms.

As Jokowi’s governing experience has been limited to the Central Java city of Surakarta and the capital city of Jakarta, he and vice president-elect Jusuf Kalla need to immediately implement confidence-building programs of action in such strategic areas as land acquisition for basic infrastructure such as roads, airports and seaports and power plants.

Instead of being embroiled in political bickering, scapegoating and blame games, it is now past the time for rhetoric and high time for swift action. It is the responsibility of the Rini team to thoroughly select top-priority programs for immediate execution that will have the biggest impact on building public confidence in the policy-making and implementing capability of the Jokowi administration.

Hence, the structure of Jokowi’s working office and the architecture of the upcoming Cabinet that the transition team will prepare should be designed for fast decision-making, yet with a high degree of transparency and accountability.

Put another way, the institutional mechanism of the president-elect’s working office should enable Jokowi and Kalla to provide effective leadership, and the Cabinet should be filled by ministers capable of providing the proper management and coordination of all reform measures.

One of the most important organizations that Rini and her team should prepare is the kind of a crisis-management mechanism directly under the president where well-coordinated action programs can be quickly decided and any problems in their implementation can be settled at the highest level.

The crisis center should serve also as a nerve or a war-room-like center to bring the political leadership face to face with the representatives of the business community and bureaucratic institutions at least once a month to frankly discuss and resolve any problems faced in the economic sector with the utmost sense of urgency.

 Any issues related to economic activities such as stalled budget execution, land acquisition, port clearance for imports and exports, anti-business rulings issued by local administrations, smuggling and other crucial reform measures should be settled quickly at the highest level of the executive branch.

The basic rationale of such a crisis-management mechanism is that the management of an economic crisis should run like the emergency center of a hospital where fast decisions and concrete programs of action are much more important than bureaucratic procedures or rigidities, where problems are resolved by executive fiat on the spot.

It is the center where political resolve is translated into bureaucratic resolve as the personal presence of the president in the chair will keep the bureaucrats on their toes as they have to be ready with answers to the president’s questions.

Last year, Yudhoyono’s economic think tank, the National Economic Committee (KEN), also recommended the establishment of a special government-business task force to serve as a crisis-management center to cope with more pressing economic challenges.

Jokowi made the right choice by appointing Rini as the leader of the transition team. With her past experience as, among other things, a senior executive at Citibank Indonesia, chief executive officer of the widely diversified Astra International business group and trade minister under the Megawati Soekarnoputri administration in 2001-2004, Rini well fits the bill to lead the transition office.

Rini is fully aware that without new major investment in basic infrastructure the economy will become increasingly less competitive and less attractive to new investment in manufacturing.

Further down the line, without new investment the manufacturing sector will become less competitive because its obsolete plant and equipment will make it grossly inefficient, unable to produce goods of higher added value and will render its products unable to meet changes in market preferences.

_____________

The writer is senior editor at The Jakarta Post.

Vincent Lingga, The Jakarta Post, Jakarta | Commentary | Wed, August 06 2014, 9:19 AM

Read full post »

View Point: Jailing ex-BI governors and deputy governors

Even though over the past 10 years, eight former Bank Indonesia (BI) governors and deputy governors have been jailed for corruption or other forms of wrongdoing, I beg to disagree with the Jakarta Corruption Court’s panel of judges which decided on Wednesday that the November 2008 bailout of Bank Century (renamed Bank Mutiara) was made in bad faith and motivated by corruption.

Former BI deputy governor Budi Mulya did deserve severe punishment for his unethical borrowing of Rp 1 billion (US$86,095) from Robert Tantular, the former owner of Bank Century. 

Even though the loan was personal and had been repaid, it was still a serious conflict of interest because, at the time, BI (the central bank) was still the supervisor of the banking industry.

But deciding that the $670 million bailout policy was made in bad faith and motivated by corruption would cause long-term damage to the government’s policy and decision-making capability, destroying the capacity and morale of policymakers, especially at the central bank and Finance Ministry.

If politicians could dispute or even attack a policy judgment made in good faith and in compliance with proper procedures, senior officials would not have the courage to take any economic or financial decisions, however urgent or imperative they may be.

The 3,700-page indictment of the prosecutors failed to reveal and prove who the main beneficiaries of the bailout measure were, as they could not find a single cent of the bailout funds flowing to then finance minister Sri Mulyani Indrawati (now a managing director at the Washington-based World Bank) and then BI governor Boediono (now Indonesia’s vice president).

If corruption was the motive, the big question then is who was so powerful that they were able to pressure Sri Mulyani and Boediono, both well known for their impeccable integrity and long careers within government, to abuse their authority in such an important, high-profile policy decision.

The court decision would only satisfy the ill-advised and corruption-infested House of Representatives that in March 2010 decided to order the government to conduct criminal investigations into the bailout process.

The main bone of contention with the House on which prosecutors built their indictment was that Bank Century was not qualified for BI emergency liquidity credit and was not a systemically important bank, thereby not entitled to be bailed out by the Deposit Insurance Corporation (LPS).

The Financial Sector Policy Committee (KKSK), chaired by Sri Mulyani and including the BI governor and deputy governors, argued that the financial system in late 2008 was so fragile due to the fallout from the 
global financial crisis that began in New York, that allowing even a small bank such as Bank Century to fail at that time would have a domino effect on dozens of other similar-sized banks.

The financial crisis in the last quarter of 2008 was certainly not as severe as that in 1998 but the financial market was indeed in deep distress, as shown by the following developments:

The government decided on Oct. 12, 2008 to increase the ceiling amount of bank deposits covered by the LPS by 20 times, from 
Rp 100 million to Rp 2 billion, to prevent capital flight as neighboring countries such as Singapore and Australia implemented a blanket guarantee on deposits. 

The government issued a regulation in lieu of law on the establishment of the framework of a financial safety net that authorized the finance minister to lead the management of a financial crisis, indicating emergency conditions. 

The rupiah melted from Rp 9,500 to the dollar to Rp 12,500, capital outflows reached $9 billion, more than 20 mid-sized banks suffered severe liquidity problems while the interbank market dried up. 

Even the largest state banks in the country begged a liquidity injection of Rp 15 trillion from BI. Share prices collapsed and the stock exchange was closed for a few days in early October, 2008.

Given the critical condition, it was within the full authority of the BI board of governors and KKSK, based on the law on the financial safety net framework, to take such a contingency measure as changing the threshold for Bank Century to make it qualified for BI emergency liquidity credit, to prevent a full crisis. 

After the bailout of Bank Century, Indonesia did escape the global crisis unscathed and the economy began to recover strongly in 2009 and expanded by around 6 percent a year until 2012.

However, Boediono and Sri Mulyani’s defense of the Bank Century rescue was made very weak after the discovery of the massive cost overruns of the actual bailout, the questionable massive withdrawal of deposits a few days before and after the bailout, as well as the discovery of banking crimes by the bank’s owners and management.

The situation became murkier after vested-interest groups at the House jumped in and exploited the bailout issue to hold the Susilo Bambang Yudhoyono government hostage. 

But there is a caveat of debating now, that the situation has returned to normal and stable, as to whether Bank Century did pose a systemic risk to the banking industry. It is simply impossible now to reconstruct precisely the psychological condition of the policymakers and the national and international financial situation prevailing in November 2008. 

Any decision involves a choice from a number of alternatives. Decisions can be a choice of complex admixtures of facts and values especially in a critical situation.

The consequence of the court’s verdict on Mulya is that as the bailout was based on a collective decision of the BI board of governors and KKSK, all executive members — including Sri Mulyani and the seven members of the then BI board of governors — should also be brought to court.

In another twist that could also rock the stability of the financial system, Muliaman Hadad, chairman of the Financial Services Authority, currently the sole supervisor of the whole financial services industry, was a member of the BI board of governors in 2008.

The writer is a senior editor at The Jakarta Post.

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, July 20 2014, 11:50 AM

Read full post »

The week in review: Grim economy clouds campaign

More bad economic news has clouded the campaign for the July 9 presidential election, two weeks before the campaign period ends. 

That is not because of the shocking statement by presidential candidate Prabowo Subianto last Sunday that the state had lost Rp 7.2 quadrillion due to corruption and inefficiency. 

Almost all analysts, ministers and former ministers immediately rejected Prabowo’s figures as simply groundless, irrational and completely wrong even though he claimed that the number originated from an official statement by Corruption Eradication Commission (KPK) chairman Abraham Samad.

Samad himself denied Prabowo’s statement, asserting that the presidential candidate grossly misquoted him out of context and not from the right perspective.

Prabowo highlighted the huge state losses during a televised debate between him and rival Joko “Jokowi” Widodo on Sunday night, which focused on economic issues. Prabowo said it would be quite easy for him, if elected president, to implement all the grand development programs he had promised because he would simply focus on slashing state budget losses to secure more funds.

But then again, even though the alleged state losses were not as huge as Prabowo asserted in his campaign rhetoric, many things seemed to worsen in the economic sector, especially in the monetary and fiscal outlook.

The latest data shows that Indonesia’s debt service ratio (against export revenues) increased to 46.3 percent in the first quarter from 36.8 percent in the same period last year, much higher than the 30 percent deemed the maximum for a safe level.

Meanwhile, selling pressure pushed down the rupiah exchange rate to as low as Rp 12,027 per US dollar at one time on Wednesday, amid concerns over the country’s trade balance and current-account deficit due to the sharp upward trend in international oil prices caused by escalating tension in Iraq. 

Concerns have also been growing over the significant increase in the private sector’s foreign debts as a default could adversely affect the financial sector’s stability. Bank Indonesia (BI) data as of Tuesday revealed that the private sector’s foreign debts rose by almost 13 percent year-on-year to $145.63 billion as of April.

Even though the latest private sector debt position is not yet dangerous, BI will soon issue new regulations to check foreign borrowing by the private sector. According to the central bank, non-bank companies accounted for 82 percent of the total private sector’s foreign debts. National enterprises accounted for $38.05 billion and Indonesia-foreign joint ventures for $42.76 billion. 

Further bad news from the fiscal sector should worry the new government that will take over in October after the government and House of Representatives agreed on Wednesday to carry over Rp 50 trillion in energy subsidies this year to the 2015 state budget.

The government-House agreement on passing over the fiscal burden to the new government was reached at a plenary session that approved amendments to the 2014 state budget, made necessary by the lower economic growth estimate and consequently smaller tax revenues.

The energy (fuel, gas and electricity) subsidies for the current fiscal year are estimated to increase by 24 percent to 

Rp 350.3 trillion due to rising oil prices, higher consumption and rupiah depreciation. But Rp 50 trillion of this subsidy will be carried over to the next state budget.

The rupiah rate heavily influences the costs of fuel because Indonesia now depends on imports for almost 60 percent of its demand of about 1.5 million barrels a day.

The amended budget for 2014 cut down spending by Rp 43 trillion, derived mostly from capital expenditures. Despite this cut, total spending will still increase from the Rp 1.842 quadrillion set in the original budget to Rp 1.876 quadrillion or 2.4 percent of gross domestic product (GDP) due to the 24 percent rise in energy subsidies.

The budget amendments also slightly changed macro assumptions for the current year, with gross domestic growth set at 5.5 percent, inflation at 5.3 percent, the average rupiah rate at Rp 11,600 to the dollar, the short-term interest rate at 6 percent and the average oil price at $105/barrel.

Finance Minister Chatib Basri therefore warned that whoever won the upcoming presidential election would not have many policy options, unless he slashed energy subsidies.

*****

In a shocking revelation of more details on the dismissal of Prabowo Subianto from the military in 1998, former military commander Wiranto asserted Thursday that Prabowo had been discharged for ordering the abduction of pro-democracy activists between late 1997 and March 1998.

The confirmation could scupper Prabowo’s presidential hopes as many did not question the credibility of the information even though Wiranto is a member of the campaign team for Prabowo’s rival, Joko “Jokowi” Widodo.

Wiranto, who was Prabowo’s superior at that time, said military leaders had not ordered the abductions, emphasizing that the abductions were an initiative taken by officers under the command of Prabowo, then head of the Army’s Strategic Reserve commander (Pangkostrad).

Prabowo’s supporters have long tried to play down his dismissal from the military, calling it a past incident that has no bearing on his suitability as a presidential candidate.

— Vincent Lingga

The Jakarta Post | Editorial | Sun, June 22 2014, 11:40 AM

Read full post »

How Salim Group reemerged from near bankruptcy to vast conglomerate

When autocratic president Soeharto fell in May 1998 after almost 32 years of rule with steady, robust economic growth, he left behind an economy in shambles floating on a corrupt bureaucratic system polluted by business cronyism and nepotism.

So fragile was the foundation of the economy that the crisis caused one of the most substantial wealth destructions in modern history. The rupiah melted from Rp 2,500 to the dollar in mid-1997 to as low as Rp 17,500 and pushed an estimated 30 million people into dire poverty as the economy contracted by 14 percent in 1998.

Soeharto’s fall certainly set off a devastating backlash against Liem Sioe Liong (aka Sudono Salim), who had been the leader of Soeharto’s business cronies and had owned the largest conglomerate in Indonesia and controlled the country’s largest private bank; vast oil palm plantations; flour milling, cement, noodle and cooking oil businesses; and hundreds of other companies.

Most analysts and politicians then predicted that the tornado of anti-crony backlash would wrench away all Liem’s assets and crushed the Salim Group as political pressure and demonstrations virtually demanded “blood” in revenge.

 Liem did lose most of his business assets, including Bank Central Asia (BCA), almost 300,000 hectares of oil palm estate, automobile and cooking oil companies and cement industries, as he had to pledge hundreds of companies, worth more than US$5.5 billion, to the government as security to cover debts incurred during the economic crisis.

But less than 15 years later, the Salim Group has not only survived but has grown to become one of the largest conglomerates in Southeast Asia.

Forbes magazine last year put Anthony Salim, Liem’s youngest son, who replaced his father as the CEO of the Salim Group, at number three on its list of the 50 richest Indonesians, with an estimated $6.3 billion in assets spread out across Indonesia, Singapore, China, Australia, the Middle East and Africa.

The latest book on Liem and his business group by husband-wife authors Richard Borsuk and Nancy Chng, Liem Sioe Liong’s Salim Group: The Business Pillar of Suharto’s Indonesia, documents how Liem had gained Soeharto’s trust since the 1950s and eventually became his most trusted business crony and financier for more than three decades.

Many books and articles have been written about Liem and other Chinese Indonesian businessmen who thrived during Soeharto’s rule, but this book is quite special because it includes the results of many hours of interviews with Liem and Anthony between 2006 and 2007.

These interviews were the first time Liem, who died on June 10, 2012, and Anthony had talked to writers on a wide range of topics because the Salim Group had always been averse to publicity.

It is to the credit of Borsuk, who had more than 40 years of journalistic experiences in Asia, including in Indonesia as the Asian Wall Street Journal’s correspondent from 1987 to 1998, and Nancy, a scholar and business analyst with experiences in Thailand and Indonesia, that their perseverance and good reputation enabled them to gain Liem and Anthony’s trust.

Another factor that made the 573-page book rather outstanding and credible is that it is not an autobiography. The writing was, from the outset, undertaken as an independent venture. It was neither authorized nor financed by the Salim Group or the Liem family, the authors assert.

Further contributing to the book’s empirical richness and analytical depth, is that the authors also conducted research in Jakarta, Singapore, Hong Kong, Fuqing — Liem’s hometown in China; Kudus — his hometown in Indonesia; and Semarang, as well as interviewing Liem’s business partners and rivals.

The authors also interviewed executives from the Indonesian Bank Restructuring Agency which, on behalf of the government, took over Liem’s assets during the height of the economic crisis, business and political analysts and the executives of the International Monetary Fund (IMF), which gave bailout funds to the government and actively took part in supervising Indonesia’s economic management from 1997 to the early 2000s.

The most interesting parts of the book, which reveals many new facts, are the last seven of the 22 chapters as they show blow-by-blow how Anthony’s strategic business vision and acumen brought the group through the hostile political atmosphere and adverse business climate.

Describing how difficult and dilemmatic the problem he encountered in mid-1998 soon after B.J. Habibie replaced Soeharto, Anthony told the authors “he [Habibie] hated me like hell” because the Salim Group CEO had urged Soeharto in early 1997 to give then vice president Try Sutrisno a second term.

 The book provides insight into how Antony demonstrated his business skills and prowess in negotiating the settlement of the Salim Group’s huge debts, incurred mostly through the failure of Bank BCA, with IBRA while many politicians, including several Cabinet ministers, simply demanded the dismantling or confiscation of the Salim Group’s assets.

He showed his strategic business vision by striving hard to maintain Indofood (flour milling and noodle) as the only major enterprise within the Salim Group after pledging more than 105 companies to IBRA for its debt settlement.

The flour and noodle business turned out to become his main cash cow which greatly aided in the reacquisition of most the business assets he lost in 1998, and even aggressively expanding businesses in dozens of other countries.

The authors tell in a journalistic style the dominant role Liem’s businesses played in the economy and on to describe how an emotional-based nationalization of the Salim conglomerate not only would wipe out any chance of the government to recoup the billions of dollars in central bank credits to BCA but also would cause severe economic disruptions.

Then president Habibie did face a delicate balancing act as he underwent tremendous time pressures to complete debt settlements with the Salim Group and hundreds of other big debtors, many of whom were the business cronies of Soeharto and his children or his relatives, before they tried to strip their assets.

The high-quality analysis and the depth of the material presented in the book rightly commend Liem’s business acumen, skill, instinct, serendipity and networking skills, high talent in choosing the right business partners and ability to win the trust of people, including Soeharto’s generals.

Liem, as Soeharto’s most-trusted business crony, did receive favors and preferential treatment such as monopoly rights in many commodities and businesses, but all this also was related to Soeharto’s mission to develop the economy out of the shambles left behind by Sukarno.

Liem and Soeharto, thus, were simply tied in mutually beneficial relationships. Soeharto needed seed money for economic development as the government was strapped in a liquidity crisis in the mid-1960s and for keeping the military loyal. Liem with his sharp business acumen and access to funds from overseas was well fitted to become Soeharto’s best business crony who, being of Chinese descent, did not pose any political threat to Soeharto.

After the crisis, Liem and his successor Anthony have proven their business group can thrive without patronage. As Anthony once said he and his father did had good access to capital in the early days, but credit should not be given only to capital formation. The important thing is what happens after that.

True, during the Soeharto era, there were many people who had the same access to capital but they did not manage it properly.

Liem himself once told the authors that he was successful because things had fallen into place for him. He had been at the right location, at the right time and had the right connections.

In another quotation summing up the role of Liem, the book cites excerpts from an obituary article by Endy Bayuni, former chief editor of The Jakarta Post, on Jan. 12, 2012: “For good or for bad, Liem is very much part of Indonesian history, just as Soeharto is. He just happened to be the right man at the right place and at the right time and used this historical destiny well in building his business empire.”

Liem Sioe Liong’s Salim Group: The Business Pillar of Suharto’s Indonesia
Richard Borsuk and Nancy Chng
ISEAS Publishing, 2014
573 pages

Vincent Lingga, The Jakarta Post, Jakarta | Feature | Mon, June 09 2014, 11:36 AM

Read full post »