View Point: Freeport imbroglio: Sanctity of a contract should not always be honored

Vincent  Lingga, Jakarta | Opinion | Sun, December 06 2015, 2:38 PM

Should  the sanctity of an investment contract always be honored and should  business contracts be held sacred? Not always, assert Louis T. Wells and  Rafiq Ahmed, business management experts, in their book Making Foreign Investment Safe: Property Rights and National Sovereignty.

They  argue that the “magic” of property rights in industrialized countries  comes not from being absolute, but rather from a balance between  individual or corporate rights and fairness, and, especially, overall  economic benefits.

When circumstances change after a contract is  signed, making it impossible or impractical, or uneconomic or  inefficient, to comply with contractual obligations, courts may relieve a  party of its commitments.

Consequently, Wells and Ahmed further  argue, a nation may be excused from honoring a treaty if, first, the  existence of the circumstances that changed constituted an essential  basis of the consent of the parties to be bound by the treaty and,  second, the effect of the change radically transforms the obligations  that are to be performed under the treaty.

Even courts in  industrialized countries may excuse parties from fulfilling contracts if  they were entered under compulsion (duress) or corruption or if one  party is not competent, the book states. Sometimes in such cases, a high  standard of proof is not required as courts may simply assume that  something is amiss when there are at least substantial hints of  compulsion or corruption and the terms of investment arrangements seem  imbalanced.

The book contains real case stories on a  telecommunications and power generation contracts the Indonesian  government awarded to foreign investors in 1967 and 1992-1994,  respectively, under Soeharto’s authoritarian rule, when corruption,  collusion and cronyism were considered to have been rampant.

Wells  was one of the foreign advisers hired by the Indonesian government to  renegotiate the contract with International Telephone and Telegraph  (ITT) and nationalize the ITT subsidiary in 1980 into a state firm now  renamed PT Indosat Ooredoo.

Ahmed, an experienced manager, worked for Exxon Corporation for 20 years, including five years in Indonesia in the 1980s.

The  ITT subsidiary was nationalized in 1980 without causing any damages to  Indonesia’s credibility and reputation because the deal seemed to have  been based on a greedily lucrative contract that gave the US company an  annual rate of return on equity of over 80 percent.

But how are  these points of argument relevant to PT Freeport Indonesia (FI), the  local unit of US-based mining giant Freeport-McMoRan, which has mined  the world’s largest gold deposits in Papua since 1972?

The first  Freeport contract was signed in 1967 and its renewal was made in 1991  for another 30-year tenure also under the authoritarian government of  Soeharto.

Right or wrong, the public has perceived even until  now that most major mining companies that obtained their concessions  during Soeharto’s rule in 1967-1998 had bulldozed their way through the  corrupt licensing
system to obtain all the necessary permits for their operations in collusion with corrupt officials.

As Denise Leith observes in her book The Politics of Power: Freeport in Suharto’s Indonesia,  in the early years of Soeharto’s New Order regime, the government used  the vast mineral riches of Papua as collaterals on foreign loans aimed  at holding the archipelago together.

In the government’s  eagerness to steer the country toward economic stability and  international credibility, generous concessions were granted to FI in  its first contract of work in 1967. This contract of work had been  portrayed by many analysts as a blank check for Freeport to operate in  any way it chose with little regard for the consequences.

By  1991, when the contract was extended for another 30 years, Leith argues,  FI had become an integral part of Soeharto’s patronage system, an  integral cog in the politico-business machinery of the New Order.

None  of the allegations made against the New York-listed mining company have  ever been proven in court. But blatant unfairness could be easily seen  in the terms of the renewed contract that were mostly to the  disadvantage of the Indonesian people.

Being just and fair is even more crucial in FI’s case because mineral resources involve national patrimony.

Certainly  FI, which has invested hugely in Papua but has also reaped whopping  profits there over the past 45 years, will fight at any cost to get its  contract another 30-year extension because it plans to invest another  $17 billion in its mining expansion.

The problem, though, is  that the 2009 Mining Law stipulates that negotiations for extensions can  start only two years before a mining contract’s expiry, which in FI’s  case is 2021. Hence, FI can start contract negotiations only in 2019,  which will be an election year when nationalist sentiments usually peak.

The dilemma facing the government is that the FI 1991 contract  allows the American company to ask for contract negotiations any time  and it has implicitly threatened to bring any dispute to international  arbitration.

But the public has demanded that the government  stand firmly by the 2009 Mining Law and start negotiations only in 2019  and make good preparations to gain a fair share of the benefits from the  huge Ertsberg and Grasberg gold deposits in the next contract  extension.

Historian Greg Poulgrain of the University of  Sunshine Coast in Brisbane suggested in a recent article in this paper  that during the upcoming negotiations on the FI contract extension, the  government should demand clarification about the gold concentration of  the copper concentrate FI extracts in Papua.

Poulgrain, who has  interviewed Jean Jacques Dozy, the Dutch geologist who discovered the  Ertsberg and Grasberg gold reserves, says in his article that “the  Ertsberg gold concentration was stated to be around 2 grams/ton yet the  concentration in official Dutch reports and confirmed during my  interview with Dozy was 15 grams/ton”.

“This discrepancy needs  to be clarified […] The Ertsberg and the Grasberg, it should be stated,  have geologically developed from the same subterranean source,”  Poulgrain says.

The government, therefore, should force FI to  build a smelter in Indonesia, as required by the 2009 Mining Law, so  that the government will be able to ascertain the difference between  official and unofficial FI gold production.
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The writer is a senior editor at The  Jakarta Post.

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Global palm oil conference highlights smallholders

Vincent Lingga, The Jakarta Post, Kuala Lumpur | Business | Sat, November 21 2015, 5:34 PM 

The Roundtable on Sustainable Palm Oil (RSPO), a global body of plantation companies, refiners, consumers and green groups, that promotes the development of socially, environmentally and economically sustainable palm oil, concluded its 13th annual conference here on Thursday by highlighting the role of smallholders. 

Around 800 delegates from 45 countries who attended the three-day RSPO meeting acknowledged the important role of smallholders in Indonesia and Malaysia, who account for around 40 percent of the global palm oil output of 60 million tons.

While the majority of participants were delegates from big plantation companies, green NGOs and civil society organizations, they realized that the campaign for sustainable palm oil would never fully achieve its objective if smallholders were not educated and empowered to meet all the principles and criteria of social and environmental sustainability.

“I have a dream that someday in the future both national and international markets and consumers in general will know that all commodities coming from my regency have been produced by companies and smallholders in a sustainable manner,” Seruyan Regent Sudarsono told the meeting.

Seruyan regency and Sabah state in Malaysia are the first sub-national govenrments to adopt RSPO’s jurisdictional approch to develop sustainable palm oil, a model of rural development that improves the welfare of the rural poor through higher productivity but without damaging the environment.

Indonesia and Malaysia account for around 85 percent of the world’s palm oil production, supplying 40 percent of the global vegetable oil needs, according to the Rome-based United Nations Food and Agriculture Organization. Indonesia, as the world’s largest producer, has approximately 10.5 million-hectars of oil palm estate, of which 40 percent or 4.6 million ha is currently owned by smallholders.

Sudarsono said that the Seruyan administration, in cooperation with NGO Inobu, an affiliate of the Earth Innovation Institute, is presently conducting a comprehensive census of palm oil farmers, to gather complete data on both land status and the main problems faced in meeting the requirements of sustainability.

“We hope to complete data collection by next year so that we can start addressing such issues as legality, deforestation, land conflict, peat land destruction and eventually advance to sustainability certification programs,” Sudarsono added.

South Sumatra Governor Alex Noerdin, who also attended the meeting, announced that his administration was also finalizing preparations to adopt a jurisdictional approach for oil palm estates in the province.

Different from the previous program of targeting sustainability certification at individual plantations, a jurisdictional approach includes all the players in the industry, from multinational plantation owners down to the smallest of smallholders. 

“When a local government agrees to jurisdictional certification guidelines, local stakeholders are given access to work with regional governments to improve the welfare of smalholders, while encouraging environmental best practices,” RSPO co-chairman Biswaranjan Sen noted.

“The RSPO jurisdictional sustainability approach is not dissimilar to the Indonesian Sustainable Palm Oil [ISPO] program as both schemes promote the principles of best farming practices, transparency, legal and regulatory compliance, environmental responsibility and local community development,” Sudarsono noted.

The International Finance Corporation (IFC), the private-sector arm of The World Bank, has also paid considerable attention to palm oil farmers through a joint program with the Musim Mas industry group.

IFC and Musim Mas, one of Indonesia’s largest integrated palm oil industries, have started the Indonesian Palm Oil Development for Smallholders (IPODS) in North Sumatra which plans to train 100,000 independent farmers in the production of sustainable palm oil. 

“Of the total, 25,000 will get training in meeting ISPO and RSPO requirements for the certification of their fresh fruit bunches. Our target is for 10,000 smallholders to get certification,” Musim Mas Communications Manager Carolyn Lim said.

Last year, the United Nations Development Program (UNDP) and the Agriculture Ministry launched a program called Indonesian Palm Oil Platform (INPOP) designed to enhance the capacity of smallholders in implementing sustainable oil palm farming practices.

Delegates from developed countries, notably the EU, apparently in response to the increasing commitments made to sustainable palm oil production, reaffirmed their pledge to buy or import only certified sustainable palm oil by 2020.

As the most produced and traded vegetable oil in the world, palm oil indeed plays a crucial role in enhancing food security. 

And given its big potential as a major source of renewable fuel, palm oil seems to deserve significant attention, especially in Indonesia where this industry directly employs more than 4.7 million workers and generates more than $20 billion in export earnings. 

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The week in review: The worst forest fires

Vincent Lingga, The Jakarta Post | Editorial | Sun, November 01 2015, 3:13 PM

The forest and peatland fires and smog, billed the worst in Indonesian history, still dominated media headlines this week, with thousands of hot spots covering Sumatra and Kalimantan. 

At least 19 people in Sumatra and Kalimantan have died, and thousands, mostly children, have been hospitalized because of severe respiratory illnesses caused by the haze. According to the National Disaster Mitigation Agency (BNPB), the ongoing haze crisis has resulted in more than 500,000 people in six provinces — Riau, Jambi, South Sumatra, West Kalimantan, Central Kalimantan and South Kalimantan —suffering from acute respiratory infections.

As evidence indicates that most hot spots are related to oil palm and pulp wood plantations, President Joko “Jokowi” Widodo has instructed the Forestry and Environment Ministry to stop issuing new permits for peatland cultivation for monoculture, restore damaged peatland and review all peatland licenses that have been issued. 

Put bluntly, companies can no longer convert active forests and deep peat or any peat area into monoculture plantations, such as acacia for pulp and oil palm plantations. 

Recent research by forest scientists at the Bogor, West Java-based Center for International Forestry Research (CIFOR) found that the main cause of haze in Riau came from dry and deforested peatland, and not just from the slashing-and-burning of forested areas, as commonly thought. The research found that peat swamps in their natural state are resistant to fire because they are wet underground, but they can be highly flammable when they dry out and are degraded.

Research by Greenpeace has discovered that left in its natural waterlogged condition, peatland rarely burns. An untouched tropical rain forest is similarly fire-resistant. However, two decades of forest and peatland destruction by the plantation sector has made parts of Indonesia into giant tinderboxes.

Peatland soil stores a massive amount of carbon. When peatland is cleared and drained for a plantation, it degrades and the carbon it stores starts to be released into the atmosphere as CO2 emissions. If peat soil catches fire, it can smolder below the soil surface and be exceedingly difficult to extinguish. 

 The reason people burn land is quite simple. It is a relatively easy, quick and incredibly effective way to remove unwanted vegetation. Land is cleared almost immediately and the time it takes for the ground and heavier fuels to cool is relatively short.

The fire problem is further exacerbated by a lack of centralized coordination, planning, control, containment or monitoring in the region. An absence of active and coordinated fire management and surveillance is the key reason why people and companies are able to burn as much forested land to remove unwanted vegetation. 

Greenpeace studies show that forest fires are a threat to the health of millions. Smoke from the fires kills an estimated 110,000 people every year across Southeast Asia, mostly as a result of heart and lung problems, and weakens newborn babies.

The impact is even worse during El Niño years such as 2015, which the Australian Bureau of Meteorology estimates is turning out to be the worst El Niño in 20 years .

Indonesia’s annual forest and peatland fires are a man-made crisis, with devastating health impacts for Indonesia and its Southeast Asian neighbors as well as the global climate. Operating under weak and poorly enforced laws, plantation companies and other actors continue their reckless expansion — clearing forests and draining wet, carbon-rich peatland — that lays the foundations for these fires. The unwillingness of the government to put concession maps in the public domain makes it harder to identify those responsible for the fires or the destructive practices that cause them. 

The destruction continues despite commitments from many of the larger traders and producers of Indonesian commodities, such as palm oil and pulp, to end deforestation and peatland degradation and impose strict no fire policies. Indeed, many fires are reportedly burning within the concessions of companies that have “no deforestation” policies.

Ultimately, these fires will continue until plantation companies stop deforestation and start restoring forests and peatland. Commodity traders and their customers must work together to deliver an industry-wide ban on trade with companies that continue to destroy forests and peatland, eliminating the economic incentive for forest clearance. 

Companies that use, trade and produce Indonesian commodities must support massive programs to restore and protect forest and peatland and stop the fires before they start. 

The government must support these initiatives, publish concession maps to allow those responsible for fires to be held to account and reform the plantation sector to halt the destruction and degradation of Indonesia’s forests and peatland.

The heavy haze should be the momentum for the government, the people and the business community to take firm and bold measures to prevent a similar disaster. Failure to do so will embolden the campaign launched in Singapore and Malaysia to encourage consumers to boycott Indonesian products such as pulp, paper and those containing palm oil. We will also become the ugly guy during the climate change summit in Paris in December.

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View Point: Still waiting for bold reforms in infrastructure sector

Vincent  Lingga, Jakarta | Opinion | Sun, October 04 2015, 3:26 PM

We  understand the government has been preoccupied with the sharp  depreciation of the rupiah and its damaging repercussions on the prices  of many basic goods, people’s purchasing power and consumer and business  confidence.

Hence, the first and second reform packages  launched last month focus on boosting the supply of dollars in the local  banking industry, strengthening the purchasing power of low-income  people and easing business licensing and operations procedures.

 The  second reform package included bold deregulatory reform in the  licensing system in the forestry sector that will speed up license  issuance from the current four to six years to only 12 to 15 days for  various permits needed to use or lease forested land.

This  reform, considered a “miracle” in Indonesia’s business scheme of things,  will be a great boon to the installation of overhead high-voltage power  transmission lines and geothermal development.

But given the  strategic role of basic infrastructure and the blunt fact that the acute  lack of infrastructure and the crumbling condition of existing  facilities are among the biggest barriers to investment and the main  causes of the unusually high logistics costs, the government should have  accelerated the pace of regulatory and bureaucratic reforms in  infrastructure.

Infrastructure investment has the potential to  increase efficiency and competitiveness, promoting both international  linkages and domestic integration and raising output in the short term  by boosting demand and in the long term by raising the economy’s  productive capacity.

The large infrastructure gap reflects a  combination of our institutional and financial constraints, as well as  the pressure from rising demand. And the best way to speed up  infrastructure development is through public-private partnerships (PPPs)  because of the limited financing resources of the government.

The  government increased the infrastructure budget this year to Rp 290.3  trillion (US$20 billion), but as of last month only about 30 percent or  Rp 90.2 trillion has been spent as a result of bureaucratic inertia.

How  can the government expect private investors to put up 80 percent of the  $450 billion needed for infrastructure development for the next five  years if it is not able to break through its own regulatory and  bureaucratic barriers to implement its own projects?

A discussion forum on infrastructure jointly hosted by state-owned PT Sarana Multi Infrastructure and The Jakarta Post on  Wednesday cited the acute lack of single leadership, poor  inter-ministerial coordination, complex land-acquisition procedures,  excessive regulations and inadequate institutional capacity for  preparing bankable and investable projects (making detailed designs,  feasibility studies and environmental- and social-impact assessments).

With  so many government institutions involved as players in the  infrastructure sector, coordination has become a big problem owing to  the absence of an authoritative PPP management center to drive projects  with proper planning, reliable risk analysis and risk sharing,  designing, efficient and well-organized tender procedures and  construction management.

Currently, PPP projects are handled by  the ministries of finance, public works and national development  planning without a single leadership. It is little wonder that many  infrastructure projects listed in the PPP book published by the National  Development Planning Ministry and put to tender still lack proper  contracts, appropriate risk allocation, a sustainable revenue model,  government support, key project input such as international-standard  studies for feasibility, environment or social safeguards, uncertain  resource assessments and properly secured land.

 The Finance  Ministry said in July it would issue a regulation to smooth the land  conversion process as it seeks to make flexible the government’s  land-capping funds, which could soon be used to support stalled  infrastructure projects. The ministry said land procurement funds for  stalled infrastructure projects could be tapped from the government’s  land-capping funds. The land-capping funds are a fiscal instrument  whereby the government “caps” land prices at certain levels and provides  funds as compensation for private investors if there is any unwanted  price increases.

The President has mandated the Committee of  Infrastructure Priorities Development Acceleration (KPPIP), which is led  by the coordinating economic minister, to create a pipeline of projects  to be developed under the PPP scheme.

But the KPPIP, which  includes the ministers of finance and national development planning and  the chief of the National Land Agency, does not have any teeth at all.

Decisions  by the KPPIP are not legally binding and any policies or measures  adopted at its meeting have yet to be approved by the ministries that  oversee the sectors or areas where the particular infrastructure  projects are to be built or developed.

The KPPIP still  encounters a complex web of different entities with overlapping roles  and responsibilities in the infrastructure arena, since President Joko  “Jokowi” Widodo himself did not consider this committee as important.

If  the government is really serious about accelerating infrastructure  development and wooing investors to this sector, Jokowi should upgrade  the authority and role of the KPPIP into the nerve center for all  decisions regarding big infrastructure projects under the PPP scheme.

The  basic rationale of such a nerve center is that during an infrastructure  crisis like the one we are now facing, the KPPIP should act like a  hospital’s emergency center when fast decisions and firm measures are  much more important than bureaucratic procedures or rigidities.

The  leadership provided through such a war-room like operation center would  help regain market confidence in the government’s ability to implement  its policies through a mechanism that focuses on good coordination,  fast-decision making and concrete programs of action.

Infrastructure  has been one of the government’s top priorities since 2004, but not  much has been achieved. It is high time to go all out with bold  measures.
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The writer is a senior editor of The Jakarta Post.

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The week in review: Unshackled from regulations

• The Jakarta Post
• 13 Sep 2015
• — Vincent Lingga

Excessive regulations and licensing red tape are this week’s buzzwords as the government fights to streamline all the regulatory pipelines and clean up a rusty bureaucracy to facilitate the economic development process. As dark clouds hang over the economy, President Joko “Jokowi” Widodo announced on Wednesday a package of reform measures to strengthen people’s purchasing power, strengthen anti-inflation efforts and increase the supply of dollars at local banks.

Jokowi said 89 regulations would be revised to improve the ease of doing business and strengthen the competitiveness of the manufacturing sector. Dozens more reform measures will be launched later this month, all aimed at improving the investment and business climate.

As part of measures to strengthen purchasing power, which has been eroded of late by the steady depreciation of the rupiah against the US dollar, the government raised the maximum amount of untaxable income from Rp 22 million (US$1,600) per year for a single unmarried worker to Rp 36 million. The interest rates on credit for micro and small businesses were slashed from 22 to 12 percent. Procedures for the disbursement of village funds from the state budget were streamlined to speed up cash injections into rural areas.

It is encouraging to learn that the government will continue its regulatory and bureaucratic reforms with several more packages of policies to be released within the next few months. The process of regulatory reform has become more and more imperative as National Development Planning Minister Sofyan Djalil revealed earlier this week that his office had identified more than 2,700 regulations and presidential and ministerial decrees that were inimical to economic activity.

As President Jokowi himself has often complained: “we have been shackled by excessive procedures and regulations.”

Yet more flabbergasting is the blunt fact that the many regulations that have been erected seem useless in their ability to control this country because corruption and numerous other forms of malfeasance continue to thrive and Indonesia has gained a notorious reputation as one of the most corrupt nations in the world.

The arduous regulatory chain is in fact a stretch of landmines that officials and businesspeople must navigate. Businessmen and officials often unintentionally make mistakes picking their way through the minefield and so they become trapped in charges of corruption, making them prey to corrupt law enforcement officials.

Many aspects of the trade and investment policymaking process are fragmented across many ministries and government agencies — with no formal and independent assessments of such regulations. Various high-level teams have sometimes been engaged to hold regulatory review consultations with stakeholders; but these are mostly on an ad hoc basis and are the result of financial market turbulence.

The Organization of Economic Cooperation and Development (OECD) asserted in a special study on Indonesian regulatory reform in 2012 that independent and objective evaluations of policies from an economy-wise perspective had not yet been institutionalized.

The OECD recommended that an institution within the existing regulatory framework should be empowered to conduct these types of evaluations, with a view to significantly enhancing inter-ministerial coordination and improving regulatory outcomes.

Unfortunately, there have been no significant improvements in the process of enacting regulations.

The government has yet to build up a strong, effective mechanism to ensure public consultations involving a broad base of stakeholders are held systematically to enhance transparency and avoid unintended trade restrictions. Rules or guidelines that ensure consultation with experts and interested parties area are desperately needed.

While significant steps have been taken to group together the many licenses needed to start and operate a business in Indonesia into one-stop shops at the Investment Coordinating Board (BKPM) and provincial BKPMDs, more efforts are still badly needed to streamline the licenses themselves.

Worse still, the central government is not yet able to ensure that regional licenses have clear policy objectives and that these are not contradictory to national laws. The fragmentation of the policymaking process has led to an increase in opportunities for special interests to exert influence.

As a result, the government should consider embedding regulatory impact assessments systematically into the regulatory framework for all policies that meet a pre-defined threshold.

Stronger coordination among ministries is therefore critical. Note how many new regulations contradict higher order laws and regulations, thus creating confusion and uncertainty. Such coordination is particularly important given decentralization of authority and increasing clout of the House of Representatives.

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Commentary: Alcohol industry terrified as political process for prohibition advances

Vincent Lingga, The Jakarta Post, Jakarta | Commentary | Mon, August 31 2015, 5:57 PM

Publicly listed PT Multi Bintang Indonesia, the country’s largest brewery, has put on hold its US$42 million plant expansion projects in East Java after the ban on alcohol sales slapped on minimarts by the Trade Ministry in April slashed its sales by 40 percent and its profits by 47 percent in the first half.

Yet the worst may be yet to befall the alcohol industry as a draft bill initiated by the House of Representatives will completely ban the production, distribution, sale and consumption of alcohol in the Muslim-majority country.

Under the draft bill, anyone found to be distributing or producing alcoholic drinks containing more than 1 percent alcohol could face between two and 10 years in prison, or a fine of up to Rp 1 billion ($77,000). Those caught consuming alcohol could face jail time of between three months and two years or fines of up to Rp 500 million.

The political process for ushering in prohibition in the world’s largest archipelagic country started in April after the House’s Legislation Body approved the bill as a House initiative and put it among the 37 priority bills for deliberation during its current sitting period. President Joko “Jokowi” Widodo, who received the draft bill in July, instead of turning it down entirely, decided to continue the legislation process by assigning the Trade Ministry as the coordinator in charge of preparing the government’s stance on the bill.

Informed sources at the Trade Ministry said the President may submit to the House the government’s views on the bill sometime next month to make it a fully fledged draft law for further deliberation at the House. 

The alcohol industry is horrified by the extremely radical bill, not only because of its economic and social impacts but, more worrisome, by the acutely inadequate institutional capacity of the government to fully and fairly enforce such a draconian law.

The alcoholic drinks association grouped under APMBI has said it fully supports the initiative of the government and the House to make a comprehensive law to control the production, importation, distribution and consumption of alcohol in the country.

But such a comprehensive law should also be designed to protect the right of consumers, including tourists, to consume alcohol in a responsible manner based on a set minimum age, APMBI secretary-general Kwendy Alexander noted.

“But totally banning the production, distribution and consumption of alcohol drinks, which even now are already controlled by 36 government regulations and 147 regional bylaws, could cause a set of new, even more damaging impacts,” Alexander pointed out.

Many analysts share Alexander’s view, arguing that prohibition would only force the industry to go underground. If this happens the government would lose excise duty revenues and, yet more alarming, there would be a proliferation of bootleg liquor production without any health and safety standards. 

“We compiled newspaper reports showing that between last December and May alone, almost 160 people died after drinking bootleg alcohol and hundreds of others were made totally or almost blind,” he added.

According to the association’s estimate, total prohibition would cause the government to lose Rp 6 trillion in excise duties and result in the laying off of 180,000 workers. Thousands of other workers along the supply chain of the industry would become jobless.

A preliminary study by the Centre for Strategic and International Studies concluded that a total ban would cause revenue losses of Rp 22 trillion in the whole sector or 0.11 percent of gross domestic product, in addition to Rp 6 trillion losses in excise duty receipts (based on the government target as set in the 2015 state budget).

Yet more damaging is the devastating impact that prohibition would inflict on the tourist industry at a time when the government is stepping up its efforts to woo more tourists by granting visa-free facilities to visitors from 30 more countries in a concerted bid to improve the current account balance.

Put simply, a total ban would boil down to the government shooting itself in the foot. 

Given the potentially extensive damage, the association and many political analysts are confident that the final bill that will be deliberated at the House will be centered on a more effective framework of controlling the production, distribution and consumption of alcoholic drinks.

The ASEAN economic ministers meeting in Kuala Lumpur last week also decided to maintain alcohol on the General Exception (GE) List. The GE list includes products that are permanently excluded from the free trade area for reasons of protection of national security, public morality, animal and plant life, health and items of artistic, historic and archaeological value. 

Some political analysts estimate that the initial sponsors of the draft bill — the Islamic-based United Development Party (PPP) and Prosperous Justice Party (PKS) — may not be strong enough to push through a total ban as the basic philosophy of the final bill. Moreover, six of the 10 political factions at the House are secular parties.

However the controlling framework is eventually strengthened under a new law, one of the most important points is to ensure that liquor remains subject to punitively high excise. Hence, the trade and finance ministries should design an importation and distribution system that is easy to oversee, yet effective in controlling liquor sales to the targeted market niche — foreign visitors and residents. 

Liquor drinking has now increasingly become part of a modern way of life. And as our economy has become intensively globalized and our country more popular as a tourist destination, we will inevitably be host to an increasingly large number of foreigners.
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The writer is senior editor at The Jakarta Post.

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Hong Kong organizes largest ever promotion in Jakarta

The Jakarta Post, Hong Kong | Business | Fri, August 14 2015, 3:28 PM
Hong Kong will come to Jakarta in a big way in the middle of September. The city, located just off mainland China, will host a week-long promotion of its fashion, jewellery and electronic products and services and try reaffirm to Indonesians its role as the best gateway into mainland China, the world’s second largest economy.

Labeled ‘In Style Hong Kong’, the large-scale promotion will bring to the Jakarta Convention Center and the Grand Indonesia shopping mall more than 100 Hong Kong lifestyle brands. Some of these include fashion retailers such as G2000, Giordano, Bossini, Chow Tai Fook jewelleries, watchmakers such as Edwin Cosi Moda, Memorigin and Charles Hubert and electronics companies such as Goodway and Gold Peak.

This will be the largest economic promotion campaign Hong Kong has ever undertaken in Southeast Asia, propelled by the rationale that Indonesia is the largest economy in the ASEAN region, and the country is therefore an attractive market for Hong Kong businesses. This is the rationale that Raymond Yip, Deputy Director General of the Hong Kong Trade Development Council (HKTDC) detailed to a group of Indonesian journalists last week.

“We expect some 10,000 trade buyers, importers, distributors, retailers, brand agents, franchisees and specialists to visit the exhibition, the largest ever promotion we will make in Southeast Asia,” added Yip.

HKTDC is organizing the whole promotional program, which will also be attended by Hong Kong Chief Executive CY Leung.

Yip said that the Hong Kong Design Award Display, entitled ‘Fame In Style’ and located at Grand Indonesia from September 14-20, would showcase a range of award-winning products in addition to ‘Batik crossover’ collections by six designers, namely Lulu Cheung, Walter Kong and Jessica Lau, Walter Ma, Aries Sin, Harrison Wong and Cecilia Yau. The purpose of ‘Fame In Style’ is to highlight Hong Kong’s creative and design power.

Yip said that as part of the promotion, HKTDC senior officials and business leaders would also hold a full-day symposium and services consultation and business-matching event at the main lobby of the Jakarta Convention Center on September 17.

According to HKTDC, Indonesia-Hong Kong trade ties amounted to US$5.1 billion in 2014 and Hong Kong was the 9th largest foreign investor in Indonesia, with $657 million of investment in 2014.

The symposium will brief Indonesian businesspeople on why and how Hong Kong, with a per capita income of over $42,000, has become the second largest private equity center in Asia, Asia’s second largest stock market, its third larget foreign exchange market and the third largest source of foreign direct investment in Asia, all in addition to being the most important entrance port to mainland China.

Business visitors also will receive comprehensive briefings on how they could benefit from using Hong Kong as a platform to make investments or enter the market in mainland China, particularly as the city is a new and emerging center of fashion design and creative enterprise. (vin)

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HK emphasizes role as platform for global supply-chain

The Jakarta Post | Business | Fri, August 14 2015, 3:43 PM

The Hong Kong government invited a group of Indonesian journalists, including Vincent Lingga of The Jakarta Post, for  a visit to Hong Kong last week in light of the In-Style Hong Kong in  Jakarta in September, dubbed as the largest ever economic and trade  promotion campaign Hong Kong will ever make in the ASEAN region.

Below is his report based on a series of interviews and discussions with Hong Kong officials and business executives:
Its  strategic role as the gateway to the world’s second largest economy,  mainland China, being an efficient regional logistics hub and the  world’s third-largest financial center are several of the strongest  advantages Hong Kong will offer to the Indonesian business community and  consumers during a big bang, week-long economic promotion in Jakarta  next month.

But the fundamentals that will continue to  strengthen Hong Kong’s role as the leading trading and financial center  in Asia are what Hong Kong Trade Development Council (HKTDC) deputy  executive director Raymond Yip calls the Hong Kong brand.

“The  Hong Kong brand embodies a strong rule of law, good governance, first  class infrastructure and a credible regulatory system in the financial  service industry,” Yip noted at a briefing.

All these advantages  have made Hong Kong the most efficient platform to access the Chinese  economy, concurred Indonesian Consul General Chalief Akbar in Hong Kong. 

“Indonesian companies intending to enter the market in mainland  China should take advantage of the complete pool of financial, legal  and knowledge resources available in Hong Kong,” Chalief added.

Jimmy  Chiang, the associate director general of Invest, the department of the  Hong Kong administration in charge of foreign direct investment (FDI),  cited another important role of Hong Kong as what he called the  ‘superconnector’ of investments between mainland China and the rest of  the world.

“About 60 percent of China’s investment overseas was made through Hong Kong,” Chiang said.

He  cited the 2015 World Investment Report of the Geneva-based United  Nations Conference on Trade and Development that named Hong Kong as the  world’s second largest FDI destination, receiving a total of US$103  billion last year, behind mainland China which got $129 billion.

The  report showed Hong Kong’s ranking surpassed the US, which attracted $92  billion, the United Kingdom ($72 billion) and Singapore ($68 billion).

Hong Kong also ranks second in FDI outflows with $143 billion in 2014.

“These  numbers underscored Hong Kong’s role as a super-connector, in which  foreign companies use Hong Kong as a base to invest in mainland China,  and mainland Chinese companies increasingly use Hong Kong as a platform  to make global investments and acquisitions and to raise funds,” Chiang  said.

Hong Kong is also the second largest stock exchange in Asia  after Tokyo, and is the sixth largest hub for foreign exchange trading.  According to the latest data at HKTDC, as of the end of May, there were  more than 1,780 companies listed on the HKE with a total market  capitalization of $3.2 trillion. About 50 percent of the listed  companies are mainland Chinese corporations.

But the relationship  between Hong Kong and mainland China seems complex. Beijing for the  most part has kept its promise to uphold the ‘one country, two systems’  mandate.

Officially, Hong Kong is considered a ‘Special  Administrative Region’ (SAR), which means that it is treated as a  separate country from an immigration standpoint and continues to  circulate its own currency, the Hong Kong dollar. Hong Kong also retains  an independent legal and judicial system inherited from the previous  British rulers.

The message HKTDC wants to convey to Indonesia  next month is that “If you want a piece of mainland China’s rising  economic power, it’s best to find a proven and safe entry point. Its  name is Hong Kong.”

Kenneth Choy, a senior executive of the Law  Society of Hong Kong, cited the experiences and expertise of the almost  1,000 local and 80 international legal firms in Hong Kong that are  important for firms intending to do business in mainland China.

“We  have deeper understanding of the laws, culture and business practices  in China, which is key to minimizing the risk of commercial disputes.  Yet more importantly, the international arbitration center here is  independent, credible and very reliable,” said Choy.

The basics  that make Hong Kong a model for free-market enthusiasts is the city’s  low taxes, unfettered capital flows and rule of law routinely earn  recognition as the world’s freest economy, Chiang noted.

Hong  Kong therefore has and will continue to play a pivotal role in the  modernization of the Chinese economy, providing capital, logistical  support, access to world markets, management know-how, technology,  equipment, design and research, marketing skills, procurement services  and quality assurance.

According to Chiang, the services sector  (financial, trading, tourism and real estate) accounted for almost 93  percent of Hong Kong’s $291 billion gross domestic product last year.

Even  though today most manufacturing companies have relocated out of Hong  Kong in search of lower-cost land and labor, notably in the Pearl River  Delta region (southern area of mainland China), industrialists remain  active in Hong Kong, operating their local offices as trading companies  and business headquarters that support offshore production.

They  mastermind and control the entire production process from their  headquarters in Hong Kong. Such an arrangement allows Hong Kong  companies to make the most of location advantages and division of labor.

 Today,  many Hong Kong traders still possess this dual operational status. They  perform non-manufacturing activities in Hong Kong, providing support  services such as marketing, order processing, materials sourcing,  product design and development, quality control, and logistics support  to their affiliated factories offshore, particularly in mainland China.

Its  long international business experience and knowledge about China make  Hong Kong the best partner for foreign companies to do business with or  in China, and for mainland Chinese companies to do business around the  world, noted Raymond Wong, the business development director of the  Geneva-based SGS, the world’s largest inspection, verification, testing  and certification company.

But advanced technology, research and  development activities have now become the new focus of the economy to  make Hong Kong another technology center in Asia, Wong added.

Hong  Kong’s extensive financial and business service cluster is unique in  Asia for its breadth, depth, sophistication and mix of international and  local firms. This cluster includes private banking, fund management,  corporate finance, currency trading, insurance, venture capital finance,  direct corporate investment, stock broking as well as support services  as laws, accounting, management consulting, executive search, public  relations, advertising, communications and information technology  support.

Hong Kong export trading firms have increasingly played  the role of packagers and integrators, matching demand from North  America or Europe with sources of supply throughout Asia and beyond.

Hong  Kong is able to play this role because it is the home to a number of  dynamic clusters of industries that are related to each other, that draw  upon common skill bases or inputs and that can reinforce each other’s  competitive position through dynamic interaction. They are capable of  bundling, integrating or packaging different aspects to create unique  combinations.

Its complete and most dynamic clusters of  industries facilitate a process to deliver products across the globe  involving financial and business service centers, suppliers,  distributors, port operators, forwarders, customs brokers, forwarders  and carriers in a finely-tuned chain operating in concert.

No  wonder, as of early this year more than 3,800 foreign companies had  their regional headquarters in Hong Kong for overseeing their Asian  operations.

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The petroleum-fund concept confuses fuel price-floating policy

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, Aug 2 2015, 11:02 AM

This is another example of the acute absence of policy coherence that has damaged market confidence in the economic team of President Joko “Jokowi” Widodo’s Cabinet.


 
Minister of Energy and Mineral Resources Sudirman Said suddenly came out last week with a strange petroleum-fund concept to defend the government’s inconsistency in the implementation of its fuel price-floating policy. The price-floating policy was launched earlier this year to gradually phase out the wasteful spending of taxpayer money on energy subsidies.

The minister explained that the government would start building up what he called a petroleum fund next year to cope with the oil-price fluctuations. The petroleum fund would be amassed from any profits that would accrue whenever subsidized fuel prices were higher than the market price. This fund would be used to compensate Pertamina for any losses it may suffer whenever the market price were higher than the subsidized fuel price and the government decided not to make price adjustments.

Under this mechanism, the government would not have to adjust the subsidized fuel price with monthly market price developments. Put another way, the fuel price-floating policy would be abandoned, and the adjustment of the subsidized fuel price to the market price would not be based on a longterm energy policy to gradually phase out fossil-fuel subsidy.

Even though such technical details as the organization, legal foundation, accountability and operational mechanism of the petroleum-fund concept have yet to be worked out with the House of Representatives, the idea itself and the stated objective of the fund will only make the future direction of energy policy and development of renewable energy more uncertain and unpredictable.

We still believe that the best and most effective way to influence consumer behavior on fossil fuels and to encourage investment in renewable energy development is through a market-price mechanism. The most vulnerable segment of society should be protected from the fuel-price volatility, but the majority of the consumers should be educated to live with the true economic costs of energy.

The government’s plan to throw away the fuel price-floating policy through this unusual petroleum fund seems to be irrational because in the oil market nothing is simple. High volatility has been the main characteristic of fuel oil. The main reason is that the short-term supply and demand for oil are what economists call ‘price-inelastic,’ meaning that they don’t respond much when the price of oil changes. Motorists don’t immediately start driving less when gasoline prices rise.

On the supply side, drilling projects take a long time to start up, so higher prices don’t immediately translate into more supply, or lower prices into less. This means that the way prices typically return to normal — through increasing supply or diminishing demand — doesn’t really happen in the oil market as it does in most other natural resource commodities.

Consequently, by its nature, oil trading is beset by uncertainty and predicting oil prices is simply a mug’s game. It’s not just a matter of the precarious geopolitics of where most of the world’s oil reserves are located. There’s also the fact that predicting future demand requires forecasting the performance of the whole global economy, which is quite complex and prone to big errors.

Hence, the most sustainable way of coping with highly volatile oil prices is by floating them on market rates in a managed way. This way the monthly changes in the subsidized fuel price will be gradual, and any price increase would be incremental. This may be the best way to accustom the consumers to the market price mechanism. Most national and international analysts welcomed the government’s decision earlier this
year to gradually abolish gasoline subsidies by floating the price of fuel in line with developments in the international oil price and the exchange rate of the rupiah. The price subsidy of diesel oil and kerosene, which are used mostly by fishermen and poor households in rural areas, was then fixed at Rp 1,000 per liter.

There is another twist to the oil-fund idea. What Said defined as a petroleum fund is strangely different from the oil-fund concept used by most oil producing countries.

In 2012, the government and the House planned to stipulate provisions on the petroleum-fund in the final draft of the oil and gas bill. But the philosophy of the fund has nothing to do with fuel subsidies. Instead, the main objective of the petroleum fund as defined in the draft bill is designed to support the petroleum industry by improving the depth of geological data on oil concessions that will be tendered to mining companies.

The oil and gas concessions auctioned to oil contractors have become less attractive due to the acutely inadequate geological data on the oil blocks, while most of the unexplored, promising oil basins lie in deep seawaters in the eastern part of the country. These potential oil basins, besides being highly risky, require huge investment and advanced deepsea technology.

None of the countries that build and manage oil or petroleum funds use those funds for supporting wasteful spending on fuel subsidies.

In Norway and Azerbaijan, for example, the petroleum fund is legislated in a special law that stipulates that the oil fund is to be accumulated, managed and preserved for future generations, and the use of the fund is supervised by high-powered boards of commissioners.

The cornerstone of the philosophy behind the oil or petroleum fund is to ensure intergenerational equality with regard to the country’s oil wealth.

The main objectives of oil funds, which in most countries have become giant sovereign wealth funds, usually include the preservation of macroeconomic stability, ensuring fiscal-tax discipline, decreasing the dependence on future oil revenues and stimulating the development of renewable energy and providing inter-generational equality by retaining oil revenues for future generations.

The Norwegian oil fund has developed into a huge sovereign wealth fund with about US$900 billion worth of assets and the Azerbaijani state oil fund more than $37 billion as of early this year.

The writer is a senior editor at The Jakarta Post. Vincent Lingga

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View Point: National banks sensible about foreign players' role

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, May 31 2015, 11:02 AM

The Federation of Private Domestic Banks (Perbanas) made a lot of sense when it recommended to the House of Representatives that the banking bill, which will begin to be deliberated in August, should not stipulate a fixed percentage for a cap on foreign ownership in banks.

The suggestion is relevant because the latest version of the banking bill after its last revision early this year stipulates a 40 percent cap on foreign ownership in banks and requires foreign investors who now control local banks to divest their majority shares within 10 years after the law takes effect.

Perbanas chairman Sigit Pramono reminded the House on Wednesday that the foreign investors, who now control 11 publicly listed banks, had been invited by the government during the height of the Asian financial crisis in 1998 to help strengthen the banking industry.

Pramono warned that the compulsory divestment by foreign investors into minority ownership even within 10 years after the enactment of the new law could shock the stock exchange and the banking industry in general.

The next big question is which national investors will be able and willing to spend billions of dollars to take over the banks’ shares.

The Perbanas recommendation boils down to a demand that whatever restrictions on foreign ownership of local banks will be stipulated in the banking bill should include a grandfather clause (not retroactive).

The House should also realize that a bank is a capital-intensive and capital-hungry business that requires steady capital replenishment to be able to grow and expand. Hence, partnerships between local and foreign banks are good for the whole banking industry.

Regarding bank capital, for example, the Basel-based Bank for International Settlement (BIS), which oversees the global banking industry, has launched what it calls Basel III capital requirements. This rule requires two liquidity ratios which are designed to ensure that banks can survive liquidity pressures. The liquidity ratios are Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

The LCR focuses on a bank’s ability to survive a 30-day period of liquidity disruptions. Basel III regulations require the LCR to be greater than 100 percent so that the bank’s liquid assets are sufficient to survive these pressures.

The NSFR focuses on liquidity management over a period of one year and the NSFR should be greater than 100 percent so that the calculated amount of stable funding is greater than the calculated required amount of stable funding. The above new rules are tough and have the potential to dramatically change bank balance sheets, and are scheduled to be enforced in 2018.

Indeed, many analysts and politicians have expressed grave concerns over the increasing foreign ownership of banks in Indonesia, arguing that would make it extremely difficult for Bank Indonesia (the central bank) to guide monetary policies and bank lending for national economic development.

The latest data showed that 11 of the 41 banks listed on the stock exchange are controlled by foreign shareholders and six other banks had minority foreign shareholders. Foreign investors held almost 41.5 percent of the total market capitalization of the publicly traded banks.

But we should not blame foreign investors for their dramatic increase in ownership of banks in the country. Foreign investors (mostly banks) entered Indonesia upon the invitation of the government which was forced by the 1998 economic crisis to nationalize all major private banks and bail out all state banks.

But when economic rationale and the need for good corporate governance eventually required the government to sell almost all of the nationalized banks to the private sector, it was mostly foreign investors who won the competitive bids thanks to their financial strength, technical and managerial competence.

We do not really see the increasing foreign ownership of banks as an issue. It instead indicates positive foreign investor perception of the country’s long-term economic outlook. Foreign investors would not have been interested in staking out more capital for our banking industry if the economic conditions had not been improving because a bank can thrive and grow robustly only in an expanding economy.

The experiences of many countries, such as South Korea, Thailand, Malaysia and Mexico, point to the great benefits of the entry of major international banks with high reputation for the development of good governance practices.

Look how almost all of our best professional bankers were formerly executives of foreign banks in Indonesia or overseas, or had built up years of work experience with foreign banks.

True, a bank is not simply a business entity in an ordinary sense, given its vital role as the purveyor of lifeblood (credits) for the economy, its fiduciary responsibility and the multiplicity of transactions it is involved in.

This is precisely why the principles of good corporate governance for banks are much tougher and more elaborate than those for other business entities. That is why not everybody who can put up adequate capital can have controlling ownership of a bank.

Those who want to become controlling owners and members of the management and supervisory (commissioner) boards of a bank have to pass a “fit-and-proper test” from the central bank to assess their technical competence, business vision and philosophy and integrity.

Put another way, banks are the most heavily regulated and supervised industries. Good governance and corporate responsibility are the prerequisites for the integrity and credibility of market institutions as banks themselves are institutions of trust.

All these supervisory and regulatory frameworks can make us rest assured that it is not the nationality of bank owners that matters, but the capital resources, business philosophy, technical competence and integrity of the major or controlling shareholders.

Of utmost importance is for the Financial Services Authority to strengthen the legal and regulatory framework for the banking industry and issue guidelines for foreign banks to increase their contribution to the national economy, not only through lending but also the transfer of expertise in risk management and dissemination of best prudential practices.
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The writer is senior editor at The Jakarta Post.

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