View Point: Plunging price of oil resolves several complex problems for Jokowi

The Jakarta Post, Jakarta | January 25 2015 | 1:30 PM

The more than 55 percent plunge in oil prices since July has resolved several potentially explosive political and economic problems for the new government of President Joko "Jokowi" Widodo.

But he should not get complacent, as the condition is largely a matter of good fortune.

As the saying goes, lightning never strikes twice in the same place. This could be the only oil-price down-cycle during Jokowi's five-year term until October 2019.

The government, therefore, should seize the opportunity for energy reform to reduce the nation's dependence on fossil fuels and gear up the economy for weathering perpetually volatile oil prices.

As a net oil importer since 2004, Indonesia enjoys a state-budget windfall savings every time international oil prices drop steeply that creates fiscal room for a massive cut or the abolishment of fuel subsidies. Now that oil prices have fallen to below US$50 a barrel, the government expects to save almost

Rp 200 trillion ($16 billion) throughout this year.

The government should not succumb to the temptation to squander the huge savings on populist programs. It should instead direct them toward more productive programs in poverty alleviation and infrastructure to improve our economic competitiveness.

The government made the right policy with its quick decision to put domestic fuel prices on a managed floating market-price mechanism early this month.

This move immediately set off a virtuous circle: it will spare the government from wasteful political bickering with the House of Representatives every time international oil prices rise sharply and has freed the government from being held hostage to the wildly volatile international oil market.

In the oil market nothing is simple. Predicting oil prices is always a mug's game because the prices are influenced by both economic and non-economic factors.

In mid-2008, for example, international prices skyrocketed to a peak of almost $150 a barrel, but collapsed to as low as $47 later the same year. A similar down-cycle has taken place since last July.

Consequently, by its very nature oil trading is beset by uncertainty and it is not just due to the precarious geopolitics in countries where most of the world's oil reserves are located.

But bringing domestic fuel prices closer to — or on par with — their economic costs will also remove the fuel-subsidy time bomb.

But more important is that abolishing subsidies will encourage the development of renewable energy, energy efficiency and conservation.

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

But energy reform should not end at putting fossil fuels on a managed floating market-price mechanism.

The government should instead bolster energy diversification programs by providing fiscal incentives for investment in developing more biofuels and gas and their infrastructure, mini hydro-power, geothermal and other renewable energies.

In short, the government should launch a more concerted effort to implement the 2007 Energy Law that stipulates strategic measures aimed not only at reducing dependence on fossil fuels but at compelling the government to provide incentives for energy efficiency and conservation.

Companies should be given fiscal incentives to invest in energy-conservation programs, such as in-house management of energy efficiency; performing maintenance and housekeeping measures; replacing select equipment; or modifying entire manufacturing processes.

No one can predict how long the oil price down-cycle will last or where prices will bottom out. But the government should design a formula for determining the ceiling and floor prices for oil to cope with future price volatility.

Ceiling prices should be set at levels that will encourage fuel efficiency, but which will not impose large subsidies on the state budget. Floor prices, meanwhile, should be designed to make the development of renewable energies like biofuels, geothermal and biomass still commercially viable.

The oil-price collapse has changed almost all the basic assumptions used for predicting key economic indicators for the 2015 state budget for the better.

We are glad to learn that the proposed amendments in the 2015 state budget the government proposed to the House will allocate the bulk of savings from the slashed fuel subsidies to developing infrastructure.

The rationale is that poor and inadequate infrastructure has become the biggest barrier to investment and among the main drivers of high logistics costs limiting the competitiveness of exports.

But given the dismal record in infrastructure development over the past decade, the new government should be able to make headway on several vital projects, including roads, airports, seaports and power generation that have been stalled for several years due to arduous land-acquisition procedures.

Making a breakthrough in such high-profile projects as the multibillion dollar Batang power plant in Central Java; the access road to Indonesia's biggest seaport, Tanjung Priok; and the access railway to Soekarno-Hatta International Airport in Tangerang will boost market confidence in the government's capacity to develop basic infrastructure.

Fortunately, this year marked the start of the full enforcement of the 2012 Land Acquisition Law, which provides stronger legal certainty for land appropriation for infrastructure projects.

The law stipulates a clear-cut, shorter time frame for land acquisition, expedites court proceedings for appeal and mandates the appointment of an independent committee for setting compensation levels with property owners.

The acute lack of strong legal frameworks to regulate land acquisition and rampant land speculation has long been the main obstacle to infrastructure development, as the costs of land often make projects financially unfeasible.

Vincent Lingga

The writer is senior editor at The Jakarta Post.

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The week in review: Crackdown after plane crash

The Jakarta Post | Editorial | Sun, January 11 2015, 9:41 AM

The Dec. 28 crash of AirAsia flight QZ8501 from Surabaya to Singapore has set off an overall review of Indonesia’s civil aviation industry, prompting a series of forensic audits on airline operations and the aviation regulatory system, placing  the country’s airline safety in the international spotlight.

Several heads have rolled within the civil aviation directorate general, the state-owned airport management and other related operating bodies. Even the Corruption Eradication Commission (KPK) has hinted at the possibility of joining the fray as allegations of bribes have surfaced regarding the flight route and slot designation process.   

Findings of investigations that suggest that the flight had not been properly licensed further strengthened the perception that Indonesia is one of the world’s most hazardous places in terms of civil aviation safety.

The government immediately suspended AirAsia’s permit to operate the Surabaya-Singapore route and promised to take equally harsh measures against other airline companies failing to comply properly with the whole process of flight and route permits.

Since 2007, the US has effectively barred Indonesian carriers from increasing flights to American destinations. The EU currently has Indonesia on a “blacklist” with substandard safety records; only the national flag carrier Garuda Indonesia is permitted to fly into the continent

The EU and US have implicitly acknowledged that their great concern is no longer limited to the safety of individual airlines but is also focused on the competence of the civil aviation regulatory body, especially its air safety certification directorate, which is in charge of issuing pilot licenses, aircraft operation certificates for new airlines and safety approval, a function that can make or break an airline.

Deeply rooted in the issues over the country’s air safety standards is the integrity and technical competence of the air safety certification directorate.            

In sharp contrast to these air safety concerns, the full-fledged liberalization of civil aviation has spurred high growth in the industry. There are about 400 planes carrying more than 50 million travelers annually. Air traffic has been growing at annual rate of over 15 percent.

As of last May, the International Civil Aviation Organization’s audits assessed Indonesia’s air-safety oversight system as inadequate, even below Pakistan and India.  Likewise, the EU noted late last year that the air safety oversight system in Indonesia still needed substantial improvement.

Transportation Minister Ignasius Jonan promised an overall reform of the whole civil aviation regulatory and operating bodies, covering such aspects as route licensing, slot allotment, air traffic control services allotment, airport management and navigation and aircraft inspection.            

The Transportation Ministry went further to even intervene in the flight fare structure by fixing the minimum ticket prices of scheduled airliners to as high as 40 percent of the mandated ceiling (maximum) fares. This boils down to an increase of 10 percentage points in the lowest fares allowed for all scheduled services, including those of low-cost or budget airliners.

The ministry argued that the higher fare structure would give airline companies adequate financial space for maintaining reliable flight safety standards.

Even though analysts argue that such a market intervention appeared to be an overkill as  there was no direct link between ticket prices and safety, civil aviation officials still think that such tough measures are required to maintain public confidence in the industry.

Hopefully, this “air safety turbulence” will not affect the implementation of the ASEAN Open Skies policy, set to be fully effective by the end of the year, because this policy will boost connectivity and people’s movements in the region and in turn spur regional economic growth.

Under the new policy, Southeast Asia’s skies will be transformed into a single aviation market as part of the ASEAN Economic Community commitments.         

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Indonesia, a country with the world’s largest Muslim population, has joined other nations in condemning the brutal shootings at the office of the satirical magazine Charlie Hebdo in Paris that killed 12 people, including three cartoonists, the chief editor and two police officers.

No form of violence can be accepted and Indonesia supports France’s efforts to bring the perpetrators to justice, Foreign Minister Retno LP Marsudi said.

Indonesian Ulema Council (MUI) chairman for international relations, Muhyiddin Junaidi, said the international community should not generalize the attack as a part of Islam but he conceded that the shootings could strengthen anti-Muslim feelings.

In Banda Aceh, Rosnida Sari, a Muslim lecturer at Ar-Raniry State Islamic University, has been intimidated and threatened by Acehnese clerics and fellow lecturers and bullied in social media after she invited a number of her students to visit and hold dialogues in a church in Banda Aceh last week.

Rosnida said she had been accused of “Christianizing” her students and had been temporarily suspended by the university.

She defended her initiative, arguing that the church visit, conducted voluntarily, was part of her creative teaching method to make Muslim students understand other faiths and build mutual understanding and religious tolerance.

An alliance of NGOs have called on the government to protect Rosnida and uphold academic freedom.

— Vincent Lingga -

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