View Point: Regional governments get 10% share in new & renewed oil, gas concessions

Vincent Lingga,The Jakarta Post, Jakarta | Sat, December 3 2016 | 08:10 am

The energy and mineral resources minister is finalizing a regulation that will entitle regional governments to 10 percent participating interests in new and renewed oil and gas mining concessions in a more concerted effort to address their discontent and gain their cooperation in expediting local permits for oil contractors.

The participating interests must be given to regional administration-owned companies (BUMD) and cannot be shared with or sold to private companies. If BUMDs cannot afford to pay the participating interests the payment can be installed with the revenues derived from the shares.

East Kalimantan province and Kutai Kartanegara regency will be the first to benefit from the new regulation when the Mahakam oil and gas block, which accounts for one third of the country’s natural gas output, ends in December 2017 and the concession will be given to state-owned Pertamina oil company.

It is debatable as to whether the granting of the 10 percent participating interest would be the most effective way to enable regional administrations and local people to get the greatest benefits of oil and gas resources in their areas, given the inadequate financial management-capacity of most regional administrations.

But the new energy and mineral resources minister, Ignasius Jonan, did not want to take the risk of local political turbulence when Pertamina takes over the Mahakam concession from the French-Japanese consortium Total-Inpex later next year.

Most regional administrations still depend on grants from the central government for around 80 percent of their annual budget. And most of their financial accountability reports still get qualified opinions and, in many cases, even disclaimers, from the Supreme Audit Agency.

The government decentralized its mining licensing system in 2001, except for oil and natural gas, to regional administrations. But the law on inter-governmental fiscal relations entitles regional administrations (provincial, regency and municipal governments) to 15.50 percent of oil revenues and 30.50 percent of gas revenues.

Despite the clear-cut revenue-sharing ratio between the central government and regional administrations whose areas hold the resources, and the inadequate competence of most regional governments in financial and investment management, regional demands for a portion of the shares of resource-based companies have been mounting.

The problem is that mining operations, especially in the hydrocarbon sector which is fully controlled by the central government, sometime cause wrong perceptions and too high expectations among regional administrations and local people. Because even though it is the central government that negotiates oil concessions with companies and collects royalties and taxes, it is the people closest to the mining sites that see the dramatic changes in their environmental and economic landscape.

This is one of the main factors why the central government should seriously address the issues of regional governance of natural resources through better-designed policies and continuous capacity-bulding programs, not simply with ad-hoc measures to assuage local disillusionment.

Over the past decade, especially after the fall of the authoritarian Soeharto administration in 1998 and the launching of regional autonomy in 2001, many regional administrations have maneuvered to acquire a sizeable portion of the assets of resource-based ventures in their areas.

Just a few examples of conflicts over the past few years.

In May 2011, East Java Governor Saifullah Yusuf threatened to close access to the West Madura Offshore oil and natural gas block in a strong protest against the central government which turned down the demand of the provincial administration for 40 percent of the shares of the oil and gas field.

Earlier in April 2011, the West Sumbawa regency administration sponsored massive demonstrations against the US$3.8 billion copper and gold mine of PT Newmont Nusa Tenggara (NNT) because it was not allowed to acquire an additional 7 percent of the mine.

In May 2013, the local administration of Tanjung Jabung Timur, Jambi, sealed off 14 of 140 oil and gas wells of PetroChina for several weeks due to disagreements over the amount of licensing fees and corporate social responsibility.

During the democratic era, local communities often use the freedom of expression to make further demands of resource-based companies in their areas, not necessarily because of the companies’ past wrongs but rather they can be more assertive now. They are often prodded and supported by civil society organizations or NGOs.

NGOs represent a crucial link in the new dynamic emerging around the mine sites because they have the time, commitment and financial resources to persuade local people to destabilize mine sites. But some NGOs also have a hidden agenda, using mining companies as their political or economic footballs.

Natural resources are indeed a window of opportunity for economic development. In principle, revenues derived from their exploitation can help alleviate the binding constraints that regional administrations often face when attempting to transform their economies, boost growth and create jobs.

Hence, when members of local communities do not feel like they are benefiting from a national extraction project, conflicts can result.

Unfortunately, the design of power or revenue sharing system has not adequately been supported with institutional capacity building for regional administrations. The decentralization of policy making seemed to have been done in a reactionary manner due to political pressures soon after the fall of the Soeharto, thereby creating opportunities for conflicts and corruption.

Capacity gaps have emerged as there is a sudden demand for extractive expertise in more locations throughout the country.

While some studies have shown real income levels rose in communities living closest to mines compared to other communities in the same country, other studies concluded that local economies were harmed by sudden large increases in public spending.

The National Resource Governance Institute (NRGI), a non-profit organization, has concluded after a series of studies and surveys in several resource-rich countries, including Indonesia, that while many of the good practices required at the national level do matter and apply at the subnational level, one cannot simply cut-and-paste national level solutions into subnational resource governance challenges.

NGRI research has shown that the large, volatile and finite nature of resource revenues can distort economies and lead to wasteful government spending.

The fundamental goal of the governance by regional administrations of natural resources is to transform their shares of the non-renewable resources into assets — human and financial — that will generate future income and support sustained development, especially in coping with weak commodity prices and reserve depletion.

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View Point: Concept of subsidies for renewable energy misunderstood

• Vincent Lingga
  

  The Jakarta Post, Jakarta | Sat, October 1 2016 | 08:03 am

The development of renewable energy sources such as solar, micro-hydropower and palm oil-based biogas, notably in rural areas, could virtually stop next year after the Budgetary Committee of the House of Representatives simply turned down the government proposal for a Rp 1.3 trillion (US$100.1 million) subsidy for the development of renewables.

Many may immediately blame the rejection of the subsidy proposal on the state budget austerity approach. But deliberations at the House on the 2017 draft budget showed that the lawmakers simply misunderstood the concept of the subsidy for the development of renewables. They argued that since the proposed subsidy spending would go to companies and not directly to consumers, the proposed subsidy for renewables does not comply with the 2007 Energy Law.

The misunderstanding should also be blamed partly on officials of the Finance Ministry who seemed unable to enlighten the politicians on the need for fiscal incentives to entice private-sector investors in harnessing renewables. Officials used the terminology of subsidy to describe the fiscal incentives, which are vital for producers of electricity and biofuel derived from renewable energy sources.

But the lack of comprehension was also caused by the way renewables are communicated to the public. The marketing of renewables is often made primarily within the environmental perception and perspective prevailing in the developed world of the US and Europe, which focuses on mitigating climate change.

In emerging economies such as Indonesia, the imperative development of renewables should be promoted more from their economic benefits. This concept is more palatable to politicians and the people, rather than the warning on carbon emissions.

With an abundance of almost every renewable energy source — including 40 percent of the world’s geothermal reserves — Indonesia can be a global clean energy leader. The government itself has set an ambitious target of raising renewables’ share of the national energy target to 23 percent by 2030, from about 6 percent at present. Around 94 percent of the primary energy supply now is derived from fossil fuels (oil, gas and coal).

But these targets need to be converted into real projects and stable private sector investments. And pioneers in the development of renewables initially need fiscal incentives, which actually boil down to subsidies, to offset the high up-front capital costs until the minimum level of economies of scale is achieved.

Tariff structures and regulatory guidance for clean energy must also be improved. This would entail preferential tariffs for geothermal, micro-hydropower, solar energy and waste-to-energy such as palm oil mill biogas, wind and solar PV rooftop cells power. Regulatory frameworks should be stable and sensitive to market and private sector needs.

Take, for example, the development of micro hydropower stations with capacities of up to 10 MW. A series of successfully commissioned pilot projects in eastern regions such as Sulawesi, East and West Nusa Tenggara and Papua have provided much-needed project development experiences and capacity. These models have attracted the interest of private investors (independent power producers or IPP) as these provinces have resources for run-of-river hydropower plants. But the small-scale hydro power stations initially need fiscal incentives through higher feed-in tariffs of state-owned electricity firm PLN.

Even more important, the development of micro-hydropower plants is also environmentally friendly because the electricity makes people in rural areas, who are mostly not yet connected to the national grid, much more aware of the vital role of forests. This awareness makes them strong protectors of forests in their surrounding areas.
 Likewise, solar power has big potential. Most of Indonesia lies close to the Equator with maximum sun intensity year-round. Average daily insolation is said to range from 4.5 to 5.1 kWh/m2, indicating good solar potential, especially suitable for remote islands and communities with limited or no grid connections.

The country’s current installed solar capacity is low (30 MW) relative to its potential. Solar energy development in Indonesia is appropriate for mini-grids for lighting and thermal purposes, in isolated grids, solar home systems in very remote, off-grid areas of rural Indonesia, or solar rooftops in urban areas.

The pricing regime for solar photovoltaic (PV) power should provide fiscal incentives to attract IPP investment to make solar home systems a viable option for off-grid electrification in rural Indonesia. But it is not possible within the current institutional framework to provide the secure, long-term operational subsidies needed to ensure supply affordability. Even the US government gives tax credits of up to 30 percent for installing rooftop solar panels. Another subsidy is available to households that are able to sell surplus electricity to the energy company at favorable prices. Similar tariff mechanisms or guidance on fiscal incentives are also needed for wind power.

Another renewable, biogas from palm oil mill effluent (POME), which is still mostly burned to create carbon emissions, can be harnessed to generate power. As palm oil mills are located near plantations, biogas from POME is available in major plantations in Sumatra and Kalimantan and can become most efficient resources of power through small-scale decentralized power stations.

Several pilot projects built by plantations companies show that 10,000 to 15,000 hectares of oil palm estates can produce biogas to generate one MW for 1,000 households. The potential is quite huge as Indonesia is the world’s largest palm oil producer with a total area of 10 million ha. But plantation companies need fiscal incentives to invest in the biogas power station.

The Finance Ministry therefore should seek alternative fiscal incentives and other concessional and innovative financing to promote renewable energy use and electrification projects for the poor people in remote areas.

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Promotion of green building concept needs firm regulations

Vincent Lingga, The Jakarta PostSingapore | Sat, September 10 2016 | 09:22 am

Global trends in environmentally sound construction were showcased to more than 800 property developers, urban planners, architects, engineers, builders and landlords at a three-day conference in Singapore that ended on Friday.

The green building conference was the anchor event of the eighth annual Singapore Green Building Week, which was organized by the Building and Construction Authority (BCA) of Singapore and the Singapore Green Building Council.

Speakers at the conference noted the tangible benefits of green buildings, such as energy savings of up to 30 percent, a healthier and more comfortable environment throughout the building’s life cycle: from design and construction to operation, maintenance, renovation and demolition.

The green building concept requires close cooperation and coordination between the designers, architects, engineers, builders, developers and even the client at all project stages. It also requires 5 to 10 percent more capital than conventional buildings of comparable size.

It is one thing to build a green building fully equipped with all the green trappings like lush indoor greenery, tall sky gardens, planter terraces and reflecting pools — as now seen in many new buildings in Singapore — yet quite another to market these green credentials to end users.

“The consumers or occupants may not necessarily know that they live in a certified green building and how it benefits their health or cuts energy consumption, thereby reducing carbon emissions,” noted Chia Ngiang Hong at the opening of the conference.

A concerted campaign was still needed to educate and empower the end users, he added.

Studies presented at the conference show that buildings account for 30 to 35 percent of total energy consumption. “The higher capital costs of planning, designing and constructing a building to meet our green certification requirements can be recouped with the cheaper maintenance and energy costs within seven years,” the CEO of BCA, John Keung, said, quoting the results of BCA audits.

Keung added that said Singapore had made green certification mandatory for new buildings and provided subsidies and incentives for retrofitting existing ones to meet the green parameters. At present, he added, about 30 percent of all buildings in the city state had been certified under the BCA Green Mark program, which was designed largely to reduce energy and water consumption. The target for 2030 was for 80 percent of all buildings to be certified.

In Jakarta, the Green Building Council of Indonesia (GBCI), which started operations in 2009, even claims that certified green buildings could reduce operational costs (mostly from energy and water consumption) by about 40 percent for new buildings and by 10 percent for existing ones.

The managers of certified buildings at the Singapore conference explained that the combination of green design techniques and energy efficient technology, such as solar power, not only reduced energy consumption, operational and maintenance costs, but also created a more pleasant working environment and boosted property values and rental returns.

Keung claimed BCA’s Green Mark certification had been used in 14 countries, including Indonesia. But several green rating tools have emerged in other countries, such as the Leadership in Energy and Environmental Design (LEED) in the US. The World Bank also has launched its own green certification scheme called the EDGE (Excellence in Design for Greater Efficiencies). The different rating systems are designed to capture country-specific circumstances.

Several green-certified buildings in Singapore, such as the Park Royal Hotel on Pickering and the Capita Green, a 40-storey office building, seemed to be designed exclusively for a prosperous urban metropolis as Singapore, and this may not be directly applicable to countries as Indonesia, with different environmental conditions.

The GBCI green building rating system, called Greenship, embodies six parameters: appropriate site development, energy efficiency and conservation, water conservation, material resource and cycle, indoor health and comfort, environmental building management.

According to GBCI spokeperson Erlyana Anggita Sari, GBCI, as the first and only green building certification body recognized by and registered with the Ministry of Forestry and Environment, has certified 19 buildings as green.

In Jakarta, Anton Sitorus, the director and head of research at PT Savills Consultants Indonesia, said the idea and concept of green building in Indonesia was still in an early stage of development. Only several top property developers acknowledged the true concept of green building, which was closely associated with sustainable and environmentally friendly projects with proper development processes and standards — from the planning stage throughout the construction period until the inauguration.

Sitorus noted that most major international companies though their head office guidelines strongly supported green technology and sustainability. Hence, certified green buildings had the advantage of attracting foreign tenants of high reputation.

Most countries still lag behind in the shift to sustainability due to some key challenges, mainly a lack of incentives, high upfront capital costs and low market awareness. In the ASEAN region, for example, only Singapore and Thailand have enforced rules for energy conservation for new buildings, while in Indonesia, Malaysia, the Philippines and Vietnam they are still voluntary.

Yet most development economists at the Singapore conference agreed that the green building campaign would continue alongside other global campaigns for sustainability, such as the concepts of a green economy, blue fishing and sustainable palm oil and timber.

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Mahakam oil and gas block a litmus test for Pertamina

The Jakarta Post, Vincent Lingga, Sat, July 23 2016 | 12:55 pm

It is now futile to debate the government’s decision of July 2015 not to renew the production sharing contract (PSC) of Total Indonesie of France and Japan’s Inpex for the Mahakam oil and gas block in East Kalimantan and instead award the concession to state-owned Pertamina oil company.

The decision did end several years of uncertainty about the future status of the giant gas concession after the expiry of its PSC at the end of 2017, but the most pressing challenge now is how to ensure a seamless transition of the operational management to Pertamina. This is vital to maintain the smooth operations of the Mahakam Block, which accounts for almost 30 percent of Indonesia’s gas output and 7 percent of its oil production.

Excluding the administrations of East Kalimantan province and Kutai Kartanegara regency from the negotiation loop regarding the participating interests (shares) in the gas concession could set off social and political turbulence and even protest demonstrations.

Regional administrations have often demanded shares in resource-based businesses, such as mining ventures located in their areas, even though they simply do not have the financial capacity, or the managerial capability, for buying assets worth hundreds of millions of dollars.

But the factor of regional administrations cannot be just sidelined because although oil extraction companies operate under the concept of the PSC with the central government (through the SKKMigas regulatory body), oil contractors still have to obtain from the local administration dozens of permits related to the various aspects of mining operations.

However, these issues are only some of the challenges Pertamina is facing in managing the transition of management until the full takeover in January 2018.

Certainly Pertamina, despite its decades of experience in the petroleum industry, still needs technical and managerial assistance from major foreign oil firms as partners to operate the giant oil and gas field.

Given the complexity of the operations and logistics, many analysts have raised concerns about the big risk of output disruption if Pertamina takes over the block without the assistance of foreign partners for at least five years.

According to Total Indonesie, during its peak operations on the Mahakam Block as many as 100 wells per year should be drilled and about 10,000 well interventions performed annually to maintain daily production of 1.7 billion standard cubic feet of gas and condensate of about 62,000 barrels of oil equivalent. The concession also requires more than 700 logistical support vessels to operate and can on any given day employ more than 20,000 workers.

The state oil company needs foreign partners with experienced management, high technical competence and expertise and, no less important, with high credit ratings because the operations of the Mahakam Block require US$2.5 billion in working capital and investments every year.

Since most domestic banks shun lending to oil companies, Pertamina will have to seek loan financing from foreign creditors. The problem, though, is that Pertamina’s credit rating is not high enough to secure such a huge amount of foreign loans.

In this context Total Indonesie, the current operator of the block, and Inpex should naturally be the best suited for that role to secure a smooth transition.

But negotiations for Total and Inpex participating interests still failed to reach transfer and commercial agreements even after the June 30 deadline because of the combination of the persistently weak oil market that has pressed international oil prices to below $50 per barrel and the worsening business climate in Indonesia’s hydrocarbon industry.

Hydrocarbon prospecting is capital and technology intensive and highly risky and oil companies operating under Indonesia’s PSC concept are required to fully bear all the risks related to exploration. Production sharing takes place only after commercial volumes of reserves are discovered for further development.

It comes as no surprise therefore that the number of drilled exploratory wells in the country has fallen steadily from as much as 100 a year in the early 2000s to about 50 last year and oil production fell to 820,000 barrels per day at present from as high as 1.25 million barrels in the early 2000s.

Yet more discouraging is that the success ratio of oil explorations fell further to as low as 15 percent from 20 percent in 2014 and more than 50 percent in the early 2000s.

Set against the negative factors cited above, the terms and conditions offered by Pertamina for a minority interest (maximally 30 percent) in the Mahakam Block for both Total and Inpex seem not attractive. These foreign oil contractors will have to calculate the risks to their investments as minority shareholders under the management of national oil company Pertamina.

The biggest lesson from all these problems is that the government should enact a firm regulation on clear-cut rules and step-by-step procedures for the termination or renewal of the PSC. To put it briefly, the PSC should stipulate clear-cut provisions for a transition period of at least five years to ensure a smooth transfer of operations and management.

The crucial point is that taking into account the complexity of operations and the big investment needed for production development, the future status of the PSC should have been decided at least five to seven years before its expiry, not less than three years as the government did with the Mahakam Block.

The uncertainty about the mechanism and procedures for the extension or termination of the PSC will haunt about 20 other contracts that will expire between 2016 and 2019. These concessions account for 30 percent of the national oil output. For the next 10 years, PSCs that account for 80 percent of oil production will expire.

The writer is senior editor at The Jakarta Post.

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Tax amnesty tells evaders to ‘stop hiding and come home’

• 21 Jun 2016
• The Jakarta Post
• Vincent Lingga
• THE JAKARTA POST/ JAKARTA

 

A national political consensus is now highly probable for legislating the tax amnesty, a fiscal facility previously despised as an insult to the public’s sense of justice and a blank check for businesspeople and tax evaders to launder their money back home.

The tax amnesty idea has been on and off in public policy debates since 2003. But the idea seems to be more politically acceptable and economically more imperative now because of several factors.

The primary factor is that the government is severely strapped for cash at present, so if the House of Representatives does not approve the tax amnesty bill, the current state budget will suffer another deep cut because the government has budgeted Rp 165 trillion (US$12.38 billion) in additional revenues from tax penalties imposed on repatriated and declared assets.

Government data on Indonesians hiding assets overseas, last estimated at Rp 11.45 quadrillion, has also been strengthened and validated by the recent leakage of the Panama Papers on companies setting up special-purpose vehicles in tax haven countries.

Moreover, the upcoming system of global automatic exchange of information (AEOI) between tax authorities is expected to be powerful enough to force tax evaders to stop hiding and come home or at least declare their hundreds of billions of dollars of assets hidden overseas.

The AEOI system, scheduled to start in 2018, requires tax authorities to exchange information even without prior requests or criminal indications. For example, financial institutions in countries such as Singapore or Switzerland that collect information from existing and new clients are required to file this information with their respective tax authorities, which in turn are obliged to pass on the information to Indonesia’s taxation directorate general (DGT). Likewise, the Indonesian DGT should exchange information with the tax offices in those countries.

Under the AEOI framework, tax evaders cannot hide any longer. In fact, the AEOI could virtually override banking secrecy.

Despite the risks of moral hazards and the poor credibility of tax-law enforcement, a tax amnesty is not without a strong rationale, especially in Indonesia, where tax evasion has always been quite extensive, as indicated by the mere 12 percent tax ratio (tax revenues as a percentage of gross domestic product).

The supporters of the tax amnesty idea argue that as the DGT is unable to hunt down tax evaders and uncover their hidden assets, there is no harm in offering them a oneshot amnesty if the measure can lure back massive capital inflows.

Conglomerates or corruptors will not hesitate to reinvest their capital in Indonesia to expand the economy and create jobs once their previously hidden assets are declared legitimate under the amnesty program.

Raising tax revenue is a key challenge for low-income developing countries such as Indonesia. The government has to struggle to raise sufficient tax revenues to provide essential public goods and services.

The low tax take in Indonesia is largely due to weak enforcement. As the informal sector and the cash economy are dominant, taxable economic activities are easily hidden and do not leave behind verifiable information trails, such as receipts, bank records and credit card information. Audits are few in number and poorly targeted — partly because of the weakness of information trails.

Another potential benefit of the tax amnesty is the big chance of netting a large number of new taxpayers, including small and medium enterprises (SMEs), thereby broadening the tax base for future tax collection. The amnesty will also reduce the administrative costs of tax collection and improve tax compliance by monitoring new registered taxpayers.

Moreover, as the court system is both corrupt and overburdened, a tax amnesty may allow the tax administration to economize on prosecution costs.

Simply waiting for an efficient, strong tax administration system to be established before a tax amnesty is legislated would be a futile exercise as it would take more than five years to complete such a reform.

The weakest component of the tax authority is the internal control of tax auditors because the audit process is the most vulnerable to corruption. No one, not even the DGT chief, knows what goes on between auditors and audited taxpayers, except if the corruptors are caught red handed.

The experiences of other countries show that to achieve a successful tax amnesty program — one that generates a sustainable increase in revenue as a result of a larger tax base and higher tax compliance — the DGT should first be empowered to upgrade its capability and be given access to data and information from other government institutions as well as industry associations and private bodies.

But the fundamental problem encountered by the DGT lies in its acute lack of resources and the distrust in its integrity. The DGT has yet to complete extensive reforms that were begun in 2006 when Darmin Nasution, currently the chief economic minister, led the DGT.

In fact, Darmin himself recently expressed his apprehension about the full benefit of the planned tax amnesty if it is not immediately followed with strong law enforcement by a highly trusted tax authority.

The DTG should significantly improve its efficiency, technical competence and integrity, otherwise the House will not be willing to give it wider access to sensitive data protected by secrecy laws. Only with high integrity will the DGT be able to collect information from those in the corridors of power or those who are politically well-connected in light of tax audits.

Other government bodies will readily cooperate and open their vaults of data to the DGT only if the tax authority is perceived to possess impeccable integrity and demonstrates the highest standards of good governance.

Tax laws only mandate tax officials to audit annual tax returns. The question now is how the DGT could convince the public of the credibility of an audit of its own officials if it is not transparent about the findings of their audits.

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VAT dispute with coal producers affects investment

• 9 Jun 2016
• The Jakarta Post

High tax burdens associated with preparing, filing and paying taxes and with the post-filing process that involves tax audits, tax refunds and tax appeals have been a major factor that has made Indonesia’s rank in the World Bank’s annual ease of doing business survey consistently low, even the lowest in the ASEAN region.

The 2015 World Bank’s ease of doing business index has put Indonesia 114th out of the 189 countries surveyed.

One of the most blatant examples within the post-filing process seems to be the inefficient and even inconsistent treatment of the value added tax (VAT) on coal caused by differing interpretations of the laws and regulations, and different analyses of the process of coal mining and processing.

VAT is essentially a tax that is charged on a broad range of transactions with a tax deduction mechanism allowing businesses to offset VAT paid on inputs against VAT paid on outputs.

Each taxable business pays VAT to its providers on its inputs and receives VAT from its customers on its outputs. Input VAT incurred by each business is offset against output VAT.

David Hamzah Damian, a partner at the Tax Compliance and Litigation Services of Danny Darussalam Tax Center, confirmed that the Directorate General of Taxes (DGT) had issued several contradictory ruling letters regarding the VAT on coal.

DGT itself has also acknowledged there have been different interpretations on and treatment of the VAT mechanism by tax officials and judges at the tax court, especially as regards the third-generation coal mining contracts awarded between 1997 and 2000.

But DGT did nothing and decided instead to wait for the outcome of the renegotiations of the coal mining contracts with the Energy and Mineral Resources Ministry.

The government apparently wanted to amend all coal mining contracts to adjust them to the 2009 Mining Law and to make all coal mining firms subject to prevailing laws (not lex specialis).

Simply waiting for a solution to the dispute over the VAT mechanism between coal miners and DGT as part of the overall contract negotiations could adversely affect the production of coal, which still plays a crucial role in power generation.

Hamzah explained that different from the second-generation contracts, which are subject to prevailing laws, third-generation coal mining contracts stipulate provisions specifically nailed down to the 1994 VAT Law.

Hence, the contract is legally regarded as lex specialis, not subject to laws and regulations enacted after the contract signing until the contract expires.

The 1994 VAT Law specifically stipulates that crude oil, natural gas, and gravel and other directly extracted natural resource commodities are non-taxable goods within the VAT mechanism.

But the law does not explicitly include coal in the category of mining products that are non-VAT taxable.

But we also know that coal is produced in several qualities, depending on the value-added processes the mineral undergoes (such as washing or upgrading).

The different qualities represent the different grades of coal sold in the market.

But problems arose after the government issued a regulation (PP 144) in 2000 explicitly stating that coal is not taxable within the VAT system, thereby contradicting the 1994 VAT Law.

In 2008, six giant coal companies refused to pay outstanding coal royalties totaling US$598 million to the government, claiming that the government still owed them the same mount in unpaid VAT refunds. But the companies, which at that time still enjoyed high coal prices, eventually yielded to government pressure.

Instead of waiting for the results of contract renegotiations that could take more several years to conclude, many coal companies lodged their VAT dispute cases at the Tax Court.

Coal producers claim they still have more than Rp 1.5 trillion ($110 million) in VAT refunds that have yet to be settled by DGT.

Hamzah acknowledged that within the short term, tax dispute resolution through the Tax Court seemed to the best legal avenue. The problem though is that the Tax Court itself has been inconsistent in its rulings, again due to the different interpretations of the laws and rules and different analyses of coal production processes.

The Supreme Audit Agency (BPK) concluded in its 2014 audit of the DGT that the DGT regional offices had been discriminatory or inconsistent in their treatment of input VAT refunds for coal companies.

BPK discovered that in 2014, DGT approved Rp 1.66 trillion ($123 million) in input VAT restitutions for 11 coal companies, but rejected similar VAT claims for refunds from many other coal companies of the third generation.

Judges at the Tax Court often had differing views about the stages of value-adding chain in coal production. A panel of judges who understand the value-adding coal processing chain usually consider upgraded coal to be taxable commodity.

Strange, though, even though DGT has ruled that coal is no longer taxable under the VAT mechanism, coal companies remain subject to the regulation obliging them to collect VAT from the coal they sell under their domestic market obligation.

• The writer is senior editor at The Jakarta Post.

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China’s belt initiative begins packaging projects

Vincent Lingga,

• 24 May 2016
• The Jakarta Post

The Baker & McKenzie report also warns that Chinese and Western companies are different in terms of culture, management models and operating styles. Also adding to the mix is the cobweb of local and international laws to which companies must comply — not to mention the full spectrum of political, security and economic risks.

Thomas Chan, head of the China Business Center, Hong Kong Polytechnic University, argued that the OBOR scheme was not supposed to be designed as a fixed blueprint but an open-ended initiative — because its implementation largely depends on bilateral deals between China and the countries along the OBOR route.

OBOR is primarily about connectivity, starting from physical connectivity to economic, social and cultural connectivity. It is not just about investment and trade.

With the world’s largest economies vying for influence, ASEAN economies could be in for great benefits. The region desperately needs the huge infrastructure spending that China is bringing.

The deeper integration that these mega-regional projects are expected to promote will also add momentum to the ASEAN Economic Community (AEC) and the vision of a single ASEAN market, panelists said.

These developments make for a more attractive investment destination; as Asia’s mega-regional trade and investment initiatives unfold, they create and deepen channels of connectivity in ASEAN and beyond. Greater connectivity in turn creates big opportunities for business.

Creating demand for heavy industries in China seems to be one of the objectives of the OBOR initiative. Improving physical connectivity via massive infrastructure investment will raise demand in certain industries and expand trade between China and participant countries.

As most of the countries covered under the OBOR are developing countries that need quality infrastructure, large investment will be made in infrastructure, which in turn will raise demand for products such as steel and cement. Certainly such demand orders will go to Chinese companies that have thus far been saddled with unutilized capacity due to a lack of demand.

Like what has been taking place in Indonesia, exports for infrastructure projects from Chinese companies to Indonesia have been mostly financed by Chinese institutions (like the New Silk Road Fund) and policy banks (like China Development Bank and China Exim-Bank) or the China-dominated multilateral financial institution such as the AIIB.

Indeed, what China needs from now on — as it faces what is being considered a “new normal” (lower) economic growth — is to give a boost to aggregate demand to sustain a growth rate of only 7 percent. Higher demand in these heavy industries will lead to higher production. China is likely to use its $4 trillion foreign-reserve power to finance such institutions and this in turn will strengthen the internationalization of the renminbi.

But as Teresita Sy-Coson, vice chair of the widely-diversified Philippine business group, SM Investment Corp., noted, it is alright for China to export its huge savings to other countries through infrastructure exports, which will also strengthen the internationalization of the renminbi.

By advancing renminbi-denominated loans or credit lines for projects importing Chinese goods as it has done in Indonesia, China would be able to broaden the international usage of its currency.

 

Vincent Lingga The writer is a senior editor of The Jakarta Post

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View Point: Misguided decisions in the oil and gas industry

The Jakarta Post, May 14, 2016, Vincent Lingga

First, the blunt facts: None of the eight oil and gas blocks offered last year by the regulatory body SKKMigas were taken up by contractors. The number of drilled exploratory wells fell to 52 last year from 83 in 2014 and an average 104 between 2011 and 2013.

National oil production has fallen from as high as 1.25 million barrels per day ( bpd) in 2001 to below 820,000 bpd now. The success ratio of oil explorations has fallen to as low as 15 percent from 20 percent in 2014 and almost 70 percent in 2011-2013. International oil prices continue to hover below US$40/ barrel, as against $95 in 2014.

These harsh realities should have rudely jolted the government to act quickly and firmly to improve the investment climate in the petroleum industry in order to woo new investment.

But the government instead continues to behave and act as if it is only Indonesia that has sedimentary basins with large reserves and geological prospects. Take it or leave it: That is the way the government has treated oil companies that have taken big risks.

The latest grave mistake was President Joko “Jokowi” Widodo’s “verbal” decision last month that Inpex- Shell should change their plan of development in the huge Masela/Abadi gas field in Maluku from an offshore to an onshore liquefaction plant.

This misguided decision could delay the development of the huge gas reserves (10.7 trillion cubic feet) by more than five years to 2030. This was the first oil or gas project for which the approval had to go directly to the President, instead of being appraised and approved only by the SKKMigas and the energy and mineral resources minister.

After several years of uncertainty, the government finally decided last year not to renew the production-sharing contract between Total Indonesie of France and Japan’s Inpex for the Mahakam gas block in East Kalimantan, the country’s largest producer, which will end in 2017.

The concession was instead awarded to state-owned oil and gas company Pertamina under a decision that smacks of nationalist sentiment. The uncertainty surrounding the mechanism and procedures for the extension of production sharing contracts will haunt 19 other contracts set to expire between 2015 and 2018.

These concessions account for 30 percent of the national oil output. Over the next 10 years, PSCs accounting for 80 percent of oil production will expire. The government’s management of contract extensions will be a benchmark for attracting future investment in both exploration and development. The uncertainty over contract extensions could put further pressure on output and investment plans made by companies operating in Indonesia.

Hence, the government should enact a firm regulation on clearcut rules and procedures for contract extension or renewal. If the government does not act quickly and firmly to woo new investments in hydrocarbon prospecting, according to the Indonesian Petroleum Association (IPA), Indonesia will become a net energy importer by 2019. IPA estimates Indonesian energy demand at 6.1 million barrels of oil equivalent per day (B0EPD) in 2019, while domestic production (oil, gas and coal) will only be 6.04 million BOEPD. The energy deficit may reach 2.4 million BOEPD in 2022. Most oil executives and hydrocarbon analysts agree that Indonesia still has many basins with large reserves. But most of the country’s oil and natural gas fields are already quite mature and have reached their production peaks, and without new proven reserves Indonesia could see the last drop of its own oil. This indicates only one thing: The volume of proven reserves has not increased as fast as consumption growth as a result of an acute lack of investment in exploration. Only by increasing proven oil and gas reserves will Indonesia be able to make its production sustainable and sufficient to meet its steadily rising consumption along with the constant expansion of its economy. But the only way to increase proven hydrocarbon reserves is to increase investment in exploration. The other paradox is that there seems to be a mounting resource nationalism among politicians and even many energy analysts, suggesting the reduction of foreign oil companies’ dominance in the hydrocarbon industry.

But every time the government puts new oil blocks on open tenders, very few national companies are interested in bidding, given the high risks and the high-capital and high-technology nature of investment in the upstream oil industry.

The hydrocarbon industry requires an ever better investment climate, as most of the undiscovered, prospective basins are located in frontier, eastern areas.

The eastern region of the country has potentially big reserves that are not proven yet, but their prospecting requires sophisticated technology and huge investment, estimated at 10 times as large as those in Java and Sumatra, thereby involving bigger risks.

IPA has often cited rising concerns of uncertainty surrounding cost-recovery legislation, corruption, interference by government agencies and the general regulatory structure of the upstream and downstream oil and gas industry.

Legal and regulatory uncertainty and inefficient bureaucracy are especially inimical to investors in the upstream segment of the hydrocarbon industry — exploration and mining — as this business involves high risks and requires big capital.

Cost recovery — the mechanism in the PSC (production sharing contract) that allows contractors to recover their investment in exploration, development and production — has always been a highly contentious issue.

Given the slim chance that a dollar spent on exploration will turn into a commercial venture, most banks shun lending to explorations. Hence we need foreign oil firms willing to risk their own money.

However, as veteran oil executive Tengku Nathan Machmud observed recently, these companies now feel frustrated that they are no longer welcome as their contracts are not being extended and that their complaints about heavy-handed micro management are not being heeded and they are increasingly concerned about the negative attitudes and overtones in the media against the oil and gas investor community.

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HK eyes major role within China’s Belt-and-Road initiative

    Logistics hub:  Employers manage air cargo handling at the Hong Kong International Airport. Hong Kong is gearing up to seize business opportunities generated by the introduction of China’s “One Belt, One Road” infrastructure development initiative. (Courtesy of Hong Kong Air Cargo Terminals Ltd. )

Vincent Lingga, The Jakarta Post, Thu, April 21 2016 | 09:17 am

Government and business leaders here have been gearing up to make Hong Kong the platform for financial, trade and professional services for the new business opportunities expected to be generated by the implementation of China’s ambitious “One Belt, One Road” (OBOR) infrastructure development initiative to link Asia and Europe.

Hong Kong is organizing what it calls the first Belt-and-Road summit to be held on May 18 where government and business leaders, including those from Indonesia, will discuss business opportunities arising from the initiative.

“Hong Kong will play an important role in supporting infrastructure development as well as facilitating China’s investment along the Belt-and-Road route covering more than 60 countries”, Francis Ho, the associate director general of InvestHK, told journalists from ASEAN countries in a pre-summit briefing here last week.

Ho said Hong Kong would bank on its strategic role as the gateway to the world’s second economy--mainland China-- its efficient regional logistics hub for sea and air cargo and its position as the world’s third-largest financial center.

The ambitious OBOR initiative was launched by Chinese President Xi Jinping in early 2014 to link China with Europe through central and western Asia by inland routes and with Southeast Asia by sea routes. Since then China’s policy banks such as China Development Bank, China Exim Bank have been quite aggressive in lending to infrastructure projects in Southeast Asia, especially Indonesia.

William Chui, director of international relations at the Hong Kong Trade Development Council (HKTDC), the summit organizer, said infrastructure development in the ASEAN region would be one of the main themes of the summit.

The OBOR initiative certainly requires huge investment and project contracting and will drive big demand for a wide range of professional services.

“In this connection, Hong Kong should be able to find a considerable array of opportunities in financing, project risk management, infrastructure and real estate services,” Chui added.

Led from the highest levels of the government the OBOR push is backed by substantial financial firepower from the US$50 billion Silk Road Development Fund, the $100 billion Asian Infrastructure Investment Bank that has now been joined by almost 60 other countries, including Indonesia, as shareholders.

Ho cited another important role of Hong Kong as what he called the conduit of investment between mainland China and the rest of the world.

“More than 50 percent of China’s investment overseas was made through Hong Kong,” Ho said, adding that last year alone $58.5 billion worth of mainland China’s investment overseas was made through Hong Kong.

These numbers, Ho pointed out, highlighted 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.

Latest data at the HKTDC showed that as of last year, 1,400 foreign companies used Hong Kong as their regional headquarters.

Hong Kong is also the second-largest stock exchange in Asia after Tokyo, and is the sixth-largest hub for foreign exchange trading.

“In fact, last year the Hong Kong stock exchange (HKEX) was the largest in terms if initial public offerings with 138 new listings, raising US$30 billion in fresh funds,” HKEX’s vice president for publc reations Scott Sapp said.

More than 1,885 companies were listed in the Hong Kong exchange as of March.

Philip Yang, honorary chairman of the Hong Kong International Arbitration Centre, elaborated the experience and legal expertise of the thousands of local and 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 are key to minimizing the risk of commercial disputes,” Yang said, giving an assurance that the arbitration center was politically independent.

HSBC’s senior executive George Leung agreed that its long international business experience and knowledge about China made Hong Kong the best partner for foreign companies to do business with or in China and for mainland Chinese companies doing business around the world.

The renminbi (RMB) has become an international currency after the IMF’s decision last December to include the RMB in the Special Drawing Rights (SDR), the basket of currencies used by the IMF as its unit of account, joining the US dollar, euro, pound sterling and the yen.

“Hong Kong is the largest center for international RMB transactions and the renminbi liquidity here now amounts to more than 1 trillion [US$154 billion], “ Leung added.

C.C. Tung, Chairman of Orient Overseas Ltd. (OOL), the holding company of one of the world’s largest integrated logistics service providers, cited the role of Hong Kong’s seaport as the world’s fifth-busiest container port, which last year handled 20.1 million twenty-feet equivalent units (TEUs), with 256.6 million tons in total port throughput.

“The efficient port services make us the most popular sea-transportation hub in Asia, which can arrange multi-stage cargo routes,” Tung pointed out.

Orient Overseas Container Line Ltd., one of OOL’s integrated logistics service providers, is also active in Indonesia.

On top of that, the Hong Kong International Airport is also the busiest air cargo hub in the world, claimed Mark Whitehead, the chief executive of Hong Kong Air Cargo Terminal Ltd.

Last year, according to HKTDC, the three Hong Kong air cargo terminals, which operate around the clock, all year long, handled 4.38 million tons of freight.

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Belt and Road Summit to focus on ASEAN infrastructure opportunities

Vincent Lingga, Tue, April 19 2016 | 08:35 am

China’s One Belt One Road (OBOR) development agenda to boost connectivity between mainland China and 65 countries in Asia and Europe by building infrastructure ties fits well with the 2010 Master Plan on ASEAN Connectivity.

The Hong Kong government, which will host the first Belt and Road Summit on May 18, chose infrastructure development opportunities in the Southeast Asian region as the main focus of discussions between business leaders, ministers and investors from around the world.

ASEAN countries will be able to tap the more than US$200 billion in financing resources that China’s policy banks, including the $100 billion Asian Infrastructure Investment Bank (AIIB) and the $50 billion Silk Road Infrastructure Fund, have committed to infrastructure, notably road and rail links and power grids along the corridor covered by the OBOR initiative.

President Xi Jinping launched the OBOR initiative in early 2014 to build a network of overland road and rail routes, oil and natural gas pipelines and other infrastructure that will stretch from central China through Central Asia and ultimately reach as far as Moscow and Venice.

But even though President Xi has asserted from the outset that the OBOR initiative would adhere to the principles of noninterference in other nations, not seeking to increase the sphere of influence, a number of countries are concerned over the geopolitical impact of the agenda.

Analysts, senior government officials and business leaders who talked to journalists from ASEAN countries during a series of presummit briefings in Hong Kong last week have mixed views on the OBOR initiative. The leading thread of views sees the initiative as the Chinese government’s recognition that its own prospects are inextricably linked with those of its trading partners along the OBOR route.

But if the controversies over several infrastructure projects China’s policy banks plan to finance in Indonesia, Thailand and Laos are any guide, the strongest note of caution prevailing now is: China needs to tread very carefully and work hard to gain trust for the Belt and Road agenda to boost connectivity and commerce between China and the 65 other countries involved.

A proposed $5 billion railway line that stretches through to Thailand could support that country’s ambitions to become a regional logistics hub, and China’s need to access key export markets, offering a win-win for both countries. But latest reports from Thailand suggest Thailand might go alone in financing the construction of the first phase of the project instead of seeking financial loans from China, as originally planned, due to what it claimed were unusually high interest rates charged by Chinese lenders.

The 250-kilometer railway is seen as part of an ambitious network linking Bangkok with Kunming in Southwest China’s Yunnan province, through Laos in the north and connecting Thailand, Malaysia and Singapore in the south.

Obviously, upon completion, the countries involved will all benefit from such regional arteries. But the uncertainty shows that different countries may have different expectations when they respond to China’s overtures.

Some prospective projects also could potentially be viewed as primarily benefiting China by building local infrastructure unrelated to the OBOR route, such as the $5 billion Jakarta-Bandung high-speed railway.

Such a suspicion may arise because the OBOR initiative was launched at a time when China’s economic growth fell from a two-digit level to below 7 percent.

Hence, many see the agenda as China’s attempt to export its huge excess manufacturing capacity in steel, cement and various other industrial products.

Such an impression has been strengthened by the fact that China’s policy bank loans extended for infrastructure development have mostly been tied to the involvement of Chinese companies, either as suppliers of machinery and raw materials or in construction and operation.

Hong-Kong based brokerage CLSA and China’s Citic Securities noted in a recent report that China was preparing to counter the accelerating slowdown in its domestic economy through enormous investments in overseas infrastructure that could absorb overcapacity in key industries.

The aggressive lending by China’s policy banks like the China Development Bank and Exim Bank to such developing countries as Indonesia has also been seen as a program to boost exports through Chinese companies that win construction jobs.

Last August, for example, the China Development Bank gave $3 billion in loans to Indonesian state-owned Bank Mandiri, BRI and BNI to finance infrastructure projects that involve Chinese construction companies. So suspicious has the House of Representatives been of these loans that the House’s finance commission summoned the directors of the three banks for explanations on how those loans were spent.

In addition, as Julian Vella, the Asia Pacific head of global infrastructure at KPMG International, cautioned in a recent analysis that Chinese investors must acknowledge that some of the countries on the proposed OBOR route have traditionally strong links to other nations with a vested interest in the region, and may resist China’s overtures.

Certainly, implementing the Belt and Road agenda will require a high level of mutual understanding of the regulatory, political, legal, financial and project risks, such as resource nationalism, transparency and labor unrest associated with potential projects along the OBOR route.

All in all though, seeing it from the positive side of things, the OBOR initiative will help fulfill part of Asia’s huge funding gap for infrastructure financing, which is estimated by the Asian Development Bank (ADB) at $800 billion annually over the next decade.

In fact Japan’s recent decision to commit more than $100 billion in new lending resources to the ADB within the next five years specially for funding high-quality infrastructure should also be seen as another positive impact of China’s OBOR initiative.

Yet more encouraging is the statement made by AIIB president Jin Liqun in Washington last Wednesday that the AIIB, the ADB and the World Bank would cofinance infrastructure projects in Asia.

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Commentary: Jokowi's hardball may mothball Masela gas project until 2022

Vincent Lingga, Wed, March 30 2016 | 09:20 am

President Joko '€˜Jokowi'€™ Widodo'€™s decision to choose an onshore liquefaction process for the giant Masela gas project could be right for domestic political consumption.

But his hardball approach and policy inconsistency, without taking into account the prevailing weak oil-market conditions, could jeopardize the commercial viability of the whole Masela LNG project gas development in southern Maluku.

That was our main reading of the President'€™s decision last Wednesday to select an onshore liquefaction (OLNG) concept for the Masela project, which sits on almost 11 trillion cubic feet of gas reserves in the Arafura Sea.

His decision overrules the recommendations of the SKKMigas upstream oil and gas regulatory body, his energy and mineral resources minister and the oil and gas contractors, Inpex-Shell, which all chose a floating LNG (FLNG) concept.

Ordering Inpex-Shell to go back to the drawing board to prepare an OLNG project will possibly postpone the final investment decision on the project until 2022, almost three years after a new government takes over.

Both Inpex and Shell say they have not received the final documents on the President'€™s decision, so were unable to make any meaningful comment, except confirming that the project would suffer another delay.

But analysts have noted that since this is a huge project, Inpex-Shell will certainly conduct a disciplined approach to see whether the OLNG project will be consistent with their requirements for a development concept that is commercially robust across a range of scenarios.

Wood Mackenzie consulting company observed in its latest report that '€œ the decision to go onshore will not only extend the time to first gas [delivery] but also brings into questions Inpex and partner Shell'€™s commitment to the project'€.

Inpex-Shell had previously looked into both OLNG and FLNG options but had selected a FLNG concept because it would cost over US$7 billion less than the estimated $22 billion for an OLNG, as well as being faster to develop.

They will certainly ask for more incentives to make the project commercially viable and bankable, but these additional incentives could wipe out most of the economic advantages (multiplier impacts) Jokowi had in mind when he chose an OLNG over a FLNG.

Upstream oil and gas analysts here estimate that Inpex-Shell will need at least two years to conduct another environmental impact analysis, another one year for a more detailed feasibility study on the OLNG and one year more for finalizing its final plan of development (POD).

Even if the government speeds up approval of the POD, the oil companies will still need another two years to seek potential buyers and lenders. Hence analysts predict Inpex-Shell will not make a final investment decision until 2022. If the contract for the project'€™s front-end engineering design is awarded within one year later, engineering, procurement and construction will start only in 2023 and the plant will come on-stream in 2029.

The main predicament in this process is that Inpex-Shell will have to negotiate an extension of the Masela block concession, which will end in 2028, because even under the original POD for a FLNG, as proposed by the contractors, the project had been scheduled to start production only in 2024/2025.

Fortunately, though, the extension of an oil and gas production contract can be negotiated 10 years before its end. But negotiations for the contract'€™s extension are unlikely to start in 2018, an election year, when inordinately strong nationalist sentiments heat up campaigns.

The negotiation process will also plunge the project into political and social quagmire, as the Maluku provincial and regency administrations, as well as state-owned Pertamina oil company, may demand a piece of the huge gas-resource pie.

Since this is a gas business and all the risks are to be borne by Inpex-Shell, commercial viability is the key to determining whether the project will advance to the implementation stage or end up mothballed.

The main question then is who will buy the gas and at what prices and for how long. When it comes to the LNG market, many analysts have predicted a market glut within the next 10-15 years, with an estimated additional capacity of 50 million tons a year to come on stream, mainly in Australia, the US, Africa and Malaysia.

The day Jokowi announced his choice of OLNG for Masela, newspapers in Australia reported that Woodside Petroleum and its partners, including Shell, had shelved plans to build the $30 billion Browse floating LNG project off Australia in the face of global oversupply. The decision means there are no longer any major gas export projects under serious consideration in Australia after a $220bn-plus run of investment decisions unprecedented anywhere in the world.

The pace of development of giant gas export schemes has slowed globally, as LNG prices have plummeted with oil prices, prompting many companies to delay funding decisions until business conditions brighten.

In Asia, LNG prices have plunged by 80 percent over the past two years. The basic question then is whether the much larger cost and the more complex development of OLNG justifies spending vast amounts of money at current oil prices below $40/barrel.

Yet more important is whether potential lenders who will put up at least 80 percent of the investment will be convinced that their credit will be returned. After all, most giant oil and gas companies have seen their available funds for development decimated by slumping prices. 

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View point: New financial safety law will accelerate bank consolidation

Vincent Lingga, Jakarta | Opinion | Sun, March 20 2016, 8:09 AM

The Financial System Crisis Prevention and Mitigation Law, which was approved by the House of Representatives on Thursday, will accelerate bank consolidation as big depositors, concerned about the safety of their savings, will most likely shun most small and medium-sized banks.

Apparently learning from the political controversy and debacle over the November 2008 bailout of Bank Century (now Bank Mutiara), the new law has been designed to prevent the use of taxpayer money to help insolvent banks.

To minimize the moral hazard, the law prohibits the bailing out of insolvent banks, except big banks classified by the Financial Services Authority (OJK) and Bank Indonesia (BI) as domestic systematically important banks (DSIBs).

Only in a particularly vulnerable condition and in extreme cases that meet the stringent criteria set by the Deposit Insurance Corporation (LPS) can the OJK be authorized to instruct LPS to handle troubled non-DSIB banks similar to DSIBs.

This means that most small and medium-size banks that face problems of insolvency will either be taken over or closed down by LPS. However, both DSIBs and non DSIB-banks are entitled to short-term liquidity credit from BI as long as they can put up enough security for the loans.

 Even the procedure for government (LPS) intervention to help DSIBs is quite tight and tough. If government intervention is needed due to systemic risks, it will be the shareholders who primarily take whatever losses the market doles out and creditors should be heavily penalized.

The legislation stipulates that owners of the DSIBs are to be primarily responsible for saving their ailing banks by injecting fresh capital to improve their solvency, a scheme called a "bail-in". Only if the scheme fails will state-owned LPS step in, using its own financial resources to cover customers' deposits and finance the lender's takeover.

But given the large number of banks in Indonesia — 118 commercial banks and thousands of rural credit institutions covered by LPS — the extremely small space for government intervention could turn a mini banking debacle into a full-blown financial crisis.

We reckon only about 20 of the 118 commercial banks with core capital of Rp 5 trillion (US$370 million) or more will be classified by the OJK as DSIBs worthy of government intervention during a financial crisis.

This means big depositors will most likely shun the other 98 commercial banks, because if these banks face severe financial distress, most of them will be allowed to close down and depositors would lose all their money, except the initial Rp 2 billion, the maximum sum per account that is covered by the LPS insurance scheme.

For sure, the banking industry will become more segmented.

The problem, though, is that we hardly know when or from where a financial crisis will strike. Therefore, effective banking supervision is even more crucial to prevent a financial crisis.

Given the experiences from the 1997-1998 financial and economic crisis, even the closure of small banks that are not systemically important could trigger severe financial panic and eventually a full-blown crisis if the number of bank failures is relatively big.

What's unique about such panicking, and most dangerous, is the amount of collateral damage they do to the innocent, to people who borrowed responsibly, who weren't overexposed. The banking system is the lifeblood of the economy.

It's like a power grid. One has to make sure the lights stay on because if the lights go out, then many people could face damage, such as that seen in 1997 and 1998 when Indonesia experienced what international analysts described as one of the biggest wealth destructions in the world.

Many people lost their jobs, more people lost their businesses, lost their savings and were devastated. Bailing out banks may look beneficial only for the banks' owners. But bailing out systemically important banks also actually protects people from the impact of bank failures.

The four members of the Financial System Stability Committee (KSSK) — the Finance Ministry, BI, the OJK and LPS — will be responsible for the nation's crisis prevention or firefighting approaches. They are in charge of performing regular monitoring of the financial system, purchasing government bonds in the secondary market and bailing out insolvent banks.

It is therefore crucial that decision-making by the KSSK be transparent, quick and firmly based on the most comprehensive data available at the time of a crisis.

Certainly, decision-making under duress during a crisis is different from that under normal circumstances. Any decision involves a choice from a number of alternatives. Decisions can be made from a complex mixture of facts and values, especially in a critical situation.

It is good to know that the law grants legal immunity or protects members of the KSSK from civil and criminal lawsuits for their decisions as long as their decision-making is in accordance to the law.

If politicians could dispute or even attack a policy judgment made by the KSSK in good faith and in full compliance with proper procedures, as stipulated in the law, no senior officials would be willing or have the courage to make any economic or financial decision no matter how urgent or imperative it may be.

The main purpose of this law is to give a clear direction on crisis-management protocol, which will give natural legal protection for policymakers who take action based on the preset steps.

The law is seen as crucial in encouraging policymakers to act decisively at times of financial crisis, with Indonesia in particular at risk of sudden shocks in the global economy given the vulnerability of its local financial markets due to the dominant role of foreign portfolio investors.

In Indonesia, threats of capital outflows are high as foreigners own at least 50 percent of shares and 40 percent of bonds traded in secondary markets, among the highest in the region.
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The writer is senior editor at The Jakarta Post.

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Commentary: Decision on Masela plan will impact other giant gas projects

Vincent Lingga, The Jakarta Post, Jakarta | Commentary | Tue, February 09 2016, 6:18 PM

The government’s decision with regard to the US$15 billion Masela gas development plan in Maluku will have a great impact on Indonesia’s hydrocarbon industry because most of the country’s promising sedimentary basins are located in the country’s eastern region and the highest success ratio of explorations has, thus far, been in gas.

The question now is just how did Japanese Inpex and Royal Dutch Shell (Shell) find themselves in such an imbroglio for their gas development plan, previously under the full jurisdiction of the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) and Ministry of Energy and Mineral Resources.

Why did the Masela gas project become the first of such developments required to go directly to the President for approval, not simply the minister of energy and mineral resources as has been the case for the last five decades.

Another question is whether the Masela debacle portends that the final approval process for oil and gas development projects no longer rests with the authority of SKKMigas and the minister of energy and mineral resources. If that is the case, it will cause severe damage to the whole industry at a time when oil prices are at their lowest.

When Inpex, as the operator of the Masela Block in the Arafura Sea, submitted its plan of development (POD) for the 10.7 trillion cubic feet of gas reserves in the Abadi field last April, the licensing process should have run as normal through comprehensive technical and economic assessment at SKKMigas. Recommendation from this regulatory body have so far been perfunctorily approved by the energy minister.

In September, SKKMigas recommended the Masela POD, for a floating LNG (FLNG) project with a designed capacity of 7.5 million tons a year and 24,000 barrels of condensate a day, to the Energy and Mineral Resources Ministry. The two-year feasibility study by Inpex concluded that an onshore LNG (OLNG) plant on Aru Island would cost $22.3 billion and require a reasonable length of time to build.

But Coordinating Maritime Affairs Minister Rizal Ramli, who entered the Cabinet only in mid-August, cried foul in October, shooting his mouth off against the project. He demanded a whole review of the Masela project, arguing that the POD should be linked to an OLNG plant instead of FLNG so as to generate more multiplier impacts on the national economy.

Analysts wondered, though, how comprehensive and reliable Rizal’s study was, especially when compared to the Inpex POD which is based on a two-year feasibility study of both FLNG and OLNG concepts. If Rizal’s study was so credible why was it not submitted to SKKMigas as a comparison to the Inpex POD?

I don’t think SKKmigas is so short of technical experts and analysts as to recommend the POD on Masela project if it is largely biased against the country’s interests. It is worth a reminder that it is Inpex and Shell that bear the entire cost of the Masela project and that these companies will only be able to recoup their investment only after the LNG plant has commenced commercial operation.

The feasibility study used for the POD must be accepted as credible and reliable by those international creditors who will finance the bulk of the $15 billion investment.

It is also regrettable that President Joko “Jokowi” Widodo, instead of encouraging vigorous discussions and debates within his Cabinet, allowed such policy bickering in public.

But the ministerial squabbling should also be blamed on Jokowi. The President has been so obsessed with his concept of developing a maritime axis and sea toll roads that he created the portfolio of the coordinating maritime affairs minister in his first Cabinet in October, 2014.

Jokowi made another misguided decision during the first reshuffle of the Cabinet last August, when he agreed to change the nomenclature of the maritime affairs portfolio to “coordinating maritime affairs and natural resources minister”, hence putting four ministries — maritime and fisheries, tourism, transportation and energy and mineral resources — under it.

I think this nomenclature change will continue to dog the Cabinet’s economic policy making because of the blurred division of jurisdiction between the coordinating economic minister and the coordinating maritime affairs and natural resources minister.

Things became increasingly murky when Jokowi responded to Rizal’s criticism and ordered an independent assessment of the Masela project. But US consultant Poten & Partners, hired by the ministry of energy and mineral resources, also recommended a FLNG last December, as proposed by Inpex and approved by SKKMigas.

Both Rizal and Jokowi are wise and right in demanding that the Masela gas project generate maximal benefits for the Indonesian people and have a multiplier impact on the national economy. But it is misguided to push through this objective at the expense of the commercial viability of the project.

For the Maluku administration and its people, neither concept matters much because there are not many local people on the small islands of Aru or Tanimbar whom are qualified to take the jobs created by the project construction. It is better for them to invest additional revenue from Masela in priority programs to meet local needs.

There have been exhaustive debates on the pluses and minuses of FLNG and OLNG concepts for the Masela project.

The advantages of FLNG are that its capital cost is $7 billion cheaper than OLNG and faster to construct because it does not need vast land acquisition and long gas pipelines, causing less environmental impact and generating $57 billion in revenue for the government, in comparison to $48 billion in the case of OLNG. The domestic shipbuilding and offshore structure industries will also benefit greatly from the FLNG concept.

Proponents of OLNG claim benefits including greater multiplier impacts on Aru or Tanimbar Islands — such as jobs, businesses, services and amenities like markets, a hospital, housing and other public facilities and infrastructure — as well as the petrochemical industry.

For the OLNG concept, the big question is, do we possess the capacity and resources in engineering, procurement and construction (EPC) for such a huge and complex, high-technology industrial complex?

If the final decision is in favor of OLNG (rather unthinkable), it will cause another long delay, meanwhile the concession for the Masela block will expire in 2028.

And, even if the President finally decides soon to choose the FLNG concept, the Masela project will not be commercially viable if the Masela 30-year concession is not extended at least by 10 or 20 years because Inpex-Shell needs two years after the President’s final POD approval to prepare their final investment decision and another six years for the building of the FLNG and its supporting infrastructure. - See more at: http://www.thejakartapost.com/news/2016/02/09/commentary-decision-masela-plan-will-impact-other-giant-gas-projects.html#sthash.jhB7OkC9.dpuf

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View point: Strengthening Bulog’s role in achieving food security

Vincent Lingga, Jakarta | Opinion | Sun, January 24 2016, 3:32 PM

The government’s plan to extend the oversight authority of the State Logistics Agency (Bulog) from only over rice to over 10 other food commodities, including sugar, cooking oil, beef, chicken, eggs, onions, chili and flour, should be seen as part of the broader program to achieve food security for the country’s 250 million people.

Bulog remains one of the most important institutions for ensuring food security and food price stability in Indonesia, but a stronger and effective internal control system is needed for it because this company has since 2003, been assigned to undertake both commercial activities and public service obligations — maintaining national security stocks, public procurement in support of farmgate prices and emergency food response. 

The challenge here is that national food consumption occurs throughout the year and increases steadily because of population growth while food crop harvests take place mostly three to four times times a year, even only twice for rice in Java and just once in most areas outside Java where irrigation networks are inadequate.

Yet the most challenging thing is that farm production tends to fluctuate mainly because of weather factors that are beyond the control of producers or the government. 

The internal control of Bulog should be exercised through the approval of its annual business plan and budget. The government also should enhance alternative delivery mechanisms and contracts with different providers of the public service obligations to establish measures of unit costs for comparison with Bulog’s costs.

Bulog’s market intervention, however, should be designed in such a way that the food price movements still allow for a fair profit margin for wholesalers and traders. Since it doesn’t make any economic sense for Bulog to manage more than 8 percent of national consumption as buffer stocks, the bulk of national stocks should be held by private traders across the vast archipelago. 

An effective internal control mechanism is a prerequisite to gaining a political consensus for the allocation of a much greater portion of the state budget to Bulog, to enable it to manage adequate national stocks of the food commodities.

Certainly Bulog will never be able to properly execute its tasks if it relies mainly on commercial bank loans. The bulk of its operational funding should be derived from the state budget and any bank loans that are still needed to support its working capital should be obtained at very low, or even subsidized interest rates.

During the authoritarian administration of Soeharto and even until 2007, Bulog had been notorious for being a bastion of corruption and a cash cow for politicians. 

Indonesia generally does not suffer from a problem of food availability. It produces around 34 to 35 million tons of rice each year and consumes only slightly more, 36 to 37 million tons. Moreover private distribution networks appear to operate reasonably efficiently ensuring access to food throughout Indonesia. Secondary food crops and horticulture also are plentiful. 

The most important element of food security is ensuring that the poor can afford to obtain food. This is best achieved through a broad-based strategy for growth — particularly growth that benefits the poorest. 

Certainly the main responsibility for securing dequate food supplies — rice, secondary food commodities and horticuture produce — falls on the shoulder of the Agriculture Ministry, but the ministry’s programs should focus on productivity improvements across a wider array of agricultural produce as food consumption is shifting across all income groups toward higher quality foods. 

For example, at their current growth rates, household consumption of fruits and vegetables and other horticulture produce may surpass the value of rice consumption within the next decade. The production of high value fruits, horticulture and livestock where domestic demand growth is highest should be enhanced. 

Agricultural programs need to move aggressively toward a research and extension-service agenda focused on this high value and high growth produce and on assisting the broad base of small producers to meet quality standards for these emerging markets and to gain access to procurement chains that are increasingly defined by supermarkets.

I think as long as the government continues to depend on ad hoc policies as import measures to check food commodity prices, we remain vulnerable to bouts of wild food price gyration.

The government should implement integrated efforts to increase domestic supplies of the various food commodities as the number of middle-class consumers with strong purchasing power is projected to increase to more than 135 million within the next decade.

What I mean by integrated efforts here are continuous integrated programs to empower the farmers with extension services and farm input provided through cooperatives and other grassroots economic cooperation and to improve rural infrastructure.

Certainly, traditional retail markets need improved hygiene and sanitary standards, infrastructure (pavement, roads, buildings and stalls) and cold chain systems. This will create an efficient system linking producers, processors and packers to the modern procurement system. 

The success stories of countries in developing a strong agricultural sector, such as South Korea, Taiwan and Thailand, show the important role of contract-farming schemes between farmers’ associations or farmer cooperatives and large supermarket chains under government supervision.

Under such contract-farming schemes supermarket chains can act as the development agent for horticulture farmers, providing them with extension services, farm input, credit financing and market outlets.

At the end of the day, though, food security involves many complex issues ranging from trade and economic development to health and environment. Pursuing food self-sufficiency would not guarantee food security. 

Food security should be made part of a broad-based agriculture development program with the ultimate objective of increasing rural household incomes both from farm and off-farm activities.

The concept thus aims at empowering the farmers’ economy and the rural community through the development of rural and farm infrastructure. After all, more than 55 percent of the total population still lives off farming in rural areas. 

Of most importance is to make the integrated agricultural development an ongoing process — irrespective of the volatility in food commodity prices — by pouring more investments into such basic rural and farm infrastructure as roads, marketplaces, transportation, research stations and farm technical extension services designed to meet area-specific conditions.
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The writer is a senior editor at The Jakarta Post.

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