Commentary: Looking at Freeport deal through distorted lens of politics

Published on December 27, 2018

 

President Joko “Jokowi” Widodo deserves the highest praise for his appropriate pursuit of resource nationalism. Last Friday, the government finally closed its deal with United States mining giant Freeport-McMoRan (FCX) on acquiring majority shares in its subsidiary Freeport Indonesia’s (FI) Grasberg copper and gold mine in Papua for US$3.85 billion — less than four months before the presidential and legislative elections in April 2019.

Still, it is mind-boggling to hear the perpetual criticisms analysts and the campaign team of presidential challenger Prabowo Subianto have lashed out at the successful FI divestment.
Looking at the FI acquisition only through the distorted political lens of misguided arguments simply insults the people’s intelligence.

Critics have ridiculed the acquisition of the world’s second largest copper and gold mine as a “senseless and stupid move”, asking why the government did not wait until FI’s current contract ended in 2021 — by which time it could simply take over the mine without paying a single rupiah.
These detractors deliberately ignore the legal fact that under Indonesian law, mines operating under a contract of work (CoW) serve as both contractor and investor.

Hence, the government cannot “simply take over” mining operations in the event that the FI contract is not extended beyond 2021, because FCX has the legal right to take home all mining equipment and other fixed assets of its Indonesian subsidiary. Only the mineral deposits laying deep underground belong to the state — mineral resources that have absolutely no value without FI’s technology, expertise, operational system and global network.

This is very different from foreign oil companies, which cannot claim anything after their production sharing contract (PSC) ends, as they are purely contractors.
Taking over the FI mine after the CoW ends without paying due compensation to Freeport as mutually agreed would land the government at the international arbitration court and isolate Indonesia as a pariah of the international community.

If the critics suspect that the price for acquiring majority ownership in FI was unusually high or smacked of irregularities, it would be more productive if they lobbied the House of Representatives to request that the politically independent Supreme Audit Agency conduct an investigative audit into the entire divesture of the world’s most complex mining operation.
The FI divestment was a normal business transaction between the government, through state-owned mining holding company PT Indonesia Asahan Aluminium (Inalum), and FCX, as required by the law. The negotiations were long and tough, overshadowed by the sociopolitical controversy of FI’s 50-year operations in the country’s easternmost province.

The fact that FCX — which still holds 48.76 percent ownership in FI after the divestment — did not ask for international arbitration as it had threatened, shows that the US mining giant was satisfied with the deal.

The final stage of the divestment smoothly followed the initial agreement signed in August 2017, followed by a heads of agreement signed in July 2018 and a sales and purchase contract that concluded in September.

Judging from the step-by-step process and the comprehensive due diligence the state financial comptroller (internal audit) and the Attorney General’s Office conducted on the deal, we can rest assured that the acquisition was clean and free of any malfeasance.

Most important for FCX is that the deal secures a 20-year extension of FI’s operations through 2041, and guarantees fiscal and legal certainty under a special mining license protected by the 2009 Mining Law. This is vital to the multi-billion dollars in additional investment that is still needed as the mine’s operation shifts from open-pit to underground next year.

On the other hand, the majority ownership enables the government to control FI management, corporate policies and such business plans as dividend payouts. And the government will have more authority over FI when its CoW ends in 2021 and it recommences operation under the special mining license.

Yet more important is the copper smelter, which will be built in Indonesia as one of the key requirements of the new mining license, and which will in turn allow the government to ascertain the gold content of the mine’s copper concentrates.

The fact that Inalum was able to purchase the acquisition with the proceeds of $4 billion global bonds is another proof that the transaction was clearly commercially viable.

Inalum successfully issued in November a $4 billion total tranche of three-year, five-year, 10-year and 30-year bonds in London with yields of 5.5 to 7.30 percent on a choppy global market from concerns over the US-China trade war, the US’ monetary tightening and slowing growth in Asia.
In using the bonds instead of bank loans, Inalum prudently managed its future debt service burden.
A word of caution, however: FI’s production output — and consequently its profit — will most likely decline in the first two years following the divestment.

But by no means is this legal ground for the critics to sue the ministers or the Inalum CEO for corruption. Nor can such a short-term decline in production be blamed on Inalum’s managerial incompetence, because the potential for this problem has been anticipated as Grasberg commences underground mining operations in 2020.

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Executive column: For insurance, it’s business as usual in election year 

Jakarta   /   Wed, December 26 2018   /  02:48 am 

 

 

Jonathan Hekster (Manulife Indonesia)
Manulife Indonesia, the oldest foreign life insurance company in the country, remains upbeat about the outlook of the industry despite the political noise during the presidential and legislative elections next April, the global uncertainty and financial market volatility.
“We have operated here for over 33 years and we now serve 2.4 million customers. We have faced many uncertain situations and political elections, yet our business has never declined even in an election year,” Manulife Indonesia chief executive officer Jonathan Hekster asserted here.
Hekster told Vincent Lingga of The Jakarta Post that regardless of any situation, life risks come anytime. This is something that people need to be aware of and Manulife Indonesia will help them to anticipate those risks.
Below are excerpts from a recent interview in which Hekster charted out the challenges and outlook of the industry, including health insurance:

Question: How do you think the political noise during the presidential and legislative elections next year would impact the life insurance business in Indonesia?
Hekster: The political noise will have an impact only on the span of attention of the general public. Regardless of any situation, life risks come anytime, anywhere. This is something that people need to be aware of and we will help them to anticipate those risks. Therefore we remain optimistic that it won’t affect the way we run our business. Moreover, the market potential is quite huge as the latest data at the industry’s association show that life insurance penetration is only 7.1 percent of the estimated 260 million population. Hence, there is still huge potential to fulfill the insurance and protection needs of the different groups of people through the right insurance solutions. The association estimated the industry will grow by 20 or 30 percent this year and will most likely expand at a similar rate next year.
How do you meet the insurance and protection needs of the rising number of middle-class people and high net-worth (top rich) individuals in the country?
Manulife continues to design new products to meet the different needs of our customers: This year alone, for example, we launched three products: Manulife Education Protector (MEP), a regular-pay unit-linked insurance product to help parents plan for their children’s education, MiTreasure Optimax Protection (MiTOP) and Manulife Prime Assurance (MPA) to protect high net-worth customers and prepare them for legacy planning.
The latest Global Wealth Report data showed that there are an estimated 100,000 high net-worth individuals in Indonesia and this number is growing rapidly. A study by Baker McKenzie in 2017 found that more than 50 percent of family businesses in Asia were run by first generation, but only 3 percent of family businesses were run by third generation. Hence, MPA is designed as a comprehensive insurance product to help these rich people balance their lifestyle changes and financial management and to prepare the next generation to take over their family businesses.
Do you think the medical insurance component of life insurance firms could greatly complement the government’s universal health insurance program?
Indonesia’s National Health Insurance (JKN) program has been having a positive impact on the insurance industry by increasing the insurance literacy rate. Both insurance business players and the government have the same mission, which is to increase the people’s welfare with the right financial protection. In principle, the awareness of insurance in general needs to be improved. Manulife has operated in Indonesia since 1985. We understand the culture well. This is why we are maximizing every channel like TV programs for campaigning to promote a healthy lifestyle which is a key component of our medical scheme.
Could you describe the latest trend in the Manulife Sentiment Index?
Our latest Manulife Investor Sentiment Index or MISI survey in 2017 found that Indonesian investors critically underestimate future retirement costs. It revealed that while nearly all investors (96 percent) believe they will maintain or enhance their lifestyle in retirement, their savings are likely to fall far short of their spending, jeopardizing their financial security. Although they place a high priority on retirement planning, ranking it second to paying for their children’s education, nearly a quarter of investors (24 percent) allocate only 10 percent of their savings or less to retirement.
Could you reveal Manulife Indonesia’s performance for this year?
Unfortunately we can’t yet disclose our unaudited result for 2018. But the trend so far shows our performance this year will likely be as robust as last year. Our audited report for 2017 recorded greatly positive developments: Our new business premiums increased by 19 percent to Rp 4.4 trillion (US$314 million), total premium income rose to Rp 25 trillion, consolidated comprehensive profits almost tripled to Rp 2.6 trillion and risk-based capital (RBC) position was 582 percent for conventional business and 372 percent for Tabarru Sharia, both way above the regulatory minimum requirement.

 

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Greenpeace activists try to sabotage Indonesian economy

Greenpeace activists try to sabotage Indonesian economy

Vincent Lingga

The Jakarta Post

Jakarta | Tue, November 27, 2018 | 11:05 am 


Greenpeace activists unfurl a banner reading "Drop Dirty Palm Oil Now" at a Wilmar International palm oil refinery in Bitung, North Sulawesi, in September. (Greenpeace/Jurnasyanto Sukarno)

Greenpeace activists who last week prevented a tanker loaded with palm oil from Indonesia from mooring at Rotterdam port and earlier on Nov. 17 illegally boarded the same cargo vessel off Spain in protest at what they described as an ecologically damaging commodity could be regarded as saboteurs of the Indonesian economy.

It is one thing to campaign to influence public opinion against unsustainable farming practices, but it is against the law to unilaterally and arbitrarily block the passage of a legal shipment of palm oil.

Hence, the demand by the Indonesian Employers Association (Apindo) and the associations of palm oil companies and smallholders for the government to take stern measures against the Indonesian chapter of Greenpeace is fully justifiable.

The campaign against palm oil has long been riddled with misperceptions, amid claims that palm oil has caused massive deforestation in developing countries, notably Indonesia, the world’s largest producer.

The debate over palm oil has not always been based on straight facts and has often been biased in favor of noisy demands from environmentalists who are unable to suggest workable solutions to the industry’s multilayered complexity, which essentially boils down to the issue of poverty-alleviation.

Meanwhile policymakers in Europe, under pressure from vegetable oil industry associations and green campaigners, have rushed to build up regulatory barriers against palm oil products entering their markets.

For almost two decades, palm oil has been a target for European agricultural interests, lawmakers and NGOs, with the European Union seeking to block the commodity both as a food ingredient and energy source, citing environmental and human rights violations in its production.

So vigorous has been the negative campaigning against palm oil that we, along with several scientists in Europe itself, have concluded that allegations of deforestation, human rights and violations of workers’ welfare are a subterfuge to protect EU producers of vegetable oils such as soybean, rapeseed and sunflower, which have become increasingly uncompetitive.

Another misconception is that palm oil is bad for health as its extracts can increase heart problems. But Bill Wirtz, a policy analyst for the Consumer Choice Center (CCC), cited in a recent article the findings of studies by the School of Medical Science and Technology of the Indian Institute of Technology in 2009 and the World Journal of Cardiology, that palm oil’s effect on blood cholesterol is relatively neutral when compared to other fats and oils.

The CCC claims to represent consumers in over 100 countries and monitors closely regulatory trends in Washington, Brussels, Geneva and other hotspots of regulation, and informs and activates consumers to fight for greater choice.

Even with healthier nutritional alternatives, for the sake of a fair market, consumers should be allowed to freely choose which fats they want to consume. It is certainly ill-advised to put labels on one particular product or campaign for a boycott on another.

Banning palm oil in biofuels and severely restricting it in foodstuffs and other consumer goods, as the EU plans to do, while global demand for vegetable oils steadily increases, could even increase hazards to the environment and biodiversity.

The United Nations Food and Agriculture Organization (FAO) records that palm oil now accounts for over 50 percent of global vegetable oil consumption and has increasingly been leading the market as a result of the much lower yields of other vegetable oils, produced mostly in temperate-zone countries.

The latest report of the Switzerland-based International Union for the Conservation of Nature (IUCN) warned in a report released at a recent international forest conference in Oslo that completely replacing palm oil with other vegetable oils would be even worse for the environment.

The key factor, the report said, is that the palm oil yield is nine times higher than those of other vegetable oils. Hence other vegetable oils would require up to nine times more land than oil palm to produce the same volume of oil.

Palm oil is currently produced from just 10 percent of all farmland dedicated to growing oil crops, yet accounts for 35 percent of the global volume of all vegetable oils and half of the world’s population uses palm oil in food. So if we ban or boycott it, other, more land-hungry, crops will be required.

Palm oil is widely used in food, cosmetics, cleaning products and fuel, and is cheap to manufacture. Growing oil palm is about 10 times more effective than growing soybeans or rapeseed. Such a productive and profitable crop would not be easy to replace.

It is understandable for Indonesia to proclaim that palm oil is here to stay. Palm oil contributes around US$20 billion to Indonesia’s annual exports and employs over 8 million workers in the estate-cultivation and processing industries. More importantly 40 percent of the estimated 12 million hectares of oil palm estates are owned by about 2 million smallholders.

Therefore international cooperation is urgent to help producing countries such as Indonesia develop new oil palm seeds with higher yields so that production can steadily be increased on the same acreage of land, thereby preventing encroachment into primary forests.

Over the past 15 years the government has subjected the industry to tougher rules designed to make the commodity sustainable economically, socially and environmentally. Certainly the improvement is still an ongoing process as it not only involves crop cultivation but is part of broader poverty-alleviation programs and the empowerment of millions of smallholders.

In fact, oil palm development is currently among the most transparent industries as its practices are periodically examined and monitored by auditors and constantly scrutinized by green NGOs. Palm oil producers are now held to Indonesian Sustainable Palm Oil standards and those of the international multi-stakeholder Roundtable on Sustainable Palm Oil.

Topics :

• greenpeace, Indonesia, economy, sabotage, palm-oil,environmental-issues

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Executive column: Our goal now is to achieve chain scale in Indonesia

Tue, October 2 2018 | 02:58 am

Alan Watts (Courtesy of Hilton)

United States-based Hilton Worldwide, like most international hotel chains, sells only its managerial skills, expertise and global marketing network in the hospitality industry and does not own the properties or hotels it manages. Yet Hilton has developed into one of the world’s largest hotel chains, with a portfolio of 14 world-class brands, including luxury Waldorf Astoria and Conrad and flagship Hilton, comprising more than 5,400 properties under its management in 106 countries.

Hilton does not invest in property, thereby avoiding the sensitive issue of land acquistion, but in human resource development through the transfer of skills in the various segments of the hospitality industry.

Hilton’s Asia Pacific president Alan Watts recently spoke to The Jakarta Post’s Vincent Lingga in Singapore about how Hilton is preparing for its big-bang expansion in Indonesia over the next five years:

Question: What is the current landscape of Hilton’s operations in Indonesia and what are Hilton’s business plans for the next five years?

Answer: Hilton currently operates five hotels [Conrad Bali, Hilton Bali Resort, Hilton Bandung, DoubleTree by Hilton Jakarta and Hilton Garden Inn Bali Ngurah Rai Airport]. As Southeast Asia’s largest economy with a burgeoning middle class, Indonesia is a particularly important growth market for Hilton. Our goal now is to achieve chain scale in Indonesia, deploying everything from the luxury Waldorf Astoria to mid-market Hilton Garden Inn. Four more mid-market hotels will open in Surabaya [East Java], Jakarta and Karawaci [Tangerang, Banten] in 2019 and 2020. Hilton’s world-renowned luxury brand Waldorf Astoria and Conrad will open in Jakarta and Bali’s Nusa Dua in 2020, to be followed by another Waldorf Astora in Bali’s Ubud area in 2024. Eight others property, mostly in Java, are also in the pipeline

What is the main principle behind Hilton’s management contract?

Hilton is a hotel management company and its growth strategy in the region has been to focus on acquiring management contracts by identifying the right partners and opportunities and by offering owners the right brand for their property and market, creating good relationships with them through the delivery of one of the best returns in the industry, and providing solid support to owners or investors right down from the design and construction through to operations of the hotel. The key is to get the right partner for a long-term management tie-up because we invest a lot in human capital.

How does Hilton maintain the same level of services for each brand around the world?

As a business of people serving people, we focus on finding the right talent and giving them the right training through our inhouse training system we call Hilton University, an online training platform with over 3,000 training courses for all aspects of hospitality for team members [employees] in all lines of operations. We also conduct training in cooperation with local vocational schools as the one we made with the Bali State Polytechnic in early 2017.

So important has training been in our system of operations that Hilton often recruits and trains employees — we call team members — even one year before a hotel begins operations. We also run a food and beverage operations academy because this hospitality segment has contributed an average of 40 percent to Hilton revenues. Hilton’s top priority is in providing meaningful opportunities for building great careers through sustained growth and development through programs that include national and overseas work exposures.

As the Hilton chain operates world wide, how do you think Hilton could contribute to Indonesia’s market in global outbound travel?

The hospitality sector especially moves in step with the economy as a whole. Greater investor interest means more business trips to the bustling metropolises like Jakarta. Indonesia will gain a wider global exposure to potential visitors and investors through Hilton’s worldwide promotion campaign such as the Hilton Honors loyalty program, which has more than 56 million members around the world and 8 million in the Asia Pacific region alone. In fact, 40 percent of booking reservations for our properties are made through this loyalty program.

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Hilton hotel chain expands, beefs up operations in Indonesia

• Vincent Lingga

  The Jakarta Post

Singapore | Thu, September 27 2018 | 03:06 am

American hospitality company Hilton Worldwide, which manages one of the world’s largest hotel chains, is poised to restore its status as the market leader in Indonesia’s hospitality industry with 15 new hotels scheduled to open within five years.

“Four mid-market brand hotels will open in Surabaya, Jakarta and Karawaci, Tangerang, in 2019 and 2020. And Hilton’s world-renowned luxury brand Waldorf Astoria and Conrad will open in Jakarta and Bali’s Nusa Dua in 2020, to be followed by another Waldorf Astoria in Bali’s Ubud area in 2024,” Alan Watts, the president of Hilton Asia Pacific, said in Singapore on Wednesday.

Watts told Asian and Australian journalists that new properties, including the 74-story Waldorf Astoria in the Thamrin business center in Jakarta, would join Hilton’s Indonesian portfolio of five properties already in operation, namely Conrad Bali, Hilton Bali Resort, Hilton Bandung, DoubleTree by Hilton Jakarta and Hilton Garden Inn Bali Ngurah Rai Airport.

“As Southeast Asia’s largest economy with a burgeoning middle class, Indonesia is a particularly important growth market for Hilton,” Watts added.

Hilton’s global CEO Christopher Nassetta concurred that, as the largest economy in Southeast Asia and as part of the fast-growing Asia Pacific region, there were plenty of opportunities in Indonesia’s travel and tourist industry.

“The big growth in the middle-class group and the higher propensity of people to get experiences and see the world’s wonders, instead of acquiring things, will be the main driver of the tourism boom,” noted Nassetta, who is also the chairman of the London-based World Travel and Tourism Council (WTTC), the most authoritative research agency on the tourist industry after the Madrid-based United Nations World Tourism Organization (UNWTO).

Hilton Asia Pacific executives held a conference in Singapore on the eve of World Tourism Day, celebrated globally on Sept. 27.

In a related development, the UNWTO said in its latest report that international tourist arrivals globally grew by 6 percent in the first four months of the year, led by 8 percent growth in the Asia Pacific and 10 percent in Southeast Asia.

“Last year, international tourist arrivals worldwide increased by 7 percent to 1.32 billion with total spending of US$1.6 trillion. The Asia Pacific region got 324 million of the total with $390 billion in total spending,” the report said. Southeast Asia alone saw 120.34 million tourists, which generated $130.7 billion in total spending, the UNWTO added.

The growth also reflected deepening regional integration, better air connectivity and a strong demand from Northeast Asian source markets, notably China and South Korea, the report said.

Meanwhile, the WTTC noted in its latest research report on 185 economies that the travel and tourist industry had continued to play a crucial role in creating jobs, driving exports and generating prosperity through its multiplier effect.

“Over the longer term, forecast growth of the travel and tourism sector will continue to be robust as millions more people are moved to travel to see the wonders of the world. Just look at the airport expansions in almost all countries in Asia and the Pacific,” Nassetta said.

According to the WTTC, the direct contribution of travel and tourism to the GDP in Southeast Asia last year was $135.8 billion (4.9 percent of GDP) and is forecast to rise by 5.9 percent to $143.9 billion in 2018. This primarily reflects the economic activity generated by hotels, travel agencies, airlines and other passenger transportation services.

This region is expected to attract a total of 125.78 million international tourists this year, up from 121 million in 2017 and 115.5 million in 2016.

Thailand was the most popular destination in Southeast Asia with total tourist arrivals of 35 million and total spending of $57.5 billion, ranking it fourth in the world after the United States, Spain and France.

Indonesia, the world’s largest archipelagic country with a vast diversity of cultures and natural attractions and historical heritage, saw only about 12.5 million tourist arrivals in 2017 with total spending of $14 billion. The country has launched a more coordinated program and is looking to woo 17 million tourists this year and 20 million in 2019.

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Commentary: Freeport divestment, capital flight and collateral damage

Jakarta | Tue, July 10, 2018 | 09:41 am

Dozens of people claiming themselves as workers of gold and copper miner PT Freeport Indonesia hold a rally in front of the Energy and Mineral Resources Ministry in Jakarta on March 7, 2017, urging the government to immediately resolve its dispute with the company. (JP/Dhoni Setiawan)For the umpteenth time the government announced last week it would soon close the deal to acquire the controlling ownership of PT Freeport Indonesia (FI), which has owned and operated the world’s largest gold and copper mine in the easternmost province of Papua since 1972.

Many times, the government has renewed FI’s license to export copper concentrate even though the 2009 Mining Law has banned the export of unrefined minerals since 2014. The latest renewal was in February 2018

Acquiring the majority ownership of FI, the subsidiary of American mining giant Freeport-McMoran, would indeed generate big political gains for President Joko “Jokowi” Widodo ahead of the presidential election in April 2019. No previous president has been able to discipline FI under Indonesian laws. 

FI has been able to dodge for more than seven years the government regulation that requires the American company to cede its controlling ownership of the mine to Indonesian interests. 

The divestment agreement would also bring to an end to decades of rising public anger over the American control of the country’s largest mining venture, which has been looked on with suspicion and perceived to be a symbol of American economic imperialism in Indonesia.

But there is an immediate loss as well: the capital flight of US$4 billion, the estimated sum the government or state-owned Inalum Holding Company will have to pay for the share acquisition at a time when Bank Indonesia’s foreign reserves have been eroded steadily in defending the rupiah from further weakening against the United States dollar.

During the first semester, the rupiah depreciated by 5 percent. Last month alone, the central bank had to take $3.1 billion from its international reserves to prevent the rupiah from falling steeply, thereby decreasing its foreign exchange reserves to $120 billion.

Many foreign analysts have also warned that the compulsory divestment would cause collateral damage as it would strengthen the public perception that Indonesia can now afford to stay the nationalistic path in the natural resource sector. 

This is quite a sensitive topic, as the upcoming campaigns for the legislative and presidential elections in April 2019 could again raise the ugly head of inordinate nationalist sentiments. 

This may scare off new investors in the mining industry.

But given FI’s notorious reputation with all the preferential treatment and generous mining concessions it has enjoyed over the past 45 years, several analysts have also opined that it is the right time for Indonesia to discipline FI. 

The government has been facing extraordinary pressure from the people and national media to be firm with FI. This is driven by a perception that the company has consistently taken advantage of the Indonesian government since it entered the country in 1967 as its largest foreign investor.

Hence, FI has been seen as a special case. Jokowi’s determination to acquire the controlling ownership of FI cannot be considered a “conventional” breach of the sanctity of a contract but the revision of a contract that was made in bad faith by a foreign giant mining group exploiting the weakness of Indonesia’s government.

We should give the benefit of the doubt to Inalum as to whether FI will run better and generate more benefits for the Indonesian people or not, despite the notorious reputation of many state companies as cash cows for politicians and senior officials.

Certainly the primary challenge during the remaining 23 years of FI’s operation until 2041 (including a 20-year extension under the Special Mining License) is to secure financing for the estimated $20 billion in additional investment needed and the billions of dollars more in annual working capital as the mining operations will soon go underground. 

Technically wise, we are confident FI’s operations will continue to be fairly smooth because Freeport-McMoran will remain as the operator and manager, which will simply execute whatever business plan is given by the government (Inalum) as the controlling owner.

The question though is the source of financing for investment and operational funds because the bulk of the money is supposed to be fulfilled with loans, while the lending capacity of local banks is severely limited. At issue now is how high the credit rating of FI is under the government’s controlling ownership. 

Another task is to ensure that the smelter, one of the three key conditions for the extension of Freeport’s Special Mining License, is completed within the next five years. The 2009 Mining Law prohibits the export of unprocessed minerals. The ban should have been enforced in 2014, but it has since been postponed because most mining companies have yet to build their smelters.

The construction of the smelter has become even more imperative because of the lingering suspicions that Freeport-McMoran has not been fully transparent and honest with the gold concentration it extracted from the copper mine because the refining has from the outset been done overseas. 

Another factor is the local administration. The government made the right decision to allocate 20 percent of the central government’s equity holding to the Papua provincial and regency administrations. But controlling ownership will not automatically mean direct benefits to the local people, especially because many state companies have yet to build good corporate governance. Papua has long been Indonesia’s least developed and most restive province, with intermittent waves of security disturbances.

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Belt and Road Initiative projects pick up momentum

Vincent Lingga

The Jakarta Post

Hong Kong | Sat, June 30 2018 | 02:39 am

Massive infrastructure project: Business delegates and visitors listen to speakers during the third Belt and Road Initiative (BRI) summit in Hong Kong on Thursday. More than 100 infrastructure projects are under construction in 36 countries along the BRI route stretching from Asia to Europe, says Ning Jizhe, the vice chairman of China’s National Development and Reform Commission. (JP/Vincent Lingga)

The Thai official and business delegation, led by Deputy Prime Minister Somkid Jatusripitak, signed several agreements with Hong Kong companies for renewable energy, tourism and smart city development projects worth US$3 billion during the third Belt and Road Initiative (BRI) summit on Thursday.

Though overshadowed by negative media reports over the past few weeks on the controversy surrounding BRI infrastructure projects in several South and Southeast Asian countries, the summit and exhibition attracted more than 5,000 business and official delegates from 55 countries, including Indonesia.

Ning Jizhe, vice chairman of China’s National Development and Reform Commission, told the meeting that more than 100 infrastructure projects were under construction in 36 countries along the BRI route stretching from Asia to Europe.

“The BRI program has really been picking up strong momentum almost five years after its launch,” Carrie Lam, chief executive of the Hong Kong Special Administrative Region noted in her opening speech.

The BRI was launched by President Xi Jinping in September, 2013 to build a network of overland road and rail as well as maritime routes, oil and natural gas pipelines and other infrastructure projects in 65 countries from Central China through South, Southeast and Central Asia and Europe.

None of the 80 government and business leaders, who shared their views on the BRI infrastructure projects at the plenary meetings and concurrent thematic forums, directly reacted to the reported complaints about the lack of local participation and too dominant role of Chinese companies and workers in the implementation of BRI projects.

But the theme of the summit, “collaborate for success”, seemed designed to address the complaints, conveying the message that BRI project implementation needs to involve more local companies and workers and use local materials to convince people on the benefit of BRI’s programs. 

In contrast to the first BRI summit in Beijing in May 2017, the third BRI summit was organized by the government of the Hong Kong Special Administrative Region and the Hong Kong Trade and Development Council (HKTDC). The conference also arranged dozens of investment and business matching and project pitching sessions.

“Local participation, the sharing of benefits and high quality work are key to the smooth, sustainable implementation of infrastructure projects,” asserted Liu Qitao, chairman of China Communications and Construction Company, which is building many BRI projects.

A change of government in a host country would not affect infrastructure projects if the projects generated mutual benefits and were properly planned and designed with high economic viability, added Liu in response to a question about the new Malaysian government’s plan to review Chinese-funded projects. 

HKTDC chairman Vincent HS Lo noted that managing risk and debt, ensuring mutual benefit, cooperating with local companies and local worker involvement are the main challenges of BRI projects. 

Bank and insurance executives speaking at the plenary and thematic sessions shared their views that infrastructure investment is very complex, involving strategic planning, technical assessment, feasibility studies, deal structuring, financial and tax planning, financing, project management and risk control.

According to the Hong Kong International Arbitration Centre, the number of cases related to BRI projects rose by over 70 percent to 125 last year as a large number of Chinese companies rushed overseas to implement BRI projects in countries with different regulations, business landscapes and cultures. 

During the summit Hong Kong official and business leaders campaigned to leverage Hong Kong’s strength of being the most complete platform for fundraising, a regional logistics hub for sea and air cargo and a conduit for investment between mainland China and the rest of the world.

Most speakers agreed that even though the BRI primarily and initially aimed at enhancing connectivity for investment and trade, it goes beyond these areas. Physical connectivity will create a virtuous cycle to eventually expand and deepen economic, social and cultural connectivity.

 

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Commentary: Time of reckoning on pace of Belt and Road Initiative

Vincent Lingga

The Jakarta Post

Hong Kong | Tue, July 3, 2018 | 09:33 am



Closer ties: President Joko "Jokowi" Widodo (second right) and Chinese Prime Minister Li Keqiang (second left) witness the signing of an agreement on the review design of the Janelata and Riam Kiwa dam construction projects at the Bogor Palace in Bogor, West Java, on May 7. (Antara/Puspa Perwitasari)

Hundreds of infrastructure projects worth hundreds of billions of dollars have been getting off the ground in Asian, European and African countries included in China’s Belt and Road Initiative (BRI), along with controversy, hurdles, delays and polarized public opinion in several countries.

Physical infrastructure, as the backbone of economic development, is critical to the success of the BRI agenda. But as a large number of Chinese enterprises seem to have rushed overseas, expanding their foothold across BRI-related countries, the process has not been smooth at all times.

Hence nearly five years after the BRI launch in late 2013, the third BRI summit here last Thursday was really the right time of reckoning, on the pace of the implementation of BRI projects. This reflection included contemplating why in several countries BRI projects have caused so widely polarized public opinion.

The BRI scheme has been designed by President Xi Jinping to build a network of overland road and rail routes, oil and natural gas pipelines, and other infrastructure projects that will stretch from central China, through Central Asia, Europe and Africa.

The BRI agenda certainly fits well with Indonesia’s top-priority development program to improve connectivity within the country and between the country and the global value chains.

A recent report by Baker & McKenzie consulting company concluded that from a geographic perspective, Indonesia stood to be the biggest beneficiary among the ASEAN economies, with more than US$87 billion identified in the BRI-related pipeline of infrastructure projects.

The Indonesian government itself has signed a $5 billion contract for the Jakarta-Bandung high-speed railway project under the BRI, and has been promoting special economic zones in North Sulawesi, North Kalimantan and North Sumatra for the BRI program.

But the main concerns raised about BRI project implementation in several South and Southeast Asian countries are related to the alleged lack of local worker participation and companies, the risk of unmanageable debts and the rather dominant geostrategic interest of China, rather than the economic viability and shared benefits, in several projects. 

As most BRI projects are funded by long-term and very low-interest-rate loans from China’s state (policy) banks, most of the investment and construction also have understandably been made by Chinese companies.

Problems usually arise because many of these companies still lack work experience in foreign countries where they have to face a web of local and international laws, not to mention the full spectrum of political, security and economic risks.

Many speakers and analysts at the Hong Kong summit, including Suteja Sidarta Darmono, chief executive officer of PT Jababeka, which manages two of Indonesia’s largest industrial estates and two special economic zones, reiterated the strategic importance of tie-ups with local partners, local hiring and the procurement of local materials.

“Look for local companies with a good track record as they are the ones who know the local rules, business landscape, the local culture,” Darmono asserted in one of the sessions during the summit.

“Almost 90 percent of China-funded projects have been implemented by Chinese companies,” cautioned Shinta Widjaja Kamdani, vice president of the Indonesian Chamber of Commerce and Industry, in one of the plenary sessions.

This shows that in a more fundamental way, the biggest challenge is how China communicates its intentions and its vision for the BRI programs and reconciles its geostrategy with the interest of the host country of the projects, while it tries to flex its economic muscles as a regional and global power.

Fortunately, Hong Kong, seen as the super connector and most strategic gateway to mainland China, seems to have been aware of the start-up problems encountered in BRI projects in several countries.

One day before the summit, the Hong Kong Trade Development Council (HKTDC) initiated the establishment of a global alliance, the Belt and Road Global Forum, comprising over 110 chambers of commerce, industry associations, investment promotion agencies and think tanks from around 30 countries. 

The forum will steadily admit new members from the BRI-related countries with the spirit of collaboration and openness in sharing experiences and views about infrastructure and business development.

Hong Kong has a significant role to play in the development and success of the BRI. The city is regarded among the world’s freest economies, with a vibrant capital market, and a regional logistics hub for sea and air cargo. 

Earlier on June 20, according to China Daily, the All-China Journalists Association and around 100 journalists from 47 countries gathered in Beijing and set up the BRI Journalists Forum. This forum will be developed as a platform for mass media to nurture a better, comprehensive understanding of the BRI goals, through news sharing, mutual learning, policy studies and building bridges between cultures.

The BRI understandably still seems far away from being a coherent blueprint of interconnected international infrastructure investment. Infrastructure investment is very complex, involving strategy planning, technical assessment, feasibility studies, deal structuring, financial and tax planning, financing, project management and risk control. 

The greatest benefit, though, is that physical connectivity could create a virtuous cycle to expand and deepen economic, social and cultural connectivity. The main challenges are identifying and designing the right projects, assessing the risks and then packaging projects in a way that ensures they are economically viable, beneficial, bankable and, most importantly, directly benefit the local people.

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The writer is a senior editor at The Jakarta Post.

 

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