Indonesia Business Review 2002 - Part 1B

Crooked importers are customs service stooges 
Thursday, March 07, 2002

The Indonesian Importers Association (Ginsi), which claims around 3,300 members across the country, is the most vocal critic of the customs service for its miserable failure to curb smuggling. Ginsi chairman Amirudin Saud shared his views about the government's decision to set up an interministerial antismuggling team and about customs service problems in an interview with The Jakarta Post's Vincent Lingga.

Question: How do you view the Cabinet's decision late last month to set up an interministerial team to combat smuggling that will also include the National Police?

Answer: I think the team would not be effective because the main problem is not physical but rather administrative smuggling, whereby crooked importers collude with customs officials to underinvoice their import prices, thereby slashing their duties and taxes, or customs officers lack the technical competence to assess real import prices. The police are certainly not trained to assess customs duties. So the root problem is mentality or the high venality of customs officials. I am even afraid that the customs service would simply use the team to validate or endorse whatever decisions it would take.

Q: Doesn't the Customs Law stipulate that the basis for valuation of customs duties is the import transaction value?

A: You are right. The Geneva-based World Trade Organization also stipulates such a provision. But that does not mean that importers are free to declare any value they choose, nor is the customs service relieved of the responsibility to determine import prices on a shipment-by-shipment basis. Professional customs valuation is still needed, especially when importers can easily manipulate their invoices in cooperation with companies overseas.

This is the main reason why we have strongly urged President Megawati Soekarnoputri to take contingency measures to reintroduce a preshipment inspection of imports (PSI) as Soeharto boldly did in 1985. Many industries that are our export leaders have been crying out over unfair competition from smuggled or underinvoiced imports.

Q: But how would preshipment inspection help reform the allegedly crooked mentality of customs officials?

A: No, PSI would not directly help reform the customs service. Yet we need PSI right now as many industries are dying. People tend to see the impact of smuggling or underinvoicing only in terms of the loss of state revenues from import duties, value-added tax and income tax. The most damaging effect is the unfair competition imposed on our manufacturing industries. The reform of the customs service, like the development of good governance in the public sector, will take more than five years. We cannot wait that long.

The Cabinet's decision on the antismuggling team is a magnanimous acknowledgement that the customs service has miserably failed to reform itself over the past five years after it regained its import inspection authority in April, 1997 simultaneously with the termination of the PSI system. Then by all means, let the duty valuation be given to a third party under PSI until the customs service completely reforms its organization and mentality.

Don't forget, besides its devastating impact on domestic industries, state revenue losses caused by underinvoicing of imports are also huge. We estimate them at Rp 33.3 trillion (US$3.1 billion) in 1998, Rp 27.4 trillion in 1999, Rp 37.1 trillion in 2000 and Rp 34.9 trillion in 2001. The University of Indonesia estimated that loss at about $610 million in 2000 alone.

Q: Why do you put the blame entirely on customs officials for underinvoicing? Shouldn't crooked importers, who may also belong to your association, should also be held responsible for that collusion?

A: That is entirely nonsense. I have always asked customs officials to notify me on what they call bogus importing companies with unknown addresses so that I can deal with them myself. But the customs service has never come up with a clear reply. Why? Because what they call crooked importers are really their stooges involved in the contraband trade. Problems such as the existence of bogus importing companies never occurred under the PSI system in 1985-1997.

Moreover, retired senior customs officials often are engaged in forwarding services. Why don't you investigate, for example, who owns or manages PT Swakarsa Bhakti Mandiri, a major forwarding company?
Customs and duties director general Permana Agung claims there are more than 30 state and private institutions involved at seaports so the customs service should not be held solely responsible for things that go wrong with imports or exports.

That is another big nonsense. True, there are many institutions engaged at ports but when it comes to the clearance of goods from ports it rests primarily with the customs authority. The port administrator cannot release goods from the port without the prior approval of customs.

Permana's statement late last month at the Jakarta port of Tanjung Priok that the port administrator had released two luxury cars from the port without clearance from the local customs service was strange and entirely questionable. How could imports or exports get out of the port terminal without clearance from the customs service? If such a thing did happen, the only explanation is that some customs officials colluded to make it possible.

Q: Some industrialists claim that smuggling has also been rampant through the duty rebate system for the importation of inputs for export-oriented factories, after the customs service took over the export inspection service from state-owned PT Sucofindo last August. How could that happen?

A: Export-oriented companies can get reimbursement of the duties paid on basic materials imported for processing into export goods. So, for example, a garment exporter can import fabric duty-free if it can be proved that the fabric will subsequently be processed into garments for export.

The problem is that, after the customs service took over the inspection of exports from Sucofindo, which had done the job professionally for more than a decade, there has been as yet no adequate technical capacity at the customs service to verify whether the volume of duty-free materials imported by export companies is really used wholly for producing goods for export.

Specific skills are needed to determine the coefficient of inputs into final products, and there are numerous industrial products that have to be verified. Without verification competence, quite apart from collusion, a factory can import basic materials duty-free to a much greater extent than it actually needs for production. It can then sell the balance to the domestic market.

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War-room leadership needed to end crisis

Tuesday, February 19, 2002 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

The government and economic players in the real sector seem to live in different worlds.
While the economic crisis is entering its fifth year, the government is still talking about concepts, mulling over a recovery plan.

Vice President Hamzah Haz said last week the government would launch early next month a new package of integrated economic-recovery programs to boost the real sector and the financial services industry.

Earlier in October, chief economic minister Dorodjatun Kuntjoro-Jakti talked about the need for a new package of emergency measures to prevent the economy from total collapse. But nothing came of his statement.

Businesspeople, however, don't see any need for a new package of ambitious measures, reiterating instead what they repeatedly suggested last year: An effective crisis management center.

In their view, the diseases that caused the economic bleeding have been accurately diagnosed, and the right medicines have been prescribed. What is really needed are quick decisions and action programs to stop the economy from bleeding.

But for such a spirit to envelop the government, the president and the whole Cabinet should work in the spirit of a nerve center or a "war-room" where problems can quickly be fixed by executive fiat at the highest level.
Rapid bureaucratic action is possible only when the government is truly aware that it is faced with a critical situation and accordingly professes a real sense of urgency.

remarks only strengthen the public perception that the government does not have any sense of crisis at all, nor does it see any need to act quickly, firmly and decisively.

Thinking and acting as if the economy is by no means mired in a critical condition, while thousands of small, medium and large-size businesses are crippled by bad debts, more than 40 million people are either wholly unemployed or under-employed and almost 50 percent of the assets of all major national banks consist of illiquid government bonds is a fatal self-delusion.

It is this attitude of perpetual denial that prompted then president Soeharto and his successors, B.J. Habibie and Abdurrahman Wahid, to backtrack on emergency reform measures sorely needed to cope with the crippled economy, thereby destroying their credibility.

Saddening to note, Megawati Soekarnoputri's government, instead of learning from the fatal mistakes of the previous administrations, appears to be deluded by the same mindset. The whole game now is "business as usual".

The well-designed, correctly-sequenced, and internationally-endorsed reform measures, as stipulated in its latest reform package launched last December, seemed to be formulated only to impress the International Monetary Fund.

No wonder the credibility of the Megawati government is now at its nadir after only seven months in power. The virtual absence of any confidence-building action has put it under constant public suspicion regarding any major decision or measure it intends to make or has taken.

The government cannot even change the management of its own companies without setting off employee revolts or prompting analysts to cry foul.

It is not clear what Hamzah meant by a new package of measures as his statement was short of details but long on recounting the costs of the economic crisis.

But whatever the new package might be, anything short of the 53-point reform measures stipulated in the December 2001 package would be unable to stop the economic hemorrhaging, or help generate a sustainable recovery.

Without significant progress in bank and corporate debt restructuring, the reform and privatization of state companies and the recovery of assets currently managed by the Indonesian Bank Restructuring Agency, and legal and governance reform, the macroeconomic situation will remain fragile and the recovery process will never gain a strong footing.

As analysts have often argued in this newspaper, a faster pace of asset recovery will reinvigorate thousands of companies through the infusion of new capital and new management and will help plug the budget hole.

An accelerated process of corporate debt restructuring will enable thousands of businesses to regain access to new working capital loans. The government can also sell these restructured loans to the banks or exchange them with the bonds issued to recapitalize those banks. This in turn will reduce the bond interest cost, which has been one of the main causes of the large budget shortfall.

Equally positive impacts will accrue from the privatization of selected state companies as proceeds from the sales will help cover the budget deficit and new investors will improve the efficiency of the companies.

The reduction of wasteful subsidies and more vigorous tax collection would enable the government to set aside larger appropriations for the social safety net programs and other labor-intensive projects for economic pump priming.

All these measures are the essence of the December reform package. They are also by and large the kind of emergency measures implemented by other crisis-hit countries such as Thailand and South Korea, which have now seen a much stronger economic recovery.

What is fatally missing in Indonesia is a sense of urgency among the three branches of the government -- the executive, legislature and judiciary -- as reflected in the "business-as-usual" manner in which the government is managing the economic crisis.

While the other crisis-ridden countries have acted quickly and firmly by mobilizing all their political, social and economic resources to attack their economic woes, Indonesia has been embroiled most of the time in political bickering, scapegoating and the blame game.

There have been no measures or deals significant enough to spur a virtuous circle and rebuild confidence in the political and technical capability of the government.

Just look at the rupiah exchange rate. It has been hovering at Rp 10,500 to the dollar since last September.
Even though Indonesia's situation is admittedly much more complex than the other countries in that the nation is having to learn about democratic practices in the midst of its economic crisis, it could have done much better, had the government and all political and social organizations put aside their respective group interests and firmly united in addressing the economic crisis.

However, such an overall supportive climate is possible only if the government is capable of building up a favorable public opinion environment. This in turn can be created only if Megawati is able to provide effective leadership and her Cabinet ministers are capable of providing the proper management and coordination of all the reform measures.

Herein lies the rationale of the businesspeople's demand that the government set in motion a crisis management mechanism directly under the president where well-coordinated action programs can quickly be decided and any problems in their implementation can be settled at the highest level.

Instead of being embroiled in public squabbles over policy decisions, Cabinet ministers should be united in pushing through any policy measures that have been taken.

A united stance, a quick but highly-accountable decision making process and well-coordinated action programs will lend credibility to the government and create bureaucratic and legal certainty, a prerequisite for reinvigorating national investment and wooing foreign direct investment.

The blunt fact is that the economy is now in such a dire situation that it will never be able to recover strongly without a heavy dose of foreign capital injection.

It is worth remembering that foreign direct investment brings in higher standards of accountability, transparency and corporate governance. One should also remember that it was corruption, collusion and the miserably low standards of accountability within the public and private sectors that were primarily responsible for destroying the foundations of the economy

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Unshackling imports from corrupt customs

Tuesday, February 05, 2002 Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

President Megawati Soekarnopurti is under pressure to take bold measures to bring back a system of pre-shipment inspection of imports, first introduced by the Soeharto regime in the mid-1980s, to free up a vital segment of the economy from the hands of corrupt customs service officials.

Over the last three months, almost all industrial associations and foreign chambers of commerce have urged the government to deal firmly with what they have characterized as a grossly incompetent and corrupt customs service.

In early December, Megawati herself set aside one hour for a special meeting with the executive board of the Indonesian Importers' Association, led by Amirudin Saud, who pleaded for the government to unshackle imports from the corrupt customs officials by reintroducing the pre-shipment inspection of imports (PSI) that began in 1985.

The President might not have been surprised by Amirudin's reports, which described the damages inflicted on the economy by inefficient, incompetent and highly customs officials.
After all, the customs service is an arm of a government that has been perceived as one of the most corrupt in the world.

Certainly, the Customs Directorate General is no less corrupt than, say, the taxation service.
A nationwide study of corruption conducted last year under the sponsorship of the World Bank and United Nations Development Program confirmed that the customs and tax services were the most corrupt public institutions in Indonesia.

The reform program agreement with the International Monetary Fund (IMF), signed on Dec. 13, stipulated elaborate measures, including implementation schedules, to improve tax administration, while minimizing tax evasion, and cleaning up the tax offices of corrupt officials.

But not a single program was cited for the customs service. The agreement only stipulated that "the government will formulate a plan by June 2002 to improve customs procedures ... "

The question arises, then, if inefficient tax service is damaging the economy, should it instead require more immediate remedial measures than customs?

The answer, of course, is a resounding no.

It is the incompetent and corrupt customs service which, in fact, is causing the more serious damage.
The most harmful effect of inefficient tax administration is state losses in revenue, as the government continually gets far less than what is due from taxpayers.

But corruption and incompetence within the customs service has far-reaching damage to the economy.
Violations of customs regulations also distort the domestic market. When the duties paid and taxes levied on foreign goods is much less than that which is mandated by law, unfair competition against domestic products results.

Producers of textiles, garments, electronics, electric appliances, and footwear, all major export commodities, have repeatedly complained about contraband goods that are eroding their share of the domestic market.
These goods enter either through conventional smuggling, or a form of administrative smuggling in which under-invoicing of import prices takes place.

Still more egregious is the fact that delays in import clearance and customs officials' demands for bribes from importers have made exports far less competitive, as most Indonesian companies still depend on imported raw materials, intermediate inputs, parts, and components.

Since manufacturers cannot calculate how much time will be needed to clear their imports, most are compelled to build up stocks of imported raw materials or inputs to secure continuous production.

But this increases inventory costs and debt interest burdens, because working-capital loans, which charge high interests, become tied up far longer than need be in stocks.

Foreign investors have complained about what they see as excessive discretionary powers exercised by customs officials, letting them interpret the rules as they like.

State revenue losses from the under-invoicing of import prices are no less damaging, especially now, when the state budget is suffering from a huge deficit.

A 111-page research report of the Economic and Social Research Institute of the University of Indonesia, led by senior economist Muhammad Ikhsan and issued in December, concluded that under-valuation of imports (outside oil and gas) led to US$1.2 billion in losses for the year 2000.

The problem began after importers failed to properly pay duties and the 10 percent value added tax.
The losses amounted to almost $US950 million in the first six months of 2001 alone.

But the study did not address losses stemming from the underpayment of luxury sales taxes, and the 2.5 percent income tax imposed on imports.

Ikhsan explained that the losses were calculated based on an analysis of non-oil imports as recorded by the Central Bureau of Statistics. The final figures were determined by comparing tariff rates that should have been collected, with what was actually collected as reported by the finance ministry.

Amirudin of the importers' association came up with an estimate of even bigger losses: some $3 billion a year.
The research institute has recommended that the government reintroduce pre-shipment inspection for imports (PSI). Researchers have argued that the benefits of such a system to the economy, state budget and business climate will, overall, far outweigh the costs of such a system.

The corruption-plagued customs service was stripped of its import inspection authority in 1985 when the government introduced PSI system for imports.

The PSI was ended in April 1997 when the customs service, thought to have cleaned up its act and reorganized, was given its inspection authority back.

The customs service then promised to streamline import inspection procedures and root out corruption by introducing an electronic data interchange (EDI) system.

Customs officials said that the communications system would allow customs, import and banking officials to more effectively determine and receive of customs duties and taxes via a modem transmitted to the customs officials' EDI clearing house.

According to Amirudin, however, the customs service was back to "business as usual" only a few months after resuming its inspection authority.

Amirudin and other business leaders insisted that a corrupt mindset -- rather than technical incompetence or lack of equipment -- was the core problem. It is, indeed, all but impossible to expect the customs service to be an island of virtue in a sea of corruption.

Corruption is a disease that cannot be cured within one or two years, and certainly cannot be treated in isolation from other government and state institutions.

But problems within the customs service are urgent.

Customs and Excise Duty Director General Permana Agung, however, has defended the conduct of his office, saying that the criticism is only part of a campaign to have him removed.

He added that delays in import release cannot be solely be blamed on the customs service, because there are some 30 government institutions which play a role at seaports.

Amirudin, nonetheless, insisted that the current system has benefited only importers eager to collude with corrupt customs officials.

No wonder, many have said, that industrial associations have demanded that the PSI be reintroduced immediately, recalling its success during its years of existence between 1985 and 1997.

In 1996, the Ministry of Finance reported that, under the PSI system, customs collection rose dramatically from Rp 960 billion in fiscal 1986-1987 to Rp 3.5 trillion in l995-1996.

Though the achievements should be attributed partly to the steady increase in imports, they were nonetheless considered quite impressive because the average import tariff fell sharply -- from 22 percent to 9.5 percent during that period.

The importers' association said that the PSI system cut down on the costs of imports by more than 70 percent, while reducing the time needed to import goods by 86 percent.

The PSI system also minimized physical contact between importers and customs, thereby removing the points at which collusion and corruption could take place. Under that system, importers passed through only two customs counters, compared to more than 35 before.

One counter served as a check of the surveyor's inspection ports; the other, for the physical location and release of imports.

There were additional benefits, too. The PSI system was able to detect discrepancies between the imports ordered, and the contents of the shipment such that importers could be assured that the quality and quantity of what they would receive would fully conform with their wishes.

Importers have been so displeased with the current system that they said they are even willing to bear the costs of the PSI to gain certainty in import flows, and to avoid any more contact with customs officials than is necessary.

It is high time for the Cabinet to address the customs problems, especially now, as Indonesian exports are facing tougher competition, and the government is strapped for additional revenues to plug its gaping budget hole.

Djimanto, secretary general of the Footwear Association, has asked why, when the economy was better in 1985, the government acted so decisively, in contrast to now, as the economy is ailing severely.

Re-launching PSI may not be so difficult now that the government-owned surveyor company, PT Sucofindo, has built up decades of experience and has gained a strong international reputation in commodity inspection service.

Moreover, importers have said they would be willing to bear the cost of inspection to secure on-time delivery of imports to create more certainty in the customs process.

Even if the PSI is funded by the budget, the surveyor's fee, amounting to about 0.5 percent of the value of shipments inspected, will still be negligible, compared with the bigger duty and tax revenues to be collected under the system.

More important still are the bigger benefits to be accrued from smooth import flows, and the removal of a major source of high costs to the economy.

The costs can be minimized if the government focuses the PSI system on imports from countries considered highly vulnerable to "irregularities" such as Hong Kong, Singapore, Taiwan, China, India and South Korea.

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Bali to open specialist center

Monday, January 21, 2002 Vincent Lingga, The Jakarta Post, Jakarta

President Megawati Soekarnoputri will open an international center in Bali next month, which will provide mid-career and senior executives in the public and private sectors the skills and knowledge necessary to be effective leaders in an increasingly complex and challenging global environment.

Called The Executive Center for Global Leadership (ECGL), the institute will bring internationally renowned academics, business and government leaders from around the world to conduct world-class professional development programs.

"It will be a unique training center where executives from the public and private sectors can interact with each other, learn from each other's experiences under the guidance of outstanding business and government leaders," noted Tanri Abeng, one of ECGL's founders.

Tanri said ECGL would not simply duplicate what local business schools have been doing and would go further than simply grooming competent managers with high technical skills.

"We aim at training quality leaders, who are both entrepreneurial and managerially competent with a global mindset and high sensitivity to differences in cultures, ethics and human behavior," added Tanri.

The opening ceremony will also feature Thailand's Prime Minister Thaksin Shinawatra, as the keynote speaker, and Coordinating Minister for Economy Dorodjatun Kuntjoro-Jakti, as a luncheon speaker.

He said his two decades of managerial experiences at multinational companies, another six years of directing a national conglomerate and 20 months of working in the public sector as the minister for state enterprises led him to believe that there is an imperative need for a leadership training center like ECGL.

Tanri, who was dubbed the million-dollar manager in the early 1990s due to his impressive managerial track record, seemed unperturbed by the miserable end of his political career that implicated him in the Bank Bali loan scandal.

Even though his investigations by the Attorney General's Office led to nothing, and he was never declared a suspect, his personal integrity is still perceived by many as tainted by his deep involvement in the game of power politics in 1998 and 1999.

He said he did not harbor any political ambitions by launching ECGL other than helping the nation to groom more capable leaders in all sectors.

"Our prolonged economic crisis has made more imperative than ever the need for executives, in both the private and public sectors, to be imbued with the essential elements of leadership and overriding values that enable them, not only to create cohesion and cooperation within an organization, but also to communicate and inspire confidence," he asserted.

Tanri's vision is shared by many other business and government leaders, as can be seen in the list of ECGL founders, including State Secretary Bambang Kesowo, Coordinating Minister for Social Welfare Jusuf Kalla, who is himself a former businessman, Aburizal Bakrie, president of the Indonesian Chamber of Commerce, businessman Pontjo Sutowo, Robby Djohan, Henry Leo and Andi Indra Kesuma.

The ECGL Board of Trustees also boasts an impressive list of national and international figures such as Ian Buchanan, vice president and partner of Booz Allen & Hamilton, Tan Sri Dato Seri Jeffrey Cheah Fook Ling, chairman of Malaysian Sunway Holdings Inc., Arthur E. Johnson, vice president of Lockheed Martin Corp., James R. Moffett, chief executive officer of Freeport-McMoRan, Sabam Siagian, former Indonesian ambassador to Australia and currently director of The Jakarta Post and Ben J.M. Verwaayen, vice chairman of Lucent Technologies.

Leading change, efficiency and integrity in government, privatization, corporate governance and managing in a value-adding environment are some of the short-term course programs offered by ECGL for the next three months.

"One of our annual flagship programs is called the Chief Executive Officer forum, which will bring in one outstanding chief of state to an annual brainstorming session with corporate leaders in Bali," Tanri added.

As the programs are being designed and led by lecturers and presenters from famous institutes such as William F. Miller of the Stanford Institute, Henri-Claude de Bettignies of INSEAD, Robert Klitgaard of the Rand Graduate School, Gregory Maassen of the Rotterdam School of Management, James O'Toole of the Aspen Institute, Roger S. Leeds of the John Hopkins University, the course fees do not come cheap.

A three-day program will cost almost US$2,500, including lodging and meals at the ECGL campus in the Bali Handara Mountain Resort, which also offers a golf course.

"Bali's renowned center of culture and natural beauty will be another attraction of the ECGL as it provides inspirational surroundings for course participants to learn, confer, discuss, reflect and think," Tanri added.