Going beyond the law to spur sustainable palm oil

Vincent Lingga, Kota Kinabalu | Thu, 11/24/2011 10:10 AM

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When the Indonesian government and the private sector announced in late 2009 a broad plan to launch a sustainable palm oil scheme, it was immediately welcomed. 

The announcement was seen as showing a strong determination to develop oil palm plantations that were socially, economically and environmentally sustainable. 

That move was made soon after giant consumer product companies, such as Unilever and Nestlé, suspended crude palm oil purchases from several Indonesian companies, which were alleged by the environmental organization Greenpeace to have damaged the environment.

But when the green movement was officially launched in Jakarta early this year under the Indonesian Sustainable Palm Oil (ISPO) program, and when the Indonesian Palm Oil Association (Gapki) decided a few months ago to quit the internationally recognized Roundtable on Sustainable Palm Oil (RSPO), questions arose as to the motives behind that program.

Most big palm oil producers in Indonesia and green nongovernmental organizations (NGOs) see the Gapki move as misguided and narrow-minded, as demonstrated by their strong presence at the ninth RSPO conference and assembly, which ended on Thursday.

The ISPO program and the RSPO could complement each other because the former scheme is designed to make palm oil production sustainable in compliance with Indonesian laws, while the latter program goes beyond the law as it also covers the social aspects of the industry.

While the ISPO program is mandatory, designed and administered by the government, the RSPO is voluntary, running as a multi-stakeholder forum with the mission of promoting the growth and use of sustainable palm oil products through credible global standards.

The establishment of the RSPO in 2004 by plantations (growers), processors, manufacturers of consumer products, retailers, banks, nature conservation NGOs and civil society producers was prompted largely by market forces, or mounting consumer demands for green products.

The RSPO now has over 650 member organizations from 35 countries, including large companies such as Unilever, Walmart, Carrefour, Nestlé, Hershey’s, Citibank and the World Bank.

As Norman Jiwan of Sawit Watch, an NGO specializing in monitoring the palm oil industry, argued that if the ISPO program upholds only Indonesian laws and regulations, it will not be adequate because the scheme still falls short of several other elements vital for sustainable palm oil management.

The principles of sustainable management promoted and assessed by the RSPO for its certification process are more complete, covering such elements as transparency, legal and regulatory compliance, best production practices, environmental responsibility and commitments to local community development, human rights and land rights. 

By and large, the principles and criteria assessed for the RSPO green certification are precisely the best practices of agricultural development that Indonesia itself has been trying to promote. 

Even though the green consumer campaign in Indonesia’s biggest palm oil markets of China, India, Pakistan and Africa has not been as strong as those in Europe and the US, Indonesia cannot simply ignore the RSPO and the principles of sustainability it promotes.

Though Europe takes only around 8 to 10 percent of Indonesian total output and its biggest markets now are in Asia, giant companies, increasingly pressured by green consumer organizations, will enforce the principles of sustainability in their subsidiaries in the region as well.

The allegations that the RSPO movement is a deception by producers of vegetable oil, such as soybean, sunflower, rapeseed and corn oil, in rich countries, in coping with the fierce competition from palm oil, seems misplaced.

Independent product certification has earlier been used in the forestry industry as a market-based instrument to supplement the regulatory system in curbing illegal logging.

Environmental NGOs and other civil society organizations have mobilized consumers and traders to shun forest products that are not certified according to internationally recognized standards of sustainable forest management.

The Bonn-based Forest Stewardship Council (FSC), which groups representatives from environmental and conservation groups, the timber industry, forestry professions, forest certification organizations and forestry communities has developed forest certification standards and accredits independent certifiers.

Therefore, an increasing number of Indonesian companies, mostly furniture producers in Java, have voluntarily sought forest certification for their products from internationally accredited certifiers to gain easier access to American and European markets.

Consumers’ buying decisions affect what ingredients manufacturers use and what retailers put on their shelves. As consumers actively seek out the trademark on certified products, manufacturers will be compelled to use only sustainable palm oil and wood in all their products.

However, the success of the RSPO campaign will finally depend on how much the premium price producers can gain by certifying their products.

As Malaysian Minister of Plantations Industries and Commodities Tan Sri Bernard Dompok warned at the opening of the RSPO conference on Tuesday, “If suppliers do not see a growth in market demand, or the RSPO brand is not strong enough, they will not increase supplies.”

The author is a staff writer of The Jakarta Post.

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Transforming China

Vincent Lingga, The Jakarta Post, Jakarta | Sun, 10/02/2011 4:00 AM

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Broad-based economic reform is never easy. Because: first, it takes away rents that have been built up in an economic system and therefore sets off opposition from those whose income is at risk.

Second, wholesale reform requires broad-based popular sentiment supporting leadership and systemic changes to address mass dissatisfaction through concrete programs.

The upshot is that with very few exceptions, broad-based reform seems to require as a necessary condition – a perception of crisis, or at least a sense of chronic deterioration. 

China met all these prerequisites when in early 1979 it launched its reform and opening policies under the leadership of Deng Xiaoping, which in just about 30 years transformed China’s economy from ruins under ten years of the Cultural Revolution into the world’s second largest economic powerhouse after the United States.

Many books have been written about China’s economic “miracle”, the discovery of cheap land and a huge pool of low-cost labor that has attracted trillions of dollars of foreign investment that now fuels China’s export juggernaut.

One new book, titled Breaking Through: The Birth of China’s Opening-Up Policy, written by former Vice Premier Li Langing, translated into English by Ling Yuan and Zhang Siying and published by the Oxford University Press, is perhaps the first book that tells the story from an insider, one of the key players in the reform and opening movement.

Since Li was one of the key government executives who took part, not only in the making but also supervision and implementation of the opening policies and decisions, he was able to vividly chronicle the step-by-step process of decision making, the trials and errors, the actions and the thought process which brought about reform measures. 

The book is a perfect reference to better understand who the main players were and the key events and milestones in the early years when Deng, against tremendous odds and resistance, led the Chinese people, who in 1978 were just recovering from the devastating effects of ten years of the Cultural Revolution, out of their decades long international isolation and economic ruins.

The book provides details about the process by which government officials at all levels executed policy decisions. 

Li, who began his government career in the early 1960s as one of the top executives of China’s first domestic car manufacturer (Dongfeng), was directly involved in implementing the opening-up policy in 1978 when he conducted negotiations to tie up Dongfeng with US General Motor to modernize its factory.

He rose steadily through the ranks to enter the Party central leadership and eventually became a vice premier, which enabled him to often meet personally with Deng.

Demonstrating Deng’s reformist determination, Li quoted the Chinese leader as repeatedly asserting at their numerous personal encounters “We have to reform and open up, otherwise we are doomed”.

Li played a more pivotal role in the opening program when in early 1982 he was appointed a director general and later a vice minister at the ministry of foreign economic relations and trade in charge of foreign investment and involved directly in overseeing the development of special economic zones (SEZ).

He was widely known as a strong advocate of joint ventures between China and foreign companies in order to bring in foreign technology and equipment, initially championing the development of the Guangdong province SEZ and eventually in nine other provinces in south and southwest China, now popularly known as the Pearl River Delta regions. 

He rightly devoted more than one third of the 465-page book to the early process of SEZ development. This concept has undoubtedly been the window and main instrument of China’s colossal economic transformation.

The trove of information in the book about the early process of developing the SEZ in 1979 should be a good source of lessons for Indonesia, which has still to build SEZs in various provinces under its 2009 SEZ law.

The Hong Kong factor

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

Nothing would have happened, however, had it not been for the strong leadership of Deng, who was supported by a determined team of reformers, including Li Langing. 

It all began in early 1979, when a China state company based in Hong Kong applied for a license to open a factory in Guangdong province. 

When this application was sent to Deng, who at the time had started promoting the idea of opening to the outside world, this reformist leader immediately wrote down his instruction, “Guangdong should be provided a free hand to to give this sort of thing a try”. 

His ministers and Guangdong regional leaders immediately followed up that instruction by designing a special economic zone initially in Guangdong with more liberal economic regulations than in Fujian and other provinces in the south.

However, this process was not an easy one because the opening policy and SEZ were unprecedented in a socialist country following the lingering impacts of the Cultural Revolution.

There had been some concern that the special policies and flexibility granted to Guangdong and Fujian could slip these provinces on to the capitalist road. 

Some equated the special zones with “foreign colonies” or restoration of capitalism.

Deng’s strong leadership, however, continued to push officials and state company executives in the province to implement the SEZ concept.

The name Special Economic Zone was given by Deng himself in April 1979 after officials tried to come up with a name that did not connote foreign concessions or enclaves such as free trade zones or free ports.

The success in Guangdong became a confidence-building block for developing SEZs in other provinces in southern China. 

The basic idea then was to combine Hong Kong’s abundant finacial resources and advanced technlogy and efficient infrastructure with China’s low-priced mainland real estate and labor resources to bring in foreign capital, technoloy and raw materials. 

Hong Kong still has an important role to play in the trading business. Its current relationship with the Chinese mainland is complementary. As a major business service center, Hong Kong and its firms package financial and business deals for corporate and private clients from Hong Kong and the rest of the world.

The Pearl River Delta, now one of the most economically dynamic regions in China, has developed into a manufacturing center of global importance and one of the world’s fastest growing economic regions due largely to the vital role of Hong Kong as an excellent international financial and supply-chain management center of global importance.

The Greater Pearl River Delta covers Hong Kong, Macao, Guangzhou, Shenzhen, Dongguan, Foshan, Jiangmen, Zhongshan, Zhuhai, Huizhou and Zhaoqing.

While Hong Kong has developed as a leading center for management, coordination, finance, information and business services, the Pearl River Delta region has emerged as a manufacturing powerhouse with few global rivals. 

The idea of SEZ then was: Instead of making only incremental progress through an overall reform simultaneously in the whole mainland that could take many decades to accomplish, it was deemed more effective and efficient, and most importantly, more politically acceptable to start with bold moves in particular areas (islands), selected for their strategic roles, to establish show cases of success and thereby build confidence.

It was indeed unrealistic – given China’s vast territory and regional disparities in socioeconomic development and uncertain investment environment – for all regions to jump on the opeing badnwagon at the same time.

SEZ therefore essentially called for the development of islands of competence with streamlined licensing procedures, good infrastructure, flexible labor regulations, superior logistical efficiency, anchored on fast flows of goods, labor and documents, efficient tax administration and customs and immigration service.

They were called special ecoomic zones because the economic regulations and other rules in these zones are more liberal and flexible than most of the rest of the mainland. 

Jiang Zemin, who supervised SEZ development since its launching in 1979, noted at a meeting with foreign guests in June 1987 the strategic importance of China’s decision to establish SEZ (see box story).

“Our effort to run the special economic zones played an important role in our reform and opening endeavor as a whole”, noted Jiang, who later became China’s President for ten years (1993-2003).

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Indonesian provinces reach out to Russian investors

Vincent Lingga, The Jakarta Post, Moscow | Wed, 09/14/2011 8:00 AM\

Four Indonesian provincial governments competed with each other here on Monday to attract Russian investors to develop resource-based ventures and infrastructure in their respective regions.

North Sulawesi Governor Sinyo Harry Sarundajang offered railway, toll road and geothermal projects. North Sumatra acting governor Gatot Pujo Nugroho promoted toll road projects and palm oil-based industries. East Kalimantan Regional Secretary Irianto Lambire highlighted opportunities in coal-transportation, palm oil and cacao plantation projects, while the West Nusa Tenggara Regional Investment Board chief promoted seaweed and tourism-related businesses.

“The six governors in Sulawesi will meet next month in the North Sulawesi provincial capital of 
Manado to discuss the development of the 1,200 kilometer Trans-Sulawesi railway project,” Sarundajang said at the Indonesia-Russia investment forum here on Monday.

He said the railway project is commercially feasible because it will connect the six provinces on the island of Sulawesi, which is naturally rich in mining and maritime resources, as well as agriculture and tourism opportunities. 

“We are only 20 minutes by air from the famous resort island of Bali and we have tremendous investment opportunities in tourism-related industries. Yet more interestingly, our new Lombok international airport will soon open for wide-bodied jetliners,” the West Nusa Tenggara investment chief said.

North Sumatra’s acting governor Nugroho promoted railway and tollroad projects which will connect the main growth centers in that province, pointing out that several of the projects had been supported with feasibility studies.

East Kalimantan offers four railway-projects, mostly for transportation of coal and plantation commodities such as palm oil and rubber. 

Indonesian Ambassador to Russia Hamid Awaluddin and Investment Coordinating Board (BKPM) chairman Gita Wirjawan, both of whom organized the business gathering, described it as a good start in promoting economic linkages between the two countries.

Gita said Russia, with its US$1.6 trillion economy and foreign reserves of more than $480 billion, has been a major provider of technology and financial capital to foreign countries, but its investment in Indonesia is almost negligible compared to most other countries.

“It is our fault that your investment in our country is still very small. We should have come here more often, knocking at your doors,” Gita said.

Over the past few years Gita has told journalists that Russia had set its eyes on investment opportunities in the Middle East, but the recent political turmoil in several countries in the region investors to seek other safer and more stable investment destinations. 

“I think we now have many advantages to attract [Russian] investment to our country, especially because of the long [almost 60 year] history of our relations,” he added, citing the recent tax-incentive package launched in Jakarta for high-priority investment projects in infrastructure and natural resource-based ventures. 

Russia itself seems to be very enthusiastic about developing broader economic relations with Southeast Asia, as it will for the first time take part as a full-fledged participant in the upcoming East Asian Economic Summit in Bali in mid-November.

Russian-Indonesian Business Council executive director Mikhail Kouritsyn also hailed the investment forum as a good start for Russian businesspeople in exploring and developing businesses in Indonesia.

“But this is only the first step on a very long journey,” Kouritsyn cautioned.

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BKPM chief woos investors from Germany, Russia

Vincent Lingga, The Jakarta Post, Moscow | Mon, 09/12/2011 8:00 AM

Seizing on the sustained momentum of high flows of foreign direct and portfolio capital to Indonesia, the Investment Coordinating Board (BKPM) chief Gita Wirjawan opened a business forum on Monday to brief Russian businesspeople on investment opportunities in Indonesia. 

The delegation also included regional leaders and investment board chiefs from North Sumatra, North Sulawesi, East Kalimantan and West Nusatenggara.

“I deliberately asked several regional leaders to join this mission to enable them to interact with, and brief, potential investors on investment opportunities in their areas,” Gita said Sunday, arriving from another promotion in Germany.

“A joint mission like this will also promote better understanding and cooperation between the central government and regional administrations in attracting investors from overseas.”

Earlier on Friday, at an Indonesian Business Day as part of the Asia-Pacific Week Berlin 2011, Gita enlightened businesspeople on the wide range of business opportunities and the new tax incentive package the Indonesian government will be offering to investors. 

Gita seemed confident about attracting more foreign investors to Indonesia, primarily because of the severely limited investment opportunities in developed countries due to the lingering debt woes in Europe and the economic slump.

The Indonesian government, after several years of debates, finally launched in August a tax incentive scheme which provides income tax holidays between five to 10 years and tax allowances for projects in high-priority sectors and in remote areas, in a bid to ramp up investment in infrastructure and resource-based manufacturing industries.

The tax holiday facility will be offered to manufacturing projects in base metals, oil refining, petrochemicals, machine tools and renewable energy, with a minimum investment of about US$117 million. 

Tax allowances — a reduction of taxable income up to 30 percent of total investment carried over six years — will be offered to labor intensive projects in remote areas with a minimum investment of 
Rp 50 billion ($5.82 million). 

Indonesian Ambassador to Moscow, Hamid Awaludin, also saw the investment mission as quite opportune. Russia has been enthusiastic about its interaction with the dynamic Southeast Asian region as, for the first time, it will attend as a fully fledged member, the East Asian Economic Summit, due to take place in Bali in the middle of October.

As part of the preparations for the summit, ASEAN economic ministers held a consultation with a Russian delegation in Manado in August to chart out a road map for their economic, commercial and investment cooperation.

The ASEAN region, with its 10 member states, a total population of 600 million people and $1.7 trillion economy, is strategically nestled between India and China, and has become an attractive alternative for investment amid the global volatility triggered by concerns about the European sovereign debt crisis and economic slowdown in the US.

For the $1,500 billion Russian economy, with a total population of 142 million and per capita income of $15,200, deeper economic linkages with Southeast Asia also seem quite strategic.

Indonesian Trade Minister Mari Elka Pangestu led a trade mission to Russia last September in a concerted bid to expand trade ties with the world’s 11th largest economy.

According to the data collected by the Indonesian embassy, bilateral trade between the two countries more than tripled, to US$1.91 billion last year, from figures in 2009, with a deficit of $180.3 million for Indonesia. During the first half of this year, bilateral trade totaled $980 million, with a surplus of $290 million for Indonesia.

Indonesian exports consisted mainly of palm oil, coconut, coffee, tea, electronic goods and footwear, while imports from Russia comprised defense/military equipment, chloride, iron ore, metal, synthetic fibers and aluminum.

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Commentary: Regional summit in Bali designed to unshackle entrepreneurship

Vincent Lingga, The Jakarta Post, Jakarta | Fri, 07/22/2011 8:00 AM

We don’t expect many investment deals between Indonesian start-up businesses and American prominent entrepreneurs and angel investors during the ASEAN Regional Entrepreneurship Summit opening in Bali on Friday as a follow-up to the Entrepreneurship Summit hosted by US President Barack Obama in April, 2010.

The meeting, expected to be attended by 200 foreign and domestic delegates and to be addressed by US Secretary of State Hillary Rodham Clinton, will serve more as a forum for exchanges of experiences and views about best practices and prerequisites for nurturing entrepreneurship.

But, to be sure, the gathering will heighten the momentum for the development of entrepreneurship in Indonesia because participants from the US, well known as the beacon of entrepreneurship, include well-known entrepreneurs and leaders of the Angel Capital Association, which groups individual investors looking for investment opportunities in start-up businesses.

Entrepreneurialism is deeply rooted in American history. It was founded and then settled by innovators and risk-takers who were willing to sacrifice old certainties for new opportunities.

This culture is greatly supported by flexible labor rules — the freedom to hire and fire workers — big venture-capital industry and the long traditions of close relationships between universities and the industry.

Many American giant companies such as the Amway consumer products company and Wall-Mart began from garages. Even the history of many high-tech giants started up as partnerships: Steve Jobs and Steve Wozniak founded Apple, Bill gates and Paul Allen (Microsoft), Sergey Brin and Larry Page (Google) and Mark Zuckerberg and Dustin Moskovitz (Facebook).

Studies by the World Bank and various business institutes in Europe and the United States found the positive correlations between a broad base of entrepreneurship and economic expansion.

Entrepreneurs contribute greatly to producing and commercializing high-quality innovations, spurring productivity growth and enhancing employment creation and dynamics because creativity and innovation are at the heart of entrepreneurial behavior.

Entrepreneurship is important for continued dynamism of the economy because it is entrepreneurs that are capable of identifying business opportunities and have the will to stake out their capital in business start-ups against all the risks.

Yet Indonesia erected regulatory barriers that make it extremely difficult to start up businesses. 

Costly regulators hamper the creation of new firms, especially in industries that should naturally have high entry.

No wonder many SMEs in Indonesia continue operating in the informal sector (underground economy), thereby denying them easy access to low-cost bank financing and other public services and facilities.

The Doing Business 2011 report of the World Bank that rated 183 countries according to their performance in 11 requirements for the ease of doing business ranked Indonesia at the 121st. Even among ASEAN countries, our performance was among the worst, better only than the Philippines.

Regulatory and administrative costs obviously hinder entrepreneurial activity, dampen investment and researches and development and stunt firm growth. They can edge firms out of business by absorbing too much time and resources.

Even difficult exit conditions that make it costly for firms to wind down, such as lengthy creditor claims on assets or too rigid labor regulations on severance allowances, debilitate business start-ups.

As the American experiences have shown, culture is another important factor for building up an entrepreneurial society, influencing career preferences and shaping up attitudes to risk-taking and reward.

The government can play an important role in nurturing entrepreneurship, through formal education and training (including continued education) and fostering entrepreneurial attitudes.

Establishing conducive regulatory framework for the development of venture capital companies will also provide alternative financing for start-up businesses.

In major developed countries, notably the US, the business schools at major universities also function as the incubation centers for small entrepreneurs where innovations and creative ideas are developed and converted into commercial products.

But in Indonesia most university graduates are acutely short of entrepreneurship quality. Hence, they look mostly for paid jobs either in the private or public sectors.

Entrepreneurship thrives mostly among small and medium enterprises (SMEs). The role of small businesses cannot be underestimated.

But neither can the challenges they face, particularly in a world where markets are globalizing and large-scale enterprises dominate so much of the government’s policy making time

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Commentary: The Ruyati case and the plight of the maids

Vincent Lingga, The Jakarta Post, Jakarta  Sat, 06/25/2011 8:00 AM

The Indonesian government’s decision last week to stop sending maids to Saudi Arabia starting as early as next month should only be a temporary ad hoc measure that would be revoked as soon as both countries put in place stronger legal frameworks for the protection of the human and labor rights of our migrant workers in the gulf state.

The national outcry over the last few days after the surprise execution of Ruyati binti Satubi, who was convicted of murdering her Saudi employer, is of course understandable. But we should not allow it to blind us to the greatly important economic role the millions of Indonesian migrant workers in Saudi Arabia and other countries in the Gulf have for their native villages in Java.

No other government program, not even poverty alleviation projects, can be so effective in directly injecting as much cash into the rural economy in Java as the billions of dollars our migrant worker women in the Middle East remit every year.

We would not tolerate any abuse of our migrant workers overseas, but with more than 1 million Indonesian women working as domestic workers in Saudi Arabia alone, there are inherently big risks that some of them are bound to be abused.

In fact, we should magnanimously acknowlege that most of our migrant workers who work as maids overseas have been treated better and paid much higher than domestic servants in Indonesia.

The temporary moratorium on sending maids to Saudi Arabia should be used as an opportunity to look deeper into all aspects related to our migrant workers in the Middle East, right down from the qualification of employment agencies, their recruitment processes, their preparations (technical training), the terms and condition of their employment contracts and the terms imposed by the Saudi Arabian government on the families employing the migrant workers.

We should understand the plight of our migrant workers, who have been forced by the extremely difficult economic conditions at home to set out from their native villages into such far-away places as the Middle East with a strikingly different social environment and culture.

The acute shortage of jobs in Indonesia for low-skilled laborers has forced them to seek work abroad to support their families and pay for the education of their children or siblings. It is indeed a great sacrifice and heart-rending experience for them to be uprooted from their home villages and to leave behind their families for such a long period of time.

President Susilo Bambang Yudhoyono himself, when addressing the Intenational Labor Organization’s conference in Geneva a few days before Ruyati’s execution, praised Indonesian migrant workers as economic heroes who should be given social justice and protected from abuse.

Working overseas as maids will remain an outlet for the millions of unemployed, unskilled laborers from rural areas, until our economy is able to expand fast enough to absorb all the job seekers.

But the Saudi Arabian government should also realize the great contribution of Indonesian migrant workers to the welfare of its people through the supply to its economy of low-priced labor and should consequently see to it that the maids are treated humanely by their employing families.

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Living with inflation, capital inflows, poor infrastructure

Vincent Lingga, The Jakarta Post, Jakarta Tue/12/21/2010 Opinion

The biggest policy challenges for the Indonesian government in the year ahead include how to cope with rising inflationary pressures, ensure less volatile and sustainable capital inflows and accelerate the development of infrastructure.

Certainly, the large role portfolio investment plays in total capital inflows and the ensuing risks of asset price bubbles pose challenges for controlling inflation, especially in case of sudden capital reversals.

The year may end with a cumulative inflation of at least 6.2 percent, much higher than last year’s 2.78 percent. But this would not prompt the central bank to immediately raise its benchmark interest rate, which has remained at 6.5 percent since August 2009, because the rise in food prices, caused by weather anomalies that reduced supplies, was the main driver behind the increase in the consumer price index.
The reluctance to hike interest rates, at least until the end of the first quarter, also stems from great concern that a further widening of interest rate differentials would attract more short-term capital inflows, further complicating the central bank’s liquidity management efforts.
But the risks to the inflation outlook have increased due to the combination of persistently strong domestic demand, supply disruptions caused by weather anomalies and inflationary pressures due to capacity constraints and inefficient logistics.
The government measure to gradually phase out fuel subsidies starting in April will also aggravate inflationary pressures next year.
The growth of gross domestic product in the third quarter surprised on the downside, coming in at 5.8 percent year-on-year, down from 6.2 percent in the second quarter due to the unusually wet weather which adversely affected mining, construction and exports.

But, persistently high domestic consumer confidence will still enable the economy to close this year with a minimum expansion of 6 percent.

Consumer spending will remain the main driver of economic growth, which is estimated at between 6.3 and 6.5 percent next year, due in part to the positive wealth effect from the stock market and rising wages.

“ Since infrastructure development consists mostly of multi-year projects, the highest growth the economy may achieve next year is 6.5 percent. A faster expansion may cause the economy to burst at the seams.”

Bank Indonesia will continue the use of a mix of monetary policy and macro-prudential measures to deal with inflation risk, strong capital inflows and high excess onshore liquidity by setting higher compulsory reserve requirements, including on dollar deposits, and regulating vostro accounts (rupiah demand deposit accounts held by non-residents in domestic banks).

The central bank will use more liquidity management tools rather than the policy rate. Hence, Bank Indonesia’s first line of defense will continue to be liquidity withdrawal by raising the dollar reserve requirement and further lengthening the maturity of the term deposit facility to lock in additional liquidity for longer durations.

The 6.25 percentage point interest rate differential, and substantial improvements in Indonesia’s economic fundamentals, will continue to be magnets of both foreign direct and portfolio investment to the country.

According to the International Monetary Fund in Jakarta, foreign direct investment in the first nine months of 2010 alone totaled US$6.77 billion, compared to a mere $1.92 billion in all of 2009, while portfolio capital reached $14.45 billion against $10.36 billion last year.

Most portfolio capital inflows this year went to buying government bonds ($10 billion), Bank Indonesia’s SBI debt papers ($2.37 billion) and shares ($2.1 billion) as of early October.

Certainly, the best approach to cope with the torrent of short-term capital inflows, and to gain the greatest benefit from them, is to convert the funds into direct investment and initial public offerings (IPO) through the stock exchange and lengthen the maturity of capital inflows, thereby reducing the volatility.

But this requires significant improvement in the overall investment climate, reducing infrastructure bottlenecks and further improving capital market infrastructure to encourage more IPOs and corporate bond issuance.

Inadequate infrastructure has been one of the biggest drags on economic expansion over the past few years. In fact, the country lags behind most major Southeast Asian economies in the adequacy and quality of infrastructure.

Lack of inter-connectivity between major islands has caused wide regional economic disparities.

Infrastructure, such as roads and port facilities, in many provinces has crumbled due to an acute lack of maintenance under severe fiscal restraints. Power shortages and rotating blackouts continue to hit several provinces.

Inadequate infrastructure impairs the competitiveness of the economy because production and distribution costs are made much higher than those in other countries.

Studies by the University of Indonesia School of Economics concluded that inadequate infrastructure and the crumbling condition of existing infrastructure have made the costs of logistics in the country among the highest in Asia, or 14 percent of total production costs, compared to four to five percent in other countries.

The biggest barrier to private investment in infrastructure is land acquisition. The arduous, complex procedures for land acquisition make this component the biggest factor of uncertainty for project cost.

Yet more discouraging is that the government is still drafting a law on land acquisition for infrastructure that should have been completed early this year.

The most optimistic view now is that the bill would be enacted in the first half of 2011, at the soonest. However, because the new law has yet to be supported with government regulations stipulating technical details for its enforcement, more investor-friendly land acquisition legislation can be expected only later next year, or even early 2012.

The government has set up several supporting facilities to help expedite infrastructure financing, such as the infrastructure finance company in a joint venture with the World Bank and Asian Development Bank and an infrastructure fund guarantee.

But don’t expect any substantial improvement in the infrastructure sector unless a strong regulatory framework for a more expeditious land acquisition system is already in place.

The government built only about 120 kilometers of toll roads over the past five years and completed even less than 40 percent of the 10,000 megawatts in new power generation capacity launched under a crash program in early 2006 to cope with the power crisis.

Since infrastructure development consists mostly of multi-year projects, the highest growth the economy may achieve next year is 6.5 percent. A faster expansion may cause the economy to burst at the seams.

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Commentary: Stopping subsidies for private cars could be the best policy of the year

Vincent Lingga, The Jakarta Post, Jakarta | Tue, 12/14/2010 10:47 AM | Headlines

Want to know what an incompetent government looks like?

You’re looking at it.

As early as December 2007 then chief economics minister Boediono, who is now the Vice President, announced after a Cabinet meeting that the government was preparing a program that would restrict the sales of subsidized gasoline only to public transport vehicles and motorbikes, thereby forcing private cars to use fuel sold at international prices.

But the program, which would be phased in initially in Jakarta, West Java and Banten provinces, was eventually buried under the indecisiveness of the government and opposition from the House of Representatives.

Tens of billions of dollars in taxpayers’ money continued to be burned annually into carbon-based emissions by private-car owners.

The government revived the same idea in June but the plan was again shelved due to the acute leadership of the government and resistance from politicians in parliament.

The same song played again in October when fuel subsidies became an increasingly heavy burden on the state budget.

But two weeks before the program was supposed to be initiated in Jakarta and its surrounding towns on Jan. 1, the pathetic government had not shown the House technical details on how the policy measure, which would affect tens of millions of people, would be implemented.

Even state owned oil company Pertamina, which controls more than 95 percent of the distribution of subsidized fuels, has not started logistics preparations.

The question then is how will the government be able to gain a national political consensus for a policy measure that is so strategically important to the nation?

The House would surely not want to be made the culprit for approving a policy that could potentially cause chaos in fuel distribution due to a lack of infrastructure and the inadequate institutional capacity of both Pertamina and gasoline stations.

Having said all that, I don’t mean to say the energy policy is not good.

Instead, I think the move to stop subsidizing fuel to private cars could become one of the best economic policies of the Yudhoyono government.

Technically, socially, economically and politically, the measure is the best option available.

Technically, the measure is not completely new because fuel for industrial users has long been floated on international market prices. Hence, the move will only extend the enforcement of the same fuel-pricing policy to private-car owners.

Since the restriction will start only in Jakarta and its surrounding towns, the program will not likely cause major supply disruptions to private-car owners because most of the gasoline stations in these areas have been selling unsubsidized, high-octane gasoline from Pertamina, Shell, Petronas and Total.

A one-year transition before the policy becomes effective in the rest of Java and Bali and other major islands of Sumatra, Kalimantan and Sulawesi seems adequate for Pertamina and gasoline stations to make adjustments to their storage facilities and logistics arrangements.

Economically, the measure is also the most feasible and one that poses the least risks, yet immediately with the greatest impact, because Jakarta and surrounding towns account for almost 20 percent of subsidized fuel consumption, Java and Bali 40 percent, Sumatra 18 percent and the other islands the remaining 22 percent.

The move also is socially and politically acceptable because it will affect mostly better well-off households or families who own cars.

Hence, the new fuel policy, if approved, will by one stroke generate multiple great benefits to the nation because energy subsidies actually have been a missed opportunity for investment in health and education, reducing poverty and building up infrastructure.

Since almost 55 percent of fuel subsidies have been enjoyed by private-car owners, this budget spending is simply a gross misallocation of scarce resources and a future tax and burden on the economy.

It has been too long for the government’s fiscal management to be held hostage by fuel subsidies. The policy will give investors certainty as to the future direction of the energy policy. Such a long-term perspective and policy guidance is key to wooing investment in alternative, renewable energy such as biofuel and in energy conservation and efficiency programs.

Moreover, as long as the differences between domestic gasoline prices and those in our neighboring countries such as Singapore remain large, it is rather impossible to prevent export smuggling from Indonesia, the vast archipelago country with such long porous coastal lines.

If the House members use their intelligence and reasoning properly, they should approve the new fuel policy, though under a more flexible implementation schedule — say starting next July, instead of next month as originally planned — to allow more time for infrastructure development and logistics preparations.

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RI coal export prospects still bright

Vincent Lingga, The Jakarta Post, Singapore Fri, 11/05/2010 10:50 AM Business

Indonesia, already the world’s largest exporter of seaborne thermal coal since 2005, will continue to be a major supplier to the Asian market even though the quality of its coal reserves has declined to sub-bituminous and even liqnite or lower-rank coal, Garibaldi Thohir, the chief executive officer of publicly listed PT Adaro Energy, said here Wednesday.

“First of all, the biggest international market for coal now is Asia, notably China and India, which are practically on our doorstep,” said Thohir who was here to receive several awards for Adaro Energy at the 2010 Platts Top 250 Global Energy Company Rankings on Tuesday evening.

The ninth annual Platts 250 Global Energy Company Rankings measures companies’ financial performance using four key metrics: asset worth, revenues, profits, and return on invested capital. And to be ranked, companies must have assets greater than US$3 billion.

Thohir said the high economic growth in China and India, which made these countries hungry for natural-resource commodities, notably energy, had drastically changed the international coal market.

Asia now accounts for more than 65 percent of global coal consumption.

Platts analyst James 0’Connell quoted The Australian Bureau of Agricultural and Resource Economics (Abare), a government research agency, as saying recently that India, the fastest growing importer of thermal coal, will import almost 70 million tons this year.

“Indian imports will expand to more than 77 million tons next year as 18.8 GW in additional capacity of power generation is expected to be completed next March,” Abare estimated in a report in June.O’Connell said China, with an annual production already exceeding 3 billion tons, will still import almost 100 million tons this year and 103 million tons next year to fire its huge power generation industry.

Another Indonesian competitive advantage, according to Thohir, is that Indonesia has very low production costs as most of its 95 billion tons of reserves allow for open-cast mining, he added.Yet most important, he added, “our coals produce very low emissions of sulphur, nitrogen oxides and wastes. The benefits of all this for users is that our coal would reduce the costs of their equipment maintenance and ash disposal”.

Indonesian coal exports are estimated by the coal miners association at about 200 million tons this year, much lower than the original projection due to the unusually heavy rainfalls that have affected mining operations.Andre Mamuaya, Adaro Director and Corporate Secretary, said Indonesian domestic coal consumption would also increase steadily as the country is expanding the capacity of its coal-fired power generation to reduce dependence on oil.

“The State Electricity Company [PLN] now uses only about 40 million to 42 million tons of coal per year. But this volume could double within the next five years as several new coal-fired power stations come on stream”, Mamuaya added.The Ministry of Mines and Energy recently revealed the government program to convert diesel-fired power plants with a combined capacity of around 8,000 MW into coal-fired plants.Most of the additional 10,000 MW new capacity being built under the first crash power program which was launched in 2006 is also based on coal.Based on the government’s energy plan, the state electricity company (PLN) will generate more than 50 percent of its output with coal.

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Analysts foresee imminent correction in roaring stock market

Vincent Lingga, The Jakarta Post, Medan | Mon, 10/25/2010 10:33AM

The debt crisis in Greece last April triggered market panic across Europe and set off a free fall in global stocks in May and created a bearish sentiment in the Asian markets. The Indonesian Stock Exchange (IDX) composite index fell to 2,514.11 on May 25, the lowest level since last December, after more than US$5.5 billion in foreign were pulled out.

What a contrast to the mood at the IDX now.

The market has been roaring since early July, hitting all-time highs as the combination of near zero interest rates in the developed countries and bullish sentiment in the largest Southeast Asian economy has made Indonesia a top destination for foreign investors.

More than $13 billion (net) worth of portfolio capital flowed into the financial market through stocks, government and corporate bonds and Bank Indonesia debt papers (SBI) in the first 10 months of the year alone, raising the total value of the financial market to Rp 287 trillion ($32 billion) as of last week.

When the stocks index rose to the highest-ever recorded level of at 3,013.40 on July 21, or up 19 percent from early January, many analysts thought the year’s peak had been reached. But the index continued toward the stars, setting a new all-time record of more than 3,600 recently before dropping off slightly to below 3,600 last week.

Several analysts, however, have raised concerns that stock prices may no longer be sustainable and could enter a roller-coaster cycle because the price earnings ratio (the ratio of share prices against expected income) has exceeded 30 to one — the highest level in Asia.

“I think a significant market correction is in the offing,” said Haryajid Ramelan, an analyst at PT Capital Bridge Indonesia, at an investor gathering in Medan, North Sumatra, last week.

Ramelan said 3,200- 3,300 would be a more sustainable range for the IDX index for the next few months.

Handrata Sadeli, president of PT Panin Sekuritas, said he also forecast a market correction but not as big as last May’s because Indonesia still offered a promising growth opportunity with an increasing number of new shares issues.

The first nine months of the year saw 12 initial public offerings, and 13 more, including one for state company PT Krakatau Steel, are in the pipeline.

Only one of the 12 new share issues declined on the secondary market, while the others gained in price by 12 to 677 percent.

Surya Maulana of PT Dongsuh Securities agreed there would be fairly serious risks of choppiness in equity markets if capital continued to pour into Indonesia as foreign investors could suddenly decide to withdraw their money, as they did in 2008.

“As long as transactions on the IDX are still controlled by foreign investors our market will remain prone to a boom-and-bust cycle,” Maulana added.

“As long as transactions on the IDX are still controlled by foreign investors our market will remain prone to a boom-and-bust cycle.”

However, several other analysts who attended the investor gathering remained confident that foreign investors would continue rushing into the market in part to take advantage of the growing gap between near-zero interest rates in the United States and Japan and the 6.5 percent rate in Indonesia.

As the difference between the rates grows, traders can make more money by borrowing dollars and yen for cheap and investing those funds in higher yielding stocks and bonds in Indonesia.

Several other analysts here are concerned about the torrent of funds flowing from developed countries as they have been pressuring the rupiah to strengthen, risking a bubble in the stock market.

They see the dizzying heights of the stocks as unjustified even in light of the country’s high growth rate, which is estimated at slightly more than 6 percent this year, up significantly from 4.5 percent last year.

The big concern is that the bulk of the foreign money flooding into Indonesia is going into equities and debt instruments, rather than into green-field (new) projects and start-up businesses.

But Maulana said he was confident the IDX would remain bullish at least until the end of the year because investors were unlikely to find better opportunities elsewhere in the world.

IDX director Eddy Sugito has said he is confident that the IDX’s sterling performance will continue because the positive sentiment there is based on a bright outlook on economic fundamentals and the corporate sector supported by strong domestic consumption and high commodity prices.

Many analysts here shared Sugito’s bullish sentiment, noting that the strong demand for commodities in other Asian countries would continue to be the main driver of the IDX’s growth, given Indonesia’s important role in such minerals as gas, coal, nickel, copper and agricultural commodities including palm oil, rubber, cocoa and wood-based products such as pulp and plywood.

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