Commentary: Poor, inadequate infrastructure causes inequality, poverty

• Vincent Lingga

  The Jakarta Post

Yokohama | Mon, May 8 2017 | 12:12 am

Six of the more than two dozen simultaneous seminars and conferences held on the sidelines of the four-day 50th Asian Development Bank Board of Governors meeting in Yokohama, Japan last week focused on various aspects of infrastructure development.

The rationale is self-evident. Infrastructure investment has the multiplier effect of increasing efficiency and competitiveness, promoting both international linkages and domestic economic integration and increasing an economy’s productive capacity.

Many international and national studies have also concluded that inadequate physical infrastructure is not only an impediment to growth, but is also one of the root causes of poverty and inequality. And poverty as well as inequality are the main problems of most ADB members.

An ADB report on Asian infrastructure needs issued in February concludes that inadequate physical infrastructure is not only an impediment to growth, but is also one of the root causes of poverty. 

Addressing the region’s infrastructure and connectivity means addressing the risks and uncertainties linked to regional investment and the lack of public funding. 

The study estimates infrastructure needs in developing Asia and the Pacific at more than US$22.6 trillion through 2030, or $1.5 trillion per year, if the region is to maintain growth momentum. 

Meanwhile the National Development Agency in Jakarta put Indonesia’s infrastructure financing needs at around Rp 5,000 trillion ($373 billion) for the 2015-2019 period or $75 billion a year. Of which, 40 percent is expected from the government and 60 percent from the private sector.

Panelists at the seminars agreed that the existence of large infrastructure gaps across many countries reflected a combination of institutional and financial constraints. And the best way to speed up infrastructure development is through public-private partnership (PPP) schemes because of the limited financing resources of governments. 

But the central issue is when governments enter into a long-term contract with a private entity to give it a license to operate public infrastructure, they must address such questions as who will be responsible for land acquisition; whether or not there could be changes in the future to the regulations on setting tariffs or tolls; who will take on the risk of a loss in the event that the income does not match projections.

A key issue in confronting these difficulties is how to define the roles of the private and public sectors in such a way that infrastructure gaps can be closed while ensuring good service delivery and protecting both investors’ and taxpayers’ (consumer) interests. 

“We need better solutions to attract investors to PPP projects because infrastructure development requires big investment and is long term in nature, thereby exposing investors to risks related to exchange rates, maturity mismatch, policy and tariff changes,” Indonesian Finance Minister Sri Mulyani Indrawati noted.

Even though the Indonesian government has launched a PPP program since 2005 and has set up many support facilities for the program, very few large infrastructure projects have attracted investors as a result of an acute lack of bankable projects.

Panelists at infrastructure-related seminars here said many tendered projects lacked proper contracts, appropriate risk allocation, a sustainable revenue model, government support, key project inputs such as international-standard studies for feasibility, social safeguards, uncertain resource assessments and properly secured land.

Hence, the role of the ADB Office of PPP which was set up in 2014 to help enable the governments of its developing member countries such as Indonesia to prepare bankable infrastructure projects to be offered to private investors under the PPP scheme. 

The PPP Office provides assistance to set up regulatory frameworks and transaction advisory services (TAS) to developing member countries to deliver bankable PPP projects and coordinate and support PPP-related programs. 

The ADB last year also set up a $73 million technical assistance fund to focus on creating a pipeline of bankable PPP projects to support the ADB program of scaling up its operations by 50 percent from $14 billion in 2014 to more than $20 billion in 2020, with 70 percent of this amount for government and private infrastructure investment.

Yet more encouraging is that the ADB also has embarked on cofinancing programs with the World Bank and China-led Asian Infrastructure Investment Bank (AIIB) ) despite previous concern that the Japanese government, one of the ADB’s largest shareholders, was lukewarm to the establishment of the AIIB.

Multilateral development banks like the ADB and the World Bank have been effective in building good infrastructure because they combine finance with expertise and knowledge, drawing on their experience across countries. In addition to bringing advanced technologies to projects, the ADB has helped strengthen government capacity in planning and implementing infrastructure projects. 

During the conference last week the ADB also announced another initiative to improve and monitor the business environment for PPPs and to strengthen the bankability and implementation of PPP projects at the ADB Board of Governors meeting, which ended on Sunday.

The initiative was the Infrastructure Referee Program (IRP) whereby the ADB will provide independent third-party advice through qualified consultants to help public and private parties to resolve disagreements that may arise over the life of a PPP project.

Riyuichi Kaga, head of the ADB’s PPP Office, said disagreements between public and private parties over risk allocation could arise during tendering, negotiation, construction or operation, potentially triggering protracted delays and increased costs.

An enabling environment that delivers well-prepared, viable proposals for private investment is critical for PPP projects. However, to meet their potential, they need to be structured within a regulatory and institutional environment conducive to private investment.

Read full post »

Commentary: EU moves to wipe out palm oil from the European economy

• Vincent Lingga

  The Jakarta Post

Jakarta | Wed, April 12 2017 | 12:09 am

The European Union has since 2013 been slapping anti-dumping countervailing duties on Indonesian exports of palm oil-based biodiesel, despite a lower EU court ruling last year that annulled the duties. 

Then early last week, the European Parliament voted overwhelmingly to totally ban biofuels made from palm oil by 2020 to prevent the EU target of sourcing 10 percent of its transport fuels from renewables from inadvertently contributing to deforestation.

While the motion is not yet legally binding, EU lawmakers are now drawing up amendments to EU legislation that would be legally enforceable if approved by the European Commission.

We see this move and its objective simply as an illusion. Certainly, the EU cannot take a farm commodity out of its economy and think that would solve its problems. The political move would instead only damage EU ties with Indonesia and Malaysia, which together supply more than 80 percent of the world’s palm oil, and many other smaller producing countries in Africa and Latin America.

Yet more worrisome, the palm oil issue could become a perpetual thorn in the side of Indonesia-EU relations at a time when they are negotiating a comprehensive economic partnership agreement.

The EU Parliament’s motion seems to have been prompted mostly by the strong lobbying of the EU vegetable oil (soybean, rapeseed and sunflower) industry, which naturally would never be able to compete with palm oil. 

Palm oil, which now accounts for almost 50 percent of global vegetable oil consumption, has increasingly been leading the market as its yield per hectare is estimated by agronomists at nine times as high as soybean, five times as high as rapeseed and eight times as high as sunflower.

Palm oil is now the most widely used vegetable oil in the world. It is almost impossible for most consumers to go a day without using or eating something that contains palm oil. Some analysts in Europe have even predicted that palm oil will steadily grow to be a US$88 billion industry by 2022.

Palm oil has been developing as one of the biggest non-oil exports from Indonesia and a very important part of the economy, as 40 percent of the estimated 11 million ha of oil palm estates are owned by smallholders. Indonesia exported around 26 million tons last year, or almost half of the global palm oil trade.

In fact, data submitted to the EU Parliament showed that palm oil lately accounted for two-fifths of all global trade in vegetable oils, and the EU is the second largest consumer, with annual imports of 7 million tons. Almost half of these imports are used to make biofuels.

True, in the first decade after the beginning of the palm oil boom in Indonesia in the mid-1990s, oil palm estate development had caused deforestation and sometimes community 
conflicts.

But due to strong pressure from international consumers with the full support of green NGOs and the increasing awareness on the part of the government of climate change impacts, the industry has been subjected to much tougher rules designed to make the commodity sustainable economically, socially and environmentally. 

Palm oil producers are now overseen and ruled under the sustainability standards of the Indonesian Sustainable Palm Oil (ISPO) program, which is legally compulsory; and the international multi-stakeholder Roundtable on Sustainable Palm Oil (RSPO), a market-driven certification scheme. 

A nationwide sustainability certification program has been implemented since the early 2000s under RSPO and ISPO principles and criteria by accredited certifying bodies supported by independent social and environmental auditors. In fact, oil palm cultivation is arguably the most transparent industry now, as its farm practices are periodically examined by auditors and constantly scrutinized by 
green NGOs.

Chain Reaction Research (CRR), which is partly funded by the Norwegian Agency for Development Cooperation (Norad), concluded after a study last year of the 10 biggest oil companies listed in the Indonesia Stock Exchange (IDX) that major palm oil growers have increasingly found that what is bad for the environment is also bad for business.

The financial risk of losing buyers committed to sustainable supply chains has helped motivate four of the biggest planters to mend their ways, according CRR, which conducts sustainability risk assessment for financial analysts and investors in environmentally intensive commodities, especially palm oil, and pulp 
and paper.

The survey shows the No Deforestation, No Peat, No Excessive Exploitation (NDPE) policies do have an effect on suppliers to strengthen their sustainability policies and practices.

Despite the progress, green NGOs have constantly attacked the sustainability campaign, either motivated by real concern about environmental damage or influenced by lobbyists funded by EU and United States vegetable oil producers who are afraid of the palm oil competitive advantage. 

Certainly, the achievement of the sustainability campaign is still short of expectations as the program is an ongoing development process, especially as the industry also involves millions of smallholders with complex poverty problems. The problem has been made more complex by the huge gap in land titling in the country.

But a blanket ban, as the EU Parliament recommended, is destructive, only reflecting a stance of bad faith that tends to see a glass-half-empty situation instead of half full.

A constructive engagement modeled on the scheme EU and Indonesia have established under the EU Forest Law Enforcement, Governance and Trade (FLEGT) is much more productive for the global economy. This program audits the entire supply chain in Indonesia, up from the source of timber to downstream processing until the point of exports to ensure social and environmental sustainability.

Read full post »

Commentary: Still waiting for long-delayed reform of logistics services

• Vincent Lingga, The Jakarta Post

Jakarta | Thu, April 6 2017 | 12:19 am

A raid by the police at the East Kalimantan port of Samarinda on March 17 uncovered massive rent-seeking practices and confiscated Rp 6.1 billion (US$450,000), believed to be illegal fees collected by stevedores from coal mining companies. 

A preliminary investigation found that most coal companies had been extorted by stevedores organized under the Komura cooperative. Some firms even claimed having to pay up to $220,000 in monthly illegal fees, otherwise their coal exports were not loaded. Police also found that stevedores charged up to Rp 180,000 per 20-foot container and Rp 350,000 per 40-foot container, more than 15 times the fees charged at other major seaports. 

The massive illegal levies are only a small part of the labyrinth of seaport handling in Indonesia, which has made our logistics costs the highest in Southeast Asia. 

But as the world’s largest archipelagic country with over 14,000 islands, ports as the key part of sea transportation play a vital role within the logistics system. 

There are two main constraints in the system. One is the lack of physical infrastructure and the crumbling of a lot of existing infrastructure. This problem is being solved through the development of infrastructure, such as ports, airports and roads, which has been accelerated since 2015.

The second constraint, inefficiency caused by regulatory and bureaucratic barriers and corruption, is supposed to be the main target of the 15th reform package. 

It is now almost four months since chief economics minister Darmin Nasution pronounced that “the 15th reform package, which will focus on the logistics system, will be issued within a few days.” Yet the launch date remains uncertain.

The long delay only shows the complexity of the tangled regulatory and bureaucratic web affecting the logistics system. The port-handling process alone involves more than a dozen institutions and service providers apart from land transportation.

The utter inefficiency in port handling and sea transportation in Indonesia has often been exposed by studies by national and foreign institutions. But even incremental improvement seems difficult.

After a few months in office President Joko “Jokowi” Widodo set up in early 2015 a special task force in charge of expediting dwell times — the total time spent releasing containers from the port after a vessel berths — at major seaports to two to three days from as long as one week.

But after two years, the dwell time even at Tanjung Priok, Indonesia’s largest port that handles almost 70 percent of the country’s imports, remains one of the most inefficient in the ASEAN region.

No wonder a 2016 World Bank report cynically noted: “It is cheaper to ship a container from Shanghai, China, to Jakarta than from Jakarta to the West Sumatra capital of Padang, though Shanghai and Jakarta are six times farther apart than Jakarta and Padang.” 

Inefficient port handling and sea transportation hinder connectivity between the islands, preventing least developed regions from linking to growth centers on other islands. Poor sea freight logistics makes it very difficult to connect resource-rich regions on the outer islands such as Sulawesi, Kalimantan, Papua, Maluku and Nusa Tenggara to the more developed Java and Sumatra.

This connectivity problem has been among the main barriers to the development of manufacture on the sparsely-populated outer islands, because manufactured products have to be transported either to the most-populated islands of Java and Sumatra or be exported.

However, poor sea transportation makes the supply chains extremely fragmented and prevents manufacturing companies from integrating into global value chains.

The 2016 World Bank study concludes that manufacturers estimate logistics costs account for 20 percent of their sales, comprising 40 percent for transportation and cargo handling, 17 percent each for administration and warehousing and 26 percent for inventories, also the highest in Southeast Asia. 

The high inventory costs reflect the uncertainty in supply chains, as many industrial companies often simply don’t know when their inputs or parts will arrive due to uncertainty in port handling, bureaucratic paperwork and inefficient road transportation. 

A 2013 study by the Bandung Institute of Technology and the Association of Indonesian Logistics concluded that transportation accounted for almost 50 percent of logistics costs. This study also blamed price differences between regions on poor connectivity, as unreliable supply chains prevent traders and local producers from responding timely to price changes. 

Logistics services also suffer from an extremely fragmented regulatory and licensing system as too many institutions issue and implement too many regulations.

“We operate in a highly fragmented regulatory environment, as each service component of the logistics system requires permits from different institutions and is subject to different laws and regulations,” says H. Syarifuddin, the executive director of the Association of Courier, Postal and Logistics Service Providers (Asperindo).

For example, trucking, freight forwarding and warehousing need to be registered with different government agencies, thereby preventing the integration of supply chain services. This fragmentation means laws and regulations are developed separately by each ministry. Worse, the logistics sector also is subject to the different regulations of local administrations.

This is quite inimical to enhancing efficiency, because as a growing sector, the logistics services industry is constantly evolving to meet new demands that need a more integrated approach that ensures efficiency throughout the supply chain.

In today’s increasingly complex logistical industry and particularly in Indonesia, a comprehensive solution to managing multiple aspects of a business is urgently needed. Under such a framework, companies, instead of organizing supply chains with multiple service providers, would only need to deal with a single business entity that manages the entire supply chain.

Read full post »

ID mega corruption reveals weak anti-money laundering system

The Jakarta Post,14 Mar 2017, Vincent Lingga

Has anyone seen our financial intelligence agency? The whereabouts of the Financial Transaction Report and Analysis Centre (PPATK) is a big question prompted by the fact that the Corruption Eradication Commission (KPK) took about three years and questioned almost 300 witnesses to build a case on the suspected Rp 2.3 trillion (US$170 million) corruption within the Rp 5.9 trillion electronic identification card (e-ID) project.

 

Yet the KPK has so far indicted only two defendants.

 

How could such a huge amount of money — the Rp 2.3 trillion that was allegedly stolen from the project — be moved around between 2011 and 2012 without being detected by the PPATK through its anti-money laundering radar, which is supposed to monitor suspicious transactions in all financial services companies?

 

The fact that the KPK questioned almost 300 witnesses but was able to compile indictments against only two defendants out of about 50 politicians, senior officials and institutions implicated in the country’s biggest corruption case shows that it is extremely difficult to trace the illicit money.

 

This means the alleged stolen money was distributed in cash, using United States dollars or rupiah. Further down the line this boils down to a miserable failure of the anti-money laundering system that was launched in 2002 under a special law.

 

The PPATK, as the politically independent implementing agency of the Money Laundering Law, monitors suspicious transactions through banks and other financial institutions in fighting money laundering. Other providers of goods and services such as property developers, timber companies, car dealers and jewelry stores have also been required to report to the PPATK any big cash transactions (more than Rp 500 million) and other financial deals that are beyond their customers’ profiles.

 

The PPATK, which has many police officers, lawyers and financial experts among its staff, analyzes and examines the reports to ascertain as to whether a suspicious transaction smacks of money laundering. Only transactions with strong evidence of money laundering are submitted to law enforcers for further investigation and prosecution.

 

Likewise, the central bank has issued a “know-your-customer” code for all financial services companies, requiring them to report any suspicious transactions or cash transactions worth Rp 500 million or more. Suspicious transactions mean financial transactions that do not fit the income, business or economic profile of the parties involved.

 

The e-ID corruption case also points to the weak enforcement of the Money Laundering Law. Many local financial services companies and other providers of goods and services seem inconsistent in implementing the “knowyour-customer” code, afraid that reporting suspicious transactions could cost them big customers.

 

Seen from the big sums of dollars used in suspicious transactions, the central bank’s supervision of money changers also seems to be lacking.

 

As the KPK has increasingly caught corruption suspects redhanded with lots of rupiah or dollars, there has been mounting demand for amendments to the Money Laundering Law to strengthen the PPATK, and for reducing the minimum cash transactions for compulsory reporting to only Rp 100 million.

 

In fact, the global fight against big cash transactions and money laundering has continued unabated as cash transactions have been used by criminals and others engaged in illicit and corrupt activities.

 

Indian Prime Minister Narendra Modi in November ordered the withdrawal of 500 and 1,000 rupee notes from circulation. The European Central Bank announced in May last year that it was cracking down on high-denomination notes by gradually phasing out the €500 bill.

 

High-denomination notes or big cash transactions are indeed key to the illicit economy, given the anonymity and lack of transaction documents involved and the relative ease with which they can be transferred (laundered) and stored.

 

As Harvard economist Kenneth Rogoff asserts in his book, The Curse of Cash, cash facilitates crime, tax and regulatory evasion and other forms of corruption. Paper money fuels corruption, terrorism, tax evasion and illegal immigration.

 

Indeed with the growth of debit cards, electronic transfers and mobile payments, the use of cash has long declined in the legal economy, especially for medium and large transactions. A central bank survey shows that only a small percentage of large denomination notes are being held and used by ordinary people or businesses.

 

Obviously, cash will remain important for small, daily transactions. The issue is more about a balancing act between fighting crime and the need for governments to keep in place a monetary instrument that provides their citizens with a way to conduct payments in relative privacy.

 

The PPATK also needs to be more aggressive in teaming up with the Directorate General of Taxation to follow up on the PPATK reports on financial transactions and audit the annual tax returns of individuals or companies implicated in suspicious transactions.

 

Cross-checking money flow to the bank accounts of those implicated in suspicious financial transactions against what they reported in their annual tax returns would be effective in discovering tax evasion and other tax crimes.

 

The rationale is that even though the police or Attorney General’s Office are not able to discover any predicate crimes related to suspicious financial transactions, PPATK reports could still lead to the discovery of tax evasion and consequently generate additional revenue for the state.

Read full post »

COMMENTARY: Freeport's threat of arbitration simply a ploy to block mining reform

Vincent Lingga
The Jakarta Post

"PT Freeport Indonesia [FI] reserves of all its rights [...] including the right to commence arbitration to enforce all provisions of the contract," Freeport-McMoRan's CEO Richard C. Adkerson asserted on Monday, referring to a protracted dispute with the Indonesian government.

That threat is quite similar to those made by many other multinational companies (MNCs), which fear decreases in their huge profits following reforms by their host governments.

Until around eight years ago international arbitration within the investor-state-dispute settlement (ISDS) mechanism had become a powerful weapon exploited by MNCs to circumvent national regulations and bully governments, notably in developing countries, to postpone or annul any reform or to silence environmental NGOs.

At the time of its launch several decades ago, ISDS was indeed vital to encourage foreign investment into developing countries where legal systems were still weak and where many governments were corrupt. It was a forum designed to resolve conflicts between investors and host governments.

ISDS has therefore been written into bilateral investment and trade agreements or treaties. One of the most popular arbitration tribunals is the Washingtonbased International Center for Settlement of Investment Disputes (ICSID), a unit of the World Bank.

The ISDS mechanism allows foreign investors to bypass local courts and seek compensation in international tribunals such as the ICSID, for what they claim to be damages caused by expropriation or policy or contractual changes by host governments.

The problem is that within the ISDS scheme only investors or companies can bring lawsuits. A government may defend itself but it cannot sue a company. The mere threat of an ISDS claim by big MNCs can alarm host governments, especially those with bad international reputations, to act in favor of the investor.

An 18-month study in 2014 and 2015 by the BuzzFeed News online platform on arbitration cases within the ISDS system in Indonesia, India, Africa, Central America and the United States, involving the inspection of tens of thousands of pages of legal documents, revealed how big corporations have turned the threat of ISDS legal action into a fearsome weapon to enable them to have their demands met by host governments in developing countries.

Under the ISDS scheme there seemed no longer a balance between protection of investors and the right of governments to regulate.

It was as striking for its power as for its secrecy, with its proceedings. Of all the ways in which ISDS is used, the most deeply hidden are the threats, uttered in private meetings or ominous letters that invoke those courts, the BuzzFeed study concluded.

The threats are so powerful they often eliminate the need to actually bring a lawsuit. Just the knowledge that it could happen is enough.

Arbitrators who decide the cases are often drawn from the ranks of the same highly paid corporate lawyers who argue ISDS cases. These arbitrators have broad authority to interpret the rules however they want. And there is no meaningful appeal.

Especially for Indonesia, which still grapples with many mining contracts awarded under the authoritarian Soeharto administration (1967-1998), the mere threat of an ISDS claim could trigger alarm.

Indonesia suffered the pang of an international arbitration in 2000 when the government, groaning under the economic crisis, canceled a geothermal power plant contract with Karaha Bodas, a local subsidiary of two US companies, in West Java.

But Karaha went to an international arbitration tribunal, which in December 2000, awarded it US$261 million, even though the company had not yet ploughed even half that amount into the project. In other words, Indonesia owed a quarter-billion dollars to a private company for electricity it would never receive, from a power plant that had not been built.

Formerly, the dominant view in ISDS circles was simply "the sanctity of a contract must be honored" as long as it was concluded with a legitimate government, however immoral, incompetent or corrupt the leader who signed the contract.

However the perception within international arbitration tribunals now no longer sees a corporate contract as being absolute but a balance between corporate rights and fairness, and, especially, overall economic benefits. When circumstances change after a contract was signed that make it impractical, or uneconomic or inefficient, to comply with contractual obligations, courts may relieve a party of its commitments.

The prevailing opinion now even tends to excuse parties, especially governments in developing countries, from fulfilling contracts if they were entered under compulsion (duress) or corruption or if one party is not competent and the terms of investment arrangements seem imbalanced.

Even the United Nations Conference on Trade and Development (UNCTAD) has criticized the ISDS regime as already going far beyond its original intention, as the system now suffers from a lack of coherence, consistency and predictability.

No wonder many governments in Asia, including Indonesia, Australia, Africa, Europe and Latin America, have decided to remove ISDS provisions from their investment or trade agreements because of the tendency of its mechanism to favor large foreign investors over national governments. Even within the ICSID there has been an increasing trend not to see corporate contracts as being absolute.

Last December an ICSID tribunal decided in favor of the Indonesian government in its dispute with mining firm Churchill, rejecting the British company's claim over $1 billion in damages, after what the latter alleged to be the expropriation of its rights over huge coal reserves in East Kalimantan.

Read full post »

COMMENTARY: Economic fundamentals key in coping with unexpected

Vincent Lingga
The Jakarta Post

United States president-elect Donald Trump will be inaugurated later this week, and more than 2,000 economists, businesspeople, financial leaders, senior executives of multilateral development banks and policymakers who gathered here Monday and Tuesday at the 10th Asian Financial Forum (AFF) waited for his policy statements with trepidation.

The consensus prediction so far portends a stormy cloud ahead for the global economy as Trump during his election campaign championed trade protectionism, which could deal a heavy blow to emerging economies.

His threat of a trade war between the US, the world's largest economy, and China, the second largest, seems unthinkable, but is roiling international markets.

The International Monetary Fund's latest global economic outlook report, which was issued on Tuesday, also cited uncertainty surrounding the policy stance of the incoming US administration and its global ramifications as the biggest caveat of its macroeconomic prediction.

"We expect the unexpected and prepare for the unexpected," asserted Raghuram Rajan, former governor of the Indian central bank and one of the keynote speakers at the AFF, in referring to the mounting wave of public and political skepticism in developed countries toward free trade and other aspects of globalization.

Earlier last year, the United Kingdom's vote to exit the European Union, or Brexit, had raised great concerns that anti-globalization sentiment was on the rise in developed economies.

But after the Brexit vote last June and Trump election last November, many things previously unthinkable now seem possible.

Rajan, who was chief economist of the IMF from 2003 to 2006, pointed to the fear and anger among the middle class in developed countries, who lost jobs as a result of technological change, free trade and globalization.

The mainstream attitude of economists and businesspeople from Asia, the Middle East and Europe and Russia attending the conference still strongly believe in the merits of free trade for productivity and economic welfare, both in developed and emerging economies.

Hence, the consensus is that barriers to trade and international capital's movement should be reduced.

While it was recognized that there could be losers from free trade in developed economies, these losers were assumed to be few and temporary, compared to the gainers. But the political upheavals of last year forced economists to reconsider what is now called "populism".

Populism seems to appeal to the group in society left behind by the economic development. Older and low-skilled workers, especially those in rural areas, have seen their relative incomes fall.

"Technological change has caused technological unemployment" Rajan said in describing the losers of globalization.

Mohamed El-Erian, the chairman of President Obama's Global Development Council, another keynote speaker, noted "you can, to a certain extent, tolerate inequality in income but inequality of opportunity could cause anger [and lead to] social conflict".

It is now increasingly recognized that the gains from globalization can only be defended and sustained if the losers are compensated by the winners. Otherwise, the political opposition to the process of globalization will embolden, Rajan has warned.

The main gainers from globalization have been unskilled labor in the emerging world, and those at the upper end of the income bracket in developed economies. The main losers have been manufacturing workers in the developed world.

Trump's widely-publicized fiscal pump-priming on infrastructure and slashing corporate tax rate may harm Asian currencies as they weaken against the inflated US dollar.

This, combined with Brexit, generated the second headwind of political uncertainty, which may spill into upcoming elections this year in France, Germany and Italy. Further worrying emerging countries, especially Indonesia, is the prospect of higher interest rates in the US, which would generate a higher pace of capital inflows.

While Indonesia's overall debt level is relatively low for Asia, it is still vulnerable to sudden capital inflows as foreign investors hold about 40 percent of the government's rupiah bonds and nearly 90 percent of US dollar bonds.

Then with increasing uncertainty and risk factors for investment and growth in the short and medium term, how can governments in emerging countries prevent disruptive capital outflows?

Tightening monetary policy to increase the interest rate differential in order to generate higher returns for foreign portfolio investors, while attractive, could cause a big drag on economic growth.

The consensus policy recommendation among central bankers and financial regulators is simply "back to basics", meaning enhancing inclusive growth, continuing the structural reform to strengthen the economic fundamentals by maintaining low fiscal and current account deficits, low and stable inflation, manageable foreign debt, strengthening the banking sector and building up sizeable foreign reserves.

IMF's deputy managing director, Tao Zhang, concurred that strengthening economic resilience is the first line of defense against uncertainty and the downside risk of financial market volatility. By focusing on building resilience, Asia can also benefit most from the vast investment and trade opportunities opening up within the region (intra-Asia trade).

Stephen Gross, the Asian Development Bank's vice president for East Asia, Southeast and the Pacific, cited Indonesia as an example that succeeded in curbing capital outflows after the Fed taper tantrum in May 2013 (reducing stimulus) by taking a painful move of slowing down economic growth (stops overheating) to check its current account deficit.

Read full post »

Rising US interest rate, protectionism loom over global economy

Manufacturing hope: Bank Indonesia's (BI) senior deputy governor Mirza Adityaswara (third right) serves as one of the speakers alongside six central bankers and financial regulators in a session held on the first day of the 10th Asian Financial Forum on Monday in Hong Kong. The event will run until Tuesday. (Courtesy of the Hong Kong Trade Development Council)

Political and economic uncertainty was the most common theme expressed on Monday during the first four sessions of the Asian Financial Forum in Hong Kong.

The views come as the world faces a rising tide of populism, nationalism, antiglobalization and a backlash on free international trade, and the impact of Britain's exit from the European Union.

Even though renowned economists, central bankers, financial and business leaders from Asia, Europe, Russia and the Middle East gathered at the event believed that populists such as United States president-elect Donald Trump may not really mean what they say, most of the 2,000 participants at the two-day forum still seemed to be looking forward with a sense of trepidation.

Opinion polls conducted during a policy dialogue session also expressed pessimism on global economic prospects and cited the upcoming policy directions under Trump and steep rise in the US interest rate as the biggest risks to emerging economies.

"But the developments so far showed that Trump's antifree trade attitude had become less extreme. Instead his policy pronouncements on tax reform and deregulation are quite progrowth," noted Mohamed El-Erian, chairman of US President Obama's Global Development Council.

Asserting the vital importance of jobs, El-Erian said: "You can, to a certain extent, tolerate income inequality, but inequality of opportunity could cause anger and social conflict."

El-Erian said the US Federal Reserve's plan to raise its benchmark interest rate this year would attract more capital inflows to the US. But the downside risk is that if the dollar appreciates much faster than the economic fundamentals can support, thereby making American exports less competitive, protectionist sentiment may rise again.

The Fed said last month after nudging up its federal fund rate by a quarter of a percentage point to between 0.50 and 0.75 percent that it would again raise its benchmark short-term interest rate more quickly than previously projected amid signs of low unemployment and a pickup in economic rowth.

The market's consensus expectation is that the rate will be raised this year by 0.75 percentage points in three quarter moves to a range of 1.25 to 1.50 percent.

Jointly organized by the Government of The Hong Kong Special Administrative Region and Hong Kong Trade Development Council, the conference, which ends on Tuesday, addresses some of the downside risks that can affect economies and the corporate world, while offering guidelines on how to make the best of opportunities and move forward with optimism.

Bank Indonesia senior deputy governor Mirza Adityaswara told the forum that Indonesia was now financially much stronger and able to face uncertainty as its economic fundamentals had significantly strengthened as a result of the overall reforms made soon after the 1998 economic crisis.

"Our banking sector is fairly strong with an average CAR [capital adequacy ratio] of 22 percent, current account deficit at less than three percent of GDP [gross domestic product] and total foreign debts of the private sector and government at less than 35 percent of GDP," Mirza added.

Another positive sign, Mirza said, was that commodity prices were estimated to be more robust this year, thereby strengthening private consumption, while 15 economic reform packages launched over the past year would help reinvigorate private investment to generate economic growth of 5 to 5.4 percent.

Read full post »

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read full post »

View Point: Concept of subsidies for renewable energy misunderstood

• Vincent Lingga
  

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read full post »

Promotion of green building concept needs firm regulations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read full post »

Mahakam oil and gas block a litmus test for Pertamina

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The writer is senior editor at The Jakarta Post.

Read full post »

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read full post »