Indonesia, Japan agreement a boon for our economy

Wednesday, August 21, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Japan will cut to zero import tariffs on almost 90 percent of Indonesian export commodities under the Economic Partnership Agreement (EPA) that President Susilo Bambang Yudhoyono and Prime Minister Shinzo Abe are scheduled to sign today (Monday).

What a great concession for improving Indonesia's access to the Japanese market.
But the sweeping, deep import tariff cuts -- however crucial they are for expanding Indonesia's share of the Japanese market -- are not the most important program under the EPA.

It is instead the technical cooperation in institutional-capacity building in the private and public sectors that is most strategically vital for Indonesia. Without adequate institutional capacity to meet Japan's quality standards for services and goods, Indonesia will simply be unable to tap the wider trade opportunities to be generated under the EPA framework.

Japan will give technical assistance, through a manufacturing industry development center, to Indonesian manufacturers to meet international quality standards, thereby enabling them to become part of the global supply chain.

Certainly, automobiles and auto parts and components, electrical and electronic goods should be among the categories accorded top priority in the technical cooperation, given their extensive backward and forward linkages and the stage of development they have achieved in Indonesia.

Leading Japanese automakers such as Toyota, Honda, Suzuki and Daihatsu are well positioned to make Indonesia their production bases for some major components designed for the markets of the Association of Southeast Asian Nations (ASEAN).

These production bases can then be linked with their production units in other ASEAN countries such as Thailand, Malaysia or the Philippines through a brand-to-brand complemental scheme.
Similar intercompany linkages and brand-to-brand complemental programs can be implemented with motorcycles, electrical and electronic goods.

Japan will also provide technical assistance to help Indonesian certification agencies as well as companies meet Japanese industrial standards in agricultural, forestry and fisheries products.
Within the sphere of international trade, non-tariff barriers such as quality standards, including safety and hygienic requirements, could become major hurdles to Indonesian exports if companies are not capable of meeting the quality standards imposed by importing countries.

Also greatly beneficial is the technical cooperation in developing Indonesian training systems for healthcare workers, sailors and workers in tourism-related businesses such as hotels and restaurants.

Technical assistance for Indonesian certification of vocational skills and greater opportunities for internships at Japanese companies will help Indonesian workers gain access to the Japanese market.

Obviously, the EPA also includes measures to improve the investment climate and to expedite business licensing procedures, even though these programs are already in various stages of implementation as part of the overall economic reform to woo foreign investment.

The right focus of the EPA will make it effective in deepening and expanding bilateral economic cooperation. Japan has always been important for Indonesia as the source of investment, capital goods, basic industrial inputs and official aid.

Japan absorbs more than 20 percent of Indonesian exports and supplies 13 percent of Indonesian imports, and has been the single largest foreign investor and provider of development aid to Indonesia.

However, the bulk of Indonesian exports to Japan have always been low value added commodities such as oil and gas and other resource-based commodities such as forestry products, minerals and coal.

The institutional capacity building program under the EPA will help Indonesia upgrade its manufacturing industries to produce higher value added goods for export to Japan and other countries.

Indonesia also has always been important for Japan as a major supplier of natural resources such as oil and natural gas and wood, and as the largest country in ASEAN and given its strategic position on the Malacca Strait, Indonesia also is vital for Japan's geopolitical interests.

At the end of the day, though, the EPA is simply a document that still needs to be translated into well-focused concrete programs by the governments and private sectors of both Japan and Indonesia.

Japanese investors are no different from other foreign businesspeople. The EPA will not prompt Japanese investors to put their money into Indonesia unless some basic preconditions are met.
Indonesia must make significant, steady progress in the long-awaited reforms of the tax and customs services, business licensing and labor regulations, and improvements in basic infrastructure.

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KPPU integrity on the line with Indosat case

Wednesday, August 15, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The decision the Business Competition Supervisory Commission (KPPU) will soon make on the Indosat case will determine whether this supposed vanguard of fair market competition will be able to retain what little trust the public still has in its integrity and technical competence.

Already heavily criticized for wasting its valuable resources investigating cases with little merit, with most of its past rulings being thrown out by district courts, the KPPU risks another misstep in its judgment on the allegations that Singapore Temasek Holdings violated Indonesia's anti-monopoly law.

Right from the outset the KPPU seems to have been biased in handling this case. Most analysts expected the KPPU would close the case after making inquiries into complaints filed by the Federation of Trade Unions at state companies last October, especially after the federation itself withdrew its complaint last April for what it claimed to be a complete lack of evidence.

However, the KPPU stepped up its inquiry into a full investigation amid a seemingly endless wave of attacks against Temasek's investment in Indonesia's telecoms industry and a bout of subterfuge by domestic and foreign investors seeking to acquire Indosat's shares.

Temasek has been charged with violating Article 27 of the Anti-Trust Law by dominating the market and engaging in price-fixing, because the Singapore government-owned investment company indirectly holds shares in both PT Telkomsel and PT Indosat, Indonesia's largest and second largest mobile telecommunications operators.

The article in essence says a business actor cannot own majority shares in several similar companies operating in the same field in the same relevant market, if this cross ownership will give it control over 50 percent of the market for a certain type of good or service, or give two or three business actors, or a group of business actors, control over 75 percent of the market for a particular good or service.

Temasek owns 54.15 percent of the SingTel Group, which in turn owns 35 percent of Telkomsel. Temasek also wholly owns ST Telemedia (STT), which controls 75 percent of Asia Mobile Holdings which in turn owns almost 42 percent of Indosat.

According to Pande Radja Silalahi, a former KPPU commissioner, based on the ownership tree Temasek indirectly owns 30.6 percent of Indosat and 18.9 percent of Telkomsel.

This clearly shows that Temasek does not own majority stakes in Indosat or Telkomsel.
On the other hand, the Indonesian government owns 14.30 percent of Indosat, including a golden share which gives it special rights, and indirectly holds (through PT Telkom) nearly 33.30 percent of Telkomsel.

The government also regulates the main components of telecoms tariffs through decrees from the minister of information and communications.

There are also now simply too many players and too many technology choices in the mobile telecom business to allow for a monopoly. If both Indosat and Telkomsel still dominate the market, that is because they enjoyed such a long lead time within the industry.

The question then is how could Temasek have ordered both Indosat and Telkomsel to conspire in price fixing or other cartel-like practices? What about the government representatives who make up the majority of both the boards of directors and commissioners of Indosat and Telkomsel?
Then why has the KPPU not included the Indonesian government as a co-defendant in the price-fixing charges against Indosat and Telkomsel?

These issues only add to the doubts over the motive behind the KPPU investigation of Temasek.
A recent study by a team headed by Pande concluded that viewed from the operating-income perspective, Temasek's market share in the mobile telecommunications industry amounted only to around 20.12 percent in 2006, down from 21.11 percent in 2005 and 21.56 percent in 2004. The government market share in the same period totaled 24.85 percent, 24.20 percent and 23.05 percent.

In terms of gross value added, which includes such variables as employee salaries, Temasek's market share declined steadily to 19.80 percent in 2006 from 21.32 percent in 2005 and 21.84 percent in 2004.

These market share developments raise another question: If Temasek was able to order Indosat and Telkomsel to collude in price-fixing, why did its market share fall.

Why would Temasek or ST Telemedia or the SingTel Group risk their international reputations by engaging in cartel-like practices that instead of expanding, eroded their market share?

Even in terms of the number of customers, Pande said, Temasek, through ST Telemedia and SingTel, controlled only about 19.20 percent of the mobile telecom market.
The objective of the KPPU investigation seems to never have been about pinning guilt, whether real or imagined, on Indosat or Temasek.

Rather, it might have been part of a political and public opinion campaign designed to make the Singapore investors sell their stake in Indonesia's telecoms industry below market prices.

There are certainly many other domestic and foreign investors, among them Russia's Altim, waiting on the sidelines ready to snap up the Indosat stake. After all, mobile telecommunications service is one of the most promising businesses in the world's largest archipelagic country.

Last June, several politicians accused Indosat of making scandalous hedging transactions to evade taxes. These allegations were laughable, given the impeccable corporate integrity of Indosat -- a blue-chip company on the Jakarta Stock Exchange -- and seemed designed solely to smear the company to make Temasek restless.

Both the capital market watchdog and the taxation directorate general stated after examinations that the allegations of tax evasion and fictive derivative transactions were completely groundless.

The senior politicians, themselves seasoned business analysts, should have realized that the damage done to Indosat is not so much a ruined reputation as the uncertainty looming over foreign investors in Indonesia, and doubts about the integrity and technical competence of the KPPU as the watchdog of fair business competition.

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Bank BNI sale reinvigorates privatization program

Thursday, August 02, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The government's decision to push ahead with Bank BNI's secondary offering of 3.95 billion shares despite the global rout that hit Asian stocks last Friday was the right move to reinvigorate the privatization of state companies.

Even though the stocks gained only the lowest end of the target price of Rp 2,050-2,700 a share, the positive response from domestic and foreign investors indicates the bright economic outlook.

Yet more encouraging was that almost half of the shares offered were taken up by foreign investors.

The July 26 steep falls in European and American stock markets, whereby the Dow Jones Industrial Average was down 3.2 percent, and the sell-off in Asian stock markets, including the Jakarta stock exchange on the following day, had initially set in a bearish sentiment on the Jakarta Stock Exchange (JSX). But the rosy economic prospects made the bank shares highly attractive to long-term investors.

Stronger economic growth predicted by most analysts for this year and next (6.2-6.5 percent) helped improved the market sentiment in the BNI share offering after the temporary fall last week because there was a positive correlation between economic expansion and the growth prospects of the banking industry.

The country's economy has indeed been growing robustly, especially since early this year, as consumer confidence has been strengthening and investments began to pick up amid weakening inflationary pressures and a bullish stock market.

For example, PT Astra International, the country's largest automobile group, on Tuesday announced its first half semester performance with a 41 percent increase in net profits built largely on the back of a 156 percent rise in net income from car sales.

Even much more meaningful than the Rp 8.1 trillion (US$885 million) raised by what has been dubbed the single largest stock offering on the JSX, is the greatly positive impact the transaction will generate on the supply side of the capital market, investor sentiment in the general outlook of the economy and the prospects of IPOs by state companies.

Amid the high flow of foreign portfolio capital to Indonesia since last year, investors have been complaining about the lack of new share issues available on the JSX.

A positive investor response to the share offering that reduced the government's stake in Bank BNI, the country's third largest financial service company, from 99.1 percent to 73.3 percent, would be a boon to the upcoming initial public offerings by three other state companies: Toll road operator and developer PT Jasa Marga and construction companies PT Wijaya Karya and PT Adhi Karya.

Minister for State Enterprises Sofyan Djalil rightly decided, immediately after his appointment as the minister for state companies in May, to privatize state firms mostly through the capital market instead of strategic sales, which are vulnerable to the collusion of vested interests.

A public listing on the JSX could be one of the most effective ways of developing good corporate governance at state firms in view of the stringent requirements of financial disclosure and high standards of accountability and audit imposed on publicly-traded companies.

Public listings also will help empower state company managements dealing with vested interests within the government and politicians who want to maintain state firms as their cash cows.

Of the nearly 140 companies that are majority owned by the government only 12 have been listed on the JSX but accounted for about 36 percent of the US$166.3 billion total market capitalization as of June.

Given the bullish market sentiment -- the JSX composite index has risen by 27 percent to almost 2,350, compared to January -- it is indeed the right time now to raise funds through share issues and at the same time increase the depth and breadth of the JSX.

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tale of mistakes piled atop errors

Monday, July 23, 2007 Vincent Lingga, The Jakarta Post

In early July 1997, when the Thai baht crashed and lost more than 50 percent of its value against the dollar immediately after the Bank of Thailand floated the local unit, Indonesia was an innocent, unaffected bystander, its rupiah stable at around Rp 2,500 to the dollar.

However, what was initially perceived simply to be a baht crisis quickly spread to Indonesia, Malaysia, the Philippines and South Korea, stripping bare their economic and political weaknesses and causing Indonesia to suffer the deepest ever plunge in the value of its currency and the most massive wealth destruction any country had seen since the early 1940s.

Foreign portfolio investors and creditors who got burned in Thailand and suffered from asset inflation, misallocated capital and inadequate regulation of the financial services industry reassessed Indonesian economic prospects against the lessons they learned in Thailand.

The Indonesian rupiah came under strong speculative attack immediately after investors and analysts found that Indonesia's economy had shared most of the diseases that led to the financial debacle in Thailand.

Bank Indonesia initially defended the rupiah by direct market intervention, dipping into its foreign reserves and raising interest rates to tighten money supply.

However, as the demand for dollar did not decrease and the attacks on the rupiah became even stronger after the Philippine peso and the Malaysian ringgit were devalued, Bank Indonesia decided to float the rupiah on Aug. 14.

The float did take pressure off the central bank's foreign reserves, but the drastic move left the currency fully exposed to the negative market sentiment, causing panic among most national businesspeople who had been comfortable for decades with the "crawling" peg of the rupiah, with an annual depreciation of 3 to 5 percent.

Within less than two weeks, amid the scramble for dollars by companies that wanted to retire their foreign debts, the rupiah tumbled to Rp 3,000 and the Jakarta stock market lost a staggering 35 percent from its peak in early July.

Hundreds of companies with unhedged foreign debts but with revenues mostly in rupiah were threatened with insolvency. The central bank's tight money policy -- interest rate rose to as high as 30 percent -- to encourage investors to hold the local unit made things even worse as Bank Indonesia was completely in the dark about the magnitude of corporate foreign debts.

As the financial condition of most companies and consequently commercial banks worsened, international banks were unwilling to do business with domestic banks, even refusing to accept letters of credit from most Indonesian banks.

The El Nino impact of a prolonged drought in the second semester of 1997 that damaged food crops and plantation commodities compounded the economic woes, thereby setting off a vicious cycle of pessimism and massive capital flight.

The steady rise in interest rates and the steady weakening of the rupiah also revealed the critical weaknesses of corruption, collusion and nepotism -- in which most business was done.

In early October, as the rupiah had lost more than 30 percent of its value to hover at Rp 3,800, the government invited in the International Monetary Fund. But the US$43 billion rescue package concluded with the IMF at the end of October failed to improve investor confidence.

In a drastic move that the IMF eventually admitted as a grave mistake, the multilateral institution recommended the closing of 16 insolvent banks, including several owned by members of the Soeharto family.

In the absence of any kind of deposit insurance program, the bank closure panicked depositors and prompted massive deposit withdrawals from most other private banks.

Then president Soeharto instructed the central bank, in contravention of its tight money policy, to inject liquidity (emergency liquidity credit) into troubled and cash-trapped banks in a bid to contain the panic. However, bank runs and capital flight continued.

Bank Indonesia reports showed that from October 1997 to January 1998, cash in circulation increased by a staggering 50 percent and the supply of base money (M1) expanded by almost 40 percent.

The two contradictory policies -- massive money expansion and punitively high interest rates at over 60 percent -- further damaged the economy, causing the rupiah to fall even lower and consequently doubling consumer prices.

Bank Indonesia reports showed that around Rp 145 trillion in emergency liquidity credits were injected into private banks between October 1997 and March 1998.

But eventual audits found that only about one-third of that amount was paid to depositors as the bulk of the credit was abused by bankers and bank owners to buy foreign exchange and shift assets overseas, to repay subordinated loans of the majority shareholders and to settle derivative contracts.

Hence, much of the ballooning quantity of the rupiah wound up being sold for dollars on the open market and shifted to Singapore and Hong Kong and other offshore locations by Indonesians desperate to get their money out of the country.

The collapsing rupiah and the bankruptcy of most banks and big business groups began to erode Soeharto's political legitimacy.

As 1997 closed, the rupiah had lost almost 75 percent of its value and the stock exchange 80 percent of its market capitalization as many companies and banks simply went bankrupt, millions of people were thrown out of jobs and the severe drought caused fears of food shortages.

The beleaguered Soeharto defied market sentiment and announced in early January 1998 a new state budget that was seen by the market as grossly unrealistic, causing the rupiah to crash through the Rp 10,000 level.

Panicked people rushed to strip supermarkets and grocery stalls bare of rice, cooking oil, noodles, flour, sugar and biscuits.

Soon after, a high-powered IMF team arrived in Jakarta and, in cooperation with the World Bank, revised its rescue package with bolder and painful reform measures.

However, the market reacted negatively to the IMF-World Bank rescue package of Jan. 15, apparently skeptical that Soeharto would implement all the reform measures.

Soeharto again stunned the nation and the international market on Jan. 20, 1998, when he unveiled then big spender minister of research and technology B. J. Habibie as his surprise choice for vice president for the March 1998-2003 term.

The rupiah fell through the Rp 17,000 point on Jan.23.

Market sentiment was further damaged when Soeharto, fresh from being reappointed to the 1998-2003 term in mid-March, announced a crony Cabinet lineup that included his eldest daughter and notorious businessman Muhammad Bob Hasan.

The president incited massive street protests when on May 5 he went ahead with raising fuel prices by more than 70 percent as part of the reform measures agreed to with the IMF.

Street demonstrations and rioting which started immediately in Medan, North Sumatra, quickly spread to cities in Java and exploded into a bloody incident in Jakarta on May 12, with four students from Trisakti University killed by troops.

This tragedy set off massive rioting and looting in Jakarta on May 14 and 15 and eventually led to the fall of Soeharto on May 21, 1998.

The Indonesian crisis is thus a tale of mistakes piled atop mistakes, misjudgments by the IMF and the Indonesian government, and bureaucratic wrangling between the IMF and the World Bank.

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Reaffirming the ten commandments for businesses

Monday, July 09, 2007 Vincent Lingga, The Jakarta Post, Geneva

Business leaders from developing and developed countries have reaffirmed their strong commitments to conducting responsible business practices based on the UN Global Compact's ten principles in human rights, labor, environment and anti-corruption.

The leaders stated in a declaration at the end of the Global Compact Leaders Summit here Friday, that only through responsible business practices can a more sustainable and inclusive global economy be realized.

The ten principles, which have been promoted by the UN Global Compact initiative since 2000, are in essence the core values of what is now well-known as the "corporate social responsibility" (CSR) concept.

But the basic question is: Are the codes of conduct worth more than the paper they are written on? Will voluntary initiatives such as the Global Compact lead to the types of changes needed to contribute to a cleaner environment, better working conditions, more humanitarian development and the curbing of corruption?

This was one of the toughest questions raised during the summit by the representatives of civil society organizations and business leaders who questioned the reputation of several companies attending the meeting.

However, the Global Compact is not a regulatory instrument. There is no enforcement mechanism beyond public scrutiny and the requirement for participants to report annually on progress in meeting commitments to the ten principles.

Rather, the Global Compact relies on public accountability, transparency and the enlightened self-interest of companies, labor and civil society to initiate and share substantive action in pursuing the ten principles.

Some stakeholders are skeptical.

Whatever goals a company pledges to reach, or standards to obey, such as fair working conditions and the protection of human rights, there must be a specific, practical application. Without this, codes will set only the overall ground rules for corporate conduct.

Critics attack the notion that voluntary codes can serve as a method of corporate accountability because corporations can simply use their participation as a substitute for real progress, distracting the public from the continuing violation of human rights, labor rights or environmental standards.

UN Secretary General Ban Ki-Moon, who opened the summit, acknowledged these weaknesses, stressing that companies which fail to meet their commitments within two years will be delisted from the UN Global Compact.

In fact, according to Global Compact Executive Director Georg Kell, 335 companies were delisted from the network last year for failing to report significant progress in implementing the ten principles.

Business executives, however, who have been observing the impact of the CSR campaign as the concerted effort, have kept a spotlight on undesirable practices. At various times, companies have stopped doing business with overseas contractors who disregarded standards.

Often companies lead the way to improvement. For example, a decision by Reebok not to sell soccer balls made through child labor practices was swiftly followed by similar commitments from other companies. This happened despite the (short-term) costs such commitments entailed.

"Our foreign buyers have always scrutinized our operations to ascertain whether our pulp and paper are derived from sustainable plantations," said A. J. Devanesan, president of Asia Pacific Resources International Holdings (APRIL), which operates a two-million ton capacity pulp industry in Riau.

In fact, pulp which is certified as sourced from sustainable managed forests or plantations commands higher prices than uncertified product, added Devanesan, who attended the summit meeting.

The summit urged the Global Compact's 4,000 members to encourage their supply-chain partners and other organizations they do business with to integrate the core values of human rights, environment, labor and anti-corruption into their operations.

Good corporate practices bring commercial benefits too. They help firms achieve a variety of goals: Protect their corporate reputation, improve employee morale, enhance consumer and client loyalty, and avoid costly criminal and civil proceedings.

Even mainstream investors are now paying more attention.

Recent studies by McKinsey & Company consultants conclude that while the capital markets have not yet mainstreamed environmental, social and good governance norms, there have been many investor initiatives which encourage socially responsible, ethically right and environmentally friendly investment.

The consulting company estimated there are now more than US$8 trillion investment funds managed by firms which factor environmental, social and governance issues into their investment analyses and decision-making processes.

So, while some stakeholders feel many companies just pay lip service to standards, these codes do in fact have bite. Companies who do not practice what they pledge risk adverse publicity and customer loss, even black-listing.

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Biz leaders commit to sustainable development

Friday, July 06, 2007 Vincent Lingga, The Jakarta Post, Geneva

The overarching message of the Global Compact business leaders summit here is loud and clear: It is no longer sufficient for companies to make profits and comply with the laws if they are really serious about sustainable development in the long term.

The world is now undergoing a period of unprecedented change and it is becoming clear that the current market mechanism and the political system cannot by itself resolve such major issues as climate change, persistent poverty and abuse of human rights.

"For markets to expand in a sustainable way, we must provide those currently excluded with better and more opportunities to improve their livelihoods," United Nations Secretary General Ban-Ki-moon said Thursday when opening the two-summit.

The UN chief called the meeting, which is being attended by more than 800 business leaders and representatives of civil society organizations and academic communities, the largest event the UN has ever convened on the topic of corporate citizenship.

Indeed, the survival and success of companies, notably big multinational groups, depends on the complex global system of three interdependent sub-systems -- the natural environment, the social and political system, and the global economy.

Formed in 2000 in response to major anti-globalization protests at a WTO meeting in Seattle, the Global Compact brings companies together with UN agencies and civil society groups to promote universal human rights, labor, environment and anticorruption principles.

The Global Compact's ten principles cover the areas of human rights, labor, the environment and anticorruption.

The Global Compact, which now has around 4,000 members, asks companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labor standards, the environment, and anticorruption.

"You can be a good company simply by making profits and obeying the law, but you never become a great corporation without strong corporate social responsibility," noted Neville Isdell, chairman of the Coca-Cola Company, at a news conference on the sidelines of the conference.

Rudy Fajar, president of PT Riau Andalan Pulp and Paper (RAPP), who is also attending the conference, concurred, saying that there had been increasing pressures for companies to invest in a way that was socially responsible, ethically right and environment-friendly.

RAPP, which is developing almost 160,000 hectares of pulp plantations in Riau province to support its giant pulp plant with an annual capacity of two million tons, is a unit of the Singapore-registered Asia Pacific Resources International Holdings Ltd. (APRIL).

APRIL joined the Global Compact during the summit meeting, pledging a strong commitment to implementing its ten principles.

The summit is due Friday to issue the Geneva Declaration on the commitment of companies to sustainable development, including stronger cooperation in coping with climate change and corruption, which Huguette Labelle, chair of the Berlin-based Transparency International, called a very serious problem.

"The World Bank estimates that 5 percent of global gross domestic product is lost to corruption. This means a waste of almost S$2.5 trillion a year which could have been used to lift tens of millions of people out of absolute poverty," Labelle noted at a news conference.

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Damaging allegations and Indosat's beating

Friday, June 08, 2007 Vincent Lingga, The Jakarta Post, Jakarta

The logic of sound financial management dictates that a company whose long-term debts and capital expenditures are denominated mostly in U.S. dollars but whose revenues are mostly in rupiah should hedge a good portion of its foreign currency exposure to minimize losses from exchange rate fluctuations.

But what should have otherwise been regarded as simply normal derivative transactions have turned into another wave of utterly bad publicity against PT Indosat and caused negative market sentiment for the country's second largest telecommunications company, with US$3.8 billion in assets and $585 million in foreign debts.

The headline stories of several major newspapers on Tuesday -- the day Indosat held its annual shareholders meeting -- screamed as if "financial scandals" related to hedging transactions had occurred within Indosat between 2004 and 2006, allegedly causing cumulative losses of Rp 653 billion (US$72.5 million).

The front-page stories were based on statements made by Dradjad H.Wibowo, a member of the House of Representatives finance commission, at a working session with the government on Monday.

The meeting was also attended by Finance Minister Sri Mulyani Indrawati, Bank Indonesia senior deputy governor Miranda Goeltom and chairman of the capital market watchdog Fuad Rahmany.

Even though what Wibowo referred to as potentially scandalous hedging transactions had been fully disclosed in Indosat's semester and annual financial statements over the past three years, many reporters still snapped at the statement as completely hot "revelations".

Given his integrity, Wibowo's remarks might have simply been motivated by his great concern for the good of Indosat. He might have simply been exercising his right to scrutinize the company.

After all, the government holds about 14 percent of Indosat, with Singapore's Temasek owning through its subsidiary Singapore Technologies Telemedia almost 42 percent and the investing public the remaining 44 percent.

But in light of the string of bad publicity against Indosat and Temasek over the past few months and the rumors about a conspiracy between national vested interests and a Russian company planning to take over Singapore's shareholding in Indosat, one cannot help but wonder why Wibowo made a big issue out of the derivative transactions only now.

The details of the derivative transactions (cross currency and interest rate swap contracts) have always been fully disclosed in the company's financial statements since 2004, which are audited by a local affiliate of Ernst & Young.

Why did Wibowo not first thoroughly analyze Indosat's annual reports and, if necessary, check the documents of the company's derivative transactions before he blew the matter out of proportion?

Given his position and since Indosat is listed on the Jakarta and New York stock exchanges and is thus subject to tough disclosure requirements and auditing standards, Wibowo could have easily obtained all the necessary information from Indosat's investor relations department to verify the transactions.

Certainly, all officials, including tax director general Darmin Nasution and chief of the capital market watchdog Fuad Rahmany and government representative in the Indosat board of commissioners Roes Aryawijaya, when asked to comment on Wibowo's allegations, said they would look into the issue.

Their replies might have been made simply to appease the inquisitive mass media. But even if they went ahead with special investigations and eventually found nothing legally wrong with the transactions, the damage had been done to Indosat and its management.

On Tuesday, for example, the price of Indosat shares fell almost 3 percent.

The news stories on the alleged derivative transaction "scandal" simply added to the seemingly endless string of bad publicity and public-opinion harassment of Indosat.

The anti-monopoly watchdog (the Business Competition Supervisory Commission or KPPU) is now investigating Indosat for monopoly practices it allegedly committed in collusion with Telkomsel in cellular services.

Temasek owns 56 percent of the SingTel Group, which in turn holds a 35 percent equity stake in the government-controlled Telkomsel, the country's largest mobile phone operator.

Late last month, the University of Indonesia's Institute for Economic and Social Research announced the findings of its study on cellular services in Indonesia, which essentially said that the market mechanism had not optimally functioned in the cellular business.

This industry has been dominated by Telkomsel and Indosat.

Even though the institute asserted that none if its findings had solidly proved any collusion between the two mobile operators, the Post and Telecommunications Directorate General seemed to have joined the fray.

Earlier, in April, political analyst Mochtar Pabottingi came out with a 29-page analysis concluding that Temasek's acquisition of Indosat's shares caused the government billions of dollars in losses and jeopardized the secrecy of the country's defense and security sectors.

What a crowd of investigators Indosat is now dealing with: The anti-monopoly watchdog, the telecommunications regulatory body, the Tax Directorate General, the capital market watchdog and a special audit committee.

Now that all the allegations have been made public, the controversy cannot simply be allowed to die down and quietly disappear by itself from the mass media agenda.

The capital market watchdog should see to it that all investigations now underway on Indosat be conducted properly according to schedules and their conclusions -- whatever the findings may be -- should be immediately announced. Otherwise the devastating allegations will continue to linger on and loom over Indosat, damaging its corporate image, credibility and the trust of the investing public.

Letting the controversy linger on without any final clarification once and for all for those allegations would also erode the public's trust in the integrity of the Jakarta stock exchange, the Indonesian Business Competition Supervisory Commission and even Ernst & Young, one of the world's major accountancy firms.

The investing public would be worried that if all those bad things alleged to have been committed by Indosat did really occur at such a blue-chip company, which is subject to such tough disclosure requirements and auditing standards, what would then be the quality of corporate governance at other listed companies?

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Managing the problems of surging capital inflows

Monday, May 14, 2007 Vincent Lingga, The Jakarta Post, Jakarta

President Susilo Bambang Yudhoyono, Vice President Jusuf Kalla, chief economics minister Boediono and Bank Indonesia Governor Burhanuddin Abdullah asserted Friday the economy is resilient enough to weather any sudden decline in the risk appetite of foreign portfolio investors, as the rupiah fell almost 1.5 percent after a few months of steady appreciation.

Yudhoyono summoned his economics ministers for a special briefing Friday afternoon, Kalla convened a special news conference after Friday's Islamic prayer services and Boediono, Burhanuddin, Finance Minister Sri Mulyani Indrawati and other economics ministers held a breakfast meeting earlier Friday, all to discuss the same issue: the problems of burgeoning capital inflows.

They all played down the risks of sudden reversals of foreign portfolio (hot) capital inflows, citing the country's foreign reserves of US$49.2 billion, strong economic fundamentals, expanding exports, a higher pace of investment and low inflation.

The rupiah gained a lot in recent months on the back of short-term capital inflows into local stocks, bonds and money market instruments, pushing the local unit to a one-year high last Thursday, while the Jakarta Stock Exchange boomed to an all-time high of over 2,000.

So, why the sudden uproar among the top economic policy-makers and economic management team?

It seems to have been set off by Sri Mulyani's statement Thursday, which was headlined by several newspapers Friday. The finance minister, who had just returned from a May 5 meeting of East Asian finance ministers and central bank governors in Kyoto, Japan, said the surge in capital inflows to Asia in recent months was similar to those that caused the financial crisis that started in Thailand in mid-1997.

What Sri Mulyani told the press was, by and large, the concerns of the Kyoto meeting, which consequently adopted a basic agreement to pool almost $3 trillion in foreign reserves to prevent the kind of currency runs that led to the Asian financial crisis a decade ago.

Many seemed to read too deeply into those remarks, apprehensive that the current situation was as vulnerable to speculative attacks on the rupiah as that in mid-1997. Hence, the 1.5 percent decline in the rupiah on Friday.

Many in the government appeared shocked by Sri Mulyani's remarks, criticizing what they saw as an exaggeration of the dangers of capital inflows.

True, the condition of Indonesia's economy and the capacity of the country's state and economic institutions are now much stronger than in 1997, but that does not negate the threat of a sudden change in the sentiment of foreign portfolio investors.

Bank Indonesia, like the central banks in most other Asian countries, has been struggling with the problem of steadily surging short-term capital inflows, wondering what to do with these reserves.

The accumulation of reserves, derived from hot money rather than foreign direct investment, is not an inherent sign of strength, but actually represent deep-seated structural imbalances, which policy makers need to address.

This is the message Sri Mulyani wanted to convey. Under the surging capital inflows and rising foreign trade surplus, Bank Indonesia, in a bid to keep the rupiah rate competitive, must buy up dollars, thereby fueling money supply growth. This loose liquidity is driving up asset prices and potentially stoking inflationary pressures.

As Frederic Neumann, an economist at HSBC bank in Hong Kong, recently observed, "by most yardsticks Asian central banks have long surpassed the levels of reserve holdings deemed sufficient to counter a potential external payments crisis".

Indeed, as Sri Mulyani noted last week, the main macroeconomic risks facing the region, including Indonesia, at present are the consequences of unmanageable balance of payments surpluses, which might spread Asian crisis-style through the region.

What the government is encountering now is excess financial market liquidity, not economic liquidity.

Yet, making Indonesia more vulnerable to currency speculators is that while most of the foreign hot money flowing into other East Asian countries is parked in stocks, the bulk of recent inflows to Indonesia went mostly into fixed income and money market instruments.

The excess liquidity Bank Indonesia is now coping with is tremendously huge. As of last month there was more than Rp 250 trillion ($27.8 billion) of private funds, including Rp 45 trillion of foreign hot money, invested in central bank debt instruments (SBI).

In addition, another Rp 77 billion of foreign money was parked in government bonds and billions more in stocks. This is quite a mountain of ammunition that could immediately be used to attack the rupiah anytime the risk appetite of foreign portfolio investors falls.

The central bank has said it has the leverage to intervene in the market to prevent too much market volatility, pointing out that prudent banking regulations and economic reforms over the past few years would minimize the impact of sudden reversals of capital inflows.

However, such assurances are meaningless unless the real business climate is conducive for attracting new investment, particularly foreign direct investment, allowing for a high rate of bank lending expansion.

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Pressure mounts for Temasek to divest stake in Indosat

Friday, May 11, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Remember Mexico's Cemex, the world's third largest cement group, which sold its 25 percent equity stake in PT Semen Gresik, Indonesia's largest cement company, to local conglomerate Rajawali in mid-2006 when Indonesia's cement market was enjoying robust growth?

Cemex, a financially strong company with operations in almost 50 countries, felt compelled to divest itself of Semen Gresik after suffering through more than five years of smear campaigns, a string of lawsuits and worker demonstrations orchestrated by renegade management at Semen Gresik's units, in collusion with politicians and senior officials.

The whole experience was quite disheartening for Cemex because it acquired, through an international competitive bid, the Semen Gresik shares by paying a premium price of more than 125 percent in October 1998, when Indonesia was still mired in political and economic crisis and shunned by most foreign investors.

A similar campaign seems to have been mounted over the last few months to discredit Singapore's government-owned Temasek, which acquired, through its subsidiary ST Telemedia, 42 percent of PT Indosat, Indonesia's second largest mobile phone operator.

Temasek won that stake through an international competitive bid in late 2002 by paying a premium price of more than 50 percent.

No one is sure who is behind the escalation of the negative information campaign against Temasek, but the bad publicity has increased, especially since October 2006, a few weeks before Russia's Altimo telecommunications investment company opened an office in Jakarta.

Altimo's representative in Jakarta, Soeharto, has repeatedly denied his company would resort to such dirty tactics, but he did confirm Altimo's commitment to investing up to US$2 billion in Indonesia's mobile telephone market.

Last October, the federation of trade unions at Indonesia's state companies lodged a complaint against Temasek with the Business Competition Supervisory Commission, accusing the Singapore company of violating the anti-trust law by dominating the market and engaging in price-fixing practices in collusion with PT Telkomsel.

Temasek also owns 35 percent of state-controlled Telkomsel, the largest mobile phone operator in Indonesia, through its subsidiary Singapore Telecommunications Ltd.

Copies of confidential documents profiling Temasek, its operations and investment strategy overseas, and providing technical briefings on the alleged monopolistic practices by Indosat, were circulated to trade union leaders and several analysts and newspaper editors critical of the Singapore firm.

Several local media ran news stories quoting analysts and politicians denouncing what they called Temasek's control of Indonesia's mobile phone market. In essence, they argued that foreign ownership of such a strategic company as Indosat was a threat to Indonesia's security and defense and the safety of databases.

Political analyst Mochtar Pabottingi came out with a 29-page analysis last month concluding that Temasek's acquisition of Indosat's shares caused the government billions of dollars in losses and jeopardized the country's defense and security sectors.

Pabottingi urged the government to buy back the Indosat shares from Temasek.
However, only one week after the release of his analysis, the country's largest telecom company -- state-controlled PT Telkom -- disclosed that its subsidiary, Telkom International, would team up with Singapore Telecommunication Ltd. (Singtel) to expand operations overseas, notably in data communications in Asia.

Metro TV ran a discussion program with three observers, all critical of Temasek's shareholding in Indosat, on Tuesday evening. Their message was similar to Pabottingi's views.

Curiously though, a counter-campaign suddenly sprang up against Altimo. Copies of documents allegedly linked to Altimo and reprints of Russian Tribuna newspaper stories circulated in Jakarta last month.

They revealed what was alleged to have been a conspiracy involving Indonesian senior officials and politicians, public relations consultants and several senior editors to discredit Temasek and force it to sell its Indosat shares.

Then in early April, in a new twist in favor of Temasek, the federation of unions at state companies withdrew its complaint against Temasek over the alleged monopoly and abuse of market power, due to what federation chairman Arief Poyuono called a lack of legal evidence.
"In addition, we felt that some people had taken advantage of the issue to make Temasek ... uncomfortable and sell its shares," Arief told weekly news magazine Tempo.

The complaint by the trade unions did seem weak, given the wide range of technology available and the number of players in Indonesia's cellular market. Besides Indosat and Telkomsel, there are a number of other mobile and fixed wireless, 3G and CDMA operators, including Telkom, Bakrie Telecom, Excelcomindo, Mobile 8, Lippo Telecom, Mobisel, Primasel, Mandara, Hutchison CP, Bimantara Citra and Batam Bintan Telecom.

And there is still room for more players because Indonesia's cellular phone market, though the fastest growing segment of the telecommunications industry, is still very young. Only about 25 percent of the country's 230 million population have cell phones.

The Business Competition Supervisory Commission, however, should go ahead with an investigation of the federation's allegation of a monopoly and abuse of market dominance to resolve once and for all the controversy.

The smear campaign is not likely to prompt Temasek to follow Cemex's exit from the country, as long as it remains clean with regard to all the allegations used by the "conspirators" as ammunition to attack it. After all, telecommunications is one of the most promising industries in the country.

However, if such public-opinion "harassment" continues, the Singapore company may eventually get tired and call it a day.

Such subterfuge to discredit foreign investors may be deployed again in the future by vested interests conspiring to buy corporate shares below market price. There are still many politicians in the country who tend to exploit nationalist sentiments as a means to advance their hidden agendas.

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Vietnam's economy soars as capital inflow surges

Thursday, May 03, 2007, The Jakarta Post

The Vietnam News Agency and Asia News Network organized an international conference on regionalism and modernization of Vietnam in Ho Chi Minh City on April 23 and 24. Vincent Lingga represented The Jakarta Post, a member of ANN, at the meeting. The following are his reports.

Almost 20 years after abandoning its collectivist economic strategy to implement market-based reforms, Vietnam has become one of the best-performing developing economies in the world with an annual growth of 7 to 8 percent over the past eight years.

Although not a complete picture of success - as it is still a poor country with a per capita income of US$700 - Vietnam has, to some extent, achieved economic development.
Vietnam's economy is on a roll and the outlook is quite promising.

It is amazing to see how a country ravaged by war for decades has been able to catch up so fast. Vietnam has now become one of Asia's most open economies, with two-way trade totaling US$85 billion last year and accounting for more than 60 percent of its economy.

Vietnam is now the world's biggest pepper exporter, second largest rice exporter after Thailand and a leading exporter of coffee, tea and shrimp.

Remarkably, Vietnam's high economic growth has not impacted on income inequality. The poverty rate has decreased from 60 percent in 1990 to around 15 percent. More than 90 percent of rural households now have electricity.

Where did Vietnam go right and where does Indonesia lag?

Foreign analysts, investors, businesspeople and Vietnam's senior officials, who declared Vietnam an economic success story at an international seminar last week, gave credit to consistent reform, strong government leadership and industrious citizens with great entrepreneurial spirit as the key factors.

Strong leadership succeeded in reducing animosity toward the United States, an enemy until the war ended in 1975; the French, the country's former colonialists; and China.

"This is by no means a small achievement, because almost every family has had a relative killed in the war. However, we decided to bury hatred in the past and turn our attention and energy to providing employment and creating prosperity," said Dao Duy Chu, senior economist and former chief executive officer of state-owned PetroVietnam.

Vietnam watches China carefully to learn from its neighbor's mistakes. Duy focussed particularly on income inequality between people in rural and urban areas.

Vietnam has not been suspicious of the Washington-based World Bank and International Monetary Fund, even though many other developing countries consider these an extension of U.S. foreign policy. Vietnam rejoined both institutions in 1993 and has since benefited greatly from intensive policy discussions with seasoned economists and technical assistants.

Even though Vietnam has never been heavily dependent on foreign aid (it accounts for less than 15 percent of public-sector spending), 30 donors are now actively engaged in extensive policy reform under the coordination of the World Bank.

Like many other developing countries, reform in Vietnam initially occurred in a haphazard manner, but as success eventually bred success, confidence rose and encouraged even bolder reforms.

An egalitarian redistribution of farmland early on, coupled with free trade in agricultural products and better agricultural support services at the local level, led to a boom in exports and a dramatic reduction in rural poverty.

"I think reform (doi moi) in Vietnam was successful because it started in the agricultural sector and created a basis for a stronger national market," said Pietro P. Masina, a senior economist from the University of Naples, who has long studied Vietnam's development strategies.

The egalitarian redistribution of land to rural households allowed for a strong recovery of the agriculture sector, which became a safety net for many people when the economic crisis hit East Asia in 1997, Masina said.

Foreign investment grew as domestic entrepreneurial spirit was unleashed. Urban residents moved into paid employment, further reducing the number of rural poor and spurting economic expansion.

Vietnam permitted 7,067 foreign direct-investment projects worth US$63.55 billion between 1988 and March, 2007, according to the ministry of planning and investment.

"In the last five years our National Assembly enacted 84 laws, 60 of which are related to rules of the game in a market-based economy," said Vu Khoan, representing the prime minister.

Included among the new laws are the unified Investment Law, which provides equal status to both domestic and foreign investors, and legislation regarding the securities market, real estate market, credit organizations, science and technology transfer from foreign to domestic companies.

Vietnam avoided the economic crisis of 1997-1998 that devastated other Asian economies, including Indonesia. Vietnam's economic growth rate has exceeded 8 percent in the last two years and the government has increased reforms, now aiming for middle-income country status by 2010.

Vietnam's communist regime has another track record to be proud of. While Indonesia's reform of its state enterprises has been bogged down in narrow-minded nationalist sentiments and vested-interest capitalists, Vietnam has recorded impressive progress in the reform and privatization of state companies.

Figures presented at the seminar showed that state companies have performed reasonably well over the past few years, with more than 75 percent profiting with rates of return on equity (ROA) of 7-8 percent a year. ROA of most state companies in Indonesia, a market economy, was only between 2 and 4 percent over the same period.

Massive privatization halved the number of state firms to around 3,000 over the past five years.

"We will privatize 600 more state companies this year, including those operating in power, post, telecommunications, aviation, maritime, oil and gas, finance, insurance and banking," said Deputy Minister of Planning and Investment Nguyen Bich Dat.

Privatization has created space for the expansion of private firms. As the private sector expands rapidly, both domestic and foreign-invested firms have connected well with global markets.
Private firms now contribute 65 percent of manufactured products and over 70 percent of non-oil exports. Vietnam is progressively becoming an integral link in international production and distribution chains.

Vietnam's geographical location is also a great advantage. Vietnam is strategically located in the Greater Mekong Sub-region (GMS), comprising Cambodia, Laos, Myanmar, Thailand and two provinces of southern China. Vietnam will play a major role as a regional economic hub.

The tremendous growth of tens of thousands of family firms, resulting from a bold government move in 2001 to ease restrictions on small businesses, is quite impressive.

Vietnam's accession to the World Trade Organization (WTO) in January has exposed its agriculture sector and companies to new competition and will accelerate the modernization of the legal system.

Vietnam should be proud of the high-quality, egalitarian growth that has been the key to maintaining social cohesion.

The biggest challenge facing the ruling communists is how to continue delivering jobs, public services and prosperity.

Official statistics show that one million young Vietnamese join the labor force each year and another one million rural people migrate to the cities annually.

"Social cohesion will continue as long as the economy expands steadily with an equitable distribution of income," noted Nguyen Van Tan, chief executive officer of T&T, a service and consulting company.

Moreover, Tan added, the Communist Party will continue to gain respect from the people because it has ruled the Vietnam since 1930 and successfully led its citizens through a succession of wars against foreign colonialists.

But as Vietnam's economy becomes more sophisticated, new challenges emerge and the need arises for better feedback mechanisms from its citizens on the quality of public policy and higher standards of transparency and accountability.

Like China and India, Vietnam has benefited enormously from the return of citizens who had fled the country. Thousands of Vietnamese have returned from overseas after learning English, gaining entrepreneurial experience and acquiring technical skills.

However, as the Vietnamese enjoy more economic freedom and as more of their countrymen and women return, bringing foreign ideas of pluralism and free speech, expectations of political liberty and free expression of opinion will grow.

The Vietnamese government appears to realize the challenges and consequences of this economic development.

"Many issues, such as the inadequate and inconsistent legal system, complex administrative procedures, overlapping departments and ambiguous responsibilities of state institutions and incompetent and corrupt civil servants have yet to be resolved," Khoan said.

A businessman from Europe expressed great concern, particularly over high-level corruption related to big government projects or business deals with state companies but "they are taking serious steps to tackle this problem."

The businessman, who insisted on anonymity, welcomed a government decision to gradually open a mechanism for expressing grievances.

"The government has previously allowed street protest demonstrations, though only a very small number of people joined," he said.

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Wooing investors through industrial parks

Thursday, May 03, 2007, The Jakarta Post

The Vietnamese government has, since the launch of its market-based reform in 1986, tried to woo foreign investment mostly through industrial parks, which in Indonesia are known as industrial estates.

The biggest advantage of such an approach is that industrial zones can be well planned and designed according to the spatial plan of each of the 64 provinces and cities across Vietnam.

But what makes these facilities exceptionally attractive to investors, especially those from overseas, is that a developed industrial park already has all the basic infrastructure in place.

Most helpful is that the licensing authority is centralized in the management board of each

industrial park, thereby making it virtually a one-stop licensing center for an investment venture, except for investment projects in "sensitive sectors" that have to obtain approval from the prime minister.

No wonder many foreign investors, including those from Singapore, Thailand and Taiwan, have been putting money into industrial park development.

It's different to Indonesia, where numerous infrastructure development projects are held up by land acquisition problems. The construction of industrial parks in Vietnam, with sizes ranging from 300 to 1,000 hectares, runs smoothly it is the local administration that is responsible for land acquisition.

Investment projects in industrial parks also are entitled to various forms of tax incentives and import duty relief for capital goods and materials, depending on the categories of industries in which they operate.

With lower minimum wages (US$45-55 a month) but higher productivity and a more expedient business licensing system than Indonesia, Vietnam ranked 98th out of 175 countries surveyed by the World Bank last year in terms of ease of doing business. Indonesia ranked 135th.

There are now more than 135 industrial parks in various stages of development across Vietnam, of which 15 are located around Ho Chi Minh City alone. No wonder this vibrant city accounts for almost 30 percent of FDI flows to Vietnam.

Take for example, the Vietnam-Singapore Industrial Park (VSIP) in Binh Duong province near Ho Chi Minh City, a joint venture between a consortium of five companies from Singapore led by SembCorp Industries and state-owned Becamex IDC Corp.

Less than ten years after its launch in 1996, the 500-hectare industrial park has been completely sold or rented to industrial investors, so that VSIP 2e with 345 ha is being developed to meet the increasing demand from new investors.

"About 300 foreign investors from 22 countries have or are establishing plants in our industrial parks with a total investment of $1.5 billion, generating more than 40,000 jobs," said Huynh Quang Hai, VSIP vice president.

Likewise, the Amata Group from Thailand has been developing a 700-ha industrial park in Bien Hoa in a joint venture with state-owned Sonadezi Bien Hoa. More than 90 investors have leased industrial plots in the park.

"We were attracted to this country 16 years ago by the policy consistency and decisive leadership of the government," noted Vikrom Kromadit, chairman of the Amata Group.

The CT & D Group from Taiwan entered Vietnam even earlier, in 1990, opening the first industrial park in Vietnam, which also serves as an export processing zone. It now hosts hundreds of industrial factories with a total investment of some $1 billion, creating more than 60,000 jobs.

"You should choose the market with the highest growth potential and the most understanding government to invest in," said Arthur King, chairman of the CT & D Group in reply to a question asking why his company had invested almost $1 billion in Vietnam in industrial parks, power plants and urban development centers.

King added he did encounter problems in Vietnam as investors did in most other developing countries. "But in my own experience, every time a difficulty arises, I have always found a helping hand here to guide us through the process."

-- JP/Vincent Lingga

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Telecom industry needs more foreign players

Thursday, April 5, 2007 Vincent Lingga, The Jakarta Post, Jakarta 

Five years after the conclusion of what was then dubbed a strategic deal that would help restore foreign investor confidence in Indonesia, the almost 42 percent Singapore shareholding in PT Indosat is still being whipped up by narrow-minded nationalists as a subterfuge to advance the vested interests of several businesspeople.

The issue of foreign ownership in Indonesian companies such as PT Indosat, PT Telkomsel and PT Excelcomindo surfaced again at a seminar on the future of the Indonesian telecommunications industry at the Centre for Strategic and International Studies (CSIS) here last week.

Last year, several trade unions at state companies issued a demand urging the government to buy back Indosat shares from Singapore Technologies Telemedia Pte (STT), expressing fears that Singapore interests would control the country's telecommunications industry, notably its mobile phone business.

There had reportedly been a tacit agreement between the government and the House of Representatives that the government would buy back STT's shares in Indosat.

However, several analysts suspected it was in the vested interests of several national businesspeople who had been eyeing the STT stake in Indosat.

Some misguided politicians at the House have naively trumpeted the fear that Singapore's presence at Indosat could threaten Indonesia's security as the island republic could easily access various data banks and the information system in the country.

Whipping up such an inordinate fear shows either a total misunderstanding about the telecommunications industry or is simply a blatant subterfuge to mislead the general public into an emotional opposition to foreign ownership of telecommunications companies.

Questioning the business and economic rationale of the STT-Indosat deal that was concluded in late 2002 is nothing but simply an attempt to whip up narrow-minded nationalist sentiments at the expense of our telecommunications industry.

Just a flashback to the STT-Indosat share transaction in 2002:

When the then cash-strapped government offered the then debt-ridden, state-owned Indosat to buyers through an international competitive bid, the mobile phone business of Indosat subsidiary PT Satelindo had been steadily losing its market share to PT Telkomsel, a subsidiary of state-owned PT Telkom.

Indosat's former core business as the mandated monopoly provider of international call services had increasingly been taken away by other much cheaper alternative communications means such as chatting facilities and Voice Over Internet Protocol. Worse still, the market share of Indosat's satellite service had been eroded by other satellites orbiting in Asia's outer space.

On the other hand, STT has been advancing as a global communications service provider, which offers a wide variety of services including fixed and mobile telephony, e-commerce solutions and services, paging, mobile-data communications, digital mobile communications network, satellite services.

It was then crystal clear that business and macroeconomic wise, STT's entry to Indosat as a major shareholder would ensure Indosat's survival in the highly-competitive and capital and technology-intensive telecommunications industry.

Put another way, STT brought a strong synergy to Indosat.

Indosat has since 2002 had a wide access to STT expertise and modern technology that is quite vital for the further development and competitiveness of Indonesia's telecommunications services. All this can now be seen in the dramatic growth Indosat has made over the past four years.

Yet most important, STT's presence at Indosat not only jump-started the modernization of Indonesia's telecommunications industry but also injected keener market competition to state-controlled PT Telkom, the country's largest telecommunications company.

True, the Singapore government-owned Temasek controls both STT and SingTel, which owns 35 percent of PT Telkomsel, the cellular phone subsidiary of Telkom. Indosat in turn controls PT Satelindo, the second largest mobile phone company after Telkomsel.

But it is inordinately irrational to allege that the STT-Indosat alliance would lead to a monopoly of the cellular phone business. There are too many players and too many choices of technology in this business to allow for a monopoly now.

There is enough room for many players because the cellular phone market, though the fastest growing segment of the industry, is still very young in Indonesia.
An efficient telecommunications industry is key to economic development and a vital infrastructure, especially in a vast archipelago country as Indonesia.

Instead of buying back shares from foreign investors -- which means capital flight -- the government should invest in other basic infrastructures, which are less attractive to private investors such as water, ports, airports and roads.

Certainly, there is not any ban on Indonesian private investors buying Indosat shares or other telecommunications companies. They are free to buy the stocks, but at market prices. Both Indosat and Telkom are listed in Jakarta, New York and London.

But the blunt fact is Indonesia's telecommunications industry is still much less developed than those in other Southeast Asian countries. We therefore need easy access to foreign expertise, capital and technology to make the industry competitive and to expand telecommunications networks throughout the country.

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Centralizing investment licensing a bad idea

Monday, April 02, 2007 Vincent Lingga, The Jakarta Post, Jakarta

Then president Megawati Soekarnoputri tried to centralize the licensing of foreign and domestic investment in the Investment Coordinating Board (BKPM) in 2004, but failed because of the strong bureaucratic jealousy between government institutions.

Going off in a strikingly different direction, President Susilo Bambang Yudhoyono announced plans in May 2005 to dilute the function of the BKPM into simply a promotion and company registry office, and to decentralize investment licensing in the spirit of local autonomy.

But except for putting the BKPM under the jurisdiction of the Trade Ministry, no other concrete measures have been taken to follow up on that idea.

The new investment law that was enacted by the House of Representatives on Thursday seeks not only to upgrade and strengthen the status of the BKPM, but also to centralize investment licensing at this agency under the concept of a one-stop investment licensing and service center.

However, the articles in the new law regarding the delegation to the BKPM of licensing authority by the various ministries and regional administrations are so ambiguous that past mistakes could be repeated, with investors again finding themselves stuck in a bureaucratic maze.

The law stipulates that the investment board shall be led by an official with ministerial status who is responsible directly to the president. This is, to a certain extent, similar to the BKPM's status under Soeharto's authoritarian administration. During the New Order, the investment board was considered a non-ministerial government institution under the oversight of the President's Operation Offices (State Secretariat).

However, the law also states in another article that the BKPM, in executing its function as a one-stop licensing and service center, shall involve direct representatives from related ministries and regional administrations.

This means that all ministries, government agencies and regional administrations related to the licenses/permits and services/facilities needed by investors should assign representatives to the BKPM.

Hence, the investment board will have officials from Manpower and Transmigration Ministry for processing work permits for expatriates, from the Justice and Human Rights Ministry for residency permits and entry visas, the Finance Ministry for granting tax and import duty incentives, etc., etc.

This could be the trap that makes the concept of the one-stop licensing and service center unworkable, because the law does not explicitly require the various ministries and regional administrations to transfer their licensing authority fully to the BKPM.

The new provisions will only spare investors the arduous procedures that require them to go from one ministry to another, from one regional administration to another, to obtain the various permits or facilities needed for their investment projects. Investors need only to file their applications with the BKPM, which is responsible, on behalf of the investors, for obtaining the necessary permits or facilities from the relevant ministries.

But inter-ministerial coordination has always been the weakest point of the government. Even the authoritarian, centralized administration of Soeharto took almost 15 years to make the BKPM a one-stop administrative center for investors. But this facility broke down soon after Soeharto's fall.

The reason behind the extreme difficulties in inter-ministerial coordination is not only the pervasive bureaucratic jealousy. From the perspective of public administration, seen as one of the most corrupt in the world, licensing authority means money for officials.

Centralizing investment licensing at the BKPM could also generate a hostile bureaucratic climate for investment ventures in the regions, and this will sabotage one of the primary objectives of local autonomy -- to encourage regional administrations to compete for investment.

The central government should instead delegate most of its licensing authority to regional administrations, with the BKPM retaining authority only for those requirements that need national standards, such as the environmental impact analysis, tax incentives, etc.

Instead of centralizing the overall investment licensing in Jakarta, which is after all contrary to the spirit of local autonomy, the government should help empower regional investment offices -- Provincial Investment Coordinating Offices (BKPMD) -- to enable them to better serve businesses and woo new investors through business-friendly policies.

Many local administrations still don't fully realize the great contribution of investment to their local economies through job creation and the injection of purchasing power to fuel consumer demand, thereby generating growth in the manufacturing industry.

Investors need expedient procedures for obtaining all the permits and facilities needed for their ventures, but the method of addressing this need should not kill the incentive for regional administrations to compete with each other in wooing domestic and foreign investment.

However, there are still escape clauses in the law that can help the government avoid past mistakes regarding the BKPM and the bureaucratic machinery for investment licensing.

The new investment law, which will replace the 1967 Foreign Investment Law and the 1968 Domestic Investment Law, stipulates that technical details on the implementation of the one-stop licensing and service center for investors, and on the division of public administration authority in the management of investment, shall be governed by presidential regulations.

Hence, like most other laws in the country, the key to the efficacy of the new investment law will depend on the provisions in the presidential regulations which, according to Trade Minister Mari Elka Pangestu, will be issued.

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Is central bank really monitoring foreign exchange?

Friday, March 23, 2007 Vincent Lingga, The Jakarta Post, Jakarta

We now worryingly doubt Bank Indonesia's capability to monitor foreign exchange (forex) flows to and from the country.

This doubt arose after the recent disclosure of state-owned Bank Negara Indonesia (BNI)'s failure to report to the central bank the transfer of over US$10 million of Hutomo "Tommy" Mandala Putra Soeharto's money from the London branch of BNP Paribas to Indonesia through the BNI Tebet, South Jakarta, branch office, in June, 2005.

Yet more confusing are the remarks made by Bank Indonesia's executives about the transaction, as quoted by Koran Tempo in its March 21 issue.

Bank Indonesia spokesperson Filianingsih Hendarta was quoted as saying that Bank BNI might consider it unnecessary to report the money transfer to the central bank because there might have been nothing suspicious about the transaction.

One found it too flabbergasting that Filianingsih seemed entirely unaware of a ruling issued by Bank Indonesia in March 2000 that required bank customers in Indonesia, including foreigners holding stay permits and Indonesians residing overseas, to submit to the central bank, through their banks, detailed reports on every foreign exchange transaction in excess of US$10,000.

The Bank Indonesia ruling, which enforces the 1999 Foreign Exchange Flow Law, also requires that such reports disclose the remitter and recipient of funds, the type and purpose of the transaction and financial relationships between the transactors.

The explanation given by Wimboh Santoso of Bank Indonesia's directorate for banking development to the same newspaper is even more dumbfounding.

Santoso said banks were not required to report any financial transactions to the central bank but should report suspicious transactions to Indonesia's financial intelligence unit or the Financial Transaction and Report Analysis Center (PPATK).

The compulsory reporting on forex transactions was designed to keep Bank Indonesia apprised of capital flow to and from the country and to enable it to implement a more effective monetary policy.

Banks are obliged to keep detailed accounts of forex transactions they conclude for themselves and their customers because they have to submit a monthly report on their forex deals to the central bank.

Indonesia has held firmly to the regime of open capital account that allows free flow of foreign exchange to and into the country.

However, the financial crisis that set off massive runs on the rupiah and a massive capital flight out of the country between mid-1997 and 1998 made the government suddenly aware of the need to make sure the monetary authority was kept posted on foreign exchange flows.

During that crisis the central bank was completely in the dark about foreign exchange flows.
Hence, the birth of the 1999 foreign exchange flow Law. Up-to-date reporting provides the central bank with accurate, comprehensive and timely data on forex deals to enable it to have a better view of the position of the external balance and to anticipate speculative attacks on the rupiah.

The March 2000 ruling was supplemented with another Bank Indonesia regulation in July 2005, which limits foreign exchange derivative transactions with foreign counterparts against the rupiah to a maximum $1 million, down from a previous total of $3 million, and caps dollar purchases in outright forward transactions and swaps at $1 million.

The foreign exchange policy measure also imposes a three-month minimum investment hedging period on foreign exchange transactions. This means that investors with underlying investments in Indonesia must keep their funds in the country for at least three months.

The question is, though, how could Bank Indonesia ensure the proper implementation of the latter ruling on such complex forex deals if it miserably failed to detect even such a simple transaction as the $10 million transfer through the Bank BNI Tebet branch?

The central bank also seemed unable to properly enforce a regulation that requires commercial banks to know their customers with regards to detecting suspicious transactions.

The fact that Tommy's money was transferred not to his own account, nor to the account of a company he owned, but to an account in the name of a directorate general at the Justice and Human Rights Ministry meant that BNI completely ignored the "know-your customer" regulation. This also violated the provisions of the 2002 Anti Money Laundering Law that called for tough scrutiny of suspicious transactions.

The BNI should have been suspicious about the transfer and should have reported it to the PPATK because the transfer "looked strange" and was not supported by any underlying transactions.

The transfer should have caused BNI executives to ask what was the business of the Justice and Human Rights Ministry with the BNP Paribas branch in London.

The BNI cannot hide behind the banking secrecy clause for its failure to report to Bank Indonesia the transfer of Tommy's money and to inform the Indonesian financial intelligence unit of that suspicious transaction for further analysis.

If the conduct of BNI, a state-owned bank that is listed on the Jakarta stock exchange, is any guide, then we should really be worried how hopelessly feeble our anti-money laundering efforts have been.

Indonesia could face the bigger risk of being internationally blacklisted again as a haven for dirty money and a high-risk country for financial transactions.

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