Commentary: STT divestment clears pebble from Temasek's shoe

Vincent Lingga , The Jakarta Post , Jakarta Wed, 06/18/2008 10:44 AM Headlines

It was visionary business acumen on the part of Singapore government-owned Temasek Holdings when its subsidiary, ST Telemedia (STT), acquired, through an international competitive bid, around 40 percent of state-owned PT Indosat telecommunications company, at a premium price of more than 51 percent in late 2002.

It was similarly clever of STT when it decided on June 7 to divest its entire Indosat stake and sell the asset to Qatar Telecom at a price of US$1.8 billion, thereby booking a hefty profit of more than $1 billion.

Yet most important is that in one stroke, Temasek and its subsidiary removed the single root cause of the messy legal and political debacle and the harassment they had encountered over the past two years--cross-ownership in Indosat and Telkomsel.

The deal was a normal corporate action by a wise management to protect the interests of shareholders, in this case the Singapore people. Making a divestment under duress or under the force of a court ruling certainly would not be in the best interests of the Singapore taxpayers who own Temasek.

Selling the stake to Qatar Telecom also was simultaneously a clever business and political decision.

It was politically a shrewd move because Indonesia has been going all out to woo investment from countries in the Middle East, which have enjoyed windfall profits from skyrocketing oil prices. Qatar Telecom's experiences with the Indosat deal could influence other investors from the Gulf with regard to investment environment in Indonesia.

The deal fits well with Qatar Telecom's investment agenda as this company has been eagerly eyeing opportunities in Indonesia's high-growth, lucrative telecommunications business.

Little wonder Qatar Telecom was willing to pay a premium price of almost 31 percent for the Indosat shares despite the ongoing litigation process. But the high-value deal also shows how Indosat, which in 2002 grappled with a steeply declining market share, has become a jewel over the past six years.

Qatar Telecom is the second Gulf investor in Indonesia's telecommunications industry after Saudi Telecom, which holds a significant stake in Axis mobile operator, a new player in the cellular market.

STT made the divestment move one month after the Central Jakarta District Court decided to uphold the November 2007 ruling of the Business Competition Supervisory Commission (KPPU), which ordered Temasek and its subsidiaries to divest their entire stake in either Indosat or PT Telkomsel.

Temasek owns indirectly, through its subsidiary, Singapore Telecommunications Ltd., 35 percent of state-controlled Telkomsel.

The KPPU ruling was based on Temasek's indirect cross-ownership at both Indosat and Telkomsel, which, the competition watchdog said, led to unfair business practices such as price-fixing to control the mobile phone market.

Even though both Temasek and STT denied the divestment had anything to do with the court ruling, the confusing logic and illogical grounds of the court's decision understandably horrified the Singapore companies about the future of their investments in both telecom companies.
The KPPU certainly was upset by the divestment, calling the transaction an insult to legal procedures in Indonesia because the case is still pending at the Supreme Court.

Temasek and its subsidiaries appealed the lower court rulings, but the political and public opinion harassment they have endured over the past two years, and their bizarre experiences with the court system here, gave them second thoughts about the due legal process at the Supreme Court.

The Singapore companies simply felt trapped in a legal black hole. Hence, their decision to divest and sell their Indosat stake to Qatar Telecom is understandable.

The critics who from the outset opposed Temasek's indirect ownership in Indosat may consider its profit from the divestment as coming at the expense of Indonesian interests.

But we see it simply as just reward for a long-term, visionary investor. It was a bold decision for Temasek and its subsidiaries to take the plunge in 2002, investing $630 million (the acquisition price) in Indonesia when most foreign investors were still shunning the country, given its political and business risks amid the messy transition to democracy.

It is thus not a business sin for Temasek and its subsidiary to rake in a profit of $1 billion from an investment made six years ago in an extremely risky environment.

Analogous with the Temasek investment in 2002 was the move by state-owned Malaysian firm Guthrie to acquire for $350 million around 200,000 hectares of oil palm plantations, spread out over several provinces,in mid-2001.

The acquisition, made from the Indonesian Bank Restructuring Agency, was also criticized by analysts as a major gamble.

That was because the acquisition was made when world palm oil prices were at an eight-year low and when many natural resource-based companies were mired in imbroglios as a result of the excesses of regional autonomy, which was introduced in January 2001.

But no one can blame Guthrie for reaping huge profits since late 2006 as a result of skyrocketing palm oil prices. And if Guthrie were to divest its plantation investments now, it could well make a killing, pocketing several billion dollars in profit.

Read full post »

Russian Uraltrac equipment to enter Indonesia

Minang Jordanindo, an Indonesian-Jordanian joint venture company, invited a group of Indonesian journalists, including The Jakarta Post's Vincent Lingga, to witness the signing of its business deals and visit the the 220-hectare Uraltrac industrial complex in Chelyabinsk in the last week of May on the occasion of Uraltrac's 75th anniversary celebration on June 1.

ChTZ Uraltrac Ltd, one of Russia's largest manufacturers of tractors, bulldozers, pipelayers and engines, will soon enter Indonesia in an attempt to break into the heavy equipment market, which is now dominated by Komatsu, Caterpillar and Hitachi.

Uraltrac's 10-ton capacity B10MB bulldozer is now on its way to Sangata, Kutai Timur regency, in East Kalimantan. The 25-ton capacity D320 and 106-ton T-800 bulldozers will follow a few months later to meet the demand boom fueled by sky-high commodity prices.

The units will form the first batch of heavy equipment ordered by PT Minang Jordanindo, which also plans to eventually assemble several types of Uraltrac equipment in E. Kalimantan that has now become one of the world's largest coal producers and a major oil palm plantation center.

The following is his report:

The mining and agricultural commodity market boom since the second half of 2006, combined with massive infrastructure development projects, started it all.
The demand for heavy equipment has become so strong that buyers often wait up to one year for delivery from traditional suppliers in the United States and Japan, but have to pay in advance to secure delivery.

This was the opportunity that prompted Minang Jordanindo, which has a long experience in reconditioning and selling used heavy equipment, to seek new suppliers.
Hence, emerged Uraltrac, virtually unknown in Indonesia, but one of Russia's largest manufacturers of heavy equipment and a long-time major supplier in East Europe, Africa, the Middle East and several Asian and Latin American countries.

"I realize it is an uphill challenge to bring in this new brand to our highly competitive market, but I see a great opportunity not only because Uraltrac guarantees deliveries within three to four months but most importantly due to its strong commitment to transfer technology," said Bonny Z. Minang, chairman of Minang Jordanindo.

The contract between Uraltrac and Minang Jordanindo was one of the four trade and investment deals between Russian and Indonesian companies signed in Jakarta early last September in the presence of then President Vladimir Putin and President Susilo Bambang Yudhoyono.

So highly confident have been Minang Jordanindo and Uraltrac that they have even started planning a joint-venture assembly plant despite having yet to make the first equipment delivery.
"In so far as our relationships with Uraltrac are concerned, Minang Jordanindo is not a mere dealer in the real sense of the word. We have gained Uraltrac's commitment to transfer technology through training and investment right from the outset of our talks," Bonny added.

He said Minang Jordanindo had prepared a 30-hectare plot of land on the bank of the Mahakam river in Kutai for its assembly plant and training center complex.

Uraltrac's chief executive officer Valeriy Platonov acknowledged that ChTZ brand name was still unknown in Indonesia's heavy equipment market, but he asserted his products have been quite popular in more than 30 countries for their high technical performance, relatively low prices and the reliability of repair service support and availability of spare parts.

"We are the first to manufacture diesel-electric tractors, which can secure a high technical performance and guarantee a steady, continuous power supply. Yet, most important, we always commit to excellence in all our products ," Platonov said.

"Don't' ask me about the performance of our tractors, but talk to our dealers who are here for our 75th anniversary," added Uraltrac's deputy director for international marketing Vladimir O. Klein.
Uraltrac, which has an annual production capacity of 4,000 units of various types of tractors, bulldozers, pipe-layers and engines, invited 90 dealers from Russia and foreign countries to the anniversary celebration and to look at its new products.

Indonesia's ambassador designate to Russia Hamid Awaludin considered the Minang Jordanindo-Uraltrac business deal a visionary agreement because it involved not only trading but, most importantly, the transfer of technology and expertise to Indonesia.

"Russia has high a technology capability, expertise and a huge sum of international reserves to invest overseas, and Indonesia needs a lot of capital and heavy machinery to explore and develop its rich natural resources. This is a strategic synergy," added Hamid, who also attended Uraltrac's anniversary celebration and visited its product exhibition in Chelyabinsk.

Hamid said economic relations therefore would be the focus of his attention in Russia as both countries have all the fundamental prerequisites for mutually beneficial relationships.
Uraltrac, which operates foundry, forging press, welding, machining, coating and thermal and galvanic production units, paraded and displayed several of its products, including its first tractor called Stalinets 60 made in 1933 and a Stalinets-2 military tank made in 1939, both of which ran well.

Alexander C. Setjadi, senior vice president for asset-based finance at Bank Danamon, one of the largest lenders to heavy equipment users in Indonesia, emphasized the crucial role of high technical performance, reliability and after-sales service in the marketing of heavy equipment.

Since the price tags of heavy equipment range from US$100,000 to $2.5 million per unit, credit financing is always an integrated part of the transaction. Banks or finance companies will not be willing to finance equipment that cannot show high technical performance, Setjadi added.

"Certainly banks will not finance a machinery that has a lot of down time because that will affect the commercial viability of the whole project," he said, adding that the first batch of Uraltrac bulldozers to enter Indonesia should be able to demonstrate excellent performance to gain user confidence.
Setjadi and Bank Mega's credit officer Michael A attended Uraltrac's 75th anniversary celebration in light of exploring lending opportunities generated by the Russian company's entrance to the Indonesian market.

PT Kutai Timur Energy, a general trading and mining company owned by the Kutai Timur regency administration, will be the first operator of the first three Uraltrac bulldozers.
Quick delivery, competitive prices and a firm guarantee of after sales service are the main factors that have prompted Kutai Timur Energy to make the plunge to buy Uraltract's bulldozers from Minang Jordanindo.

The waiting time for new purchases now often takes up to one year while "we need many of them urgently for our natural resource development projects," Kutai Timur Energy's president Anung Nugroho said.

Anung expressed high confidence in Uraltrac's competitive advantage in the Indonesian market after inspecting its production and quality-control process.

"I am especially optimistic because all of the equipment I ordered will be supported by a comprehensive technical assistance package directly from Uraltrac," Anung added.
Setjadi pointed to the dramatic growth in Indonesia's heavy equipment market due to the massive expansion in oil plantations in various provinces and coal mining in Kalimantan.

"I think our heavy-machinery market will expand this year to around 10,000 units from about 7,000 to 8,000 units last year due to the big increase in demand from the mining, plantation and infrastructure development sectors. Our oil palm and pulp plantations alone will expand by around 1.2 million hectares this year."

Setjadi said Bank Danamon expected to increase its lending portfolio in heavy equipment and other asset-based financing this year to Rp 4 trillion from Rp 3 trillion last year.
The market is almost 70 percent controlled by Komatsu and Caterpillar with the remainder shared by many other brands from South Korea and China.

But Bonny was highly confident about making a significant dent on the market, especially as the domestic demand for heavy machinery will continue to expand and the prices of Uraltrac's equipment are on average 30 percent lower than those of its competitors in Japan and the United States.

"Uraltract's strong commitment to transfer of technology to Minang Jordanindo through technical assistance and eventual joint-venture assembling and manufacturing will make our business deal outstandingly different from our traditional heavy equipment suppliers," Bonny added.

Read full post »

News Analysis: Local governments: From rent-seekers to business partners

Vincent Lingga , The Jakarta Post , Jakarta Mon, 05/26/2008 10:13 AM Headlines

Provincial, regency and municipal administrations are competing with each other to offer multibillion dollar development projects to domestic and foreign investors at the Regional Investment Forum opening here today.

They are promoting a wide variety of projects in agribusiness, mining, infrastructure, property and tourism worth between about US$145,000 and $780 million.

They include a railway project in Riau, tree-crop plantations in various provinces, a toll road and an international seaport in Banten province, industrial estates and integrated farming in Central Java. What an encouraging development.

This is strikingly different from the mind-set of regional administrations during the first two years of regional autonomy from 2001 when regional chiefs and legislators, excited by their newly acquired authority, rushed to enact bylaws aimed mostly at collecting additional rents from businesses.

Many regional administrations, euphoric about their newly gained power, flexed their muscles to grab a larger share of the wealth from natural resources. They resorted to the easy, unsustainable ways of raising revenue by squeezing companies with additional taxes and levies.

They did not realize that this rent-seeking attitude would sooner or later kill the goose that laid the golden eggs.

The Home and Finance Ministries were forced to revoke almost 1,000 regional bylaws contravening national laws.

Nevertheless, the mind-set of most regional administrations has changed over the past three to four years, especially after the introduction of direct elections for regional chiefs.

As provincial governors, regents and mayors compete in direct elections, economic performance directly benefiting the people becomes the most effective means of gaining voter support.

Thus, job creation has become an important performance measure of a regional chief executive.
Hence, regional chiefs must be friendly to the business community, but not corrupt, and establish sound business partnerships.

This new paradigm requires regional chiefs to put pro-business policies at the top of their economic agendas because it is investors who generate jobs. This in turn fuels purchasing power and spurs consumer demand for various goods and services from which local administrations can raise levies.

The virtuous circle generated by investment goes on and on, raising the value of property and consequently increasing property tax receipts, of which 90 percent goes directly to regional administrations.

Within the national context, business-friendly local administrations can contribute greatly to economic growth because most of the country's abundant natural resources, such as forests, agriculture, fisheries, mining and tourist attractions, are located in the provinces and regencies.

Certainly, the enthusiasm and aggressiveness with which regional administrations woo investment are not the same. Several provincial administrations, for example, send teams on investment missions in nearby countries such as Singapore, where most global investors set up their regional offices.

Several regencies have hired professional consultants to help them plan, design and implement investment promotion programs. Many others woo investment by expediting business licenses.
Others have not been as aggressively implementing pro-business policies due to inadequate institutional capacities and a lack of financial and natural resources.

However, provinces or regencies with poor natural endowments should not be put off as investors often see policy variables as the main factors influencing their decisions to set up business in a particular area.

Policy variables -- including legal certainty, policy consistency and predictability, public services and local regulations -- often weigh heavier for investors than physical infrastructure, labor supply and productivity.

The second regional investment forum is a good opportunity for regional administrations to learn how to promote investment projects, what investors really want and how to attract more businesses to their areas.

The success of this forum should not be calculated by the value of investment deals closed but, more importantly, seen through the ongoing attitudinal changes of regional administrations toward the private sector, not only as taxpayers, but also as the driver of economic growth.
Furthermore, business-friendly local administrations will be greatly conducive to the development of small enterprises and cooperatives in rural areas across the country.

Read full post »

Small fuel price hike will trigger new uncertainty

Vincent Lingga , The Jakarta Post , Jakarta Fri, 05/23/2008 10:53 AM Headlines

President Susilo Bambang Yudhoyono eased market concerns about the government's fiscal sustainability when, after several months of indecision, he made up his mind earlier this month about the urgent need to raise fuel prices.

The financial market was buoyed by this, even though questions on the amount of the rise and the date it would take effect were left unanswered.

The government on Wednesday removed an element of uncertainty within the fuel reform plan by fixing the size of the upcoming price increase at 28.70 percent but, in keeping with Yudhoyono's characteristic indecisiveness, still did not address the question of "when".

Yet more worrisome is the size of the price hike seems so small that, even on the basis of the prevailing international prices (which will likely continue to increase), there will still be a disparity of 40 percent or more with market prices.

This is still quite a lucrative margin for smugglers to take advantage of. Such a big difference leaves great temptation for misuse by industrial users.

Since international oil prices will likely continue their upward trend and the domestic-to-world price ratio will increase steadily, this otherwise bold measure will be made less credible. It will instead cause a new element of uncertainty as the market perceives the measure as merely temporary.

Despite government assurances there will not be any further price increases this year, the market is still asking when the next one will occur, because the proposed 28.70 percent rise would not even bring domestic prices close to 70 percent of international levels like the October 2005 fuel price rise did.

The market would likely reject the price adjustment as inadequate in making a big positive impact on the government's fiscal position. The new fuel prices will neither remove the incentives for smuggling overseas, nor provide the right market signal for fuel conservation, efficiency and investment in alternative, renewable energy sources.

We find it hard to understand why the government did not follow up on its bold move in 2005 when it increased fuel prices by 30 percent in March and again by 125 percent in October.

The economy underwent a virtuous circle within one week following the fuel reform in October 2005: the stock market rose, the rupiah strengthened and consequently reduced inflationary pressures. The market even shrugged off the impact of another terrorist bomb attack in Bali which took place almost on the same day the government more than doubled fuel prices.

Any move to raise fuel prices, irrespective of the amount, will always trigger street demonstrations. Anyway, almost any issue will give rise to protests under our present democratic system. Any measure to increase energy prices will always fuel inflationary pressures.

But with good coordination between fiscal and monetary authorities, and well managed cash transfers and other poverty programs for the poor the inflationary impact can be contained, the panic reaction minimized and poor families protected from an adverse impact.

But raising fuel prices in little increments would only prolong the pains of the reform, planting a "new time bomb" which would likely explode six months or one year from now.

Thus the fuel price policy the government will announce within the next few days should be supplemented with an additional fixed schedule for a gradual phasing out of fuel subsidies for private cars until the prices are automatically floated on Mid Oil Platts Singapore (MOPS) quotations and the rupiah's exchange rate, such as those already imposed on industrial users.

Such flotation will allow for an automatic monthly price adjustment, thereby providing policy predictability for the general public, protecting the economy from shocking inflationary pressures and sparing the government the wasteful political bickering with the parliament that occurs each time international oil prices fluctuate wildly.

It's a technical matter how such a fuel price flotation should be implemented to prevent shocking inflationary pressures. After all, we have been on that road once before in 2002.

We don't foresee any major problems in managing fuel distribution under the two-tier price scheme because state-owned oil company Pertamina, the monopoly of subsidized fuels, has built up enough expertise to minimize misuse.

What is most important is floating domestic fuel prices on international levels will free the government from enslavement to the wildly volatile international oil market, remove the fuel subsidy "time bomb" from its fiscal management and forces fuel efficiency and conservation and encourages investment in alternative renewable energy.

Read full post »

The politicking behind Krakatau Steel's planned sale

Wednesday, May 14, 2008 Vincent Lingga, The Jakarta Post, Jakarta

It is unlikely anything will come of the media hype over the past few weeks about the keen competition between four global steel giants to acquire up to a 40 percent stake in state-owned

PT Krakatau Steel, Indonesia's largest steel producer with annual capacity of 2.5 million tons.

The headlines began after global steel giants ArcelorMittal, Tata Steel and Essar, all from India, and BlueScope Steel of Australia separately notified Indonesia's ministries of industry and state enterprises of their interest in acquiring up to 40 percent of Krakatau Steel.

But even before serious negotiations began and the potential investors submitted their business plans, politicking and controversy have been heating up.

Vested interests within Krakatau Steel's boards of directors and commissioners and trade union immediately came out in opposition to the sales plan, arguing the steel company was too strategic for the country's economic interests to be sold to foreigners.

The legal aspects of the privatization of state companies are entirely under the jurisdiction of the state enterprises minister, and such a transaction can be conducted only with prior permits from the inter-ministerial Privatization Commission and parliament.

But the potential investors did nothing wrong in also consulting the ministry of industry, which is fully in charge of the regulatory and policy framework of the steel industry, before submitting their business plans to Djalil.

As with the controversy over previous privatizations of state companies, the vested interests, including politicians in the parliament, would likely gang up in flaunting national interests as the main reason for their opposition, whipping up xenophobia.

But what they really want is to maintain state companies as their cash cows.
The defense ministry also joined the fray, trying to shoot down the privatization idea by asserting that Krakatau Steel is strategic to the country's defense industry.
True, steel is a strategic commodity. But what is strategic about Krakatau Steel if it remains grossly inefficient and small.

Ten years ago, the House of Representatives blocked an attempt by Lakshmi Mittal, ArcelorMittal's chief executive officer, to buy a stake in Krakatau Steel, even after then minister of state enterprises Tanri Abeng, impatient with the inefficiency of the state company, consented to the deal.

Strategic sales should theoretically be the best way for Krakatau Steel to improve its competitiveness and expand its production capacity, because it needs not only fresh capital but, most importantly, a strategic partner that can provide the capital, technology and managerial expertise.

Economies of scale and high technology are key to the market competitiveness of a steel producer. Without a synergy with a strategic partner, Krakatau Steel will remain tiny as it has been since its establishment over 30 years ago.

An initial public offering on the Indonesian Stock Exchange -- the option initially planned for Krakatau Steel's privatization this year -- is not favorable now, given the bearish market sentiment caused by uncertainty in the global financial market and a weakening global economy.

It is not Krakatau Steel itself that has attracted the four steel giants but the huge potential Indonesia offers as a major production base for steel. The company itself, like most other state firms not traded on the stock exchange, is inefficient, burdened with excess baggage from decades of mismanagement during Soeharto's authoritarian rule and highly vulnerable to corruption by the management and "poaching" by senior officials and politicians.

The four potential investors have a long-term horizon, looking into the future of the Indonesian economy. The country now needs more than 6 million tons of steel, of which 2 million tons have to be imported, and the domestic market will certainly grow steadily as the economy expands.

But strategic sales of state companies have always been difficult and vulnerable to "political turbulence" because the government has yet to develop standard operational procedures, the step-by-step process to secure transparency and accountability and to close any loopholes that could be exploited by corrupt officials.

Given the slippery political road ahead, here is some free advice for the potential investors: tread very carefully at every step of the long, slippery process, otherwise you may be caught in an imbroglio engineered by the vested interest groups within Krakatau Steel, parliament or other ministries.

Look what happened to Mexico's Cemex cement group, which quit sate-owned PT Semen Gresik last year after almost 10 years of legal and political harassment, or Singapore's Temasek, which is now trapped in a messy litigation for its investments in state-controlled PT Indosat and PT Telkomsel.

This is just to mention a few of the foreign investors who have suffered from attacks by vested interests eager to maintain state companies as cash cows.

Minister Djalil is well advised to realize that privatization, if well managed with high standards of transparency and accountability, is greatly effective in improving macroeconomic efficiency through the promotion of a more competitive market and more efficient and consequently more profitable enterprises, bringing in larger tax revenue for the state.

It is simply much better to put state firms in the hands of private investors who can develop the assets into profitable businesses, which create more jobs and pay more taxes, rather than maintaining them as state assets that are easily plundered by senior officials and politicians.

More efficient and competitive state companies, especially those operating in upstream industries like Krakatau Steel, have multiplier impacts on downstream industries. The great concern about a minority foreign shareholder in Krakatau Steel is therefore rather strange.

Read full post »

Court ruling on Temasek reveals govt mismanagement

Tuesday, May 13, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Legal matters, however complex and technical, should also follow commonsense logic.
To the laymen, the Central Jakarta District Court's ruling Friday that the Singapore government-owned Temasek holdings and its subsidiaries breached anti-competition laws through minority cross-ownerships in PT Indosat and PT Telkomsel is both a worrisome and confusing logic.

Consider the following facts:
Fact I: The Indonesian government-controlled PT Telkom owns 65 percent of Telkomsel and holds almost 15 percent of Indosat and a golden share that gives it special veto rights over corporate action, while Temasek indirectly holds only 35 percent of Telkomsel and almost 31 percent of Indosat. Yet the court upheld the ruling by the Business Competition Supervisory Commission (KPPU) last November declaring Temasek guilty of violating article 27 of the anti-trust law which prohibits a business group from owning majority stakes in companies operating in the same business activities which result in the control of more than 50 percent of the market.
Temasek therefore was ordered to sell all its stake in either Indosat or Telkomsel or halve its holdings in both cellular companies within 12 months.

Fact II: The boards of Indosat and Telkomsel include representatives of the Indonesian government and many prominent Indonesian businessmen who would have been aware of the operational and business issues at the respective cellular phone operators. The majority of Indosat's directors, including the chief executive officer, and the majority of Telkomsel's directors and commissioners, are nominated by the Indonesian government. Yet the court decided that Temasek, through its cross-ownerships at both Indosat and Telkomsel, had controlled business decisions and corporate actions at both cellular operators.

Fact III: Both Telkomsel and Indosat are regulated businesses, operating within the guidelines of the Telecommunications Regulatory Authority. Yet the court also upheld the KPPU ruling that Temasek and subsidiaries were guilty of monopolistic price fixing (article 17 of the anti-trust law). The mind-boggling question then is this: Have the government, the regulatory body and Minister of State Enterprises Sofyan Djalil been so ignorant or pathetic as to have allowed

Temasek to commit all the anti-monopoly practices cited by the KPPU and the district court despite its minority shareholdings at both Indosat and Telkomsel?

If Temasek, despite its minority shareholdings, was able to commit all the business sins as concluded by the court and the KPPU, that should raise big questions over the management of dozens of other state companies which have foreign or domestic investors as minority shareholders.

Further down the line, if the poor management and inadequate oversight of Indosat and Telkomsel, as revealed by the KPPU and the court rulings, is typical of the way the government treats state companies, then the Parliament should oppose the planned strategic sale of state-owned PT Krakatau Steel to either one of the four global steel giants -- ArcelorMittal, Tata Steel and Essar, all from India, and Australia's BlueScope Steel, which have been eying a stake of up to 40 percent in the country's largest steel company.

Temasek will certainly appeal against the decisions at the Supreme Court. Since the court also ordered divestment, the government should brace for a long legal battle as Temasek may bring up the case with the World Bank's arbitration body, the International Center for the Settlement of Investment Dispute, in Washington.

Simply throwing in the towel out of frustration with the court system here could be interpreted by the market as Temasek's admission of business sins at the expense of its reputation all over the world.

A ruined reputation would adversely affect Temasek investment operations overseas, investments on which this government's investment holdings have relied increasingly for income growth.

Hence, there is no other alternative for Temasek but to fight it out up to the Supreme Court even in spite of all the risks and uncertainty about the legal proceedings and final results.

Until a credible appeal verdict -- favoring either side -- is issued, the case will continue to cast a long shadow over Indonesia's legal system and the KPPU as an independent body responsible for enforcing the 1999 competition law, which serves as the constitution of the market mechanism.

Read full post »

Sky-high rice prices require redesign of food security

Friday, May 02, 2008 ,Vincent Lingga, The Jakarta Post, Jakarta

Contingency measures to increase food buffer stocks and improve price stabilization are necessary but not enough to address the skyrocketing price of rice in the international market.

The most outstanding change in food grain markets since early 2007 is that sky-high food prices have been taking place amid relative abundance, not at a time of severe scarcity caused by crop failure. That means the steep price hikes have been driven mostly by demand.

Most analysts agree that the present upward price trend will likely be a permanent development due to the cascading impact of the following factors: climate uncertainty, steady rise in demand, high oil prices that make fertilizer much more costly, farmland conversion into other industrial uses and the misguided subsidized biofuel craze in the United States and Europe.
No wonder the clearest message of this trend is that, like oil, the era of cheap food has ended.
The steep price hikes to as high as US$1,000/metric ton last week should therefore prompt the Indonesian government to redesign the concept of its food security which has thus far focused on ensuring an adequate supply of rice at affordable prices to all people at all times.

The government should not let itself be misled into past grave mistakes of going all out at all costs to achieve rice self-sufficiency.

It is rather impossible for such a vast archipelago state with a population of around 230 million and an annual national rice consumption of 32 million tons -- which will keep growing -- to secure rice self-sufficiency.

Indonesia did achieve rice self-sufficiency in the mid-1980s but only for one or two years. Even this unsustainable achievement was the culmination of more than 15 years of huge investment in irrigation, agricultural extension services and studies, generous subsidies for fertilizer, pesticides and farm loans and the work of the National Logistics Agency (Bulog) to manage buffer stocks and a price stabilization mechanism.

The oil windfall that made all these huge investments possible has dried up as the country has instead become a net oil importer.

In the absence of new technology breakthroughs and of any significant expansion in rice land outside Java due to lack of irrigation networks, there seems to be few better alternative policies for the government than to step up food crop diversification programs through integrated agriculture development.

Even irrigation networks in Java, which accounts for more than 70 percent of the national rice output, have been crumbling due to lack of maintenance, Pantjar Simatupang of the Centre for Agro-Socioeconomic Research told a seminar at the Centre for Strategic and International Studies last Thursday.

However vital rice is, the blunt reality is that rice growers never find themselves among the highest earners in the rural areas, especially in Java where most farmers till less than 0.5 hectares of land. Moreover, more than 80 percent of the whole population are net rice consumers.

Food security therefore should only be part of a broad-based agriculture development program with the ultimate objective of increasing rural household incomes both from farm and off-farm activities.

The concept thus aims at empowering the farmers' economy and the rural community through the development of rural and farm infrastructure. This is quite strategic as more than 55 percent of the total population still lives off farming in rural areas.

The focus of the program should be on farmers' income, which needs a good balancing act of securing food security and a steady rise in farmers' earnings. Better earnings will enable people and the farmers to diversify their diets away from rice.

Bayu Krisnamurthi, deputy of the coordinating minister of the economy for agriculture and marine affairs, was right in observing last week that the clear and present danger now was not an acute food shortage. The real problem is the weak purchasing power of many people who have to spend as much as 25 percent of their income on rice alone.

Krisnamurthi said the per-capita supply of all carbohydrate-rich food commodities (rice, cassava, tubers, maize, sago, etc.) amounts to about 1.2 kilograms/per capita per day while a balanced daily diet only calls for 300 grams/capita.

The problem, though, is that misguided diversification programs have succeeded only in making wheat (bread and noodles), which is not grown locally, the second-most widely consumed staple after rice.

The vulnerable food situation is similar to what the country is now facing in the energy sector. Decades of misguided energy policy made the nation dependent mostly on fossil fuels despite the availability of other energy sources such as geothermal, coal and solar power.

Too much emphasis on rice no longer provides much room for additional employment and income growth because productivity gains in this food grain have diminished, especially in Java.

The government should instead accelerate integrated agricultural development by pouring more investment into such basic rural and farm infrastructure as roads, market places, transportation and processing facilities, financial networks and research stations designed to meet area-specific conditions as well as farm technical extension services.

Better farm and rural infrastructure will enable farmers to diversify their crops into higher value commodities such as horticulture, fruits and other perennial crops.

If the government is really serious about revitalizing the agriculture sector that still employs more than 50 percent of the labor force, it is the rural and farm infrastructure that should become the focus of its investment.

The Rp 20 trillion ($20 billion) allocated in subsidies for farm loans, fertilizers and seedlings this year is paltry compared to the almost Rp 200 trillion appropriated for wasteful subsidies for fuel and electricity.

Read full post »

Bribes, poor roads hamper supply-chain management

Friday, April 18, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Commercial deliveries are unpredictable because of conflicting local regulations, illegal payments and crumbling road infrastructure, according to a recent survey of domestic trucking costs by the Asia Foundation and the University of Indonesia's Institute for Economic and Social Research (LPEM-FEUI).

The study, conducted in Sulawesi, East Java, North Sumatra and East Nusa Tenggara, found truck drivers and transportation firms made regular payments to the police, officials at weigh stations and to local thugs at checkpoints along their routes.

Adding to trucking costs are the poor road infrastructure and cumbersome route licensing procedures imposed by regional administrations.

The reasons the roads are in such bad condition include the widespread practice of overloading trucks and inadequate maintenance work. Truck drivers simply bypass weigh stations by paying a noncompliance fee to the local officials.

These problems make the overall vehicle operating costs for trucks US$0.34 per kilometer, as against $0.22 in Vietnam, Thailand, Malaysia and China, the survey concluded.

The findings validated a complaint made earlier by the Food and Beverage Industries Association that hauling cargo from Jakarta to Surabaya required the payment of almost Rp 450,000 in illegal levies to officials at 14 scaling bridges between the two cities.
But it is like an egg and chicken game. Truck drivers claim they have to overload their trucks to be able to cover all the illegal levies they have to pay along the highway.

The findings of the survey show how seemingly hopeless the conditions of our road transportation services are and how incompetent the central government and regional administrations have been in coping with illegal levies on the highway.

Yet more damaging is how ignorant the government has been about the strategic role of efficient road transportation in logistics, as almost 70 percent of the country's cargo is hauled by trucks, and how crucial is superior logistics management to create efficient supply chains.

A 2005 study by LPEM-FEUI of 75 large export-oriented industrial companies at four of Indonesia's largest seaports in Java, Sumatra and Sulawesi concluded that logistics services accounted for an average 14 percent of total production costs, among the highest in Southeast Asia.

This finding confirmed what many businesspeople have long complained about; a high-cost economy that makes the country's exports less competitive in the international market.
The study found the high logistics costs derived mainly from poor infrastructure, illegal levies and arduous bureaucratic procedures.

International studies also have shown that logistics arrangements in Indonesia are still grossly inefficient, as evidenced by the high portion taken by distribution and logistics in the free-on-board prices of goods.

All these problems make Indonesia's logistics capability miserably low and consequently its supply chain grossly inefficient.

This is quite worrisome because efficient logistics -- low transportation costs, short transit times, reliable delivery schedules and careful handling of goods in cold storage chains -- are vital for trade and the smooth distribution of goods.

Globalization requires greatly increased coordination of transportation by road, rail, sea, air and lately also by an entirely new route to market -- the Internet. This makes logistics vastly more complex. The job of ensuring that all these things work together is known as supply chain management.

A study of 150 countries by the World Bank in 2007 concluded that facilitating the capacity to connect firms, suppliers and consumers is crucial in a world where predictability and reliability are becoming even more important than costs.

Being able to connect to global markets is fast becoming a key aspect of a country's capacity to compete, grow, attract investment, create jobs and reduce poverty, the World Bank said.
It is no coincidence that the most competitive economies also rank very high on the Logistics Performance Index drawn on the basis of the study. Most developed countries and Singapore, South Korea, Japan, China, India rank high on the index.

Many companies have reengineered their supply chains to gain a huge competitive advantage. What has made such giant retailers as Wal-Mart and Carrefour highly competitive is their superior logistics management. The market leaders all have supply chains that are more responsive to customer demand.

Things like transportation, purchasing and warehousing, once considered merely part of the cost of doing business and often managed as separate entities, are now seen by most managers as a strategic agenda.

Industrial companies cannot manufacture goods without the inputs they need and in the case of Indonesia most manufacturers still rely on imported materials and parts and components. Hence, if delivery times are expedient and reliable, manufacturers should not hold large inventories of inputs, thereby cutting their inventory costs.

Superior logistics management is the key to making Hong Kong and Singapore efficient shipping hubs for their neighboring countries. Besides their highly efficient port-handling systems, their auxiliary services like customs and freight forwarding are also smooth.

However, an efficient supply chain requires a minimum set of conditions, notably efficient transportation, expedient customs services and production standards to ensure the free flow of goods, services (including labor) and investments.

Without efficient logistics Indonesia will not be able to become part of the global supply chain.

Read full post »

Only credible contingency measures can reassure the market

Monday, April 07, 2008 Vincent Lingga , The Jakarta Post

Finance Minister Sri Mulyani Indrawati told an emergency news conference after an unscheduled limited Cabinet session on the economy chaired by President Susilo Bambang Yudhoyono last Thursday that the Indonesian economy was under control and that escalating inflationary pressures were manageable despite the soaring food prices and fuel subsidies.

In a stronger bid to reassure the market, Sri Mulyani put the government's money where its mouth is, stating the government would buy back in cash its bonds maturing between 2008 and 2013.

However, the market will remain jittery, nervously waiting for concrete, credible measures to maintain fiscal sustainability and check the runaway inflation, which cumulatively reached 3.41 percent during the first quarter alone, as against the 6.5 percent inflation target for the whole year.

Year-on-year inflation in March surged to 8.2 percent, already higher than Bank Indonesia's benchmark short-term interest rate of 8 percent.

No wonder that investors, already skittish due to the global financial turmoil, became more worried over what they perceive as higher sovereign risks of the government.

This is reflected in the increase in the risk premium on Indonesia's international bonds to 300 basis points (over the U.S. Treasury bonds) last month from 130 bp last year.

The government's domestic borrowing costs also have risen, as shown by the increase in the yield on rupiah bonds to more than 12 percent from around 9 percent last year.

This is truly worrisome because the government plans to raise Rp 117.80 trillion (US$12.8 billion) from rupiah and dollar bonds this year to help plug its budget hole.

The miserable failure to get a single bid for its zero-coupon bonds auctioned late last month showed how widely different were the government and market perceptions of fiscal sustainability and economic outlook.

The government claims the economic situation is generally healthy and that the underlying assumptions in the revised budget are not much different from the reality.
However, the market sees things differently.

Market players believe the state budget will not be sustainable as long as it remains helplessly strapped to the nasty roller coaster of increasingly costly oil. How could the government still claim the budget is anchored on prudent fiscal management when fuel, power and food subsidies will take up more than 23 percent of total spending this year?

How could the budget be seen as politically viable when energy subsidies alone will exceed budgetary appropriations for capital investment and social expenditure?

The state budget is a communication system, conveying signals to the market and the people in general about behavior, prices, priorities, intentions and commitments. Budget reforms therefore should take particular account of these characteristics.

Even without so many inimical external factors, the budget system is already adversely affected by multiple, converging uncertainties, entrenched patterns of expenditure, severe inflation and structural imbalances between expectations and resources.

The budget system must be built to cope with these realities.

Unfortunately, most of the contingency measures pronounced by the government focus on austerity and high budget discipline, which sadly have so far been the main weaknesses of the government.

None of the measures is designed to reduce fuel consumption or slash fuel subsidies, thereby leaving the budget a helpless hostage to the wildly volatile international prices.

Another problem is that the fiscal stimulus -- more than US$17 billion in budgetary allocations for capital spending this year -- may again come in fits and starts, ill-timed and beyond the bureaucratic machinery's digestive powers. Last year, for example, almost 60 percent of the budget appropriations for capital expenditures was spent in the last quarter alone.

Without significant progress in budget execution, the economic growth target of 6.4 percent -- as against 6 percent forecast by the ADB and the World Bank and 6.2 percent by Bank Indonesia -- will not likely be achieved because private and government consumption remains one of the main drivers of economic expansion, besides investment and exports.

How the government maintains its prudent fiscal management and implements more concerted efforts to bolster exports and investment to offset the impact of the weakening global economy will determine the government sovereign risks and investors' risk appetite regarding its bonds, which in turn will influence the costs of its borrowing.

Read full post »

Cash is king, money laundering is the game

Tuesday, March 25, 2008, Vincent Lingga, The Jakarta Post, Jakarta

Profit, according to auditors, is an opinion, a matter of definition. You can state profit as gross earnings or net income, after-tax profits or earnings before interest and depreciation, depending on which of your stakeholders you want to impress.
But cash is real, which makes it the king.

So when senior state prosecutor Urip Tri Gunawan allegedly wanted a bonus for a "job well done" he demanded it in cash and in American dollars. Gunawan was arrested by a special team of the Corruption Eradication Commission (KPK) early this month with US$660,000 in $100 bills in a carton in his van as he exited the home of Sjamsul Nursalim, the former controlling owner of the now defunct Bank Dagang Nasional Indonesia (BDNI).

Two days before Gunawan's arrest the Attorney General's Office decided to clear Nursalim of all charges of corruption and other crimes related to the Rp 28.4 trillion ($3.05 billion) in liquidity credits BDNI obtained from Bank Indonesia during the banking crisis in 1998.
Gunawan led the team investigating Nursalim.

Earlier in September, Irawady Joenoes, a member of the Judicial Commission, was arrested by a KPK team at a house in South Jakarta with $30,000 cash in his pocket and Rp 600 million in bank notes stashed in a bag. The South Jakarta District Court ruled last week the money was a commission from businessman Freddy Santoso who had just sold a piece of land worth more than Rp 46 billion to the Judicial Commission.

Joenoes was sentenced by an anti-corruption court last week to eight years imprisonment.
In March, 2007, a joint team of the KPK and the AGO searched the home of Widjanarko Puspoyo, former chairman of the National Logistics Agency (Bulog), who was then facing corruption charges, and found hundreds of millions of rupiah stashed into a big bucket covered with wet laundry in a bathroom.

The South Jakarta District Court sentenced Puspoyo to 10 years in jail in February.
In 2003, after Bank Indonesia's (central bank) board of governors decided to give about Rp 31.50 billion to the House of Representatives to "facilitate" the deliberation of a central bank bill and to fund a public opinion campaign to improve the central bank's image, the money was delivered to House members in rupiah notes.

A senior central bank executive carried the cash in a big suitcase to a room at the Hilton (now the Sultan) Hotel.

Bank Indonesia Governor Burhanuddin Abdullah and two other senior executives of the central bank have been declared corruption suspects in relation to the case.

These are just a few examples of big cash transactions that we know about. Numerous other huge cash deals involving ill-gotten money derived from corruption and other crimes remain unknown or simply ignored by the authorities.

Welcome to the land where big cash transactions are still the rule rather than the exemption and money laundering is the big game in town.

Cash deals are one of the most popular modes of transaction for corruptors and other big criminals because the anonymity of cash limits exposure, does not leave a paper trail and cannot be uncovered by tax officials.

But how can all these huge cash transactions have continued after the enforcement of the 2002 law on money laundering, which restricts big cash withdrawals and scrutinizes other forms of dubious dealings?

Indonesia's anti-money laundering efforts have remained feeble due to a lack of cooperation from the National Police and AGO. Even though the Financial Transaction and Report Analysis Center (PPATK), which in other countries is commonly known as the financial intelligence unit, has reported thousands of suspicious transactions to the National Police, only two or three people have been brought to court on charges of money laundering.

The PPATK has spent almost six frustrating years practically fighting single-handedly against money launderers with little support from law enforcement bodies such as the National Police and Attorney's General Office.

The corrupt mentality within the law enforcement agencies, such as the National Police, rather than inadequate technical competence to investigate complex financial transactions, is mainly to blame for the weak enforcement of the law on money laundering.

Cooperation between law enforcement agencies and financial service companies and other government institutions such as the customs and tax services and the stock market watchdog is vital for effective enforcement of the money laundering law because information sharing is the brain of the anti-money laundering drive.

PPATK chairman Junus Husen came out with a major disclosure in August, 2005, saying there were strong indications of money laundering involving hundreds of billions of rupiah related to the personal accounts of 15 non-commissioned officers and generals of the National Police.
But not a single case has reached the court.

The problem is the PPATK is only authorized to analyze reports on suspicious transactions from financial institutions and to submit money-laundering cases to the police for further investigation and prosecution.

President Susilo Bambang Yudhoyono should act firmly to strengthen cooperation among all law enforcement agencies in the anti-money laundering drive. This campaign is truly an important component in the fight against corruption, tax evasion and numerous other crimes. The crimes covered by the law on money laundering are quite diverse, hitting almost all major sources of dirty money including corruption, drug trafficking, smuggling, bribes, banking crimes and human trafficking.

It is also easier to construct criminal cases through the law on money laundering than the anti-corruption law, because the former legislation puts the burden of proof squarely on those suspected of involvement in suspicious transactions.

Read full post »

Entrepreneurship key to sustainable high growth

Monday, February 25, 2008, Vincent Lingga, The Jakarta Post, Jakarta

Entrepreneurship, hardly a popular subject of scientific study at universities here, was the central theme of Djisman S. Simandjuntak's oration at a ceremony inducting him as professor of economics at the Prasetiya Mulya business school in Jakarta last week.

Djisman cited the acute lack of entrepreneurial firms from 1997 to 2005, when the number of companies decreased by 1.1 percent a year, as one of the main weaknesses of Indonesia's economy.

From 1977 to 1996, the economy grew robustly (over 7 percent annually), and the number of enterprises, small, medium and big, increased by an annual average of 6 percent. But the pace of economic growth fell sharply from 1997 to 2005, along with the financial crisis and the decrease in the number of entrepreneurs.

Studies by the World Bank and various business institutes in Europe and the United States have found a positive correlation between a broad base of entrepreneurship and economic expansion.
Entrepreneurs contribute greatly to producing and commercializing high-quality innovations, spurring productivity growth and enhancing employment creation and dynamics, because creativity and innovation are at the heart of entrepreneurial behavior.

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

Yet many countries like Indonesia erect regulatory barriers that make it extremely difficult to start up a new firm. Costly regulations hamper the creation of new firms, especially in industries that should naturally have high entry rates, and consequently force new entrants to be larger.
Little wonder many SMEs in Indonesia continue operating in the informal sector (underground economy), thereby denying them easy access to low-cost bank financing and other public services and facilities.

The Jakarta city government, instead of creating an enabling environment for micro and small enterprises, has been working hard since early this year to kill the entrepreneurial spirit by evicting sidewalk entrepreneurs.

The Doing Business 2008 report from the World Bank, which rated 178 countries according to their performance in 11 categories for the ease of doing business, ranked Indonesia at 123rd. Among ASEAN countries, our performance was among the worst, better only than the Philippines.

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

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

Culture is another important factor for building up an entrepreneurial society, influencing career preferences and shaping attitudes toward risk-taking and reward.
Djisman cited an important role for the government in nurturing entrepreneurship, through formal education and training (including continued education), and fostering entrepreneurial attitudes.

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

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

A recent survey by the Central Statistics Agency found more than 700,000 university and vocational college graduates remained unemployed in 2007, more than double the number in 2006. But the actual number of jobless university graduates could be much larger because many simply do not bother to register with local manpower offices as job seekers.

Entrepreneurship thrives mostly among SMEs. Even in industrialized countries, SMEs still account for more than 85 percent of enterprises and some 65 percent of total employment, according to the secretariat of the Organization of Economic and Cooperation Development.

The role of small businesses cannot be underestimated. Nor can the challenges they face, particularly in a world where markets are globalizing and large-scale enterprises dominate so much of the government's policy making.

Yet, if the government focuses more on SMEs, so much could be achieved and a broader equity could be improved in the owners of economic assets. By encouraging more SMEs to flourish, we can realize other economic and social objectives, such as expanding worker skills and alleviating local pockets of poverty.

Read full post »

There are lies, damned lies and statistics

Wednesday, February 13, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Conferences on corruption or climate change and political party conventions are all headline-generating events. The National Press Day celebrations, like the event in Semarang last Saturday, are spectacular occasions for media coverage.

President Susilo Bambang Yudhoyono, who attended the press gathering, knew its importance, its ability to generate a vast amount of publicity and TV footage.

But statistics? What a boring and dry subject. Hence, most of the mass media simply ignored the national conference on statisticians, which Yudhoyono opened in Jakarta early last week.

It is glad to know that the President, amid his tight schedule, could still spare some time to open the national conference of the Central Statistics Agency (BPS). Yet more encouraging is that he fully realizes and reiterates the importance of reliable and accountable statistics for the policy and decision making processes.

A statistics office, being a government institution, is often suspected of engineering or tampering with figures to satisfy particular parties. During Soeharto's authoritarian rule the BPS was often accused, though never with any strong evidence, by government critics of fixing data or figures to massage the performance records of the government in all fields.

A fitting aphorism commonly attributed to Benjamin Disraeli states: "There are three kinds of lies: lies, damned lies and statistics."

Even now when the BPS has publicly been perceived to be strongly independent, the agency still often comes under attack from critics. More recently, for example, several analysts rejected the government's claim of a significant reduction in poverty figures as being based on flawed data provided by the BPS.

But Yudhoyono rightly reaffirmed the crucial role of the BPS in gathering reliable and accountable data which is needed for policy making, pointing out that complete, reliable data gathered with a credible methodology represented 50 percent of the whole process of policy making.

"I always believe the data collected by the BPS through surveys or censuses even though the data does not bode well for the government," the President said.

Reliable data indeed underlies our knowledge and hence our actions. The point is that the role of statistics goes well beyond the production of figures. It touches upon people's everyday lives.

When a government prepares a new budget, when businesses decide on investments, stock brokers make recommendations to clients, even when families decide which school their children should attend, all their decisions are mostly based on some sort of statistical information which is converted into knowledge and use to inform their decisions or choices.

Even one of our democratic tools, general elections, depends on statistical data on voters and the reliable counting of ballots.

The main challenge for the BPS is maintaining quality data under heavy demands: The process of defining and gathering the statistics, ensuring relevance, veracity and comparability, supplying the right metadata, such as definitions, sources and disseminating and updating, all in a fast-moving technological environment.

We live in a data-rich world in which ordinary people have become familiar with notions like inflation, imports, gross domestic product, or interest rates.

Statisticians do not take decisions but they do an important job as statistics represent a fundamental tool in developing knowledge, which in turn is vital for making evidence-based decisions.

Needless to say the government should always help safeguard the independence of the BPS and give it adequate resources to improve the quality of its surveys or censuses, which in turn determine the reliability and quality of its statistical data.

Without sound data, advice sounds rhetorical, and policy prescriptions ideological.

Many of our problems -- a sudden steep rise in the prices of certain commodities or services or an unexpected shortage of food -- are often caused by policy measures that were based on inaccurate statistical information which in turn caused an incorrect analysis.

The BPS undertakes methodological surveys and research on various aspects of our economic and social life and produces statistical data on a national, provincial, regency basis for use by the government, the people and businesses in making decisions.

Certainly, a number of critics sometimes wonder whether all of the statistical data work is nothing more than statistical overindulgence. We do not rule out the risk of statistical overload and of attaching too much importance to certain figures to create a perception or impression as desired.

While the importance of quality data cannot be overestimated, quite often it is the handling and interpretation of the data by both users and suppliers that causes problems.

One can see a half-empty glass as a half-full glass or the other way around.

But obviously what counts most is to know how to treat numbers and to develop the knowledge we need to act on them. Good decisions depend on good judgment. But there are too many things, the uncertainties of life, that we do not know.

Read full post »

Corrupt governance damages Soeharto's economic legacy

Monday, January 28, 2008 Vincent Lingga The Jakarta Post Jakarta

Only an economic crisis could bring down President Soeharto, a political analyst once commented in the early 1990s when the authoritarian ruler began serving his sixth consecutive term with an ever stronger autocracy.

President Soeharto's regime fell along with the economic collapse in May, 1998. That showed how crucial his economic achievements had been in maintaining his political legitimacy for some 32 years despite a stunted political system.

In March, 1967, Soeharto took over from Sukarno a bankrupt economy ruined by a decade of mismanagement and succeeded in developing it within less than 15 years into one of the economic miracles in East Asia.

The conventional explanation for Soeharto's popularity until his miserable fall in 1998 was that his authoritarian rule delivered growth, stability, security and lifted tens of millions people out of absolute poverty, though at the cost of democracy. That was what he mostly did during at least the first 15 years of what later turned out to be his autocratic rule of 32 years.

Soeharto's forceful reassertion of state power was indeed key to restoring order and stability -- the prerequisites to economic development -- because his rise to power coincided with a state breakdown and economic chaos.

But Soeharto left behind an economy in shambles causing one of the most massive destructions of wealth in modern history and plunging almost 35 million people into dire poverty.
Assisted by a strong economic team of like-minded, U.S-educated professionals under the leadership of Widjojo Nitisastro, Soeharto, immediately after taking over from Sukarno, launched what was then termed the New Order economic management and anchored in basic-needs policy measures.

With the full trust and support of the president, the closely knit team designed and implemented the whole sequence of economic policies -- from the stabilization and rehabilitation in 1967-1969 to the development stage, thereby securing policy coherence and consistency.

Soeharto's New Order regime, as his administration was eventually popularly known, succeeded within one year in controlling inflation which exceeded 600 percent in 1966 and restoring some order in government finances and international trade.

The new government regained the confidence of international creditors under the auspices of a creditor consortium called Inter-governmental Group on Indonesia (IGGI) which was later changed into Consultative Group on Indonesia and reintegrated the country into the global economy.

Encouraged by the foreign investment law that was enacted in 1967, foreign capital and technology began flowing in to the country, tapping its rich natural resources, notably oil and gas and other minerals as well as forests and fisheries and import-substitution manufacturing industry.

Luck was on also Soeharto's side. The quadrupling of the international oil prices set off by the political instability in the Middle East in 1973 pumped windfall profits into the state coffers.
With the influx of foreign investment, combined with a surge in oil revenues, steadily increasing foreign development assistance from IGGI donors and, yet more importantly, prudent economic management, the government accelerated infrastructure development and bolstered the pace of economic growth.

With the state coffers flush from the oil windfall and foreign aid and investment pouring in, the government built more roads, dams, power generation, telecommunication and transport infrastructure.

Being himself the son of a farmer and familiar with abject poverty in the rural areas, Soeharto put agriculture and rural development on top of his policies right from the outset when his first five-year development plan was launched in 1969.

He allocated a great portion of the state budget for building irrigation networks, the provision of agricultural extension services and fertilizers, pesticides and the development of high-yield rice strains.

He was honored by the United Nations Food and Agriculture Organization in Rome in 1985 for his outstanding achievements in making largely populous Indonesia self-sufficient in rice supply.
Soeharto poured a similarly huge investment into the development of education by building more schools, into health by building more rural health service centers and promoted family planning to control population growth.

This strategy -- basic-needs economic programs with emphasis on agriculture and rural development anchored by prudent fiscal and monetary management -- generated an annual average economic growth of more than 7 percent from 1968-1980. Growth declined to about 5 percent a year from 1981-1988 due to falling oil prices and a weakening global economy but rose again to an annual average of almost 7 percent between 1989 and 1996.

The broad-based growth lifted tens of millions of people out of dire poverty.
However, Soeharto's economic management began to suffer from market-distortion policies in the mid-1980s as his six children who entered the business world demanded monopolies in various sectors. Assisted by Soeharto's business cronies (mostly Chinese Indonesians), the Soeharto extended family and his relatives built up an economic empire at the cost of prudent economic management.

Corruption, collusion (between Soeharto and his business cronies) and nepotism increasingly seeped into Soeharto's administration as he became even more authoritarian and increasingly depended on a patrimonial power structure.

His economic management further suffered from more bad policies in the early 1990s after Soeharto diluted the role and influence of U.S.-trained technocrats, who quietly showed their uneasiness with the ever-expanding rent-seeking activities of his children and relatives.
He replaced the technocrats with nationalists and technologists led by B.J. Habibie, then notoriously as a big-spending minister behind several high-tech yet commercially unfeasible projects.

The corruption became a brake on growth and a drain on Soeharto's legitimacy.
Yet, the economy was still able to continue growing amid all the bad governance practices due to the steady flow of foreign soft loans from sovereign and multilateral creditors and foreign direct investment and favorable global economic conditions.

However, as the East Asian economic crisis -- which began in Thailand in July, 1997 and spread to Indonesia later in the same year -- panicked foreign investors and creditors rushed to pull out their money. This capital flight bared all the weaknesses of the economy, triggering first the melting of the rupiah and then the collapse of the financial system, causing an unprecedented destruction of wealth.

So fragile had been the foundations of the economy left behind by Soeharto that growth deteriorated to a contraction of almost 14 percent in 1998 and the rupiah exchange rate plunged to as low as Rp 10,000 to the dollar from Rp 4,000 in late 1997.

More than 25 years of steady growth generated new challenges in income inequality and weak institutions and a basic need for democratic system of checks and balances.

However, pressures from his greedy family members and relatives and business cronies and his patrimonial system made Soeharto blind to these new concerns and eventually caused his downfall, leaving behind a soup of a broad-based economy floating on a corrupt bureaucratic system as his legacy.

Read full post »

Obituary: Sadli among New Order's architects

Friday, January 11, 2008 Vincent Lingga, The Jakarta Post

Modesty was the foremost impression of many who met the professor Mohamad Sadli -- despite his role among the nation's decision makers and his wealth of knowledge.
Born in Sumedang, West Java on Jan 10, 1922, he died at the Cikini General Hospital in Central Jakarta late Tuesday at an age of 85.

Perhaps the most outstanding member of, and spokesman for, the so-called Berkeley Mafia -- the selected group of Indonesian economic scholars educated at the University of California, Sadli was one of the few technocrats who always spoke their mind even under Soeharto's authoritarian rule.

He is survived by his wife Prof. Saparinah Sadli, whom he married in 1954. Former leader of the national women's human rights body, like her husband she was also a professor at the University of Indonesia.

Sadli and his economist colleagues, including Widjojo Nitisastro, Emil Salim, Ali Wardhana and J.B. Sumarlin played a key role in fashioning Indonesia's economic development for more than three decades until the mid-1990s.

Sadli contributed to his nation, more than any other, through his decades at the university and government. He continued contributing to public policy debates long after he left both institutions, through newspaper articles and comments he regularly made until the last few months of his life.

Indeed, few have written more economic and socio-political analyses or have given so generously of their time and energy toward the interests of their nation.

As chairman of the Technical Committee for Capital Investment, the embryo of what is now known as the Capital Investment Coordinating Board, in 1967-1973 Sadli was responsible for promoting foreign direct investment immediately after the enactment of the 1967 foreign investment law (recently replaced by the new investment law).

His impeccable integrity and high ability to candidly and honestly explain the full perspective of Indonesian economic prospects and challenges and its social and political problems has been widely regarded as responsible for regaining foreign investor interest in Indonesia soon after the anti-Western campaign by the then president Sukarno in the mid-1960s.

He simultaneously held another important portfolio as the minister in charge of manpower development in 1971-1973, before being appointed the minister for mining in 1973-1978, after which he had remained outside the government. He continued making his great contribution to the national economy through his lectures and analyses in various newspapers and periodicals.

Different from most of his economist colleagues, Sadli was an engineer, graduating from the School of Engineering at the Gadjah Mada University in Yogyakarta in 1952, before he pursued his graduate economic and engineering studies at the Massachusetts Institute of Technology in 1954-1956 and post graduate economic studies at the University of California in Berkeley. He went on to gain a PhD in economics at the Jakarta School of Economics, University of Indonesia, in Depok in 1957.

It was his engineering background that perhaps enabled Sadli to consistently come up with straight, direct-to-the point answers to almost any economic issues, unlike most other economists who tend to ramble with long explanations and without much substance.

While a champion of the market economy as the most efficient mechanism for resource allocation for the benefit of the people, Sadli recognized the constantly competing camps of market efficiency and social justice, comprehending the inter-linked nature of economics and politics.

For more than four decades until 2006, he still wrote regularly for Kompas and Tempo and Business News bulletin and became perhaps the most widely-quoted analyst, because he made himself available to journalists with his valuable commentaries on economic and political issues.

Sadli was one of the technocrats who saw the great importance of developing adequate capabilities for industrial associations to hold policy dialogs with the government on an equal footing.

On an invitation, he became the secretary general at the Indonesian Chamber of Commerce and Industry in the early 1980s. There he remained for almost 10 years, acting as the chief of the chamber's policy think-tank (research department) which, from time to time, made policy recommendations and came out with sharp analyses of government policies and state budgets.

Rest in peace Pak Sadli.

Read full post »