Julius Baer private bank expands to net Indonesian rich

Vincent Lingga, The Jakarta Post, Singapore Wed, 09/08/2010 10:23 AM Business

The largest Swiss private banking group Julius Baer strengthened its commitment to making Asia its second home market by convening its board of directors meeting here last week, the first outside its Zurich headquarters, and announcing a faster pace of expansion in the region, including Indonesia, Southeast Asia’s largest economy.Julius Baer chairman Raymond J. Baer told a roundtable discussion meeting with financial editors on Monday that his bank would upgrade its Hong Kong office to a booking center, open an office in Shanghai and a trust company in Singapore, in addition to the branch office it set up in the city state in 2006.

The editor forum capped a series of meetings and gala events organized by Julius Baer in Singapore to launch its big bang expansion programs in the region. “Wealth creation in Asia has now outpaced that in the older, developed world and we are expanding our global wealth management, deepening and broadening our market penetration in Asia,” Raymond Baer noted.

A recent survey report by the Merrill and Capgemini consulting company projected that the assets of Asian millionaires will exceed those of their North American counterparts by 2013. In sharp contrast to its rival institutions in Asia, the 120-year old boutique Swiss wealth manager has been in an expansionary mode over the past few years, opening an office in Singapore in 2006 and another one in Jakarta in early November, 2008, during the height of the global financial crisis.

“We started with a staff of only 30 in Asia four years ago but now we have more than 400 with a target of double digits in net new money growth,” added Thomas Meier, chief executive for Julius Baer’s operations in Asia and Mid-East.Julius Baer globally booked US$165 billion in assets under its management as of last June.Julius Baer, however, will not compete head on with commercial banks in Jakarta because as a private bank it focuses and services only so-designated high net-worth individuals (HNWI) with at least $3 million in net financial assets for investment.Its services include asset and wealth management and tax planning, investment consultation and investment funds for both private and institutional investors and securities, as well as foreign exchange trading.

“We focus on the total integration of products and services, with emphasis on wealth protection and creation services, financial planning for short- or long-term goals,” deputy chief investment officer Lee Boon Keng said”

We are able to provide investment advisory services tailored specifically to the needs of our clients because we thoroughly analyze their risk profile, financial needs and review their investment perspective every six months,” Lee added. Julius Baer seemed to have also been benefitting from larger asset inflows because of its lack of exposure to the 2008 American sub-prime mortgage meltdown, which had damaged the reputation of several larger international banks.Clients used to look at the largest banks as the safest but as it turned out after the 2008 financial crisis, it was the big ones that had been most exposed.

“We will act as the catalyst to bring European know-how and investment expertise to Asia and bring Asian investment opportunities to Europe,” Julius Baer Group’s chief executive officer Boris Collardi said. None of the Julius Baer executives was willing to elaborate on the potential market and characteristics of the top rich in Indonesia because of confidentiality, but they all agreed the potential is very big, given the size and growth prospects for the country’s economy.

Raymond Baer asserted that the perception of the infamous Swiss reputation as a tax haven for ill-gotten wealth is now a thing of the past after the Swiss government enforced the Article 26 of the OECD Model Tax Convention which binds member countries to share information in cases of suspected tax evasion and other forms of tax crimes.

This regulation obliges the Swiss government to provide administrative assistance — not only in the form of information about document forgery, but also about tax fraud — to the authorities of requesting countries.“Our government has toughened its laws, requiring Swiss banks to know their clients [know-your-customer code of conduct] and sources of funds they intend to deposit. Would be depositors are required to divulge detailed information, which must be verified,” Baer added

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IMF warns of threat of capital outflow

Vincent Lingga, The Jakarta Post, Jakarta Fri, 06/11/2010 9:56 AM Headlines

The International Monetary Fund (IMF) charted out Thursday a rosy outlook for Indonesia’s economy for the rest of this year with an estimated growth of 6 percent, but warned the government that a volatile global environment could heighten risk aversion and sharply reverse capital flow.

An IMF mission said at the end of its annual assessment of Indonesian’s economy that volatile capital flow complicated the country’s policy strategy, but it urged the government to maintain its policy of exchange-rate flexibility in responding to changing global conditions.

“Globally, there is a lot of liquidity, but the global environment is still volatile even though the financial situation in Europe has stabilized. If the European situation worsens, then heightened risk aversion could trigger a reversal of capital flow,” Thomas R. Rumbaugh, chief of the mission, told a news conference.

Bank Indonesia (BI)’s Senior Deputy Governor Darmin Nasution revealed last week that more than US$2 billion flew out of the country during the height of the recent Greek debt crisis.
Rumbaugh praised the country’s economic resilience in weathering the 2008-2009 global financial crisis and recent turbulence in Europe and attributed the macroeconomic stability to prudent policies the government has pursued in coping with the recent dramatic shifts in the global economy.

The IMF saw BI’s current monetary stance as appropriate but cautioned that as credit growth recovers, the central bank should act firmly to anchor inflation expectations within the target range of 4-6 percent.

Rumbaugh observed the fiscal outlook this year is also supportive of economic stability and consistent with plans to further reduce public debts relative to gross domestic product, which is currently less than 30 percent.

But he urged the government to focus its fiscal policy on structural reforms.
“The tax ratio is simply too low, the government investment spending is too low due to slow budget execution, and spending on subsidies is too much,” added Rumbaugh, division chief at the Asia and Pacific Department.

Energy subsidies alone accounted for $14.5 billion or almost 13 percent of total government spending this year, while tax revenue as a percentage of GDP is less than 13 percent, the lowest in ASEAN.

He said the IMF’s projection of a 6 percent economic growth this year was based on a strong investment recovery as private consumption growth was estimated to remain at 4 percent.
“If investments, which were rather flat last year, do not recover strongly this year, the growth could be less than 6 percent,” he said.

During its 10-day visit in light of the IMF surveillance mechanism, the mission also discussed with economy ministers about the findings of the financial sector assessment program (FSAP) on Indonesia conducted recently by the IMF and the World Bank.

“The FSAP concluded the financial system has made remarkable progress over the last decade, with most major banks reporting high capital standards, comfortable levels of liquidity and solid profitability,” said Herve Ferhani, deputy director for monetary and capital market department, which co-led the assessment.

However, he warned that the government should promulgate clear-cut, precise legal guidelines for dealing with problem banks because the legal framework currently in place was not adequate. The government is in the process of proposing to the parliament a bill on a financial system safety net.

Ferhani also stressed the need for deepening the capital market with new instruments to provide investors with a wider choice of vehicles and reducing corporate reliance on bank funding as well as strengthening the law-enforcement authority of the Capital Market Supervisory and Financial Institutions Supervisory Agency.

“A capital market with a broader variety of instruments could help stem a sudden threat of a reversal of capital flow during times of market turbulence,” he added.

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Don’t cry for me, Indonesia; I go for the good of all

Vincent Lingga, The Jakarta Post, Jakarta Mon, 05/10/2010 10:38 AM Commentary

The headline may fit the farewell message that Finance Minister Sri Mulyani Indrawati is likely to make when she leaves for Washington within the next week or so to take up one of the second-highest positions at the World Bank.

Although Mulyani’s circumstances are very different from those of Evita Peron, as depicted in the famous musical Evita, the emotion evoked by the tear-jerking lyrics of Don’t Cry for Me, Argentina is also befitting of Mulyani’s departure.

The World Bank’s selection of Mulyani to become one of its three managing directors simply highlights her superb qualifications as a technocrat and acknowledges her unique experience derived during her tenures as former executive director at the International Monetary Fund and minister of development planning and then finance in an emerging economy like Indonesia.

Although Mulyani’s decision to join the World Bank constitutes a really a big loss both to the government and the nation, which badly needs her skills, international experience, credibility and impeccable integrity to continue bureaucratic reform, her move is perhaps the best option for all, at least for now.

Mulyani has been in the proverbial hot seat ever since the parliamentary special inquiry commission voted in early March to fault her decision to rescue Bank Century in November 2008, and ask for criminal investigations to be leveled at her and Vice President Boediono, who was then central bank governor.

We still strongly believe that law enforcers will never find any evidence to implicate either of them in corruption or other crimes related to the bank rescue, which succeeded to prevent the country from suffering potentially far worse effects from fallout from the global financial crisis.

But instead of allowing the law enforcers adequate time to investigate the case, which would have required months of investigations into complex financial transactions dating back to 2004, the rowdy politicians from opposition parties have continued to attempt to harass Mulyani and destroy her reputation with slander.

Under such pressure, it was difficult for her to focus on properly performing her task as she was constantly hounded by power- and publicity-hungry politicians backed by the partisan mass media. Meanwhile, the indecisive President Susilo Bambang Yudhoyono seemed to behave like an innocent bystander unable to provide her with strong political protection.

However, her decision to join the World Bank will not only benefit the quality of her life and improve her earnings, which will rise from US$24,000 a year now to more than $480,000 per year, but will eventually benefit the nation too.

As a World Bank managing director for around 75 emerging and developing economies in Latin America, the Caribbean, the Middle East, North Africa, Asia and the Pacific, Mulyani will have three years to broaden her knowledge and experience of economic development and reform in strikingly different economic and political environments.

Despite the World Bank’s shortcomings, and groundless allegations that it has largely been the purveyor of the policies of developed countries, especially the United States, the multilateral development bank, which controls more than $55 billion in annual lending, has a huge trove of experts from all aspects of development.

Employing more than 10,000 well-paid professionals, the World Bank commands a huge analytical machine encompassing a broad-range of knowledge and experience on technical, sectoral and economic development issues.

The World Bank’s experts possess the wealth of real-life development experience that its lending operations around the world have generated, especially because the bank has decentralized its decision-making apparatus by appointing country directors with the power to determine budgets and initiate projects.

The bank’s operations thus not only refer to loans, grants and technical assistance but, often more importantly, to vigorous policy dialogues and advice.

All of this makes up a huge reservoir of knowledge and experience (of failures and successes) in a complex development process that Mulyani will be able to tap into during her stint at the World Bank.

At the end of her three-year term, the body of her knowledge and experiences, combined with the expertise she previously gained as an executive director at the IMF in the early 2000s, would make her a well rounded development economist and leader.

Hopefully the 47-year-old Mulyani will return to Indonesia so that her nation will be able to benefit from her great talent and experiences.

We could even dare to hope that one of the major political parties, preferably the Democratic Party, might nominate her as a presidential or vice presidential candidate for the 2014 presidential election.

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Mulyani needs whistle-blower hotlines for early warning

Vincent Lingga , The Jakarta Post , Jakarta Tue, 04/06/2010 9:28 AM Commentary

Had it not been for a whistle-blower, former National Police chief detective Comr.Gen Susno Duadji, junior tax auditor Gayus Tambunan, several police officers, state attorneys and judges would today be relishing their shares of the US$2.8 million that they allegedly stole from taxpayers.

The public, and notably Finance Minister Sri Mulyani Indrawati, was certainly burned by the painful fact that the sweeping reform at the Directorate General of Taxation, which has cost taxpayers hundreds of millions of dollars, seemed to have failed to set up an early warning system against corrupt officials.

Mulyani, who is locked in a battle against time to regain the public’s confidence in the reform she has led since mid-2007, has moved fast to replace all staff members in Gayus’ department and has ordered a re-examination of the annual tax returns of 15,000 tax officials for the past three years and a probe into their bank accounts.

The problem is simply this - how could Gayus, a junior tax official with a monthly paycheck of just Rp 12 million ($1,200), have had $2.8 million in his bank accounts and lived so ostentatiously — owning hundreds of thousands of dollars worth of property and cars — without raising any eyebrows among his supervisors and colleagues?

Worse, Gayus had never experienced any problems with his annual tax returns. So we must assume he always understated his true income.

Learning a lesson from the actions of “renegade” police general Susno, we think Mulyani should strengthen the internal control mechanism at the Directorate General of Taxation by setting up hotlines for whistle-blowers and members of the general public to report on suspicious behavior of public officials such as tax officers.

Most multinational companies or organizations with worldwide operations, despite operating independent internal control units, set up whistle-blower hotlines as part of an early warning system to keep tabs on their employees’ compliance with laws and ethical standards.

For example, one of the world’s largest oil companies, Royal Dutch Shell, established what it calls the Shell Global Helpline and included on its website manuals that inform stakeholders (suppliers, officials of host government, employees, shareholders and the general public) around the world how to file anonymous reports on the conduct of Shell employees.

Mulyani herself has often complained about the extreme difficulty in finding tax officials with completely clean records or without skeletons in their closets for supervisory roles because of the extreme tolerance for corruption prevalent during the pre-reform era.

But again, as Gayus’ case clearly shows, even in this reform era tax officials remain hesitant to report colleagues either because they too are involved in corruption or they have no faith in their senior officials to follow up on the report.

The most important thing that must be done to ensure the effectiveness of whistle-blower lines is to protect the identity of the tipsters and to act quickly and firmly to follow up on reports of wrongdoing, unethical behavior or the excessively luxurious lifestyles of tax officials.

These factors were outstandingly absent in similar hotlines introduced by several ministries in the past, even under Soeharto’s authoritarian rule that ended in 1998.

Tipsters should be protected from retaliation and any legal consequences even if their reports are not accurate or false as long as they have made their report in good faith and without malicious intent.

A whistle-blower system could consist of a telephone line or a secure website. Obviously, state-owned telecommunications company PT Telkom could easily come up with such IT solutions.

Of course, for the sake of credibility, a whistle-blower hotline should be operated by an independent party, although follow-ups would necessitate an inquiry or investigation carried out in cooperation with tax officials. And even in such investigations, the identity of the whistle-blower should be shared strictly on a need-to-know basis.

Shell, for example, outsourced the creation and maintenance of its global whistle-blower helpline to Global Compliance.

“I think for Indonesia, the President’s Judicial Anti-Corruption Taskforce could be the most qualified to operate such a whistle-blower line, given the integrity of its personnel [leaders],” PT Shell Indonesia’s chief executive officer Darwin Silalahi said.

Such hotlines, Darwin advised, should not be restricted to issues concerning the Directorate General of Taxation but should also envelope corruption in customs and excise tax and land-title registration as well as law enforcement, involving police, prosecutors and judges.

There is certainly a risk that such a hotline would initially be flooded by false reports or information called in to maliciously attack particular officials, but such a risk is still worth taking because the future of the drive to reform the country’s bureaucracy is now at stake.

Besides, the whistle-blower taskforce surely would not be so easily fooled by such false reports or slander.

Look at how even the Corruption Eradication Commission owes many of its high-profile catches to tips from members of the general public.

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Big infrastructure deficit the highest barrier to investment

Vincent Lingga , The Jakarta Post , Jakarta Tue, 03/30/2010 9:00 AM News Analysis

President Susilo Bambang Yudhoyono made the right decision in going ahead with convening an infrastructure summit in mid-January 2005, less than three months after being sworn in, despite suggestions of postponing the meeting due to the devastating earthquake and tsunami that devastated Aceh and Nias, North Sumatra, on Dec. 26, 2004.

Roads and port infrastructure in most provinces had by then begun to crumble due to an acute lack of maintenance funds under severe fiscal restraints caused by the 1998 economic crisis.

Power shortages and rotating blackouts then began to hit many provinces in Java, Sumatra, Sulawesi and Kalimantan and several outer islands.

Five years on and after the second infrastructutre summit in 2006, investors still see infrastructure as one of the biggest hurdles when investing in Indonesia and a primary cause of economic inefficiency and uncompetitiveness.

Business leaders attending the Indonesia Summit here Thursday, which was organized by the London-based Economist media group, publisher of The Economist weekly, even ranked the country’s poor infrastructure as the biggest barrier to new investment.

The rationale is that investors favor to plow their capital in countries that have become an effective and efficient part of the global supply chain. The problem, though, is that an acute lack of electricity, poor and inadequate road networks, grossly inefficient seaports and airports have made the costs of logistics in Indonesia among the highest in Asia.

Panelists and business leaders at the conference blamed the snail-paced development of infrastructure on the government’s inability to take bold reform measures to make the investment climate in that sector conducive for private investors.

Tanri Abeng, one of the panelists at the meeting, put the blame squarely on the government’s inability to reform state companies, pointing out how almost all basic infrastructure, such as power, roads, seaports, airports and telecommunications are controlled by state companies.

“But most of the 158 state firms are quite inefficient. Their combined profits last year were only US$7 billion. In Malaysia, state-owned oil company Petronas alone booked an income of $20 billion,” added Tanri, who in 1998 became the first state-owned-enterprises minister.

Inadequate infrastructure not only impairs the economy’s competitiveness, as production and distribution costs are made much higher than those in other countries, it also hinders access to public services such as health, education and market facilities, thereby hampering poverty alleviation.

President of heavy equipment company Caterpillar Asia Kevin Thieneman agreed, pointing out that the biggest barrier to private investment in infrastructure was land acquisition.
“The problem is land and land,” Thieneman said, adding that the arduous, complex procedures for land acquisition make it the biggest factor of uncertainty regarding project costs.

Yet more discouraging is that the government is still in the process of drafting a law on land acquisition for public interests, such as infrastructure, which, given the current adverse relationship between the government and parliament, may only be completed later this year.

As the new law has to be supported with a series of government regulations stipulating the technical details for their enforcement, we can expect a more investor-friendly land acquisition legislation only next year.

The government has set up several supporting facilities to help expedite infrastructure financing such as an infrastructure finance company in a joint venture with the World Bank and Asian Development Bank and a land revolving fund and a land price-capping instrument.

However, their financing capability is quite small, compared to the hundreds of billions of dollars needed for infrastructure spending within the next five to 10 years. They will serve more as a catalyst for project creditworthiness.

So pessimistic were many businesspeople about the policy direction in infrastructure that they dismissed an announcement of $140 billion in infrastructure spending over the next five years made by Gita Wirjawan, chief of the Investment Coordinating Board, as wishful thinking.

Being a “salesman,” Gita, also speaking at The Economist conference, tried to hype the outlook of Indonesia’s economic prospects by pointing to the programs of building tens of thousands of kilometers of toll roads, and tens of thousands of megawatts of power generation within the next few years.

However, most business leaders at the conference seemed skeptical, taking into account the poor record over the last five years.

The government built only about 120 kilometers of toll roads over the past five years and completed less than 50 percent of the 10,000 megawatts in new power generation capacity launched under a crash program to cope with the power crisis in early 2006.

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Commentary: All the ‘low-hanging fruit’ programs in the first 100 days

Vincent Lingga , The Jakarta Post , Jakarta Thu, 01/28/2010 9:37 AM Headlines

Had President Susilo Bambang Yudhoyono (SBY) anticipated the thundering political noise he would encounter at the outset of his second term, he might not have trapped himself in the euphoria of the first 100-day theatre.

But then there was no reason at all why, after being re-elected with almost 61 percent of the votes, he should have such foreboding. What an unfortunate development it turned out.

was really a rough ride during the first 100 days of the SBY administration, with most of the public trust he gained in the July 2009 election wasted on adversary relations between his administration and the parliament.

The first 45 days saw the government besieged and the national mass media dominated by the tussle between the police and the Corruption Eradication Commission (KPK).
Then over the last six weeks, the public’s attention and the national mass media have been consumed by the parliamentary investigation of the controversial bailout of Bank Century in 2008, which has sapped the energy of the finance minister, the acting central bank governor, deputy governors and directors.

We didn’t actually expect that much from the Yudhoyono government during its first 100 days insofar as real programs of action that would have had a significant impact on the economy.
Because of the some 50 economic programs proposed during that “political spring”, they were all low-hanging fruits that did not require painstaking effort.

Quite a number of the programs consisted simply of making blueprints, plans of action or guidelines for various operations, such as mass rapid transport systems in urban areas, sea transport, inter-modal transportation and ports, food estate and self-sufficiency in corn, soybean sugar and beef.

These could be what Coordinating Economic Minister Hatta Rajasa dubbed “quick win” programs.

Also included in this category was the promulgation or amendments of regulations on the pricing of natural gas for domestic market obligation, tax incentives for renewable energy and domestic market obligation for coal producers, which were certainly achieved.

There was the ceremonial announcement of plans to develop clusters of agriculture-based (mostly palm oil) industries in North Sumatra, Riau and E. Kalimantan and natural gas-based industries in E. Java and E. Kalimantan.

These actions obviously do not immediately produce any significant impact on the economy, let alone make things easier for doing business, as from the outset they had been designed to be implementation over the next five years.

, the catalog of regulations, operational directives, blueprints and plans produced over the past 100 days would not do much in the way of convincing the public the government is really serious about implementing reforms.
But we should still give credit where it is due.

The government also implemented several measures to remove bottlenecks (“de-bottlenecking” as Hatta described it) in business/investment licensing, port-handling, infrastructure funds and customs service operations for 24 hours seven days a week at the four largest ports: Jakarta’s Tanjung Priok, Surabaya’s Tanjung Perak, S. Sulawesi’s Makassar and North Sumatra Belawan.

The ministers of trade, home affairs, justice and human rights, transmigration and manpower, and the chief of the Investment Coordinating Board issued a joint decree designed to expedite all licensing procedures to start up businesses that at present take about 60 days to complete, to only 17, by introducing a one-stop administration center for all kinds of licenses and abolishing 70 kinds of redundant permits.

Yet more significant was the launch of electronic one-stop processing for business/investment licenses starting on Batam Island, near Singapore, in mid-January. This bold measure will make the process much more expedient and transparent.

The 24/7 customs service operations and the application of a national single-window system in the processing of all documents needed to clear goods out of the port area are the first big steps in improving the efficiency of logistical systems that also involves many other government agencies and service companies.

Capping the achievements in the first 100 days was the government establishment Tuesday of PT Indonesia Infrastructure Finance with an equity capital of US$450 million in a joint venture with the Asian Development Bank, the International Finance Corporation (a World Bank subsidiary) and the German development bank DEG as shareholders. This new facility could be a financing breakthrough in accelerating the implementation of long delayed infrastructure projects in the country.

So all in all, taking into account its strong political mandate, we give the government performance in its first 100 days a score of 4 on a scale from 0 to 10.

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Commentary: Beleaguered government throws out sound energy policy

Vincent Lingga , The Jakarta Post , Jakarta Fri, 01/15/2010 9:20 AM Headlines

By deciding to increase budget allocations for energy subsidies by 50 percent to Rp 150 trillion (US$15 billion) this year, the government threw out a sound fuel policy launched early last year to gradually reduce dependence on fossil fuels.

That was strangely a very bad move from a government which just got a strong mandate from the people and whose coalition is supposed to control more than 70 percent of the parliament.
The government launched a strategic energy policy last January by floating domestic fuel prices on international market quotations after crude oil prices fell steeply from their peak of US$147 a barrel in July 2008 to as low as $40.

That was the right momentum for the wise policy because domestic fuel prices at that time — Rp 4,500 a liter (45 US cents) after three successive price cuts in six weeks — were only slightly lower than international prices in Singapore.

The January 2009 fuel-price floatation also was then seen as realistic because the government, in order to prevent a sudden shock to the economy, decided to anchor the floatation initially on fixed-price bands which capped gasoline prices at a maximum of Rp 6,000 per liter and automotive diesel oil at Rp 5,500.

The wise policy that allowed monthly adjustments for fuel prices would provide policy predictability for businesses and investors in energy development, protect the economy from shocking inflationary pressures and spare the government the wasteful political bickering with the parliament any time international oil prices fluctuated widely.

That measure also was rightly designed to free the government from being hostage to the wildly volatile oil market and to remove the fuel-subsidy “time bomb” from fiscal management.
Past experience showed any time the government moved to raise fuel prices, irrespective of its size, there was always political turbulence with the House of Representatives, not to mention street demonstrations and a shocking impact on general price levels.

But President Susilo Bambang Yudhoyono, fresh from a landslide victory in the July 2009 presidential election after winning almost 61 percent of the votes, simply abandoned that sound energy policy at the expense of the long-term good of the economy.

The Cabinet decided Tuesday to increase budget appropriations for energy subsidies to Rp 150 trillion ($15 billion) for this year as international oil prices have now risen to around $80, higher than the average $65 assumed for the 2010 fiscal year.

Had the government consistently implemented the fuel-price floatation policy last year with gradual monthly price adjustments, the government should not have to resort to such a policy flip-flop that is inimical not only to the credibility of the government’s policy-execution ability but also to future investment in energy conservation and diversification programs.
The government should have been fully aware that fuel subsidies do by no means benefit the poor segment of the population but mostly motor vehicle owners.

Subsidies for the poor are better distributed through specifically targeted programs.
And, given our vast, porous coastal areas, the wide fuel-price differences with our neighboring countries such as Singapore and Malaysia, which are only 30 minutes away by boat, are highly vulnerable to abuse by smugglers.

Yet more damaging is that the generous subsidy policy will deepen our dependence on fossil fuels, adversely affect the energy diversification program to promote renewable energy such as biofuel and discourages energy conservation and efficiency.

If the government does have such financial resources to spare, it would have been better to allocate much larger subsidies for micro-credits or biofuel, a wholly local product. Subsidies for biofuel will at least stay in the domestic economy, but those for fossil fuels will flow out of the country as we import more than one third of our consumption.

Also saddening to note, most of the appropriations for the energy subsidies, which are tragically larger than the combined budget allocations for education and health sectors, will be burnt by motorists into carbon dioxide.

Given the strong political mandate the Yudhoyono government just received from the people, we cannot help but get the impression that such a strangely bad policy could have been made only by a beleaguered administration with a weak leadership.

As the current parliamentary inquiry into the controversial bailout of Bank Century in November, 2008, is moving like a loose cannon that could hit the political and economic stability, the government should indeed feel embattled.

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Economic rise snags on political turbulence

Vincent Lingga , Jakarta Mon, 12/21/2009 11:28 AM Review & Outlook

It is impossible to chart the economic outlook for 2010 without factoring the Bank Century debacle into the equation.

The nationwide controversy over the Nov. 21, 2008, bank bailout is not simply a temporary distraction, as several analysts say, insofar as the economic prospects for next year are concerned.

The manner and speed in which the parliamentary inquiry committee will complete its investigation will determine the magnitude of the political and financial market turbulence facing the nation within the next few weeks or even months.

Even more worrisome is that whatever the conclusions and recommendations from the committee, they will have an adverse impact on the economy, the government’s economic team and its policymaking credibility.

What an unfortunate development it was. Instead of riding on his landslide re-election with stronger confidence, President Susilo Bambang Yudhoyono has remained a diffident and indecisive president unwilling to take firm action.

He allowed his administration to be besieged by the tussle between the police and the Corruption Eradication Commission (KPK) for nearly 50 days before he finally decided to intervene with some recommendations, however weak they seemed.

The public’s attention and the national media will again be consumed by the parliamentary investigation over the next six weeks when vice president Boediono several ministers, the central bank governor and scores of other senior central bank and government officials and expert witnesses will be summoned to testify.

This political furor and the intermittent wave of street demonstrations set off by the findings of the political inquiry will continue until February, when the committee is scheduled to submit its conclusions and recommendations to the President.

This means Yudhoyono’s government has virtually lost or wasted the golden chance during what was supposed to have been the political honeymoon period for his second administration to take painful reform measures that are badly needed to kick-start new investment and the construction of badly needed infrastructure.

Put another way, the government simply did not take any benefit early on from the almost 61 percent of votes garnered by Yudhoyono in his re-election last July.

The President instead came out weaker from the legal tussle between the corruption busters and the police. His position could become even more beleaguered by the bank debacle, and his coalition government much weaker.

The worst impact on the economy is the huge erosion of the government’s policymaking capacity and credibility, resulting in a very slow pace of reform sorely needed to overcome obstacles to investment, without which the economy will never be able grow robustly.

Due to the impact of the two big cases, the Yudhoyono administration now has neither the mandate nor the capacity to fix quickly the problems caused by corruption, regulatory risks and weak legal framework (civil service and legal reforms).

The government is scheduled to launch several bold programs during its first 100 days, including a stronger legal framework for expediting land acquisition for infrastructure, streamlining investment licensing and comprehensive bureaucratic and legal structural reforms.

But all these top-priority programs will likely fall behind schedule because it is now extremely difficult to have the Yudhoyono Cabinet, dominated by political representatives from his coalition partners, to work strongly in a united and well-coordinated manner.

Likewise, the government coalition in parliament seems in disarray now due to different stances regarding the legal and policy issues related to the bank bailout.

True, the controversy over the Century bailout is the only cloud looming over political and macroeconomic stability next year, but this cloud could turn into a devastating storm.

Putting aside what is now often referred to as “Century gate” and its adverse impact on the economy next year, Indonesia’s medium- and long-term economic outlook is bright.

The country posted a fast, strong recovery this year, and is internationally praised as the third-highest growing economy after China and India, with an estimated expansion of 4.3 percent.

The US$500 billion economy, supported by the steady improvement in the financial and banking system and the green shoots in the world economy, could accelerate to a growth of 5.5 to 6 percent next year.

The country has a sound fiscal policy, strong balance of payments and sharply declining government debt to as low as 30 percent of gross domestic product.

But again all the estimates for next year will depend on the magnitude of the political and financial turbulence caused by the political process of resolving the bank debacle, notably the fate of Finance Minister Sri Mulyani Indrawati and Vice President Boediono, both nationally and internationally respected as icons of reform.

Barring any immediate devastating fallout from the parliamentary inquiry into the bank debacle, the Jakarta stock exchange will likely end the year with growth of more than 85 percent, the rupiah gaining an appreciation of 15 percent and inflation staying below 3 percent.

The low inflation rate will enable Bank Indonesia to keep its benchmark interest rate low, currently at 6.5 percent, and this in turn will bring down borrowing costs for businesses and consumers.

But whether the central bank will be able to check inflation next year will depend on the rupiah’s stability and improvements in infrastructure.

Significant improvements in infrastructure are essential because unusually high logistics costs — caused by inadequate infrastructure, regulatory barriers, bureaucratic inertia and corruption — are one of the main causes of the economic inefficiency.

Inflation will be manageable next year, within the target range of 4 to 6 percent, if the expansion on the demand side of the economy is accompanied by adequate expansion in the domestic capacity on the supply side.

Domestic consumption will continue to be the main driver of growth, as investment and exports are expected to expand only modestly at 5 percent.

Direct investment, which this year remains cautious despite the resilience of the overall economy, is expected to accelerate next year, but a slower-than-expected pace of reforms to remove major barriers to businesses may stand in the way of robust investment.

Foreign capital turned in big inflows, increasing the foreign reserve holding of the central bank to more than $65 billion or more than five months of imports.

But instead of helping bolster the economy’s real sector, this short-term hot money makes the country vulnerable to sudden shocks as capital flight could happen at the slightest hint of trouble.

This vulnerability should cause great concern in view of the political turbulence likely to be set off by the finding of the parliamentary inquiry into the bank bailout.

Given the downside, at best the economy will likely muddle through the political turbulence with growth of 5 percent next year.

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SBY economic team may lose trust and market confidence

Vincent Lingga , Jakarta Thu, 12/03/2009 12:22 PM

Who in the government can we trust if then Bank Indonesia governor Boediono and Finance Minister Sri Mulyani Indrawati turn out to have compromised their policy decisions in bailing out Bank Century in late November 2008?

That was one of the great concerns expressed by most businessmen I talked to during an Indonesian-Australian business conference in Yogyakarta last week.

They were worried about all the possible findings or conclusions of the investigation into the medium-size bank’s rescue to be made by the House of Representatives and the Corruption Eradication Commission (KPK), not to mention the political and financial market turbulence arising during the process.

The Supreme Audit Agency (BPK) already issued early last week a very damaging report after an investigative audit that lasted more than three months, blaming the central bank and the now-defunct Financial System Stability Committee, chaired by Mulyani, for negligence and incompetence in deciding on the bailout.

The more devastating impact would be if the upcoming investigation by the House concluded that Boediono (now the Vice President) or Mulyani, or both — though quite a remote possibility — had deliberately compromised their policy decisions for political gain.

Another possible compromise solution would see Boediono and Mulyani made the scapegoats, taking the fall for the sake of political stability but at the risk of causing suspicions about the implication of Yudhoyono and/or members of his family in the bank debacle.

Whatever the final outcome, it will adversely affect the public’s trust and market confidence in the government, especially its economic team.

Many, if not most, remain in great doubt that either technocrat, with such impeccable integrity and high financial competence, would have risked their reputations for financial or political gain by deciding on a bank bailout that was not necessary.

Boediono, in his capacity as chief economics minister and later the BI governor, and Mulyani as the minister of finance, made up the bedrock of President Yudhoyono’s economic management during his first term in office.

They had been perceived nationally and internationally as personalities who had the courage to stand up to even the President when it came to maintaining policy-making credibility.

If the verdict of the House inquiry is policy incompetence, both Boediono and Mulyani — the leaders of the economic reform — must resign for moral and ethical reasons, even though their “honest mistake” was caused by wrong or incomplete input from their subordinates.

There is an inherent risk of an honest mistake being made in a bank bailout, given the time pressures and rapidly worsening problem, even after all the standard procedures for decision making have been fulfilled, as Boediono and Mulyani claim to have done for Bank Century.
That is because different from other businesses, banks may sometimes — often based on nothing more than rumor — face a run. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor is false.

Bank runs can also be contagious as depositors at other banks are likely to get nervous too, setting off a chain reaction like that in 1997-1998.

But the caveat of debating now whether Bank Century then (November 2008) posed a systemic risk to the whole banking industry or not is the big difficulty in reconstructing the precise national and international economic and financial condition prevailing when the bailout was decided.

True, Indonesia’s financial sector was rather fragile between September and December last year due to the fallout from the global financial crisis, which was triggered by the bankruptcy of Lehman Brothers investment bank in the US.

Some of the indicators:
• In early October 2008, the capital market management and regulator stopped trading at the Jakarta stock exchange for a few days after the benchmark index, which had fallen steeply since September, crashed to 1,451, losing almost 50 percent of its capitalization from early that year.
• Even when the central bank kept reassuring the people that our banking system was sound and its fundamentals were much stronger than back in 1997, the government decided on Oct. 12 to increase the ceiling amount of bank deposits covered by the Deposit Insurance Agency 20 times, from Rp 100 million (US$10,000) to Rp 2 billion.
• Three days later, the government proposed to the House a regulation-in-lieu-of-law on the establishment of the framework of a financial safety net that would authorize the finance minister to lead the management of a financial crisis, indicating an emergency condition.
• The problem was then made more difficult by the virtual stoppage of inter-bank lending as big banks, awash with liquidity, were reluctant to lend to others on fear that their money would not be repaid.

However Boediono’s and Mulyani’s points of argument for defending the Bank Century rescue were made very weak after the discovery of the massive cost overruns, the questionable massive withdrawal of deposits a few days before and after the bailout, and the discovery of banking crimes by the bank’s owners and management.

All this led critics to suspect that both Boediono and Mulyani had put aside their professional judgment in assessing the systemic risks posed by Bank Century

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Bank Century debacle: The investing public lose their shirts

Vincent Lingga , The Jakarta Post , Jakarta Thu, 09/17/2009 2:33 PM Headlines 

The hotly debated, US$670 million bailout of Bank Century last November did at least one big thing right: The move didn't save the bankers and the shareholders. In fact, one of its former major shareholders, Robert Tantular, and its former deputy president, Hermanus Hasan Muslim, have been punished, though very lightly, with four years and three years in jail respectively.

The big problem, though, is that before the bailout of the publicly traded Bank Century, the bank was majority-owned by the investing public, with 57.16 percent equity holding. These shareholders were institutional and individual investors who each held less than 5 percent.
It is a big irony then that while the investing public lost their shirts after the central bank classified Bank Century as an insolvent and failed bank and immediately transferred it to the state-owned Deposit Insurance Agency (LPS), the money of the bank's depositors has remained safe.

Even if the bank had not been bailed out, its depositors would still have gotten back their deposits of up to Rp 2 billion ($200,000) per account - the maximum amount insured by the LPS.

The business rationale is that since the bank's capital equity was already negative (-35 percent) when it failed, the bank's shares automatically became valueless.

Article 40 of Law No. 24/2004 on the LPS also stipulates that once the LPS bails out a failed bank, it automatically wholly owns the bank, and that if the bank's equity capital is already negative when it is taken over by LPS, the old shareholders are not entitled to any proceeds from the eventual sales of the bank after restructuring.

However, this provision is not fair for Bank Century's investing public, especially because more evidence has surfaced indicating that it was largely Bank Indonesia's inadequate supervision and incompetent examiners that let the poorly managed Bank Century remain in operations until last November.

Proper enforcement of banking regulations should have seen Bank Century closed down or at least forced to be acquired or merged with a bigger bank as early as three years ago. Bank Indonesia's decision to let the bank in operations much longer thus amounted to a gross ignorance of toxic assets traded on the stock market.

Preliminary audits found it was major shareholders Robert Tantular and his relatives, with 22.13 percent, and two other individual investors - one from Saudi Arabia and the other one from the UK, with 20.70 percent - who controlled the bank management and allegedly robbed the bank. The two major foreign shareholders remain at large.

Simply put, the central bank's incompetent supervision put the investing public in the dark about the real condition of the bank. Had Bank Indonesia's examiners and the stock market watchdog (Bapepam) done their job properly, the investing public could have salvaged their investment or at least cut their losses by unloading their shares on the market long before the bank was put by the central bank under its special oversight on Nov. 6, 2008, or about two weeks before it went belly-up.

True, as the Companies Act stipulates, in the case of a company going bankrupt and eventually being liquidated, shareholders are the last entitled to make claims on any proceeds from the eventual sales of the bankrupt firm's carcass.

But since Bank Century has not been liquidated, the question then is, is it fair to let Bank Century's investing public lose every cent of their investment in the bank?
It is most urgent and imperative for the government to resolve this issue. Otherwise, no investors will again touch shares in mid-size banks on the stock market.

If this problem is not resolved once and for all, Bank Century will face a big risk of an endless string of lawsuits from investors, messy litigation that will adversely affect the restructuring of the bank and the LPS's plan to divest of its investment in the bank within three to five years, as required by law.

Bank Century, which had been beleaguered by negative publicity over the past weeks due to the controversy of its bailout last November, cannot bear another wave of bad news, let alone another bout of litigation.

Because Bank Century is already mired in lawsuits brought by several of its big depositors in relation to their purchases of Antaboga discretionary funds worth Rp 1.3 trillion ($130 million), which were marketed through the bank. The depositors have not been able to redeem Antaboga funds - issued by PT Antaboga Delta Securitas, formerly one of Bank Century's major shareholders, with a 7.50 percent holding - because the funds had allegedly defaulted.

It was in fact the default of the Antaboga funds that triggered the massive deposit withdrawals and precipitated Bank Century's severe liquidity crisis in early November, which eventually led to its insolvency on Nov. 20.

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Resolving worrisome questions around Bank Century's bailout

Vincent Lingga , The Jakarta Post , Jakarta Wed, 09/02/2009 1:11 PM Headlines

 

The Finance Ministry and Bank Indonesia, responsible for the bailout of Bank Century last November, steadfastly defended the urgency and legitimacy of the rescue, citing the financial uncertainty, severe liquidity problems at 23 other mid-size banks and weakening rupiah at the time.

They kept saying they had no choice, as though a gun had been pointed at their heads. Without the bailout, things would have been much worse in the banking industry and losses to the economy could have been more devastating.

The Indonesian financial system during the last quarter of last year indeed faced adversity from the impact of the global financial crisis since September, and letting the financially distressed Bank Century go down could have triggered a massive run on many other banks.

True, a panic was prevented within the banking industry. But the argument about the systemic risk is now heatedly debated, even though such debate now seems a no-brainer because it is impossible now to reconstruct the kind of vulnerable conditions our banking industry was mired in last November for counter analysis.

As details about the bailout were revealed to the public and the cost of the rescue turned out to be many times more than the preliminary assessment, we cannot help but cry out the fault. The move simply threw out two of the basic principles of a bailout program: transparency, and least cost to the taxpayer.

True, banks differ from other commercial firms. The failure of a bank results in particular hardship to depositors and can lead to broader problems in the economy through multiple transactions.

These are among the reasons the government has provided deposit insurance through the Deposit Insurance Agency (LPS). But this means that when a bank fails, as Bank Century did on Nov. 21, the government comes in to pick up the pieces.

However, past experience has taught us that when banks are at risk of failure, their managers and shareholders often engage in behavior that risks losing even more taxpayer money.
This, we think, was what may have happened at Bank Century between November and December 2008, when the bank lost Rp 5.6 trillion (US$560 million) in deposit withdrawals.

Bank Indonesia had injected a Rp 700 billion emergency liquidity loan into Bank Century around mid-November and put it under its intensive and then special surveillance, before deciding to throw in the towel and ask the government (the Finance Ministry) and the LPS to take over.

But the developments, which followed what was then hailed as a strategic decision to maintain stability within the financial sector, left behind several worrisome questions about the integrity and competence of the central bank's supervision and the auditors of the publicly listed Bank Century, and the enforcement of disclosure requirements by the stock market watchdog (Bapepam) upon publicly listed companies.

How could a bank with total assets of Rp 15.2 trillion ($1.2 billion), net nonperforming loans of only 2.71 percent - lower than the average 3.90 percent within the industry - and capital adequacy ratio of 14.76 percent - much higher than the minimum 8 percent - as of September 2008 flirted with bankruptcy just six weeks later?

How could the value of Bank Century's assets have fallen so steeply within such a short time so as to have eroded its capital standard far below the minimum 8 percent?

Why did the preliminary agreement signed by Bank Sinar Mas Multi Artha, a subsidiary of the big Sinar Mas conglomerate, on Nov. 16 to acquire 70 percent of Bank Century fail to restore confidence in the problem bank?

Was the Sinar Mas Group able to sneeze time bombs of toxic assets in Bank Century, which Bank Indonesia examiners failed to detect?

How could we have been kept in the dark about a publicly listed bank that is supposed to be subject to stringent disclosure requirements?

These questions, we think, are some of the worrisome puzzles the Supreme Audit Agency should answer through its investigative audit in order to resolve once and for all the problems surrounding the bailout of Bank Century.

A forensic audit would be able to find more evidence of banking fraud, either by shareholders, management or big depositors.

This could have been the main reason why the capital injection by the LPS to rescue the bank ultimately ballooned to Rp 6.76 trillion, almost three times the central bank's preliminary assessment. The new wave of bad publicity will certainly make it much more difficult for the LPS to restructure the bank.

But it is much better now to raise and resolve all the questions, so that when the LPS eventually divests Bank Century within the next three to five years, as required by the law, the potential buyer will not uncover a time bomb, as encountered by Standard Chartered during a due diligence of Bank Bali in 1999, in light of a planned acquisition.

Standard Chartered uncovered that Bank Bali had paid about $78 million in bribes to brokers to have its inter-bank claims settled by the then Indonesian Bank Restructuring Agency under the deposit insurance scheme.

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A more politically confident SBY to propose his 2010 budget plan

Vincent Lingga , THE JAKARTA POST , JAKARTA Fri, 07/31/2009 1:45 PM Headlines

There are at least two positive factors that will make the 2010 budget proposal President Susilo Bambang Yudhoyono will submit to the House of Representatives on Monday more politically and fiscally credible. His re-election for the 2009-2014 period will provide his budget plan with a stronger political certitude, different from the political situation when then president Megawati Soekarnoputri proposed the 2005 draft state budget in mid-August 2004, two months before the installation of President Yudhoyono's government.


The green shoots that have begun to sprout in some developed economies and the stabilizing global financial market certainly help the government draw more reliable macroeconomic assumptions for aggregate revenue and spending estimates.
Putting it briefly, the external factor for next year's budget implementation will not be as adverse as this year.


That is strikingly different from the turbulent period for the preparations of the current 2009 budget last August, when the global financial crisis peaked, forcing the government to amend the budget plan several times even before it began to be implemented in January.

Internally, the 4.4 percent economic growth in the first quarter, compared to deep contraction in most other countries, is a confidence-building block for the economy, especially investors.
Yet another positive factor is that the upcoming spending plan is designed by a politically more confident President who will run his second and last term with much less political debt to the various parties in parliament.


Despite all these positive developments, though, we cannot expect the 2010 budget to be significantly more expansive than the current one, because economic improvements around the world next year will be incremental at best.

The total spending will most likely remain in the neighborhood of US$100 billion.
Most analysts foresee the economy to expand within the range of 5 percent to 5.5 percent next year, up slightly from an estimated 4.5 percent this year, driven primarily by private and government consumption. Hence there will not be much space for pump priming, let alone for public-sector investment, because tax revenues will not be able to increase significantly amid the sluggish real sector of the economy and weak commodity prices.


Deficit spending may increase to as much as 2.5 percent of gross domestic product (GDP), but this will not provide any boost to economic activities if bureaucratic inertia and inadequate institutional capacity remain the biggest hurdle to budget disbursement as they are this year.

The fiscal policy must therefore take into account the need to ensure the timely flow of funds to programs and projects by removing differences in outlook between budget personnel and program and planning staff related to background, values and functions.


With all the severe limitations within the budget financing, the government should design its spending programs according to policy priorities of alleviating poverty and unemployment through programs targeted to micro-, small- and medium-scale businesses and others to reinvigorate labor-intensive manufacturing operations.
Given the persistently big debt-servicing burdens, the government will not be able to significantly increase appropriations for investment.


However, larger investment spending, notably for infrastructure, would still be possible should a more confident President Yudhoyono have the courage to reduce fuel and electricity subsidies, which have been the biggest barrier to energy efficiency and conservation in the country.

All in all, the 2010 budget will not be an expansive, nor pump-priming one.
But since the budget plan is a communication system, conveying signals about behavior, prices, priorities, intentions and commitments, it can still play a catalytic role for buoying the financial market and the investment climate.


A realistic budget and a prudent fiscal system will be able to reinvigorate the pace of private investment, the third engine of growth that has run very slowly over the past few years.
A budget system, however fiscally viable, is not self-contained as it is influenced by multiple, converging uncertainties, entrenched patterns of expenditure, inflation and structural imbalances between expectations and resources.


The 2010 budget must be designed to cope with these realities, while being aware of self-inflicted uncertainties or rigidities associated with oil prices and financial markets.

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Reformer Sri Mulyani set to lead graft-tainted central bank

Vincent Lingga , The Jakarta Post , Jakarta Tue, 06/30/2009 10:54 AM Headlines 

With two of its former governors and four of its deputy governors now in jail for corruption, a good reputation, more than anything else, is what Bank Indonesia, the main plank for our monetary management, badly needs.

That need can surely be met by Sri Mulyani Indrawati, currently finance minister and acting coordinating minister for the economy. Hence, her nomination to be the new chief of the central bank by President Susilo Bambang Yudhoyono should be greatly welcomed.

Sri Mulyani, more than anyone else, is the best candidate for the post after Boediono, who took over the central bank's leadership in April last year, resigned recently due to his being selected as Yudhoyono's running mate for the July 8 presidential election.

Her knowledge and track record of experience - formerly as minister of national development planning and in her current key economic and financial role - is very appropriate, especially now that fiscal and monetary authorities have to strengthen their cooperation and coordination to cope with the fall out from the global financial crisis.

Her more fundamental asset is that she commands great authority due to her impeccable integrity and competence and is highly respected both in international - she was formerly an executive director of the International Monetary Fund - and domestic circles.

All this will significantly strengthen the integrity and credibility of the central bank which had been beset and beleaguered by several corruption cases.

Yet most importantly, she has built a robust reputation as a reformer, winning high praise for her courage and concerted campaigning to weed out ingrained corruption at the finance ministry, especially in the directorates general for tax and customs.

Her steadfastness in standing up against political pressures and interventions from vested-interests - she is known to have engaged in a number of bruising political battles to push reforms through - represents another pre-requisite asset for a Bank of Indonesia which should increasingly be projecting its political independence.

But, however welcome Sri Mulyani would be at Bank Indonesia, her nomination to the central bank would leave a big gap at the finance ministry which has yet to complete its sweeping reforms.

President Yudhoyono will face a tough job in selecting an equally capable person to lead the finance ministry.

The House of Representatives has yet to confirm Sri Mulyani's nomination, and in view of the July 8 presidential election and given the probability of a run off to select a new president, we don't think the other two presidential hopefuls would allow the incumbent president Yudhoyono to select the new central bank chief before the whole presidential election process is completed.

The central bank governor plays a very important role in macroeconomic management and a president always wants to have that position filled by someone he or she can count on to implement his or her economic framework as promoted during the election campaign.

Presidential aspirants Jusuf Kalla and Megawati Soekarnoputri, who command major factions at the House, would most likely block Yudhoyono's move to change the top management of the central bank at least until the whole process of the presidential election is completed and the new head of government is appointed.

Given the political uncertainty about the selection process, there is actually not any urgency at all to nominate a successor to Boediono at Bank Indonesia now.

After all, Darmin Nasution, another tough reformer and trusted aide of Sri Mulyani, who pulled off remarkable achievements in reforming the highly corrupt directorate general of taxation, will enter the central bank later next month as the new senior deputy governor to replace Miranda Goeltom.

Nasution, currently director general of taxation, and formerly chief of the stock market watchdog, will serve as acting governor of the central bank until the appointment of the new governor.

Darmin is expected to jumpstart preparations for the establishment of the Financial Service Authority which will take over the bank supervisory function from the central bank in early 2011, as mandated by the central bank law.

Given the acute shortage of tough reformers with impeccable reputation within the government bureaucracy, having both Nasution and Sri Mulyani simultaneously in the same institution would rather be a case of squandering severely limited high-caliber resources.

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Commentary: The poor, the unemployed and the inflated promises

Vincent Lingga , THE JAKARTA POST , JAKARTA Fri, 06/26/2009 1:05 PM Headlines

The second round of presidential debates Thursday evening presented a slightly livelier exchange of views, especially between Jusuf Kalla and incumbent president Susilo Bambang Yudhoyono, concerning what they would do to alleviate poverty and unemployment.

While Megawati Soekarnoputri continued to spout ideological rhetoric but didn't say anything substantial about job creation and poverty reduction, both Kalla and Yudhoyono demonstrated their mastery of the problems, succinctly articulating the connection between investment, economic growth, employment, purchasing power.

Like in the first round of debates, Megawati in her opening statement of vision and mission, haphazardly rambled from one subject to another, citing the importance of the traditional mutual-assistance spirit (gotong royong), then jumping to the problem of water, food imports, food sovereignty and the need for farmers to keep informed about weather forecasts.

Though her campaign slogans centered on what she called people-based economy, she didn't present any concrete policy measures on how she would cope with the problems of poverty and unemployment, failing miserably to show the vital role of economic expansion to create jobs and generate purchasing power.

Megawati failed to answer directly the moderator's questions about income, inflation, fuel subsidies. She repeatedly asserted the vital role of mutual-assistance spirit in attacking poverty and unemployment but failed to explain how. But both Yudhoyono and Kalla candidly enlightened the public on how poverty would never be reduced without fairly high economic growth, emphasizing the crucial importance of stimulating private investment through a better business climate.

As the incumbent president, Yudhoyono enjoyed the advantage of being able to articulate what his government has been doing and his achievements over the last five years.

Encouraging also was that both Yudhoyono and Kalla realized the need for multi-pronged policies in addressing poverty and unemployment, combining pro-growth policies with government intervention through populist programs specifically targeted at the impoverished people.

Economist Aviliani, who moderated the debates, deserved credit for her probing questions to each of the candidates, prodding them to debate each other's views.

According to the school of thoughts of Yudhoyono and Kalla, the fundamental goals of poverty and unemployment reduction strategy are to increase the opportunities available to poor families, reduce their vulnerability to economic shocks and empower them to address their own specific problems.

"We should not only provide them with fish, fishing hook and canoe but we should also produce fishing rods and canoes," Kalla said in emphasizing the importance of national economic resilience and minimizing dependence on imports.

According to Kalla, economic growth should reach at least 8 percent a year to reduce the poverty rate (currently 15.4 percent) by 150 basis points (1.5 percentage points) a year.

The three candidates, however, failed to present a clearly firm stance on whether they would be willing to raise fuel prices according to international price levels.
Nor did they reply explicitly to the moderator's questions about whether they would ask for foreign debt reduction or restructuring.

"I will increase tax receipts, improve austerity and efficiency to plug the budget deficit. But I will not sell or privatize state companies," Yudhoyono said, apparently in teasing Megawati who sold several state firms during her 2001-2004 presidency. The three candidates shared the same view about the need to revise the 2003 labor law to make it more flexible in order to encourage new investment but none of them elaborated how they would achieve the badly-needed amendments.

"We also need to make our fiscal incentives for investment comparable to those offered by other ASEAN countries," Kalla pointed out. So all in all, don't expect any policy breakthroughs, whoever of the three candidates eventually win the July 8 presidential election.The basic policies will remain the mixture of market-based economic management to spur growth and government intervention through well-targeted programs for the impoverished people.

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Special Report: Reforms in place to root out rent seekers

Vincent Lingga , The Jakarta Post , Jakarta Tue, 04/28/2009 12:54 PM Headlines

 

Limited financial resources and inadequate institutional capacity have forced the government to go slow in reforming the civil service.

Since bureaucratic reform is also about abolishing or reducing rent, it faces strong opposition from those whose rents are at risk.

Given its complexity, civil service reform therefore requires a long, tedious and modest implementation in several small steps, in which the correct sequencing of reform is crucial.

No wonder, then, that the structure, work attitude and values of most civil servants seem to have remained largely unchanged despite the introduction of the new civil service law 10 years ago and the decentralization of more than two-thirds of civil servants from the central government to regional administrations under the 2001 local autonomy law.

World Bank reports and studies by various other international agencies have cited unpredictable and low-quality services from civil servants and arduous licensing processes as some of the main barriers to doing business in the country.

However, the situation is not so hopeless. The big bang reform, launched in 2007 by building "islands of integrity and competence" at three institutions - the Finance Ministry, the Supreme Court and the Supreme Audit Agency (BPK) - has produced fairly impressive results.

These institutions were selected for their strategic roles in law enforcement and in safeguarding state revenue, minimizing state losses. Most of these strategic functions happen to fall with the Finance Ministry, such as tax, customs and excise duty collection, budget allocations, treasury management and the oversight of the capital market and non-bank financial service industry.

But why does the civil service reform cost so much?

Most studies have concluded one of the main causes of the bureaucratic problems and inertia is gross underpayment. Civil servants always point out their rock-bottom salaries as an excuse for their poor performance, corrupt practices or absenteeism.

Therefore the redesigning of the civil service system with modern personnel management requires exponential increases in their pay, often by as much as five times, to make their living conditions comfortable enough to resist the temptation of corruption.

The reform at the three institutions alone, for instance, cost about US$5 billion.
But the state budget cannot at once afford massive, across-the-board large pay increases for all civil servants. Hence the incremental approach for the bureaucratic reform.

The generous pay introduced under the reform is nevertheless worthwhile, as it are based on a comprehensive personnel management system with clear-cut job classification, job descriptions for key positions and guidelines for recruitment, firing and promotion based on clear-cut performance criteria.

The recruitment system in most other institutions now is largely flawed and corrupt, requiring bribes to enter the civil service or get promoted. The pay system is devoid of any built-in performance criteria.

Riding confidently on the success of the three pilot projects, the administrative reform ministry is now extending the islands of integrity and competence to the President's Office, the National Police, the Indonesian Military and the Attorney General's Office.

Bureaucratic reform, however, has been taking place not only in the central government.
The 2001 regional autonomy law, which requires the direct election of governors, regents and mayors, has forced an increasing number of regional administrations to implement wholesale reform of their civil service and set up one-stop licensing centers for businesses to woo investors.

Reform-minded regional administrations realize businesses create jobs, which in turn provide wages, which in turn generate purchasing power to fuel local economies.
Regional chiefs have increasingly realized that natural-resource endowments, though important, are not the only key assets to attract investors.

A conducive investment climate, including the ease of doing business, is no less important for wooing businesses. And a good portion of a good business atmosphere is related to the public administration service.

As regional competition for investment has now become much more fierce, more regional administrations have issued pro-business policies.

At present, more than 50 district and municipal administrations, or 10 percent of the total, have set up one-stop service centers for business licensing as the competition for new investment grows keener.

The main question, though, in view of the false starts of similar reforms in the 1970s, is how to make the civil service reform sustainable - how to extend the islands of integrity and competence into an archipelago of best governance practices amid the succession of government every five years.

Previous attempts to reform the civil service failed because the initiative and drive depended mainly on the heads of the institutions concerned. And when the reform-minded heads were replaced, it was again back to business as usual.

Here lies the importance of establishing a politically independent National Civil Service Commission, as called for by the 1999 Civil Service Law. The National Civil Service Agency, in charge of managing government personnel, also needs further empowering.

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