Commentary: Alcohol industry terrified as political process for prohibition advances

Vincent Lingga, The Jakarta Post, Jakarta | Commentary | Mon, August 31 2015, 5:57 PM

Publicly listed PT Multi Bintang Indonesia, the country’s largest brewery, has put on hold its US$42 million plant expansion projects in East Java after the ban on alcohol sales slapped on minimarts by the Trade Ministry in April slashed its sales by 40 percent and its profits by 47 percent in the first half.

Yet the worst may be yet to befall the alcohol industry as a draft bill initiated by the House of Representatives will completely ban the production, distribution, sale and consumption of alcohol in the Muslim-majority country.

Under the draft bill, anyone found to be distributing or producing alcoholic drinks containing more than 1 percent alcohol could face between two and 10 years in prison, or a fine of up to Rp 1 billion ($77,000). Those caught consuming alcohol could face jail time of between three months and two years or fines of up to Rp 500 million.

The political process for ushering in prohibition in the world’s largest archipelagic country started in April after the House’s Legislation Body approved the bill as a House initiative and put it among the 37 priority bills for deliberation during its current sitting period. President Joko “Jokowi” Widodo, who received the draft bill in July, instead of turning it down entirely, decided to continue the legislation process by assigning the Trade Ministry as the coordinator in charge of preparing the government’s stance on the bill.

Informed sources at the Trade Ministry said the President may submit to the House the government’s views on the bill sometime next month to make it a fully fledged draft law for further deliberation at the House. 

The alcohol industry is horrified by the extremely radical bill, not only because of its economic and social impacts but, more worrisome, by the acutely inadequate institutional capacity of the government to fully and fairly enforce such a draconian law.

The alcoholic drinks association grouped under APMBI has said it fully supports the initiative of the government and the House to make a comprehensive law to control the production, importation, distribution and consumption of alcohol in the country.

But such a comprehensive law should also be designed to protect the right of consumers, including tourists, to consume alcohol in a responsible manner based on a set minimum age, APMBI secretary-general Kwendy Alexander noted.

“But totally banning the production, distribution and consumption of alcohol drinks, which even now are already controlled by 36 government regulations and 147 regional bylaws, could cause a set of new, even more damaging impacts,” Alexander pointed out.

Many analysts share Alexander’s view, arguing that prohibition would only force the industry to go underground. If this happens the government would lose excise duty revenues and, yet more alarming, there would be a proliferation of bootleg liquor production without any health and safety standards. 

“We compiled newspaper reports showing that between last December and May alone, almost 160 people died after drinking bootleg alcohol and hundreds of others were made totally or almost blind,” he added.

According to the association’s estimate, total prohibition would cause the government to lose Rp 6 trillion in excise duties and result in the laying off of 180,000 workers. Thousands of other workers along the supply chain of the industry would become jobless.

A preliminary study by the Centre for Strategic and International Studies concluded that a total ban would cause revenue losses of Rp 22 trillion in the whole sector or 0.11 percent of gross domestic product, in addition to Rp 6 trillion losses in excise duty receipts (based on the government target as set in the 2015 state budget).

Yet more damaging is the devastating impact that prohibition would inflict on the tourist industry at a time when the government is stepping up its efforts to woo more tourists by granting visa-free facilities to visitors from 30 more countries in a concerted bid to improve the current account balance.

Put simply, a total ban would boil down to the government shooting itself in the foot. 

Given the potentially extensive damage, the association and many political analysts are confident that the final bill that will be deliberated at the House will be centered on a more effective framework of controlling the production, distribution and consumption of alcoholic drinks.

The ASEAN economic ministers meeting in Kuala Lumpur last week also decided to maintain alcohol on the General Exception (GE) List. The GE list includes products that are permanently excluded from the free trade area for reasons of protection of national security, public morality, animal and plant life, health and items of artistic, historic and archaeological value. 

Some political analysts estimate that the initial sponsors of the draft bill — the Islamic-based United Development Party (PPP) and Prosperous Justice Party (PKS) — may not be strong enough to push through a total ban as the basic philosophy of the final bill. Moreover, six of the 10 political factions at the House are secular parties.

However the controlling framework is eventually strengthened under a new law, one of the most important points is to ensure that liquor remains subject to punitively high excise. Hence, the trade and finance ministries should design an importation and distribution system that is easy to oversee, yet effective in controlling liquor sales to the targeted market niche — foreign visitors and residents. 

Liquor drinking has now increasingly become part of a modern way of life. And as our economy has become intensively globalized and our country more popular as a tourist destination, we will inevitably be host to an increasingly large number of foreigners.
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The writer is senior editor at The Jakarta Post.

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Hong Kong organizes largest ever promotion in Jakarta

The Jakarta Post, Hong Kong | Business | Fri, August 14 2015, 3:28 PM
Hong Kong will come to Jakarta in a big way in the middle of September. The city, located just off mainland China, will host a week-long promotion of its fashion, jewellery and electronic products and services and try reaffirm to Indonesians its role as the best gateway into mainland China, the world’s second largest economy.

Labeled ‘In Style Hong Kong’, the large-scale promotion will bring to the Jakarta Convention Center and the Grand Indonesia shopping mall more than 100 Hong Kong lifestyle brands. Some of these include fashion retailers such as G2000, Giordano, Bossini, Chow Tai Fook jewelleries, watchmakers such as Edwin Cosi Moda, Memorigin and Charles Hubert and electronics companies such as Goodway and Gold Peak.

This will be the largest economic promotion campaign Hong Kong has ever undertaken in Southeast Asia, propelled by the rationale that Indonesia is the largest economy in the ASEAN region, and the country is therefore an attractive market for Hong Kong businesses. This is the rationale that Raymond Yip, Deputy Director General of the Hong Kong Trade Development Council (HKTDC) detailed to a group of Indonesian journalists last week.

“We expect some 10,000 trade buyers, importers, distributors, retailers, brand agents, franchisees and specialists to visit the exhibition, the largest ever promotion we will make in Southeast Asia,” added Yip.

HKTDC is organizing the whole promotional program, which will also be attended by Hong Kong Chief Executive CY Leung.

Yip said that the Hong Kong Design Award Display, entitled ‘Fame In Style’ and located at Grand Indonesia from September 14-20, would showcase a range of award-winning products in addition to ‘Batik crossover’ collections by six designers, namely Lulu Cheung, Walter Kong and Jessica Lau, Walter Ma, Aries Sin, Harrison Wong and Cecilia Yau. The purpose of ‘Fame In Style’ is to highlight Hong Kong’s creative and design power.

Yip said that as part of the promotion, HKTDC senior officials and business leaders would also hold a full-day symposium and services consultation and business-matching event at the main lobby of the Jakarta Convention Center on September 17.

According to HKTDC, Indonesia-Hong Kong trade ties amounted to US$5.1 billion in 2014 and Hong Kong was the 9th largest foreign investor in Indonesia, with $657 million of investment in 2014.

The symposium will brief Indonesian businesspeople on why and how Hong Kong, with a per capita income of over $42,000, has become the second largest private equity center in Asia, Asia’s second largest stock market, its third larget foreign exchange market and the third largest source of foreign direct investment in Asia, all in addition to being the most important entrance port to mainland China.

Business visitors also will receive comprehensive briefings on how they could benefit from using Hong Kong as a platform to make investments or enter the market in mainland China, particularly as the city is a new and emerging center of fashion design and creative enterprise. (vin)

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HK emphasizes role as platform for global supply-chain

The Jakarta Post | Business | Fri, August 14 2015, 3:43 PM

The Hong Kong government invited a group of Indonesian journalists, including Vincent Lingga of The Jakarta Post, for  a visit to Hong Kong last week in light of the In-Style Hong Kong in  Jakarta in September, dubbed as the largest ever economic and trade  promotion campaign Hong Kong will ever make in the ASEAN region.

Below is his report based on a series of interviews and discussions with Hong Kong officials and business executives:
Its  strategic role as the gateway to the world’s second largest economy,  mainland China, being an efficient regional logistics hub and the  world’s third-largest financial center are several of the strongest  advantages Hong Kong will offer to the Indonesian business community and  consumers during a big bang, week-long economic promotion in Jakarta  next month.

But the fundamentals that will continue to  strengthen Hong Kong’s role as the leading trading and financial center  in Asia are what Hong Kong Trade Development Council (HKTDC) deputy  executive director Raymond Yip calls the Hong Kong brand.

“The  Hong Kong brand embodies a strong rule of law, good governance, first  class infrastructure and a credible regulatory system in the financial  service industry,” Yip noted at a briefing.

All these advantages  have made Hong Kong the most efficient platform to access the Chinese  economy, concurred Indonesian Consul General Chalief Akbar in Hong Kong. 

“Indonesian companies intending to enter the market in mainland  China should take advantage of the complete pool of financial, legal  and knowledge resources available in Hong Kong,” Chalief added.

Jimmy  Chiang, the associate director general of Invest, the department of the  Hong Kong administration in charge of foreign direct investment (FDI),  cited another important role of Hong Kong as what he called the  ‘superconnector’ of investments between mainland China and the rest of  the world.

“About 60 percent of China’s investment overseas was made through Hong Kong,” Chiang said.

He  cited the 2015 World Investment Report of the Geneva-based United  Nations Conference on Trade and Development that named Hong Kong as the  world’s second largest FDI destination, receiving a total of US$103  billion last year, behind mainland China which got $129 billion.

The  report showed Hong Kong’s ranking surpassed the US, which attracted $92  billion, the United Kingdom ($72 billion) and Singapore ($68 billion).

Hong Kong also ranks second in FDI outflows with $143 billion in 2014.

“These  numbers underscored Hong Kong’s role as a super-connector, in which  foreign companies use Hong Kong as a base to invest in mainland China,  and mainland Chinese companies increasingly use Hong Kong as a platform  to make global investments and acquisitions and to raise funds,” Chiang  said.

Hong Kong is also the second largest stock exchange in Asia  after Tokyo, and is the sixth largest hub for foreign exchange trading.  According to the latest data at HKTDC, as of the end of May, there were  more than 1,780 companies listed on the HKE with a total market  capitalization of $3.2 trillion. About 50 percent of the listed  companies are mainland Chinese corporations.

But the relationship  between Hong Kong and mainland China seems complex. Beijing for the  most part has kept its promise to uphold the ‘one country, two systems’  mandate.

Officially, Hong Kong is considered a ‘Special  Administrative Region’ (SAR), which means that it is treated as a  separate country from an immigration standpoint and continues to  circulate its own currency, the Hong Kong dollar. Hong Kong also retains  an independent legal and judicial system inherited from the previous  British rulers.

The message HKTDC wants to convey to Indonesia  next month is that “If you want a piece of mainland China’s rising  economic power, it’s best to find a proven and safe entry point. Its  name is Hong Kong.”

Kenneth Choy, a senior executive of the Law  Society of Hong Kong, cited the experiences and expertise of the almost  1,000 local and 80 international legal firms in Hong Kong that are  important for firms intending to do business in mainland China.

“We  have deeper understanding of the laws, culture and business practices  in China, which is key to minimizing the risk of commercial disputes.  Yet more importantly, the international arbitration center here is  independent, credible and very reliable,” said Choy.

The basics  that make Hong Kong a model for free-market enthusiasts is the city’s  low taxes, unfettered capital flows and rule of law routinely earn  recognition as the world’s freest economy, Chiang noted.

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

According to Chiang, the services sector  (financial, trading, tourism and real estate) accounted for almost 93  percent of Hong Kong’s $291 billion gross domestic product last year.

Even  though today most manufacturing companies have relocated out of Hong  Kong in search of lower-cost land and labor, notably in the Pearl River  Delta region (southern area of mainland China), industrialists remain  active in Hong Kong, operating their local offices as trading companies  and business headquarters that support offshore production.

They  mastermind and control the entire production process from their  headquarters in Hong Kong. Such an arrangement allows Hong Kong  companies to make the most of location advantages and division of labor.

 Today,  many Hong Kong traders still possess this dual operational status. They  perform non-manufacturing activities in Hong Kong, providing support  services such as marketing, order processing, materials sourcing,  product design and development, quality control, and logistics support  to their affiliated factories offshore, particularly in mainland China.

Its  long international business experience and knowledge about China make  Hong Kong the best partner for foreign companies to do business with or  in China, and for mainland Chinese companies to do business around the  world, noted Raymond Wong, the business development director of the  Geneva-based SGS, the world’s largest inspection, verification, testing  and certification company.

But advanced technology, research and  development activities have now become the new focus of the economy to  make Hong Kong another technology center in Asia, Wong added.

Hong  Kong’s extensive financial and business service cluster is unique in  Asia for its breadth, depth, sophistication and mix of international and  local firms. This cluster includes private banking, fund management,  corporate finance, currency trading, insurance, venture capital finance,  direct corporate investment, stock broking as well as support services  as laws, accounting, management consulting, executive search, public  relations, advertising, communications and information technology  support.

Hong Kong export trading firms have increasingly played  the role of packagers and integrators, matching demand from North  America or Europe with sources of supply throughout Asia and beyond.

Hong  Kong is able to play this role because it is the home to a number of  dynamic clusters of industries that are related to each other, that draw  upon common skill bases or inputs and that can reinforce each other’s  competitive position through dynamic interaction. They are capable of  bundling, integrating or packaging different aspects to create unique  combinations.

Its complete and most dynamic clusters of  industries facilitate a process to deliver products across the globe  involving financial and business service centers, suppliers,  distributors, port operators, forwarders, customs brokers, forwarders  and carriers in a finely-tuned chain operating in concert.

No  wonder, as of early this year more than 3,800 foreign companies had  their regional headquarters in Hong Kong for overseeing their Asian  operations.

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The petroleum-fund concept confuses fuel price-floating policy

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, Aug 2 2015, 11:02 AM

This is another example of the acute absence of policy coherence that has damaged market confidence in the economic team of President Joko “Jokowi” Widodo’s Cabinet.


 
Minister of Energy and Mineral Resources Sudirman Said suddenly came out last week with a strange petroleum-fund concept to defend the government’s inconsistency in the implementation of its fuel price-floating policy. The price-floating policy was launched earlier this year to gradually phase out the wasteful spending of taxpayer money on energy subsidies.

The minister explained that the government would start building up what he called a petroleum fund next year to cope with the oil-price fluctuations. The petroleum fund would be amassed from any profits that would accrue whenever subsidized fuel prices were higher than the market price. This fund would be used to compensate Pertamina for any losses it may suffer whenever the market price were higher than the subsidized fuel price and the government decided not to make price adjustments.

Under this mechanism, the government would not have to adjust the subsidized fuel price with monthly market price developments. Put another way, the fuel price-floating policy would be abandoned, and the adjustment of the subsidized fuel price to the market price would not be based on a longterm energy policy to gradually phase out fossil-fuel subsidy.

Even though such technical details as the organization, legal foundation, accountability and operational mechanism of the petroleum-fund concept have yet to be worked out with the House of Representatives, the idea itself and the stated objective of the fund will only make the future direction of energy policy and development of renewable energy more uncertain and unpredictable.

We still believe that the best and most effective way to influence consumer behavior on fossil fuels and to encourage investment in renewable energy development is through a market-price mechanism. The most vulnerable segment of society should be protected from the fuel-price volatility, but the majority of the consumers should be educated to live with the true economic costs of energy.

The government’s plan to throw away the fuel price-floating policy through this unusual petroleum fund seems to be irrational because in the oil market nothing is simple. High volatility has been the main characteristic of fuel oil. The main reason is that the short-term supply and demand for oil are what economists call ‘price-inelastic,’ meaning that they don’t respond much when the price of oil changes. Motorists don’t immediately start driving less when gasoline prices rise.

On the supply side, drilling projects take a long time to start up, so higher prices don’t immediately translate into more supply, or lower prices into less. This means that the way prices typically return to normal — through increasing supply or diminishing demand — doesn’t really happen in the oil market as it does in most other natural resource commodities.

Consequently, by its nature, oil trading is beset by uncertainty and predicting oil prices is simply a mug’s game. It’s not just a matter of the precarious geopolitics of where most of the world’s oil reserves are located. There’s also the fact that predicting future demand requires forecasting the performance of the whole global economy, which is quite complex and prone to big errors.

Hence, the most sustainable way of coping with highly volatile oil prices is by floating them on market rates in a managed way. This way the monthly changes in the subsidized fuel price will be gradual, and any price increase would be incremental. This may be the best way to accustom the consumers to the market price mechanism. Most national and international analysts welcomed the government’s decision earlier this
year to gradually abolish gasoline subsidies by floating the price of fuel in line with developments in the international oil price and the exchange rate of the rupiah. The price subsidy of diesel oil and kerosene, which are used mostly by fishermen and poor households in rural areas, was then fixed at Rp 1,000 per liter.

There is another twist to the oil-fund idea. What Said defined as a petroleum fund is strangely different from the oil-fund concept used by most oil producing countries.

In 2012, the government and the House planned to stipulate provisions on the petroleum-fund in the final draft of the oil and gas bill. But the philosophy of the fund has nothing to do with fuel subsidies. Instead, the main objective of the petroleum fund as defined in the draft bill is designed to support the petroleum industry by improving the depth of geological data on oil concessions that will be tendered to mining companies.

The oil and gas concessions auctioned to oil contractors have become less attractive due to the acutely inadequate geological data on the oil blocks, while most of the unexplored, promising oil basins lie in deep seawaters in the eastern part of the country. These potential oil basins, besides being highly risky, require huge investment and advanced deepsea technology.

None of the countries that build and manage oil or petroleum funds use those funds for supporting wasteful spending on fuel subsidies.

In Norway and Azerbaijan, for example, the petroleum fund is legislated in a special law that stipulates that the oil fund is to be accumulated, managed and preserved for future generations, and the use of the fund is supervised by high-powered boards of commissioners.

The cornerstone of the philosophy behind the oil or petroleum fund is to ensure intergenerational equality with regard to the country’s oil wealth.

The main objectives of oil funds, which in most countries have become giant sovereign wealth funds, usually include the preservation of macroeconomic stability, ensuring fiscal-tax discipline, decreasing the dependence on future oil revenues and stimulating the development of renewable energy and providing inter-generational equality by retaining oil revenues for future generations.

The Norwegian oil fund has developed into a huge sovereign wealth fund with about US$900 billion worth of assets and the Azerbaijani state oil fund more than $37 billion as of early this year.

The writer is a senior editor at The Jakarta Post. Vincent Lingga

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View Point: National banks sensible about foreign players' role

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, May 31 2015, 11:02 AM

The Federation of Private Domestic Banks (Perbanas) made a lot of sense when it recommended to the House of Representatives that the banking bill, which will begin to be deliberated in August, should not stipulate a fixed percentage for a cap on foreign ownership in banks.

The suggestion is relevant because the latest version of the banking bill after its last revision early this year stipulates a 40 percent cap on foreign ownership in banks and requires foreign investors who now control local banks to divest their majority shares within 10 years after the law takes effect.

Perbanas chairman Sigit Pramono reminded the House on Wednesday that the foreign investors, who now control 11 publicly listed banks, had been invited by the government during the height of the Asian financial crisis in 1998 to help strengthen the banking industry.

Pramono warned that the compulsory divestment by foreign investors into minority ownership even within 10 years after the enactment of the new law could shock the stock exchange and the banking industry in general.

The next big question is which national investors will be able and willing to spend billions of dollars to take over the banks’ shares.

The Perbanas recommendation boils down to a demand that whatever restrictions on foreign ownership of local banks will be stipulated in the banking bill should include a grandfather clause (not retroactive).

The House should also realize that a bank is a capital-intensive and capital-hungry business that requires steady capital replenishment to be able to grow and expand. Hence, partnerships between local and foreign banks are good for the whole banking industry.

Regarding bank capital, for example, the Basel-based Bank for International Settlement (BIS), which oversees the global banking industry, has launched what it calls Basel III capital requirements. This rule requires two liquidity ratios which are designed to ensure that banks can survive liquidity pressures. The liquidity ratios are Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).

The LCR focuses on a bank’s ability to survive a 30-day period of liquidity disruptions. Basel III regulations require the LCR to be greater than 100 percent so that the bank’s liquid assets are sufficient to survive these pressures.

The NSFR focuses on liquidity management over a period of one year and the NSFR should be greater than 100 percent so that the calculated amount of stable funding is greater than the calculated required amount of stable funding. The above new rules are tough and have the potential to dramatically change bank balance sheets, and are scheduled to be enforced in 2018.

Indeed, many analysts and politicians have expressed grave concerns over the increasing foreign ownership of banks in Indonesia, arguing that would make it extremely difficult for Bank Indonesia (the central bank) to guide monetary policies and bank lending for national economic development.

The latest data showed that 11 of the 41 banks listed on the stock exchange are controlled by foreign shareholders and six other banks had minority foreign shareholders. Foreign investors held almost 41.5 percent of the total market capitalization of the publicly traded banks.

But we should not blame foreign investors for their dramatic increase in ownership of banks in the country. Foreign investors (mostly banks) entered Indonesia upon the invitation of the government which was forced by the 1998 economic crisis to nationalize all major private banks and bail out all state banks.

But when economic rationale and the need for good corporate governance eventually required the government to sell almost all of the nationalized banks to the private sector, it was mostly foreign investors who won the competitive bids thanks to their financial strength, technical and managerial competence.

We do not really see the increasing foreign ownership of banks as an issue. It instead indicates positive foreign investor perception of the country’s long-term economic outlook. Foreign investors would not have been interested in staking out more capital for our banking industry if the economic conditions had not been improving because a bank can thrive and grow robustly only in an expanding economy.

The experiences of many countries, such as South Korea, Thailand, Malaysia and Mexico, point to the great benefits of the entry of major international banks with high reputation for the development of good governance practices.

Look how almost all of our best professional bankers were formerly executives of foreign banks in Indonesia or overseas, or had built up years of work experience with foreign banks.

True, a bank is not simply a business entity in an ordinary sense, given its vital role as the purveyor of lifeblood (credits) for the economy, its fiduciary responsibility and the multiplicity of transactions it is involved in.

This is precisely why the principles of good corporate governance for banks are much tougher and more elaborate than those for other business entities. That is why not everybody who can put up adequate capital can have controlling ownership of a bank.

Those who want to become controlling owners and members of the management and supervisory (commissioner) boards of a bank have to pass a “fit-and-proper test” from the central bank to assess their technical competence, business vision and philosophy and integrity.

Put another way, banks are the most heavily regulated and supervised industries. Good governance and corporate responsibility are the prerequisites for the integrity and credibility of market institutions as banks themselves are institutions of trust.

All these supervisory and regulatory frameworks can make us rest assured that it is not the nationality of bank owners that matters, but the capital resources, business philosophy, technical competence and integrity of the major or controlling shareholders.

Of utmost importance is for the Financial Services Authority to strengthen the legal and regulatory framework for the banking industry and issue guidelines for foreign banks to increase their contribution to the national economy, not only through lending but also the transfer of expertise in risk management and dissemination of best prudential practices.
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The writer is senior editor at The Jakarta Post.

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The week in review: Investor-state dispute

The Jakarta Post | Vincent Lingga | Editorial | Sun, May 17 2015, 5:51 AM 

There is nothing new in the statement by Coordinating Economic Minister Sofyan Djalil on Monday that the government would soon revise more than 60 bilateral investment treaties because the same issue has been raised by Cabinet ministers, senior government officials and lawmakers since early 2014. 

We were, however, surprised to learn that Sofyan failed to explain how far along the review was and which of the bilateral investment agreements would be given top priority. He only emphasized that the government needed to make a new set of guidelines to ensure that both national interests and foreign investors got fair and balanced protection. It is not clear as to whether revisions will be made only to treaties that are soon to expire or if the revisions will be across the board. 

As early as last year, Mahendra Siregar, then the chief of the Investment Coordinating Board, had stated that the government was drafting a new template for the investment treaties and promised that the new set of guidelines would be introduced to foreign partners within that year.

 It is true that many of the investment treaties signed in the late 1960s, soon after the enactment of the 1967 Foreign Investment Law, and in the 1970s, are now outdated in relation to the many laws in the economic sector made over the past four decades. But given the rash of lawsuits filed against the Indonesian government by foreign investors at the international tribunal, notably the Washington-based International Center for Settlement of Investment Disputes (ICSID), a unit of the World Bank, the issue of arbitration to settle disputes seems to be one of the most crucial issues within the revision of the investment agreements.

The government apparently has been frustrated by the clauses in the investment treaties that empower foreign investors, in cases of dispute over policies or changes in contracts, to sue the government at an international tribunal, thus bypassing national laws and courts.

Indonesia is not the first country to become fed up with foreign investors who could easily exploit the clauses on arbitration or the investor-state dispute settlement (ISDS) system.

Not only such emerging economies as South Africa, India and Brazil, but also developed countries such as Australia and Germany and regional economic groupings like the European Union have shown their utter disillusionment with the ISDS clauses stipulated in bilateral investment treaties.

Indonesia seems to have been one of the most adversely affected because most of the investment agreements were signed in the mid-1960s and 1970s, when the government was disadvantaged by its desperate need for foreign investment to lift the economy out of virtual bankruptcy. Its institutional capacity for negotiations with foreign parties also was still low.

The government then signed the investment agreements with their ISDS clauses without fully realizing that the arbitration provisions left it vulnerable to litigation that foreign investors could take up under the loosely worded clauses to win claims that they had been treated unfairly.

 Concerns over the ISDS system, which has for decades been a fixture of investment treaties, have been increasing even in developed countries, as multinational companies have exploited woolly definitions of changes in contracts or policies to claim huge compensation for losses.

The European Commission last year suspended negotiations with the US on the investment chapter of the transatlantic deal and is poised to launch public consultations over whether to include a dispute settlement mechanism. 

The ISDS provisions were originally designed to attract foreign investors by protecting them from discrimination or expropriation, but the enforcement of these clauses has been seen by most developing countries as disastrous. The filing by a foreign investor of a lawsuit against a government at the ICSID, for example, could immediately result in negative publicity and exact big costs for hiring foreign lawyers or consultants.

There is also a perception in Indonesia, which has big extractive industries yet has a weak law enforcement system and a corrupt bureaucracy, that the treaty-based ISDS system tends to favor foreign investors.

What is needed is new investment treaties that are more equitable in protecting national interests and the interests of foreign investors.

But requiring or forcing foreign investors to settle disputes only at local courts or a national tribunal without any chance of the last resort to go to international tribunal, would scare away investors, given the notorious reputation of our corrupt court system.

Businesspeople rightly argue that a fair, independent and transparent arbitration mechanism is vital to protect investors’ interests from unfair treatment, and most foreign investors are doubtful that they would get a fair hearing in the legislative and court processes, especially if the opponent was the government or a well-connected local. 

Hence, whatever changes are to be made in the ISDS system within the revised bilateral investment treaties should take into account the urgent need for a credible court system and national arbitration.

We still need a steady flow of foreign investment to bring in expertise, new technology and international best practices to the business world. But the government also needs to see to it that foreign investors cannot so easily file lawsuits at the ICSID or other international tribunals.

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Infrastructure problems: A lack of preparations

Vincent Lingga, The Jakarta Post, Baku | Opinion | Wed, May 06 2015, 7:01 AM
Infrastructure was one of the topics in the series of seminars held here on the sidelines of the Asian Development Bank (ADB) annual meeting on May 2 to 5 because investment in infrastructure has increasingly been recognized as critical for economic growth and welfare. 

Indeed, infrastructure investment has the potential for increasing efficiency and competitiveness, promoting both international linkages and domestic integration and raising output in the short term by boosting demand and in the long term by raising the economy’s productive capacity.

But the initiative of China, the world’s second-largest economy, to set up the Asian Infrastructure Investment Bank (AIIB) that so far has attracted almost 60 developed and developing countries as the founding shareholders, has turned into an issue of geopolitics involving Japan and the United States. 

The ADB apparently tried to avoid protracted geopolitical issues by setting “Preparing bankable projects and removing impediments to private financing” as the central theme of a seminar on Saturday that presented six panelists consisting of bankers, investors and Azerbaijan’s Finance Minister Samir Sharifov.

The panelists agreed that the existence of large infrastructure gaps across a large and varied set of countries reflects a combination of institutional and financial constraints, as well as pressure from rising demand and the best way to speed up infrastructure development is through public-private partnership (PPP) programs because of the limited financing resources of governments. 

But despite the potentially large pool of long-term savings available, securing the necessary financing on adequate terms is often a challenge, reflecting in part issues related to the appropriability of the returns on infrastructure investment, regulatory risks and long gestation periods. 

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

As Gordon Bajnai, chief operating officer of the Paris-based Meridiam Group, a leading global infrastructure company, says, PPPs are a good concept because the government still owns the project or facility. But the project should not be politically motivated, but be based on really essential needs and should be managed by highly competent officials in view of the complex supply chains involved.

Koray Arikan, senior executive of the Dogus Group, one of Turkey’s largest conglomerates, which also is active in the construction business, observes that the problem is not the lack of financing but the dearth of financially viable and well-designed projects supported with credible overall risk analyses.

Jose Isidro Camacho, managing director of Credit Suisse Asia Pacific, says the prerequisites are a strong regulatory framework, a strong legal system and the long-term credibility of the project because investors look for economic predictability, not for economic certainty.

Camacho and Arundhati Bhattacharya, the CEO of the State Bank of India, share the view that there is sufficient capital available in Asia and long term funds from pension and insurance firms like infrastructure that secures a long-term, stable stream of revenues.

Returns from debts secured against real assets are also high because financial instruments linked to infrastructure are typically hedged against inflation and offer stable returns, with low volatility and little correlation with other asset classes. The long life of these assets is a perfect match for the long-term liabilities of a pension fund. 

But the acute lack of project preparation and development seems quite obvious in Indonesia, which has since 2005 been offering hundreds of projects under the PPP program, but very few of them gained investor interest because the government did not or hesitated to allocate adequate budgets for hiring professional consulting firms and advisors to undertake preparatory work.

Whereas the upfront cost of preliminary project development more than offsets the comparative cost of delay or failure to realize important public services and infrastructure, or the increased costs private investors must charge to overcome unmitigated risks.

 The panelists see project development as an important tool for catalyzing professional development of complex infrastructure and services and a key contributor to realizing investable, bankable projects.

It is apparently because of this wide gap of project preparation that ADB last September set up the Office of PPP (OPPP) to enhance its role in supporting and enabling governments of developing countries to secure larger private investments in infrastructure development. 

An ADB study last year found that lack of project preparation is a key contributor to the failure of projects with private sector participation. Too often projects are put out to competitive bidding lacking proper contracts, appropriate risk allocation, a sustainable revenue model, government support, key project inputs such as international-standard studies for feasibility, environmental or social safeguards, uncertain resource assessments and properly-secured land.

The OPPP provides assistance to developing members to set up their regulatory frameworks and transaction advisory services (TAS) to developing member countries to deliver bankable PPP projects and coordinate and support PPP-related programs. TAS are fee-based advisory services provided by the ADB over the entire range of activities associated with the development and implementation of PPP projects.

The OPPP helps developing members prepare a pipeline of ready-to-finance infrastructure investments by assisting with due diligence and helping to address impediments to investment decisions, supporting project design, preparations and structuring.

The ADB further expanded its capacity to design and structure bankable infrastructure projects by signing a PPP co-advisory agreement with eight global commercial banks from Japan and France on the sidelines of the ADB annual meeting here. 

Under the agreement, the ADB and the eight banks can work together to provide independent advice to governments in developing Asia on how best to structure PPPs to make them attractive to the private sector and to manage the subsequent PPP bidding process. The governments will, however, make the final choice of the PPP winning bidders.
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The author is senior editor at The Jakarta Post. 

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ADB ups lending and grant resources

Vincent Lingga, The Jakarta Post, Baku, Azerbaijan | Business | Mon, May 04 2015, 7:34 AM

The Asian Development Bank (ADB) is to increase its lending and grant resources by 50 percent to as much as US$20 billion annually after the board of governors approved a groundbreaking initiative to combine its lending operations: the Asian Development Fund (ADF) for poor countries and ordinary capital resources for middle-income members.

ADB President Takehiko Nakao told a news conference on the first day of the 48th ADB annual meeting in Baku on Saturday that the initiative, deliberated since 2013, would become effective in 2017.

“Combined with cofinancing, ADB’s annual assistance will reach as much as $40 billion in coming years from $23 billion in 2014,” Nakao added.

Last year alone, the Manila-based ADB leveraged a record $9.2 billion in cofinancing, which, combined with $13.7 billion from its own resources, saw total assistance reach $22.9 billion. 

Also in 2014, ADB and the Islamic Development Bank extended their cofinancing partnership until 2017, allocating up to $2.5 billion for projects across sectors including transportation, energy, urban development, social services, agriculture and private sector development. 

Nakao said that under the initiative, the ADB’s ordinary capital resources (OCR) would almost triple to about $53 billion in 2017 from $18 billion now. This will benefit middle-income coutries such as Indonesia, as they are currently entitled only to get loans from the OCR granted at maket-based rates, while the Asian Development Fund provides concessional loans and grants to poor countries.

 Acording to ADB reports, since its establishment in 1966, ADB has approved $30.19 billion in sovereign and nonsovereign loans, $432.06 million in technical assistance and $429.98 million in grants for Indonesia.

The ADB current country partnership strategy (CPS) for Indonesia focuses on inclusive growth and environmental sustainability, with priority given to natural resource management, education, energy, finance, transportation and water supply.

According to Nakao, the latest decision by the board of governors is a win-win situation because it will increase financial support for poorer members and expand capacity for operations in middle-income countries and the private sector. The merger of the two lending resources, he said, would also enhance ADB’s risk-bearing capacity and strengthen its readiness to respond to future economic crises and natural disasters. 

Nakao dismissed fears that the launch of the China-led Asian Infrastructure Investment Bank (AIIB) would lead to a battle over staff and projects, insisting that additional sources of finance such as the AIIB were welcome in view of the huge infrastructure gap in the region, which, he claimed, required at least US$8 trillion over the next 10 years.

“We will collaborate, cofinance and complement each other,” added Nakao after a meeting on Friday with Liqun Jin, secretary-general of the Multilateral Interim Secretariat of the Asian Infrastructure Investment Bank (AIIB).

More than 67 coutries in Asia — including Indonesia — Europe and Latin America have joined AIIB as founding shareholders, but Japan, perceived to be the dominant shareholder in the ADB, has not yet made up its mind.

The ADB, Nakao said, had answered questions from the AIIB at the staff level about procurement systems and safeguard policies, as well as legal issues. 

He acknowledged, however, that the bank needed to embark on initiatives to improve its work in the region. “We must make efforts to reform ourselves by increasing our lending capacity and strengthening knowledge and streamlining procedures,” Nakao added. 

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