Plastic waste: The blame is on us, convenience-minded consumers

Vincent Lingga / The Jakarta Post

Jakarta   /   Mon, July 22, 2019   /   09:06 am 

A 3-year-old boy is helping his parents sorting the waste. (JP/Sigit Pamungkas)

 

Indonesia’s problem of plastic waste pollution is not the result of the occasional rogue foreign shipment. It is caused mainly by each one of us, the hundreds of millions of convenience-minded consumers who have become so used to buying cosmetics, household detergents, water, eggs in boxes and packaged food in single-use packaging.

When buying such products we don’t give a thought to what will happen to the plastic after we discard it. Unless sorted and collected such packaging will end up in a landfill where it will degrade only after 450 years, experts say, or, worse, find its way to the sea.

Recently, a few Asian governments intercepted imported shipments of allegedly hazardous waste comprising household garbage, municipal waste, hospital waste and electronic scrap. Indonesia itself has shipped five containers of plastic wastes back from Tanjung Perak Port in Surabaya, East Java, to the exporters in the countries of origin, mostly Western industrialized nations.

Some of this waste had been misleadingly declared recyclable plastic scrap and there is a likely connection between the sudden increase of such shipments and the notification given by China to the World Trade Organization in July 2017 that it would no longer import various kinds of recyclable scrap. Since the early 1990’s China eagerly consumed 60 percent of the world’s recyclable scrap to fuel its manufacturing boom and this sudden decision left scrap exporters scrambling to look for new markets.

According to research by the United Kingdom-based Financial Times, the countries that immediately stepped in to fill the gap left by China were, in order of size, Malaysia, Vietnam, Thailand, Hong Kong, India, Taiwan, the Netherlands, Turkey and Indonesia.

Politicians have found it fashionable to describe Asia as having become the “dumping ground” for the waste of Western countries. However, every shipment of recyclable plastic involves a buyer and seller.

No reputable recycling company wants to import scrap that has been contaminated and no foreign government wants the embarrassment of being forced to take back its own garbage.

However, in international trade there will always be rogue elements all too ready to make a quick profit through fraudulent declarations. Until recently the export of plastic scrap was not even covered by the Basel Convention, so such exporters could not be prosecuted by their own governments.

The main reason that China gave to the WTO for its decision to stop importing scrap was because many shipments had been mixed with “dirty waste” that could not be used as raw material and contaminated the environment.

Fortunately this problem was recently addressed by the Basel Action Network and in May 2019 the Basel Convention was amended to include mixed and contaminated plastic scrap as “hazardous waste”. Indonesia also signed the amendment that will come into force in January 2021.

Unfortunately the isolated cases of waste imports have resulted in an unfair backlash against the import of plastic and other scrap needed as raw material for the legitimate local recycling industry. The call for a total ban on transboundary plastic scrap is a throwaway phrase that does not acknowledge this important local industry.

In Indonesia a well-established reputable recycling industry employs thousands of people. T

he Industry Ministry estimates Indonesia needs 600,000 tons of imported scrap a year and can potentially enjoy a healthy trade surplus by exporting back recycled plastic pellets, flakes, plastic chips and geotextiles for road construction.

Reputable foreign investors have entered this sector such as the recent bottle-to-bottle recycling plant in East Java. At least one of Indonesia’s largest producers of bottled water can now claim to use bottles made out of 100 percent recycled local plastic.

However, the local recycling industry presently has no choice but to continue to import plastic scrap because it is simply not able to utilize the plastic waste produced by Indonesian consumers, owing to the absence of efficient municipal waste collection, sorting and cleaning systems.

Unless there is a demand from the consumer for biodegradable containers, or for a reuse model in which all bottled liquids have to be sold together with refills, the amount of single use packaging will not decrease in the short-term. Indonesia should instead immediately implement less challenging strategies.

We cannot expect consumers to sort their household waste or desist from throwing it into the river for love of the environment. Even Singapore, a model of urban cleanliness, has yet to convince residents to sort their household waste. However, if householders are paid to sort their waste as in the commendable Indonesian bank sampah (app-based garbage collection bank) scheme, already comprising over 7,000 banks, then they will do so.

Similarly, we cannot expect municipalities to find the funds for recycling facilities. However, such funds would be readily available if there was a regulation on a national program of extended producer responsibility (EPR) in which the producer who delivers a product in a single-use container must take responsibility for its end of life, and make a small contribution to an ecofund for recycling infrastructure. Such a program could also be extended to the less visible but more serious problem of electric and electronic waste.

The EPR regulation could be part of a wider effort under Law No. 18/2008 on waste management to cut Indonesia’s waste output; it would oblige producers and retailers to redesign their product packaging to have a higher proportion of recyclable material. It will also require that they take greater responsibility for the waste management of their products.

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Jokowi, Prabowo challenged to reveal income tax returns

Vincent Lingga

• The Jakarta Post
• Jakarta   /   Wed, February 27, 2019   /   09:05 am

Presidential candidate Prabowo Subianto, who has been campaigning vigorously for social justice and more equality in income distribution and asset ownership, turns out to legally hold cultivation rights for more than 350,000 hectares of land for 35 years in Aceh and East Kalimantan.

This finding, which was revealed in the second round of presidential debates recently, has prompted Indonesian Corruption Watch and several other civil society organizations to challenge incumbent President Joko “Jokowi” Widodo, Prabowo and their running mates to publicly reveal their annual tax returns to show their honesty.

Next month happens to be the deadline for individual taxpayers to file their 2018 personal income tax returns (SPT) and both candidates also must file their 2018 SPT before March 31.

The General Elections Commission has for the past five years required that all candidates running for presidential and regional head elections to submit copies of their SPT. However, the commission is not authorized to make the SPT documents public.

Strange, though, such tax clearance is not required for the estimated 300,000 candidates running for the legislative elections in April.

Certainly, like legally protected bank secrecy, tax laws do not allow for the publication of individual tax returns. But not a single law prohibits the two candidate pairs from reaching out to voters by voluntarily revealing their tax returns to ascertain their integrity.

As Indonesia is still perceived as one of the most corrupt countries in the world, such an unprecedented gesture of honesty and transparency could go a long way in winning the respect of voters.

Income tax returns are evidence of a citizen’s commitment to fulfilling their civic duties to the state and can serve as a good measure of integrity because the SPT documents must stipulate not only tax payment records but also all the fixed and financial assets of taxpayers.

The government does have the requirement that senior government officials and legislators annually submit the records on their liquid and fixed assets to the Corruption Eradication Commission (KPK).

But regrettably this bureaucratic requirement is rather meaningless, perfunctory at best, and not legally binding. Most officials, directors of state companies and politicians simply ignore it. Moreover, the KPK does not have the resources to audit and examine the asset reports.

SPT documents, however, are legally binding and whenever necessary can be audited by tax officials even though the taxation system uses the self-assessment principle.

The revelation in April 2016 that thousands of Indonesian businesspeople used the services of Panama-based law firm Mossack Fonseca to set up special purpose vehicles (SPV) or shell companies overseas makes it imperative for politicians and officials to now voluntarily reach out to the public to show their integrity.

True, shell or SPV corporations are not in themselves illegal and they often have legitimate business purposes. However, they were also notoriously known as the main players in the underground economy, tax evasion and money laundering, especially those based in tax havens such as Panama.

But still the lingering question is if those businessmen did not have anything to hide, why had they set up SPVs through Mossack Fonseca, whose clients were notoriously known either as big corrupters, money launderers or tax evaders.

Many of those who formerly owned SPVs in Panama are now legislative candidates.

Only 65.4 percent of the 16.3 million registered individual taxpayers filed their 2017 income tax returns by March 31, 2018 deadline, reflecting persistently low tax compliance even after the generous tax amnesty that ended in March 2017.

Yet more disappointing is that only 992,000 of the 10.6 million who filed their tax returns were self-employed professionals such as doctors, consultants, lawyers and businesspeople. The other 9.6 million were salaried employees whose income taxes were withheld by their employers.

This simply reflected the high incidence of tax evasion and was confirmed by the World Bank estimate that the government had been able to collect only half of the tax potential.

The low personal income tax return filings also reflect a low compliance tax culture, especially among highly-paid professionals and high net-worth individuals. This trend is worrisome because collecting more personal income taxes could actually help bridge widening income inequality.

No wonder, therefore, that personal income taxes contribute only around 10 percent to tax revenue and the tax ratio (revenue against gross domestic product) is only about 11 percent, the lowest in the ASEAN region.

The bizarre fact that over the past four years hundreds of legislators, senior officials and heads of regional governments have been convicted, or are being tried or investigated, on corruption charges makes it imperative for public officials to disclose their assets and prove their tax compliance.

As the public now see integrity and transparency as the most important character public officials must have, there is nothing wrong or strange for politicians to make public their annual tax returns to demonstrate their integrity.

We realize this is a sensitive matter. But as corruption will remain one of our biggest problems for the next decade, we need to build up pressure through public opinion to encourage senior officials and politicians to demonstrate their honesty by revealing to the public their annual tax returns and all their assets.

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Second round of presidential debates short of great ideas

Vincent Lingga

The Jakarta Post

Jakarta   /   Tue, February 19, 2019   /   08:47 am

Warm ending: Presidential candidate Joko “Jokowi” Widodo (left) embraces his contender, Prabowo Subianto, after the 2019 presidential candidate debate at Hotel Sultan in Jakarta on Sunday. The debate was focused on energy and food, natural resources and environment as well as infrastructure. (JP/Donny Fernando)

The second round of presidential debates on Sunday evening was livelier than the first one last month, with the exchanges of views flowing smoothly. But the debates miserably failed to generate a battle for great ideas because of the inadequate time allotted for discussing five important topics and the poorly designed structure of the debates.

Yet more unfortunate, many of the questions prepared by the eight panelists, especially on energy and food, were not relevant to Indonesia’s most pressing problems within the next five to 10 years.

The panelists miserably failed to force the candidates to state their visions and missions, views, stances and commitments in regard to the five topics of discussion: food, energy, natural resources, the environment and infrastructure.

But then again, given that the candidates were each only given a three-minute introduction, how could they adequately explain their visions and missions in such important sectors?

Certainly, Joko “Jokowi” Widodo, who has the benefits of incumbency, immediately moved to show off his achievements over the past four years. As the challenger, Prabowo Subianto could only state his dream: to achieve self-sufficiency in energy and food and lower their prices and improve the terms of trade for farmers.

So important are energy and food to a nation that they could make or break the political and economic stability of a country like Indonesia, which has a population of 270 million spread out in the world’s largest archipelago.

Yet the first question raised by the panelists on these two issues was: “How can the fourth industrial revolution [Industry 4.0] impact energy and food development?”

Even though Industry 4.0 has reached Indonesia, the issue is not the most urgent problem for the country’s energy policy now and for the next 10 years.

They should have asked the candidates about their commitment to cutting the huge amount of wasteful spending on fuel subsidies and developing renewable energy: geothermal, solar, wind, biomass, biofuel and hydropower.

Citing only the increased use of palm oil-based biodiesel as an example of successful renewable development is simplifying the whole spectrum of renewable energy development.

The general public eagerly wanted to know the stance of each candidate on the fuel subsidy, which had held hostage all previous presidents as they had always been torn between their wish to embrace market pricing for fuels and their desire to remain in power.

Jokowi made a nationally and internationally commended bold move to slash fuel subsidies at the outset of his administration in late 2014, only because international prices had collapsed to below US$40 per barrel.

He pledged to float domestic fuel prices on international oil prices as Indonesia is already dependent on imports for almost 60 percent of its needs. The managed fuel price-floating system Jokowi introduced in 2015 was still tied to fixed price floors and ceilings, whereby the government could still intervene in retail fuel prices if fuels overshot the price ceiling.

As the range of the price floors and ceilings set for the managed floating was designed to be close to the fuel economic costs, the policy also was effective at least to prevent subsidies from ballooning out of control.

Such a system would also allow a gradual incremental rise in fuel prices and would free the government from being held hostage by a wildly volatile international oil market.

But Jokowi is no different from his predecessors. Last year, he reneged on this commitment when oil prices rose to between $70 and $80, a policy he defended as most imperative to prevent inflationary pressures and to protect the purchasing power of the people.

But the blunt fact is that the drawbacks of fuel subsidies and government-regulated fuel prices have been well-documented: They are known to benefit the rich disproportionately, as they consume much more energy and they lead to wasteful consumption and environmental degradation by disincentivizing energy efficiency, conservation and the development of renewable energy.

Subsidies also distort the price signals that normally balance the supply and demand in a market, foster smuggling of cheaper fuel to higher-paying markets and tie up government funds that could be better used in areas such as infrastructure, education and health care.

Energy subsidies increased from Rp 93 trillion ($6.8 billion) in 2016 to Rp 98 trillion in 2017 and totaled Rp 165 trillion in 2018 as the oil price rose to as high as $70 from $48 as set in the budget. For this year, they are targeted at Rp 158 trillion with an average oil price of $70.

Likewise, one of the basic questions that should have been raised on the food issue is: How do the candidates define the meaning of food security or food self-sufficiency, set against the gradual shifts in the patterns of food consumption? And what is their strategy for increasing the production of such staple food as rice, corn, potato, soybean and horticulture, whose imports tend to increase annually during the Ramadan fasting month and Idul Fitri festivities?

Past experiences have shown that food self-sufficiency does not fully address the core elements of food security because of the vulnerability of crops to weather anomalies and pest attacks.

Moreover, income growth, demographic and other lifestyle changes have been causing structural shifts in the patterns of domestic food consumption and expenditure, especially in urban areas that now account for around 50 percent of the population.

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Reinvigorate manufacturing or remain trapped in 5 percent growth

Vincent Lingga
Senior editor at The Jakarta Post

Jakarta   /   Wed, February 13, 2019   /   09:06 am

Illustration of economic growth (Shutterstock/Number1411)

Even under the most optimistic projections, Indonesia’s economic growth in the next five years is unlikely to exceed 6 percent. In fact, potential growth will most probably be at 5.68 percent, according to a joint study by the Asian Development Bank and the National Development Planning Ministry.

Hence, we can simply ignore it as an empty promise if any of the presidential candidates claim they can boost growth to 7 percent or more from an average of 5 percent over the past four years.

Without a broader manufacturing base to produce high-value exports, balance of payments disparities will continue to hinder high economic growth.

The study, conducted to design comprehensive policies for the 2020-2024 period to reinvigorate manufacturing, cited continued dependence on commodities, premature deindustrialization, utterly low labor productivity and a shrinking demographic dividend as the main barriers to higher growth.

The conclusion and policy recommendations of the study for reviving the manufacturing sector are stipulated in a 310-page book entitled Policies to Support the Development of Indonesia’s Manufacturing Sector During 2020-2024, which was released by National Development Planning Minister Bambang Brodjonegoro last week.

The report essentially warned that Indonesia would never rise from a lower-middle to high income country if it failed to increase growth to at least 7 percent.

High growth can be achieved only with a stronger manufacturing base that utilizes more complex technology, which produces widely diversified high-value goods with high income elasticities of demand.

Indonesia’s manufacturing sector indeed has declined steadily after the 1998 economic crisis. The sector’s growth has always been lower than national growth and its contribution to gross domestic product consequently fell from 27 percent in 1997 to about 20 percent in 2018, according to Statistics Indonesia.

High-tech manufactured exports such as office, computer and communications equipment have declined sharply while commodities such as coal, rubber and low-tech and medium-tech products such as palm oil, tires and automotive components and cars with very low income elasticities of demand have now become the bulk of exports. No wonder, more than 65 percent of the country’s exports are commodities or commodity-related.

One of the main factors behind the decline in manufacturing was the commodity boom for almost 10 years between 2003 and 2012 that lulled the government into complacency.

Most of the other barriers to manufacturing cited by the report have by and large been diagnosed by earlier reports on Indonesia’s manufacturing sector by the World Bank and Organization for Economic Cooperation and Development research development center. But the analysis and evidence-based policy recommendations provided by the book seem to be the most comprehensive so far.

We have been too familiar with such problems as inadequate and poor infrastructure, regulatory and bureaucratic barriers, excessively high logistics costs and acutely low labor productivity. Most of these problems have been and are being addressed by the government through accelerated infrastructure development and 16 reform packages on expediting business licensing and deregulation to cut red tape.

But the progress has been way below expectations because of the acute lack of finance, difficulties in getting reforms implemented in the era of regional autonomy and poor inter-ministerial coordination and low institutional capacity.

Other policy recommendations in the report that have been implemented by the government, but unfortunately at a very slow pace, are the development of industrial estates and special economic zones outside Java that focus on particular industries with a promising future.

The government is recommended to follow the business models of such successful manufacturing countries as China, Taiwan and South Korea, whereby the governments heavily intervened in selecting the kinds of industries to be developed as the champions.

During the iron-fist Soeharto administration, Indonesia had partly implemented such a strategy but it failed miserably because the selection process was neither transparent nor based on clearly defined performance criteria and favored particular vested interest groups.

The process of selecting industries to be developed as the champions should involve the private sector and focus on the country’s strengths and comparative advantages. The strongest candidates could be the few promising product segments such as fabricated metals, electrical equipment, machinery and equipment, chemicals and synthetic fibers.

One of the boldest recommendations is to attract large foreign manufacturers to make Indonesia their production base but with strong, clear cut rules requiring them to transfer technology and expertise in product design, engineering and development within a fixed period of time.

Indonesia’s rules on local content for foreign companies and joint ventures have never been as strong and consistent as China. In fact it has been the strong regulations on the transfer of technology that turned China into the world’s manufacturing powerhouse.

True, China has been able to enforce such strong transfer of technology requirements because of its strong bargaining power given its huge domestic market. With a population of over 260 million and rich in natural resources, Indonesia can follow suit though at a smaller scale.

But to bear fruit, the industrial development strategy should be supported with a consistent and long-term policy, longer than the five-year political cycle.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.

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Replanting, downstream plants key to rubber industry

Vincent Lingga

Senior Editor at The Jakarta Post

Jakarta   /   Wed, January 23, 2019   /  10:08 am

A man collects raw rubber on the banks of the Subayang River in Riau in this file photo. Rubber is currently selling for Rp 6,500 (44 US cents) per kilogram down from a high of Rp 20,000 per kg. (The Jakarta Post/Tarko Sudiarno)

The liberalization of foreign investment in the crumb rubber industry is an example of misguided policy-making, which instead of achieving the objective of attracting investment could adversely affect the whole industry.

As natural rubber is Indonesia’s seventh-largest export commodity with an annual income of about US$5.5 billion, it was included in the latest economic reform package last November that focused on wooing more foreign direct investment. 

But the Indonesian Rubber Producers Association (Gapkindo) has strongly opposed the new policy, arguing that the crumb rubber industry has been suffering from acute raw material shortages and most plants have been operating mostly at 60 percent of their installed capacity as a result of a lack of raw materials. 

“The crumb rubber industry has a capacity of 5.6 million tons while the upstream sector [plantations] is able to supply only about 3.6 million tons of raw rubber,” noted Widyantoko Sumarlin, a senior executive of Gapkindo and chief sustainability officer of Kirana Megatara, one of the country’s largest crumb rubber producers.

Widyantoko said most crumb rubber plants had been operating far below their installed capacity because of the acute lack of raw materials and low rubber prices overseas.

Indonesia is the second-biggest natural rubber producer and exporter in the world, with a total area of around 3.5 million hectares but with an average yield of only 1 ton per ha, compared to 1.6 tons in Thailand, the second-largest producer, and Malaysia as the third-largest.

Different from oil palm plantations and the industry, which is dominated by big business groups, most (85 percent) rubber plantation areas belong to smallholders, private companies (9 percent) and state firms (6 percent). 

The government apparently thought that increasing the number of crumb rubber factories would automatically make the competition for latex much keener and this would help raise producer (smallholder) prices.

But this premise seems to be wrong. Gapkindo has said that because crumb rubber producers export more than 80 percent of their production, they use international prices that are quoted at the futures commodity exchanges in Singapore, Tokyo and Shanghai, as their main references for the domestic procurement of latex. 

True, the price of rubber, like most other commodities, has been very low over the past six years, falling from as high as $5 per kilogram in 2011 to as low as $1.20 in 2017 and $1.70 early this month. 

But this price decline was caused mainly by the sharp fall in demand in China, which accounts for more than 40 percent of global demand. 

The price will not likely rise this year because of the cascading effect of the slowdown in global growth, especially in China, and the downward trend in the price of crude oil, the basic material for synthetic rubber. 

What is badly needed instead, according to Widyantoko, is more farm extension services to help smallholders increase the yield of their plantations through the best farming practices and planting high-yield seedlings to replace their old trees.

However, smallholders simply cannot afford the replanting costs, which could reach as high as Rp 3.5 million ($240) per ha for clearing land and uprooting old trees and high yield seedlings, while the government’s budget is severely limited.

According to data at the Agriculture Ministry, 400,000 ha of smallholder rubber plantations require replanting, while the 
local production of certified seedlings is way smaller than the demand. 

Partnerships between rubber processing companies and smallholders under government oversight, as widely implemented between big oil palm plantations and smallholders, could be a highly effective collaborative model to solve the problems of low yields and poor quality because they depend on each other for their survival. 

But different from the oil palm estates and palm oil industry, which are controlled by big plantation companies, rubber plantations are dominated by smallholders who are not only poorly organized but also financially weak and lack competence in best farming practices.

“We in Kirana Megatara have been expanding our partnership programs to empower smallholders, but only on the basis of good faith. We need a better designed regulatory framework for NES [nucleus estate-smallholder] programs,” Widyantoko noted.

Even though the 2014 Plantation Law specifically requires all big plantation companies to implement NES partnerships, there is no government regulation on the technical details on how the NES scheme should be implemented. Moreover, the NES program is compulsory only for new plantations. 

Without comprehensive regulations on technical details, there seems to be legal uncertainty as to the identification of the smallholder target, standard NES contract and other issues related to land titles and permits from local administrations.

Additional investment is truly needed in the rubber industry, but not specifically in crumb rubber, an intermediate (mid-stream) material with low added value. 

The government should instead stimulate new investment in downstream plants to manufacture higher added-value products as components of automobiles and electronic goods, medical gloves, carpets, footwear and asphalt.

Thus far the biggest industrial user of natural rubber has been tire manufacturers, which have to compete fiercely with synthetic rubber producers.

Thailand’s and Malaysia’s rubber industries also depend mainly on the international market. 

But their domestic raw rubber prices have always been much higher than Indonesia’s because of the high demand from their downstream rubber factories, which manufacture a wide variety of rubber goods, besides tires and medical gloves.

***

The writer is a senior editor at The Jakarta Post.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.

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Commentary: Bold reform within customs and excise administration

Vincent Lingga

The Jakarta Post

Jakarta   /   Mon, January 7 2019   /  12:33 am

Customs and excise offices are not popular institutions in many countries as they are deemed to be notoriously corrupt. Even the Bible negatively perceives customs collectors as sinners, as in the story of Zacchaeus, who later was happily reformed and gave half of his possessions to the poor.

Authoritarian president Soeharto was so fed up with the then corrupt and inefficient customs office that he stripped it of its import inspection and clearance authority in 1985 and transferred that mandate to the Geneva-based Societe General de Surveillance (SGS), the world’s leader in surveyor and inspection services. 

Soon after the Customs and Excise Directorate General regained its import and export inspection authority in 1997, it pledged to minimize corruption by introducing an electronic data interchange (EDI) system that would facilitate all communication between officials, importers and banks in the determination and receipt of customs duties and tax. 

But reform within the directorate was sporadic over the past 20 years and the customs service, like the tax office, continues to be perceived as a corrupt and inefficient public institution even though its governance is now much better than before 1998. The directorate launched the EDI system through the internet in 2016, but the online filing of trade documents was not at that time made compulsory for importers and exporters.

Then the directorate announced on Dec. 21, through an advertisement in this newspaper, that it would fully implement the EDI system for all importers and exporters starting in January, 2019. What a bold move.

EDI, an electronic trade documentation system, will provide an online, real time electronic interface and enable exchanges of data among all players in the import and export process (customs and other relevant government offices involved in seaport and airport handling, banks, shipping lines and freight forwarders). 

Businesses (users) can transfer data (documents) at anytime and from any place with an internet connection across the world’s largest archipelagic country. Many other countries that have fully implemented the EDI have been able to slash the time it takes to complete customs clearance and the whole port handling process from a few days to a few hours, or even a few minutes as in Singapore. 

EDI implementation should certainly be supported by a comprehensive reform program that includes improving the customs code, implementing controls based on risk assessment, adopting performance standards and effective internal audit, maximizing information and digital technology, and establishing a consultation process with the private sector. 

It should also be remembered that customs clearance is only one of the many aspects influencing the dwell time of freight — the length of time cargo sits in a seaport terminal’s in-transit storage — which in Indonesia remains very long and has contributed the most to logistics costs, which are among the highest in the ASEAN region. 

Why then is a clean, efficient and technically competent customs service so vital to the economy and a key to connecting Indonesia to the global value chain?

To a certain extent, the Customs and Excise Directorate General plays a more important role than the Taxation Directorate General. The most damaging effect of corruption within the tax authority is state revenue losses, as the government receives much less than what is due from taxpayers. But malfeasance within the customs service causes far-reaching damage to the economy, especially international trade. 

Violations of customs rules, besides resulting in state losses, create distortions on the domestic market because foreign goods, on which much lower duties and taxes are paid than what is mandated by law, create unfair competition with domestic products. Outright physical smuggling, which is believed to be rampant given the vast and porous coastal lines across the archipelago, also has a similarly devastating impact. 

Even after most import tariffs have now been slashed mostly to less than 10 percent under free trade agreements, the 10 percent value-added tax (VAT) is still payable on imported finished products, and this tax is based on the landed costs of the goods, the main component of which is the declared customs value. 

If general importers can collude with customs officers and get away with declaring an invoice price at a fraction of the true value of the goods, the importer pays less VAT. A grossly corrupt customs service could cause an influx of grossly undervalued finished goods on the domestic market and cause unfair competition with local manufacturers.

In fact, no trade policy instruments will be effective, however well designed they may be, if the customs service that is responsible for guarding the gateways (airports and seaports) remains venal and technically incompetent. There will never be fair trade without an efficient, fairly clean customs service.

An efficient customs service contributes greatly to facilitating the smooth flow of imports, which is vital for the domestic manufacturing industry because of its heavy dependence on imported materials and components. Even foreign tourist arrivals, which are so important in bringing in foreign exchange, could be discouraged by an inefficient customs service. 

The launching of the EDI system will certainly face startup problems and resistance from vested interests who will lose a cash cow. But then all bold reforms are never easy because they have to deal with the rent-seeking mentality that had developed within the old system. But this is the challenge for the chief economics minister, Darmin Nasution, to see to it that all government offices involved in port handling fully cooperate to make the EDI a success.

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Commentary: Looking at Freeport deal through distorted lens of politics

Published on December 27, 2018

 

President Joko “Jokowi” Widodo deserves the highest praise for his appropriate pursuit of resource nationalism. Last Friday, the government finally closed its deal with United States mining giant Freeport-McMoRan (FCX) on acquiring majority shares in its subsidiary Freeport Indonesia’s (FI) Grasberg copper and gold mine in Papua for US$3.85 billion — less than four months before the presidential and legislative elections in April 2019.

Still, it is mind-boggling to hear the perpetual criticisms analysts and the campaign team of presidential challenger Prabowo Subianto have lashed out at the successful FI divestment.
Looking at the FI acquisition only through the distorted political lens of misguided arguments simply insults the people’s intelligence.

Critics have ridiculed the acquisition of the world’s second largest copper and gold mine as a “senseless and stupid move”, asking why the government did not wait until FI’s current contract ended in 2021 — by which time it could simply take over the mine without paying a single rupiah.
These detractors deliberately ignore the legal fact that under Indonesian law, mines operating under a contract of work (CoW) serve as both contractor and investor.

Hence, the government cannot “simply take over” mining operations in the event that the FI contract is not extended beyond 2021, because FCX has the legal right to take home all mining equipment and other fixed assets of its Indonesian subsidiary. Only the mineral deposits laying deep underground belong to the state — mineral resources that have absolutely no value without FI’s technology, expertise, operational system and global network.

This is very different from foreign oil companies, which cannot claim anything after their production sharing contract (PSC) ends, as they are purely contractors.
Taking over the FI mine after the CoW ends without paying due compensation to Freeport as mutually agreed would land the government at the international arbitration court and isolate Indonesia as a pariah of the international community.

If the critics suspect that the price for acquiring majority ownership in FI was unusually high or smacked of irregularities, it would be more productive if they lobbied the House of Representatives to request that the politically independent Supreme Audit Agency conduct an investigative audit into the entire divesture of the world’s most complex mining operation.
The FI divestment was a normal business transaction between the government, through state-owned mining holding company PT Indonesia Asahan Aluminium (Inalum), and FCX, as required by the law. The negotiations were long and tough, overshadowed by the sociopolitical controversy of FI’s 50-year operations in the country’s easternmost province.

The fact that FCX — which still holds 48.76 percent ownership in FI after the divestment — did not ask for international arbitration as it had threatened, shows that the US mining giant was satisfied with the deal.

The final stage of the divestment smoothly followed the initial agreement signed in August 2017, followed by a heads of agreement signed in July 2018 and a sales and purchase contract that concluded in September.

Judging from the step-by-step process and the comprehensive due diligence the state financial comptroller (internal audit) and the Attorney General’s Office conducted on the deal, we can rest assured that the acquisition was clean and free of any malfeasance.

Most important for FCX is that the deal secures a 20-year extension of FI’s operations through 2041, and guarantees fiscal and legal certainty under a special mining license protected by the 2009 Mining Law. This is vital to the multi-billion dollars in additional investment that is still needed as the mine’s operation shifts from open-pit to underground next year.

On the other hand, the majority ownership enables the government to control FI management, corporate policies and such business plans as dividend payouts. And the government will have more authority over FI when its CoW ends in 2021 and it recommences operation under the special mining license.

Yet more important is the copper smelter, which will be built in Indonesia as one of the key requirements of the new mining license, and which will in turn allow the government to ascertain the gold content of the mine’s copper concentrates.

The fact that Inalum was able to purchase the acquisition with the proceeds of $4 billion global bonds is another proof that the transaction was clearly commercially viable.

Inalum successfully issued in November a $4 billion total tranche of three-year, five-year, 10-year and 30-year bonds in London with yields of 5.5 to 7.30 percent on a choppy global market from concerns over the US-China trade war, the US’ monetary tightening and slowing growth in Asia.
In using the bonds instead of bank loans, Inalum prudently managed its future debt service burden.
A word of caution, however: FI’s production output — and consequently its profit — will most likely decline in the first two years following the divestment.

But by no means is this legal ground for the critics to sue the ministers or the Inalum CEO for corruption. Nor can such a short-term decline in production be blamed on Inalum’s managerial incompetence, because the potential for this problem has been anticipated as Grasberg commences underground mining operations in 2020.

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Executive column: For insurance, it’s business as usual in election year 

Jakarta   /   Wed, December 26 2018   /  02:48 am 

 

 

Jonathan Hekster (Manulife Indonesia)
Manulife Indonesia, the oldest foreign life insurance company in the country, remains upbeat about the outlook of the industry despite the political noise during the presidential and legislative elections next April, the global uncertainty and financial market volatility.
“We have operated here for over 33 years and we now serve 2.4 million customers. We have faced many uncertain situations and political elections, yet our business has never declined even in an election year,” Manulife Indonesia chief executive officer Jonathan Hekster asserted here.
Hekster told Vincent Lingga of The Jakarta Post that regardless of any situation, life risks come anytime. This is something that people need to be aware of and Manulife Indonesia will help them to anticipate those risks.
Below are excerpts from a recent interview in which Hekster charted out the challenges and outlook of the industry, including health insurance:

Question: How do you think the political noise during the presidential and legislative elections next year would impact the life insurance business in Indonesia?
Hekster: The political noise will have an impact only on the span of attention of the general public. Regardless of any situation, life risks come anytime, anywhere. This is something that people need to be aware of and we will help them to anticipate those risks. Therefore we remain optimistic that it won’t affect the way we run our business. Moreover, the market potential is quite huge as the latest data at the industry’s association show that life insurance penetration is only 7.1 percent of the estimated 260 million population. Hence, there is still huge potential to fulfill the insurance and protection needs of the different groups of people through the right insurance solutions. The association estimated the industry will grow by 20 or 30 percent this year and will most likely expand at a similar rate next year.
How do you meet the insurance and protection needs of the rising number of middle-class people and high net-worth (top rich) individuals in the country?
Manulife continues to design new products to meet the different needs of our customers: This year alone, for example, we launched three products: Manulife Education Protector (MEP), a regular-pay unit-linked insurance product to help parents plan for their children’s education, MiTreasure Optimax Protection (MiTOP) and Manulife Prime Assurance (MPA) to protect high net-worth customers and prepare them for legacy planning.
The latest Global Wealth Report data showed that there are an estimated 100,000 high net-worth individuals in Indonesia and this number is growing rapidly. A study by Baker McKenzie in 2017 found that more than 50 percent of family businesses in Asia were run by first generation, but only 3 percent of family businesses were run by third generation. Hence, MPA is designed as a comprehensive insurance product to help these rich people balance their lifestyle changes and financial management and to prepare the next generation to take over their family businesses.
Do you think the medical insurance component of life insurance firms could greatly complement the government’s universal health insurance program?
Indonesia’s National Health Insurance (JKN) program has been having a positive impact on the insurance industry by increasing the insurance literacy rate. Both insurance business players and the government have the same mission, which is to increase the people’s welfare with the right financial protection. In principle, the awareness of insurance in general needs to be improved. Manulife has operated in Indonesia since 1985. We understand the culture well. This is why we are maximizing every channel like TV programs for campaigning to promote a healthy lifestyle which is a key component of our medical scheme.
Could you describe the latest trend in the Manulife Sentiment Index?
Our latest Manulife Investor Sentiment Index or MISI survey in 2017 found that Indonesian investors critically underestimate future retirement costs. It revealed that while nearly all investors (96 percent) believe they will maintain or enhance their lifestyle in retirement, their savings are likely to fall far short of their spending, jeopardizing their financial security. Although they place a high priority on retirement planning, ranking it second to paying for their children’s education, nearly a quarter of investors (24 percent) allocate only 10 percent of their savings or less to retirement.
Could you reveal Manulife Indonesia’s performance for this year?
Unfortunately we can’t yet disclose our unaudited result for 2018. But the trend so far shows our performance this year will likely be as robust as last year. Our audited report for 2017 recorded greatly positive developments: Our new business premiums increased by 19 percent to Rp 4.4 trillion (US$314 million), total premium income rose to Rp 25 trillion, consolidated comprehensive profits almost tripled to Rp 2.6 trillion and risk-based capital (RBC) position was 582 percent for conventional business and 372 percent for Tabarru Sharia, both way above the regulatory minimum requirement.

 

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Greenpeace activists try to sabotage Indonesian economy

Greenpeace activists try to sabotage Indonesian economy

Vincent Lingga

The Jakarta Post

Jakarta | Tue, November 27, 2018 | 11:05 am 


Greenpeace activists unfurl a banner reading "Drop Dirty Palm Oil Now" at a Wilmar International palm oil refinery in Bitung, North Sulawesi, in September. (Greenpeace/Jurnasyanto Sukarno)

Greenpeace activists who last week prevented a tanker loaded with palm oil from Indonesia from mooring at Rotterdam port and earlier on Nov. 17 illegally boarded the same cargo vessel off Spain in protest at what they described as an ecologically damaging commodity could be regarded as saboteurs of the Indonesian economy.

It is one thing to campaign to influence public opinion against unsustainable farming practices, but it is against the law to unilaterally and arbitrarily block the passage of a legal shipment of palm oil.

Hence, the demand by the Indonesian Employers Association (Apindo) and the associations of palm oil companies and smallholders for the government to take stern measures against the Indonesian chapter of Greenpeace is fully justifiable.

The campaign against palm oil has long been riddled with misperceptions, amid claims that palm oil has caused massive deforestation in developing countries, notably Indonesia, the world’s largest producer.

The debate over palm oil has not always been based on straight facts and has often been biased in favor of noisy demands from environmentalists who are unable to suggest workable solutions to the industry’s multilayered complexity, which essentially boils down to the issue of poverty-alleviation.

Meanwhile policymakers in Europe, under pressure from vegetable oil industry associations and green campaigners, have rushed to build up regulatory barriers against palm oil products entering their markets.

For almost two decades, palm oil has been a target for European agricultural interests, lawmakers and NGOs, with the European Union seeking to block the commodity both as a food ingredient and energy source, citing environmental and human rights violations in its production.

So vigorous has been the negative campaigning against palm oil that we, along with several scientists in Europe itself, have concluded that allegations of deforestation, human rights and violations of workers’ welfare are a subterfuge to protect EU producers of vegetable oils such as soybean, rapeseed and sunflower, which have become increasingly uncompetitive.

Another misconception is that palm oil is bad for health as its extracts can increase heart problems. But Bill Wirtz, a policy analyst for the Consumer Choice Center (CCC), cited in a recent article the findings of studies by the School of Medical Science and Technology of the Indian Institute of Technology in 2009 and the World Journal of Cardiology, that palm oil’s effect on blood cholesterol is relatively neutral when compared to other fats and oils.

The CCC claims to represent consumers in over 100 countries and monitors closely regulatory trends in Washington, Brussels, Geneva and other hotspots of regulation, and informs and activates consumers to fight for greater choice.

Even with healthier nutritional alternatives, for the sake of a fair market, consumers should be allowed to freely choose which fats they want to consume. It is certainly ill-advised to put labels on one particular product or campaign for a boycott on another.

Banning palm oil in biofuels and severely restricting it in foodstuffs and other consumer goods, as the EU plans to do, while global demand for vegetable oils steadily increases, could even increase hazards to the environment and biodiversity.

The United Nations Food and Agriculture Organization (FAO) records that palm oil now accounts for over 50 percent of global vegetable oil consumption and has increasingly been leading the market as a result of the much lower yields of other vegetable oils, produced mostly in temperate-zone countries.

The latest report of the Switzerland-based International Union for the Conservation of Nature (IUCN) warned in a report released at a recent international forest conference in Oslo that completely replacing palm oil with other vegetable oils would be even worse for the environment.

The key factor, the report said, is that the palm oil yield is nine times higher than those of other vegetable oils. Hence other vegetable oils would require up to nine times more land than oil palm to produce the same volume of oil.

Palm oil is currently produced from just 10 percent of all farmland dedicated to growing oil crops, yet accounts for 35 percent of the global volume of all vegetable oils and half of the world’s population uses palm oil in food. So if we ban or boycott it, other, more land-hungry, crops will be required.

Palm oil is widely used in food, cosmetics, cleaning products and fuel, and is cheap to manufacture. Growing oil palm is about 10 times more effective than growing soybeans or rapeseed. Such a productive and profitable crop would not be easy to replace.

It is understandable for Indonesia to proclaim that palm oil is here to stay. Palm oil contributes around US$20 billion to Indonesia’s annual exports and employs over 8 million workers in the estate-cultivation and processing industries. More importantly 40 percent of the estimated 12 million hectares of oil palm estates are owned by about 2 million smallholders.

Therefore international cooperation is urgent to help producing countries such as Indonesia develop new oil palm seeds with higher yields so that production can steadily be increased on the same acreage of land, thereby preventing encroachment into primary forests.

Over the past 15 years the government has subjected the industry to tougher rules designed to make the commodity sustainable economically, socially and environmentally. Certainly the improvement is still an ongoing process as it not only involves crop cultivation but is part of broader poverty-alleviation programs and the empowerment of millions of smallholders.

In fact, oil palm development is currently among the most transparent industries as its practices are periodically examined and monitored by auditors and constantly scrutinized by green NGOs. Palm oil producers are now held to Indonesian Sustainable Palm Oil standards and those of the international multi-stakeholder Roundtable on Sustainable Palm Oil.

Topics :

• greenpeace, Indonesia, economy, sabotage, palm-oil,environmental-issues

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Executive column: Our goal now is to achieve chain scale in Indonesia

Tue, October 2 2018 | 02:58 am

Alan Watts (Courtesy of Hilton)

United States-based Hilton Worldwide, like most international hotel chains, sells only its managerial skills, expertise and global marketing network in the hospitality industry and does not own the properties or hotels it manages. Yet Hilton has developed into one of the world’s largest hotel chains, with a portfolio of 14 world-class brands, including luxury Waldorf Astoria and Conrad and flagship Hilton, comprising more than 5,400 properties under its management in 106 countries.

Hilton does not invest in property, thereby avoiding the sensitive issue of land acquistion, but in human resource development through the transfer of skills in the various segments of the hospitality industry.

Hilton’s Asia Pacific president Alan Watts recently spoke to The Jakarta Post’s Vincent Lingga in Singapore about how Hilton is preparing for its big-bang expansion in Indonesia over the next five years:

Question: What is the current landscape of Hilton’s operations in Indonesia and what are Hilton’s business plans for the next five years?

Answer: Hilton currently operates five hotels [Conrad Bali, Hilton Bali Resort, Hilton Bandung, DoubleTree by Hilton Jakarta and Hilton Garden Inn Bali Ngurah Rai Airport]. As Southeast Asia’s largest economy with a burgeoning middle class, Indonesia is a particularly important growth market for Hilton. Our goal now is to achieve chain scale in Indonesia, deploying everything from the luxury Waldorf Astoria to mid-market Hilton Garden Inn. Four more mid-market hotels will open in Surabaya [East Java], Jakarta and Karawaci [Tangerang, Banten] in 2019 and 2020. Hilton’s world-renowned luxury brand Waldorf Astoria and Conrad will open in Jakarta and Bali’s Nusa Dua in 2020, to be followed by another Waldorf Astora in Bali’s Ubud area in 2024. Eight others property, mostly in Java, are also in the pipeline

What is the main principle behind Hilton’s management contract?

Hilton is a hotel management company and its growth strategy in the region has been to focus on acquiring management contracts by identifying the right partners and opportunities and by offering owners the right brand for their property and market, creating good relationships with them through the delivery of one of the best returns in the industry, and providing solid support to owners or investors right down from the design and construction through to operations of the hotel. The key is to get the right partner for a long-term management tie-up because we invest a lot in human capital.

How does Hilton maintain the same level of services for each brand around the world?

As a business of people serving people, we focus on finding the right talent and giving them the right training through our inhouse training system we call Hilton University, an online training platform with over 3,000 training courses for all aspects of hospitality for team members [employees] in all lines of operations. We also conduct training in cooperation with local vocational schools as the one we made with the Bali State Polytechnic in early 2017.

So important has training been in our system of operations that Hilton often recruits and trains employees — we call team members — even one year before a hotel begins operations. We also run a food and beverage operations academy because this hospitality segment has contributed an average of 40 percent to Hilton revenues. Hilton’s top priority is in providing meaningful opportunities for building great careers through sustained growth and development through programs that include national and overseas work exposures.

As the Hilton chain operates world wide, how do you think Hilton could contribute to Indonesia’s market in global outbound travel?

The hospitality sector especially moves in step with the economy as a whole. Greater investor interest means more business trips to the bustling metropolises like Jakarta. Indonesia will gain a wider global exposure to potential visitors and investors through Hilton’s worldwide promotion campaign such as the Hilton Honors loyalty program, which has more than 56 million members around the world and 8 million in the Asia Pacific region alone. In fact, 40 percent of booking reservations for our properties are made through this loyalty program.

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