Commentary: Corruption damages tax culture, discouraging compliance

Vincent Lingga, The Jakarta Post, Jakarta | Commentary | Fri, March 06 2015, 

We support the demonstrations on Tuesday by an estimated 400 officials of the Corruption Eradication Commission (KPK) who poured out their frustrations over the government's pathetic attitude toward the weakening of the anticorruption drive and the bashing of the KPK over the past two months.

The demonstrations were triggered by the decision of the KPK leaders to stop processing the corruption case against Comr. Gen Budi Gunawan and hand over it to the Attorney General's Office (AGO), whose institutional integrity is perceived as much lower than that of the KPK. They are afraid the AGO would eventually drop the case within the detested framework of political compromises.

As graft busters who grapple daily with various cases of corruption, KPK officials know for sure that Budi's corruption case is air-tight, rooted in alleged money laundering practices whereby a suspect or defendant is treated with the presumption of guilt. That is because within the framework of the 2002 Money-Laundering Law, the indictment is virtually the verdict as the burden of proof lies on the shoulder of the suspect or defendant. 

Unfortunately, the campaign to debilitate the KPK and the weakening of the national movement against graft is occurring when the estimated 25 million corporate and individual taxpayers are preparing their 2014 income tax returns, which they have to file before the March 31 deadline.

The bashing of the KPK will hurt the government program to expand the tax base and achieve its tax revenue target of 16 percent of gross domestic product (GDP) in 2019, much higher than the current 12 percent, which is the lowest in the ASEAN region.

All over the world, stronger law enforcement alone is never enough to encourage tax compliance. Tax efforts should be undertaken as a campaign to nurture a high level of tax culture, which is key to voluntary tax compliance because there would never be enough auditors in the government payroll to examine taxpayers' returns.

About 20 million people have now been registered as individual income tax payers and this number will increase steadily in line with the higher capacity of the tax system to net new taxpayers.

True, strong law enforcement would help develop voluntary tax compliance by making the cost of tax evasion and non-filing of tax returns very costly to taxpayers. People will fulfill their tax obligations if they know that their chance of being caught by tax officials and auditors is high.

But voluntary tax compliance, which is prompted more by the willingness of people to pay income taxes, is influenced more by the public's perception of the integrity of tax officials, the efficiency of the tax administration and the government's credibility in general, rather than by repressive measures. 

A high degree of voluntary tax compliance (tax culture) requires a climate of mutual trust between taxpayers and tax officials and the public's perception of clean government. Here lies the crucial importance of the anticorruption drive.

But this prerequisite is now being damaged by the bashing of the KPK, so far the most trusted and most powerful and capable corruption buster in the country. 

If the public perceives the government is highly tolerant of corruption, taxpayers may simply ask themselves why they have to pay taxes if most of the money will eventually end up in the pockets of corrupt officials. Taxpayers will go all out to find any loopholes within the taxation system to avoid and to evade taxes.

President Joko "Jokowi" Widodo, who used integrity and clean government as the main pillars of his election platform last year, must also realize the close relationship between taxation and democracy. The more aware the people are of their civic duty as taxpayers, the more assertive they will be with regard to their rights.

As US political thinker Harry L. Hopkins, the architect of the New Deal, which was crafted to cope with the Great Depression in the 1930s, once said, "we shall tax and tax, spend and spend and elect and elect."

The rationale is that there is no taxation without representation as citizens demand something — either in the form of public services or a stronger say in political decisions on resource allocation — in return for increased taxation. 

As government dependence on tax receipts from the people has increased, so has the interaction between the state and society, forcing the government to be more responsible to its citizens. 

This development will exert a political impact as more and more people will see themselves not merely as citizens or "governed people" but as taxpayers who pay the government and its personnel. Further down the road, this also requires civil servants to change their mindset from the ones who regard themselves as the dispensers of free public services to those responsible for serving the ones who pay for the government's operations.

Concerted campaigns by the taxation directorate general and generous incentives offered to registered taxpayers have succeeded in attracting almost 20 million voluntary taxpayer registrations. 

Government regulations have created so many disadvantages for individuals without taxpayer registration numbers that even employees, whose income tax is already withheld by their employers, voluntarily registered themselves to get taxpayer identification cards.

However, the dramatic increase in the number of registered taxpayers will not automatically increase income tax filing, unless the government steadily improves the public's perception of its integrity, as reflected in clean government and high standards of fiscal accountability. 

Commentary : Tax amnesty could lead to money laundering

Vincent Lingga, The Jakarta Post, Jakarta | Headlines | Mon, February 09 2015, 7:48 AM

The idea of a tax amnesty has been in and out of public-policy debate since 2003 or five years after the 1998 political and economic crisis when jittery Indonesian tycoons reportedly rushed overseas billions of dollars in financial assets.

The main objective is to encourage businesspeople who have parked their funds mostly in Singapore to repatriate and plough them back into Indonesia's economy, thereby generating jobs and eventually expanding the tax base.

At first glance, such a facility seemed necessary, but the debates died out on strong public opposition, especially after Boediono took over the leadership of the government's economic team in December 2005. Boediono had strongly opposed the tax amnesty lobbies even when he was finance minister under the Megawati Soekarnoputri administration until late 2004.

Considering the current economic and political conditions, now seems the right time to revive the tax-amnesty concept. The idea is attractive to the government of President Joko "Jokowi"'Widodo, which is strapped for big investment to fund its ambitious programs aimed at spurring growth to over 7 percent from about 5 percent now. The government is also fed up with massive tax evasion, as indicated by the persistently lowest tax ratio in the ASEAN region.

The House of Representatives, where the majority of factions are controlled by political parties chaired by businessmen, certainly loves such a tax pardon. In fact, it was the Indonesian Chamber of Commerce and Industry (Kadin) that aggressively lobbied for that facility between 2003 and 2005.

Their main point of argument is that since the corruption-infested tax directorate general is unable to track tax evaders and uncover their hidden assets, there is no harm in offering them one-shot tax amnesty if the facility can set off massive repatriation of capital.

These proponents also reckon that conglomerates will not hesitate to reinvest in Indonesia to expand the economy and create jobs once their previously hidden assets are declared legitimate under the amnesty program.

The facility also could net a large number of new taxpayers, including small and medium enterprises (SMEs), thereby broadening the tax base for future tax collection. Tax registration will also legitimize SMEs and consequently improve their access to finance.

Then, since the tax court system in the country is perceived to be both corrupt and overburdened, a tax amnesty may allow the tax administration economize on prosecution costs. No wonder, given these potential benefits, many countries, including developed ones, have granted one-shot tax amnesties.

But the opponents of a tax amnesty also have equally strong points against such a scheme, on account of the absence of an efficient, strong tax administration system. The core argument against the tax pardon is that such a facility would mostly benefit the big tycoons, including the former bank owners, who, according to an investigative audit by the Supreme Audit Agency (BPK) in 1999, misused the bulk of the tens of billions of US dollars Bank Indonesia extended in emergency liquidity credits to help bail out the banking industry in 1998
and 1999.

It would gravely insult the public's sense of justice if those tycoons, which had been released from criminal charges under hastily drawn debt-settlement agreements, were granted tax amnesty under a weak and corrupt tax-administration system as it is now.

Such a scheme would virtually allow them to launder their hidden assets.

The opponents argue that despite our desperate need for new private investment, granting an indiscriminate tax amnesty would only damage the credibility of our tax-collection system in the future.

Certainly, big tax evaders who have no good faith in obeying our tax laws would see such tax amnesty only as a once in a lifetime opportunity to get one-shot amnesty for their past tax evasions and debts, and then it will be business as usual under the inefficient and corrupt tax system.

Our tax-administration system is not yet efficient and firm enough to make tax amnesty effective to achieve its main objectives because the facility should be provided through a good mechanism and the tax amnesty period should immediately be followed by strong and consistent law enforcement against tax evaders and manipulators.

Finance Minister Bambang Brodjonegoro said the bold tax measure would be stipulated in the proposed amendments to the General Taxation System Law, which have been put on the priority legislative agenda of the House this year.

The following are several types of tax amnesties that have been implemented in developing and developed countries in the past, including in the United States: one-shot filing amnesty (the waiving of penalties for non-filers who begin filing), record-keeping amnesty (the waiving of penalties for past failure to not maintain statutorily required records provided records now start to be kept), revision amnesty (an opportunity to revise past tax returns without penalty), investigation amnesty (a promise to not investigate the source of incomes disclosed) and prosecution amnesty( immunity from prosecution for detected offenders).

Without clear and credible commitment to administrative reform, an amnesty may signal the weak enforcement capacity of the tax administration, with consequently adverse revenue consequences during and after the amnesty.

A subtle and often neglected signaling effect of an amnesty will impact the workload of the tax administration, given limited administrative resources. The tax directorate general has complained that the number of its tax auditors now is barely one-third of its real need to develop a strong tax-administration system.

View Point: Plunging price of oil resolves several complex problems for Jokowi

The Jakarta Post, Jakarta | January 25 2015 | 1:30 PM

The more than 55 percent plunge in oil prices since July has resolved several potentially explosive political and economic problems for the new government of President Joko "Jokowi" Widodo.

But he should not get complacent, as the condition is largely a matter of good fortune.

As the saying goes, lightning never strikes twice in the same place. This could be the only oil-price down-cycle during Jokowi's five-year term until October 2019.

The government, therefore, should seize the opportunity for energy reform to reduce the nation's dependence on fossil fuels and gear up the economy for weathering perpetually volatile oil prices.

As a net oil importer since 2004, Indonesia enjoys a state-budget windfall savings every time international oil prices drop steeply that creates fiscal room for a massive cut or the abolishment of fuel subsidies. Now that oil prices have fallen to below US$50 a barrel, the government expects to save almost

Rp 200 trillion ($16 billion) throughout this year.

The government should not succumb to the temptation to squander the huge savings on populist programs. It should instead direct them toward more productive programs in poverty alleviation and infrastructure to improve our economic competitiveness.

The government made the right policy with its quick decision to put domestic fuel prices on a managed floating market-price mechanism early this month.

This move immediately set off a virtuous circle: it will spare the government from wasteful political bickering with the House of Representatives every time international oil prices rise sharply and has freed the government from being held hostage to the wildly volatile international oil market.

In the oil market nothing is simple. Predicting oil prices is always a mug's game because the prices are influenced by both economic and non-economic factors.

In mid-2008, for example, international prices skyrocketed to a peak of almost $150 a barrel, but collapsed to as low as $47 later the same year. A similar down-cycle has taken place since last July.

Consequently, by its very nature oil trading is beset by uncertainty and it is not just due to the precarious geopolitics in countries where most of the world's oil reserves are located.

But bringing domestic fuel prices closer to — or on par with — their economic costs will also remove the fuel-subsidy time bomb.

But more important is that abolishing subsidies will encourage the development of renewable energy, energy efficiency and conservation.

Energy reform will cut Indonesia's trade deficit and, consequently, the current account deficit, which has been exerting strong downward pressure on the rupiah exchange rate.

But energy reform should not end at putting fossil fuels on a managed floating market-price mechanism.

The government should instead bolster energy diversification programs by providing fiscal incentives for investment in developing more biofuels and gas and their infrastructure, mini hydro-power, geothermal and other renewable energies.

In short, the government should launch a more concerted effort to implement the 2007 Energy Law that stipulates strategic measures aimed not only at reducing dependence on fossil fuels but at compelling the government to provide incentives for energy efficiency and conservation.

Companies should be given fiscal incentives to invest in energy-conservation programs, such as in-house management of energy efficiency; performing maintenance and housekeeping measures; replacing select equipment; or modifying entire manufacturing processes.

No one can predict how long the oil price down-cycle will last or where prices will bottom out. But the government should design a formula for determining the ceiling and floor prices for oil to cope with future price volatility.

Ceiling prices should be set at levels that will encourage fuel efficiency, but which will not impose large subsidies on the state budget. Floor prices, meanwhile, should be designed to make the development of renewable energies like biofuels, geothermal and biomass still commercially viable.

The oil-price collapse has changed almost all the basic assumptions used for predicting key economic indicators for the 2015 state budget for the better.

We are glad to learn that the proposed amendments in the 2015 state budget the government proposed to the House will allocate the bulk of savings from the slashed fuel subsidies to developing infrastructure.

The rationale is that poor and inadequate infrastructure has become the biggest barrier to investment and among the main drivers of high logistics costs limiting the competitiveness of exports.

But given the dismal record in infrastructure development over the past decade, the new government should be able to make headway on several vital projects, including roads, airports, seaports and power generation that have been stalled for several years due to arduous land-acquisition procedures.

Making a breakthrough in such high-profile projects as the multibillion dollar Batang power plant in Central Java; the access road to Indonesia's biggest seaport, Tanjung Priok; and the access railway to Soekarno-Hatta International Airport in Tangerang will boost market confidence in the government's capacity to develop basic infrastructure.

Fortunately, this year marked the start of the full enforcement of the 2012 Land Acquisition Law, which provides stronger legal certainty for land appropriation for infrastructure projects.

The law stipulates a clear-cut, shorter time frame for land acquisition, expedites court proceedings for appeal and mandates the appointment of an independent committee for setting compensation levels with property owners.

The acute lack of strong legal frameworks to regulate land acquisition and rampant land speculation has long been the main obstacle to infrastructure development, as the costs of land often make projects financially unfeasible.

Vincent Lingga

The writer is senior editor at The Jakarta Post.

The week in review: Crackdown after plane crash

The Jakarta Post | Editorial | Sun, January 11 2015, 9:41 AM

The Dec. 28 crash of AirAsia flight QZ8501 from Surabaya to Singapore has set off an overall review of Indonesia’s civil aviation industry, prompting a series of forensic audits on airline operations and the aviation regulatory system, placing  the country’s airline safety in the international spotlight.

Several heads have rolled within the civil aviation directorate general, the state-owned airport management and other related operating bodies. Even the Corruption Eradication Commission (KPK) has hinted at the possibility of joining the fray as allegations of bribes have surfaced regarding the flight route and slot designation process.   

Findings of investigations that suggest that the flight had not been properly licensed further strengthened the perception that Indonesia is one of the world’s most hazardous places in terms of civil aviation safety.

The government immediately suspended AirAsia’s permit to operate the Surabaya-Singapore route and promised to take equally harsh measures against other airline companies failing to comply properly with the whole process of flight and route permits.

Since 2007, the US has effectively barred Indonesian carriers from increasing flights to American destinations. The EU currently has Indonesia on a “blacklist” with substandard safety records; only the national flag carrier Garuda Indonesia is permitted to fly into the continent

The EU and US have implicitly acknowledged that their great concern is no longer limited to the safety of individual airlines but is also focused on the competence of the civil aviation regulatory body, especially its air safety certification directorate, which is in charge of issuing pilot licenses, aircraft operation certificates for new airlines and safety approval, a function that can make or break an airline.

Deeply rooted in the issues over the country’s air safety standards is the integrity and technical competence of the air safety certification directorate.            

In sharp contrast to these air safety concerns, the full-fledged liberalization of civil aviation has spurred high growth in the industry. There are about 400 planes carrying more than 50 million travelers annually. Air traffic has been growing at annual rate of over 15 percent.

As of last May, the International Civil Aviation Organization’s audits assessed Indonesia’s air-safety oversight system as inadequate, even below Pakistan and India.  Likewise, the EU noted late last year that the air safety oversight system in Indonesia still needed substantial improvement.

Transportation Minister Ignasius Jonan promised an overall reform of the whole civil aviation regulatory and operating bodies, covering such aspects as route licensing, slot allotment, air traffic control services allotment, airport management and navigation and aircraft inspection.            

The Transportation Ministry went further to even intervene in the flight fare structure by fixing the minimum ticket prices of scheduled airliners to as high as 40 percent of the mandated ceiling (maximum) fares. This boils down to an increase of 10 percentage points in the lowest fares allowed for all scheduled services, including those of low-cost or budget airliners.

The ministry argued that the higher fare structure would give airline companies adequate financial space for maintaining reliable flight safety standards.

Even though analysts argue that such a market intervention appeared to be an overkill as  there was no direct link between ticket prices and safety, civil aviation officials still think that such tough measures are required to maintain public confidence in the industry.

Hopefully, this “air safety turbulence” will not affect the implementation of the ASEAN Open Skies policy, set to be fully effective by the end of the year, because this policy will boost connectivity and people’s movements in the region and in turn spur regional economic growth.

Under the new policy, Southeast Asia’s skies will be transformed into a single aviation market as part of the ASEAN Economic Community commitments.         

 ****

Indonesia, a country with the world’s largest Muslim population, has joined other nations in condemning the brutal shootings at the office of the satirical magazine Charlie Hebdo in Paris that killed 12 people, including three cartoonists, the chief editor and two police officers.

No form of violence can be accepted and Indonesia supports France’s efforts to bring the perpetrators to justice, Foreign Minister Retno LP Marsudi said.

Indonesian Ulema Council (MUI) chairman for international relations, Muhyiddin Junaidi, said the international community should not generalize the attack as a part of Islam but he conceded that the shootings could strengthen anti-Muslim feelings.

In Banda Aceh, Rosnida Sari, a Muslim lecturer at Ar-Raniry State Islamic University, has been intimidated and threatened by Acehnese clerics and fellow lecturers and bullied in social media after she invited a number of her students to visit and hold dialogues in a church in Banda Aceh last week.

Rosnida said she had been accused of “Christianizing” her students and had been temporarily suspended by the university.

She defended her initiative, arguing that the church visit, conducted voluntarily, was part of her creative teaching method to make Muslim students understand other faiths and build mutual understanding and religious tolerance.

An alliance of NGOs have called on the government to protect Rosnida and uphold academic freedom.

— Vincent Lingga -

With weak oil market, time is ripe for managed floating fuel prices

Vincent Lingga, The Jakarta Post, Jakarta | Headline | Thur, December 17 2014.

Now that steadily declining international oil prices have hit a five-year low at US$60/ barrel, compared to the $105 average assumed for the 2015 fiscal year, the government has a great opportunity to slash, or even abolish, the wasteful spending on fuel subsidies that cost almost $20 billion annually over the last three years.

When subsidized fuel prices are on par with international levels, which analysts estimate can occur when oil prices fall to as low as $60/ barrel, the government could put fuel prices on a managed float mechanism where prices will adjust according to market rates, as Malaysia did earlier this month. This mechanism was adopted in early 2002 under Megawati Soekarnoputri’s administration.

It was called a “managed float”, not a “free-float” system because the mechanism was still tied to fixed-ceiling prices, whereby the government could intervene in retail-fuel prices if oil prices increased dramatically.

But President Joko “Jokowi” Widodo seems to favor a fixed-subsidy mechanism, a move campaigned for by former finance minister Chatib Basri over the past two years. But then president Susilo Bambang Yudhoyono and the House of Representatives didn’t support that idea.

The fixed-subsidy scheme will fix the rupiah price of fuel subsidy per liter, irrespective of oil-market price developments or rupiah-rate movements.

Under this regime, the price of fuel subsidies per liter will neither fluctuate alongside oil-market prices nor rupiah-rate quotations, as it will be the price of the subsidized fuels that must rise or fall monthly following the oil-market quotations.

But whichever of the two alternative policies the government chooses, the decision should be based on the real economic costs of domestically refined and imported fuels, calculated in a transparent and credible manner. As we now depend on imports for almost 60 percent of our daily fuel needs of 1.66 million barrels and because imports consist of both crude oil and refined oil products, the production costs can vary, depending on the sources.

The problem, though, is that independent analysts and the general public tend to question the reliability of the production-cost figures used as price references by the state oil company, Pertamina, to estimate the fuel subsidies.

Under the current fuel-subsidy regime, the prices of subsidized fuels are fixed at a certain level. However, the final amount of subsidies ultimately depends on the average oil-market price and the rupiah exchange rate. Since oil prices and the rupiah exchange rate tend to fluctuate wildly, the final amount of fuel subsidies also tends to increase dramatically.

The benefits of implementing a fuel-price floating system or a fixed-subsidy scheme are quite obvious: It will relieve the government from the burden of having to haggling with the House every time international oil prices rise sharply, and it will free the government from being held hostage to the wildly volatile international oil market.

Predicting oil prices is always a mug’s game, as prices are influenced by both economic and non-economic factors. In mid-2008, for example, international prices skyrocketed to a peak of almost $150/ barrel, but plunged to as low as $47 later in the same year.

Bringing fuel prices closer to their true costs will also remove the fuel-subsidy time bomb from the government’s fiscal management.

But even more importantly, abolishing subsidies will encourage the development of renewable energy, promote energy efficiency and energy conservation. It will also help stop fuel-export smuggling, which has been rampant due to the porous coastal borders of the world’s largest archipelago.

Energy reform will also cut Indonesia’s trade and, consequently, the current-account deficit, which has been exerting strong downward pressures on the rupiah exchange rate.

Our experience during the first year of the flotation policy in 2002 showed that by allowing for automatic monthly price adjustments, the government was able to provide policy predictability for the market and protect the economy from sharp price adjustments and their shocking inflationary pressures.

The price signals conveyed by this policy will serve as a guideline for companies to conduct in-house management of energy efficiency through maintenance. It will also encourage companies to take housekeeping measures and replace equipment, which could require additional investments or the modification of the entire manufacturing process — moves that may require large-scale investments.

Cheaper oil should also create the momentum needed for the government to gradually phase out the low-quality gasoline with RON (registered octane number) 88.

Most countries have shifted to fuel with RON levels above 90, which are cleaner burning, more efficient and make engines perform better. Malaysia, for example, has long used only RON 95 and RON 97 fuels. Before Malaysia fully floated its fuel prices earlier this month, RON 95 gasoline was sold at RM2.30 (Rp 9,200) per liter, carrying a subsidy of Rp 520/liter. RON 97 gasoline (non-subsidized) was sold at the equivalent of Rp 10,200.

It would technically be impossible to stop selling RON 88 gasoline (strangely called “premium” gasoline) immediately due to the limited capacity of domestic refineries. But technical preparations for a gradual phase-out of this low-quality fuel should be made as part of the overall fuel reform program.

View Point: Shaking up and cleansing the oil regulatory body

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, November 30 2014, 1:15 PM

The fastest pace and widest breadth of reform taking place under President Joko “Jokowi” Widodo’s 50-day-old government has taken place at the Ministry of Energy and Mineral Resources (ESDM) for the right reason.

The ministry administers, manages and oversees the development of natural resources (oil, natural gas and all other minerals) worth hundreds of billions of dollars in exports, import procurements, taxes and royalties every year.

In a country perceived as one of the most corrupt in the region, senior officials at the ministry and all other agencies under its jurisdiction, notably those with authority for supervision, licensing and procurement, are understandably vulnerable to corruption.

No wonder, Jero Wacik who was replaced last month by Sudirman Said, is now a corruption suspect and Rudi Rudiandini, the former chief of the Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) is now in jail for graft.

 Jokowi’s first move in setting off reform at the ministry was appointing Sudirman, an anti-corruption activist and good-governance champion, as the new ESDM minister.

 Sudirman, an auditor by training, who also graduated from business management from George Washington University, has built years of experience in state and private oil companies and has demonstrated his managerial and leadership qualities in many institutions and organizations.

He was among the founders of the Indonesian Transparency Society antigraft movement and the Institute for Corporate Governance. Sudirman served for almost two years as a vice president at the state oil company Pertamina in charge of reforming its supply chains – Pertamina was at the time considered one of the most inefficient and most susceptible to corruption. But he quit in 2009, reportedly owing to intense lobbying by a strongly influential oil mafia.

 Sudirman rightly selected the oil and gas sector of the mining industry as the first target of his bureaucratic reforms, again for a strategic reason.

The hydrocarbon industry plays a central role in the economy as it is still the main source of primary energy (about 70 percent), contributing almost 6.5 percent of the gross domestic product, US$31 billion in revenues to the national budget (23 percent) and $22 billion in foreign investments a year, of which 60 percent is spent on local goods and services.

 Indonesia is already mired in an oil crisis with the supply-demand gap exceeding one million barrels a day. Crude oil and fuel imports, which last year totaled $42.1 billion, have been responsible mainly for the ballooning current-account deficit and downward pressures on the rupiah.

Worse, according to the Indonesian Petroleum Association (IPA), oil reserve replacement was at only 47 percent last year. The association estimates that annual investments in exploration alone should be tripled to over $11 billion within the next five to 10 years to prevent a widening oil deficit and another $30 billion a year investment in production development is needed, or otherwise the oil deficit could reach 2.5 million barrels per day.

But which investors would be willing to risk so huge a sum of capital if an oil company requires almost 70 types of permits from the national and regional governments, involving 284 processes and 17 agencies, and is subject to land and building tax even during the exploration stage?

According to IPA, the average time needed by oil companies to monetize proven reserves has increased from five years in the 1970s to more than 10 years in the late 1990s and 15 years in the 2000s mainly because of the arduous licensing system, bureaucratic inertia and corruption.

Thus Sudirman’s quick decision taken just a few days after his inauguration, to replace the director general of oil and gas and the chief of SKKMigas, is quite strategic.

He also immediately started preparations for the selection of officials for the levels of directors general and directors at his ministry through an open, competitive recruitment process.

The appointment of Amien Sunaryadi, a former deputy of the Corruption Eradication Commission (KPK), to head SKKMigas signals a massive shake up and reform within the regulatory body.

It plays a key role in the petroleum sector because this regulatory body oversees the management and business plans of all national and foreign companies operating in the hydrocarbon sector.

Sunaryadi’s previous experience as a senior operations officer for the Anti-Corruption Action Plan (ACAP), a cooperation program of the government and the World Bank’s Department of Institutional Integrity (DII), from 2009 to 2012, well equipped him with high managerial ability and technical competence to develop a strong institutional-integrity system at SKKMigas.

The DII has been well known for its success in establishing a strong integrity system within the multilateral development bank, which is constantly exposed to the risk of corruption and other forms of malfeasance as it operates in many developing countries.

The program was designed to build effective internal control mechanisms within projects or an institution able to explicitly identify governance-related risks to achieving project objectives, thus improving project-level governance.

The overall aim of ACAP is to improve management, monitoring and oversight within the Indonesian public sector.

Sunaryadi, an auditor by training, is believed to be able to disseminate within SKKMigas the expertise to audit business processes and eventually develop innovative ways to communicate with civil society organizations, soliciting public feedback on the quality of public services provided.

The reform of SKKMigas, combined with the recent slash of fuel subsidies to bring fuel prices closer to and eventually on par with the actual costs, would contribute greatly to mitigating the risk of corruption within the petroleum industry.

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Finding the best path toward sustainable palm oil

 Vincent Lingga, The Jakarta Post, Kuala Lumpur | Opinion | Tue, November 25 2014, 8:43 AM

The world’s largest palm-oil companies gathered here last week, sharing the best practices of what is assessed as the model of sustainable oil-palm plantation development.

Several of them magnanimously admitted mistakes amid the mounting campaigns by consumer and environmental organizations, but then they have often been accused by international green NGOs of being the main drivers of deforestation.

The occasion was the 12th conference of the Roundtable on Sustainable Palm Oil (RSPO), a global body of plantation companies, refiners, consumers and green groups, which promotes the development of socially, environmentally and economically sustainable palm oil.

Indeed palm-oil companies are most likely the first to be blamed, with pulp producers next on the list of culprits, every time haze pollution caused by forest fires in Sumatra or Kalimantan hits Singapore or Malaysia.

But it also happens that Indonesia and Malaysia, which together account for more than 85 percent of global palm-oil production, are home to the biggest palm-oil and pulp and paper companies.

Indonesia, now the world’s largest palm-oil producer with more than 30 million tons of annual output, has often been notoriously cited as the third-biggest polluter globally as the country has allegedly expanded its oil-palm estates, currently estimated at almost 10 million hectares, by destroying its rain forests.

But international environmental NGOs and consumer organizations cannot simply tell Indonesia to stop expanding its oil-palm estates because this crop turns out to be the most productive among all vegetable oils, with yields more than nine times as high as soybean, rapeseed oil, peanut oil and sunflower oil, which are cultivated mostly in developed countries.

Indonesia’s palm-oil industry, according to the industry’s association, now directly employs more than 4.5 million workers and earns about US$20 billion in export earnings a year. Yet more significant to the economy is that 40 percent of the oil-palm plantations are owned by smallholders with acreages ranging from two to 20 ha.

According to the Rome-based Food and Agriculture Organization, palm oil accounts for almost 40 percent of global vegetable-oil production, estimated at 145 million tons last year, with soybean, rapeseed, peanut, corn and sunflower accounting for the remaining 60 percent.

Douglass Cress, a senior executive of the United Nations Environment Programme (UNEP), who attended the big gathering, acknowledged the paramount role of the RSPO as an independent promoter of sustainable palm oil as it included all the representatives of the whole spectrum of the industry.

______________

The causes of deforestation or forest fires are rooted in the most basic problem of poverty.

“I am impressed by the open and frank discussions in this forum where companies talk about their successes and failures within the palm-oil industry. It is really a brave thing to do,” Cress noted.

That is why UNEP had signed a cooperation agreement with the RSPO to jointly implement programs to enhance the sustainable development of palm oil, he said, hoping that RSPO would become a model for similar programs for other farm commodities.

But the representatives of environmental NGOs and smallholders still have a lot to complain about the RSPO’s performance, notably with regard to the still weak market reception for sustainably produced palm oil.

RSPO secretary-general Darrel Webber acknowledged that even though the capacity of RSPO-certified sustainable palm oil at present already accounts for 18 percent of global output, only about 50 percent of the sustainably produced palm oil has been taken up by the market.

Several European countries, including the United Kingdom, France, Germany, Sweden, the Netherlands, Norway, Denmark and Belgium, and major corporations such as Nestle, Unilever, Carrefour and Johnson & Johnson, have committed to 100-percent RSPO-certified sustainable palm oil in 2015.

But Europe takes only around 4 million tons from Indonesia, which exports over 20 million tons annually, and supplies more than 50 percent of the RSPO-certified palm oil.

The RSPO did boast more than 1,750 members representing the whole spectrum of the palm-oil supply-chain. But as long as the growth of market uptake remains slow and the premium price enjoyed by certified palm oil remains rather insignificant, market faith in the RSPO certification program could decline.

It is perhaps because of this low market uptake and the perpetual international criticism of the palm-oil industries in Indonesia and Malaysia that both countries have launched their own certification schemes: Indonesia Sustainable Palm Oil (ISPO) and Malaysia Sustainable Palm Oil (MSPO).

But the launch of the ISPO and MSPO should actually be welcomed as the result of the increasing awareness on the part of the governments of the vital importance of sustainable management of palm oil, not as competitors to the RSPO.

However, the operation of three different certifications of sustainability for the same commodity and toward the same goal seems a waste of resources. After all, the principles of sustainable management promoted and audited under the three schemes for their respective certification processes are by and large similar, covering such elements as transparency, legal and regulatory compliance, best production practices, environmental responsibility and commitment to local community development.

Now that UNEP has engaged with the RSPO, the UN body is expected to help develop synergy between the three sustainability-certification schemes, or else they could cause confusion and unnecessarily add to the production costs. Consumer or market pressures alone cannot make the campaign for of sustainability sustainable in the long term.

It would be counter-productive if foreign green NGOs and consumer organizations, which are among the most assertive members of the RSPO, try to intervene in implementing changes in Indonesia. There are rules which are already in place and numerous ministries and local government agencies that have to be brought into the process.

The causes of deforestation or forest fires are complex as they are rooted in the most basic problems of poverty, unemployment and weak law enforcement. The blunt fact is that poor farmers trees are usually worth much more dead than alive.

Put another way, land is worth more as cropland than as forests as the benefits from trees such as capturing carbon emissions and embodying biodiversity are hard to price. They are also intangible concepts for farmers who are preoccupied with the question of what to eat tomorrow.

It will be difficult to change the behavior of small farmers illegally cutting trees and burning degraded forest lands and peats if they remain gripped by dire poverty. 

________________

The writer is senior editor at The Jakarta Post.

The week in review: Jokowi and childish lawmakers

What a striking difference between the executive and legislative branches of the government. On one side, the House of Representatives has been wasting taxpayers’ money on protracted squabbles less than one month after its installation, with the coalition of opposition parties continuing to pursue the politics of vengeance for the losing presidendial candidate Prabowo Subianto.

Prabowo’s coalition of opposition parties and President Joko “Jokowi” Widodo’s supporting coalition remained deadlocked in a fight for the leadership positions of the working commissions at the House. On the other side, President Jokowi and his Working Cabinet immediately set themselves to work hard at fulfilling the needs of the people.

Vincent Lingga- The Jakarta Post | Editorial | Sun, November 09 2014, 12:49 PM

Early this week, Jokowi launched a newly-designed social assistance program to protect the most vulnerable groups of people from the inflationary impact of a series of painful reforms the government will soon launch to prevent the public sector from going into bankruptcy and to lay a stronger foundation for the economy. The social assistance program has been designed to shift the fuel subsidy from consumptive to productive use and at the same time to promote financial inclusion by using mobile-banking mechanisms to deliver compensation funds for almost 16 million poor households.

The concept is to move away from the commodity-based subsidy to a better targeted people-based subsidy focusing on the needs of poor farmers and fishermen.

Simply lowering the fuel-price subsidy by 40 percent would save billions of dollars that could be allocated for the expanded social protection programs and badly-needed infrastructure development.

Reform is usually difficult during good times when economic growth is robust and the financial market is optimistic because the government and politicians become complacent. This was the situation in Indonesia between 2010 and early 2013 when structural reforms virtually stalled.

But the economic conditions inherited by the government of Jokowi, although not critical yet, are already quite bad, with the state budget and current account being threatened by widening deficits caused by rising oil imports and weak commodity exports. 

Hence it is a good time now to bite the bullet and launch the long-delayed reforms. This is the momentum that the Jokowi government seized by launching the newly-designed social assistance programs to cushion the most vulnerable segments of the people from the short-term pains likely to be inflicted by the upcoming fuel-price increase. 

Earlier last week, only one day after installing his Cabinet, Jokowi launched a national campaign of bureaucratic reform initially focusing on the streamlining of business and investment licensing. He made an impromptu inspection of the Investment Coordinating Board (BKPM) to proclaim his commitment to making things quite easy for doing business in Indonesia.

Earlier this week, the President gathered all provincial governors in a joint working conference with the Cabinet, discussing the vital importance of private investment in reinvigorating the economy in view of the severely limited fiscal capacity.

Jokowi urged the governors to woo investment by establishing one-stop service centers for investment licensing and gave them one year to complete the reform, or face penalties in the form of smaller fund-transfers from the central government.

In the meantime, Coordinating Maritime Affairs Minister Indroyono Soesilo announced on Wednesday that the government would soon grant visa-free entrances for visitors from Australia, China, Japan, Russia and South Korea to woo more tourists to Indonesia. The government also is fine-tuning a government regulation to expedite the licensing process for yachts and international cruise ships to Indonesia to one or two days, also to attract more tourists to spend their money on boosting the Indonesian economy.

Likewise, Indroyono added, he is also reviewing the arduous licensing process in the fishing industry to enhance the role of Indonesian companies in the marine-resource industry and at the same time prevent illegal foreign poaching of the fishery resources. These programs will bolster tax and non-tax (license fees) revenues for the government for reinvestment in human resource and physical infrastructure development.

More funds for the provision of the people’s basic needs will be available immediately after the government launches its fuel-energy reform within the next two weeks. 

While we feel encouraged at seeing the high pace of the government program, it is quite discouraging to see how the process of selecting the leaders of the House and its commissions has led to a bitter division in the legislature into two seemingly irreconcilable camps. 

We had expected high-quality debates on government policy in the House after the opposition parties repeatedly affirmed their intention to play the role of an effective check-and-balance mechanism. 

What we instead observed is a misguided political fight between the party elites to maintain their privileged positions at the expense of the common people’s interests. The coalition of opposition parties seemed intent only to harass the Jokowi government. We are flabbergasted to see how the six parties within the opposition coalition have allowed themselves to be used for the egotistical agenda of their leaders.

Fortunately, though, the common people seem indifferent or simply cynical about the childish squabbles in the House. There is no similar sentiment at the grassroots level. The current conflict in the legislature has much to do with the immaturity of the leaders of the opposition parties.

Commentary: Cutting red tape will reduce business risks, bolster investment

Vincent Lingga, The Jakarta Post Jakarta, The Jakarta Post, | Fri, October 31 2014, 9:26 AM

President Joko “Jokowi” Widodo’s surprise inspection of the Investment Coordinating Board (BKPM) on Tuesday, only one day after he installed his Working Cabinet, will not immediately solve the business licensing problems that have been plaguing the country.

The impromptu visit is symbolic, providing the right, and a loud, signal to both government officials and the business community that cutting bureaucratic red tape and expediting business and investment licenses is at the top of Jokowi’s priority programs, as he promised in his election campaign.

But the new President must be fully aware that such reform is never easy because it will take away rents that have built up in the bureaucratic system for decades and therefore will trigger opposition from those who are at risk.

Surprise inspections of public offices and impromptu meetings with the common people, called blusukan in the Javanese dialect, were one of Jokowi’s main hallmarks when he was the mayor of Surakarta in Central Java and the governor of Jakarta. It was the consistent bureaucratic reform that built up Jokowi’s business-friendly credentials.

Jokowi has designed such inspections to keep civil servants on their toes and to enable him to have informal, straightforward communications with the people.

Reforming the business and investment licensing administration is the best thing he can immediately do to improve the business climate because Indonesia is notorious for arduous, overlapping, scattered, entangled and mammoth processes to get permits.

Jokowi does not need to navigate the political minefield of the House of Representatives, where his coalition of parties is the minority, to implement his bureaucratic reform. But simply reforming the licensing bureaucracy will go a long way to reducing business uncertainty, business risks and consequently lending costs.

Former acting chief economics minister Chairul Tanjung made a shocking revelation recently, pointing out that starting up a business in the upstream oil and gas sector alone required more than 70 types of permits from 17 different government offices, not including dozens of other licenses from regional governments.

The whole licensing process often takes up to two to four years before investors can start up operations, as Jokowi himself discovered.

Likewise, it takes almost three to four years to gain all the permits from the central and regional governments for investment projects in the manufacturing, plantation, transportation, construction and power generation sectors. This means, for example, that a major manufacturing plant could take up to six years (three years for licensing and three years for construction) to begin operations.

The problem, though, is that many of the permits imposed on business or investment projects often have nothing to do with ensuring compliance with the laws or regulations. The Corruption Eradication Commission (KPK), after a few months of research and survey in the mining sector, revealed in April massive tax evasion within the coal mining industry with potential state losses of US$2.2 billion annually as it found that almost 25 percent, or 725 of the 3,826 coal mining licenses issued by regional administrations (mostly in Kalimantan and Sumatra), did not have taxpayer registration numbers.

The business licensing red tape has been responsible for putting Indonesia in the ranks of the 30 lowest of almost 190 countries surveyed by the World Bank group for its annual ranking of the Ease of Doing Business. It is also the arduous licensing procedures and other bureaucratic red tape that have made the Indonesian economy among the least competitive, even in the ASEAN region.

As a common man, and formerly a small furniture businessman, Jokowi should have experienced the pains and frustration when dealing with government offices. He also is fully aware of the vital role of business, or private investment, in bolstering the economy as it is business enterprises, not the public administration, that generate jobs and tax receipts for the government.

It is jobs that generate wages and it is wages that generate purchasing power for the people to buy goods and services and propel the wheels of the economy.

Complicated licensing procedures also have been one of the biggest hurdles faced by micro and small enterprises (SMEs), which forces many of them to remain in the informal sector (unregistered), while the role of the estimated 25 to 35 million SMEs for employment is quite significant.

Cutting the licensing red tape will benefit the SME sector more than large businesses. Without special assistance or affirmation measures, micro and small enterprises will be unable to benefit from the business opportunities generated by economic development. Put briefly, these small players cannot, without special assistance, freely enter the market game.

Hence, if the Jokowi government is really serious about expediting business or investment licensing, it must first review the cumbersome procedures and reassess the real purpose or merit of the dozens of permits an entrepreneur is required to obtain before starting up a business.

Inter-ministerial coordination has always been the weakest point of the government, in spite of the creation of the coordinating economic minister in the Cabinet and the establishment of BKPM in the 1970s.

No wonder. Because within the perspective of the public administration, which has been perceived to be the most corrupt in East Asia, licensing authority means the power to collect rents. Hence, there will certainly be strong resistance from vested interests. Moreover, this reform also requires the streamlining of overlapping rules at various ministries.

But change is often disruptive and messy. And when it is made to run fast it may set off a backlash tearing the process apart. President Jokowi therefore should provide strong leadership to push through this bureaucratic reform.

Paper Edition | Page: 9

View Point: Smuggling makes fuel-subsidy cut even more imperative

Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, September 28 2014, 1:37 PM

Several military (TNI) and police members were embroiled in a brawl at a housing complex on Batam Island near Singapore early this week after a police raid nearby on an alleged illegal storage house of subsidized fuel leaving four TNI non-commissioned officers with gunshot wounds.

A few days earlier, a low-ranking female civil servant, also in Batam, was arrested on charges of laundering Rp 1,300 billion (US$108 million) in cash allegedly derived from the illicit export of subsidized fuel. Four others, including an employee of state-owned oil company PT Pertamina and two temporary Navy employees, have also been implicated in the contraband fuel trade case.

Earlier this month, the Supreme Court almost doubled the sentence of former low-ranking police officer Labora Sitorus to 15 years’ imprisonment for fuel smuggling, illegal logging and money laundering worth about $103 million.

These are just a few of the dozens of cases of subsidized-fuel smuggling uncovered over the past 10 years.

It is common knowledge that a lot of subsidized fuel has always been smuggled overseas; the long coastlines of the world’s largest archipelagic nation provide great opportunities for such contraband trade.

Poorly-paid officials, police, members of the military and employees of state oil company Pertamina, the sole supplier of fuel oil, are all highly prone to corruption. Most importantly, the subsidized prices of domestic fuel oil are far — almost 50 percent — lower than in neighboring Singapore and Malaysia, which are only about 20 minutes by ship from Riau Islands, including Batam and Bintan.

The customs agency, the police and patrolling naval units do reveal from time to time the interception and foiling of oil smuggling, but this is simply a ploy to mislead the public into thinking that they are doing their best to prevent fuel being smuggled overseas.

The greatest credit for the latest uncovering of massive fuel smuggling should go to the Financial Transaction Report and Analysis Centre (PPATK), which in most other countries is called the financial intelligence unit.

It was the PPATK, which routinely scours financial records for signs of illegal activity and suspicious transactions through bank accounts, that discovered the fuel smuggling in Papua and Batam.

PPATK analysts realized that the billions of rupiah flowing weekly or monthly through the bank accounts of the low-ranking woman civil servant and former police officer Labora did not comply with their earning profiles, as their official salaries did not exceed Rp 4 million ($333) monthly.

The analysis and further police investigations finally traced the suspicious transactions to a ring of subsidized fuel smuggling that had been in operation for several years.

The rings of fuel smugglers in Riau Islands, Central and East Java, East Kalimantan, Papua and several other provinces that have been uncovered in recent years could not have occurred without collaboration with Pertamina officials or Navy members or seaport officials.

Pertamina still has the monopoly on the distribution of subsidized fuel throughout the country and it must know if a significant volume originally allocated for certain areas is diverted overseas.

Smuggling and other forms of malfeasance related to the misuse of subsidized fuel once again show how imperative and urgent it is now to bring domestic fuel prices closer to international levels. As long as domestic fuel prices remain at only 50 percent of international prices, the large margin is too much of a temptation for profiteers and corrupt officials to resist.

As the country now depends on imports for almost 60 percent of its oil needs and oil imports have become the main cause of the ballooning current account deficit and the sharp rupiah depreciation, subsidized fuel smuggling could be considered an act of economic subversion.

The government therefore should be deadly serious in investigating and dealing with the brains and leaders behind oil smuggling, unlike in past cases where only the “small fry” have ended up in court.

It is not exaggeration to say that the way the new government addresses the runaway fuel subsidy will be the litmus test of its economic management and policy-making capability.

President-elect Joko “Jokowi” Widodo promised in his election campaign to abolish fuel subsidies within four years. He should deliver this promise, but time the gradual phase-out wisely to minimize the impact on inflation. Most analysts consider November or April, which are the harvest seasons, as the most appropriate time to usher in the fuel subsidy cut.

Certainly, reforming the fuel subsidy system will inflict some short-term pain, as production costs and prices of goods and services will increase. Therefore the new government should conduct a nationwide information campaign to prime the public on the benefits of the fuel reform measure.

Many ideas have been touted on how to phase out the fuel subsidy. One reform scenario calls for the indexation of the subsidized fuel prices to an agreed threshold, thereby allowing the prices to move up and down on a monthly or quarterly basis.

The second idea sets a quarterly subsidy spending limit, then adjusts the prices in subsequent quarters when international market oil prices cause subsidies to breach the ceiling.

The fixed-subsidy scheme is attractive because the automatic monthly price adjustment provides policy predictability for the market and general public, as well as protecting the economy from sharp price adjustments and their shocking inflationary pressures.

Whichever policy the new government implements, the energy reform should from the outset clearly set out the fuel-policy direction for the next five years, instead of muddling through one-off price rises.

The writer is senior editor at The Jakarta Post.

The week in review: Past rhetoric, daunting tasks

The hot stories and the main topic of heated debates during the week after the Aug. 21 constitutional confirmation of Joko “Jokowi” Widodo as Indonesia’s new president beginning on Oct. 20 remain the complex and daunting economic challenges his government must immediately confront.

 Foremost among the tasks is the painful measure the new government has to immediately take to achieve fiscal sustainability, as it will be virtually impossible for Jokowi to deliver even a few of the promises he made to the poor segment of the population during his election campaign without slashing the huge fuel subsidy.

In fact, worries about the shortage of subsidized fuel have already hit many areas, prompting long lines of motorists at gasoline stations as the state oil and gas company Pertamina attempts to ensure that the use of subsidized fuel this year does not exceed its mandatory volume ceiling of 46 million kiloliters. 

The new government will indeed face a very austere budget. More than 85 percent of the 2015 state budget plan will be tied up by routine (operating) spending covering fixed expenditures mandated by specific laws on education, regional autonomy and health, as well as other inflexible expenditures for personnel, debt servicing and energy and non-energy subsidies.

Hence, Jokowi will either have to cut a portion of the Rp 364 trillion (US$31.14 billion) energy subsidy or step up tax collection to get more revenue to fund some of the top priority programs he promoted during the election campaign.

However, since economic growth in 2015 is expected to be stagnant at this year’s 5.3-5.5 percent range, it would be rather difficult to immediately increase tax revenues. Hence, cutting fuel subsidies could be the most feasible way of immediately generating savings to use for more productive programs.

When it comes to the huge, wasteful spending on fuel subsidies, Jokowi’s position is by and large similar to President Susilo Bambang Yudhoyono’s four months after his rise to power in October 2004, when his predecessor Megawati Soekarnoputri left behind a fuel-subsidy time bomb.

Consequently, Yudhoyono was forced to raise the price of subsidized fuel twice in early 2005 or face severe fiscal difficulties.

The dilemma is that the issue of fuel subsidies has always been socially and politically sensitive, causing street protests and political turbulence at the House of Representatives, despite it being public knowledge that more than 70 percent of the fuel subsidies are enjoyed by middle- and high-income citizens.

Yet more worrisome is the risk as to whether the new government will be able to gain House approval for a raise in subsidized fuel prices as the coalition of opposition parties still controls more than 52 percent of the seats at the House.

The biggest challenge in ushering in fuel-price reform (meaning raising prices) is related to how social safety net programs should be designed and structured to cushion the impact of the general price increase caused by higher fuel prices on low-income citizens, the most vulnerable members of society.

Even though the number of citizens living below the poverty line has decreased to less than 12 percent of the total population, the number of people living on the verge of the absolute poverty line has remained large. This highly vulnerable group could easily be plunged into dire poverty by even the slightest decline in the macroeconomic condition.

The other downside risk is that the commodity market will most likely remain weak next year due to the persistent decline in the economic growth of  China, Indonesia’s biggest trading partner. Meanwhile, Indonesia’s manufacturing sector is unable to offset the decrease in export earnings from natural resources because of an acute shortage in supply capacity and low competitiveness due to the high logistics costs caused by poor infrastructure.

Given these limitations, the new government should do its best to woo more inflows of portfolio capital to fill in the large current account deficit, as well as foreign direct capital to build new manufacturing plants and infrastructure.

The next top-priority initiative requires the incoming government to expedite negotiations with contractors in the general and oil and gas mining industries so that the pace of production and the speed of new investments can be immediately accelerated. The upstream oil industry needs a special boost because the large deficit in the international trade balance has been generated by oil imports that now account for more than 60 percent of national consumption.

The new government should go the extra mile to convince foreign investors that it is not influenced and misled by partisan resource nationalism, as the rhetoric during the past election campaign implied.

In view of the high expectations facing the new government and since bitter pills (painful measures) are included among the first action programs Jokowi must implement, it is of paramount importance for the new government to maintain the public trust by demonstrating high standards of governance and clean and efficient administration.

The first test for sustaining this confidence lies in Jokowi’s selection of the members of his Cabinet, especially his economic team. It would also help minimize the potential for protests if the new government channels the bulk of any savings from the fuel reform toward improving infrastructure in rural areas, rehabilitating wet (traditional) markets in urban centers and smoothing the distribution of goods to control the general price rise after the fuel reform.

— Vincent Lingga

Vincent Lingga - The Jakarta Post | Editorial | Sun, August 31 2014, 12:33 PM

Commentary: Jokowi’s transition team should prepare crisis-management center

President-elect Joko “Jokowi” Widodo describes the team set up under Rini Mariani Soemarno Soewandi as a transition team because its job is to prepare a smooth transfer of power from the outgoing President Susilo Bambang Yudhoyono administration later in October.

But a crisis-management center is perhaps a more fitting job description for Rini’s task force, given the uphill tasks ahead and the bold programs of action that need to be executed immediately to build confidence in the new government.

 However it is measured, the fiscal situation the Jokowi administration will inherit will be quite adverse due primarily to the huge fuel-subsidy burden to be left behind by the outgoing government.

The new administration will be trapped in a severe liquidity crisis, unable to make any meaningful investment if it does not act immediately to significantly cut fuel subsidies because more than 80 percent of the total budget will be
taken up by personnel costs, debt servicing and amortization, fuel subsidies and transfers to regional administrations.

 But cutting fuel subsidies without first putting in place a well-designed social safety-net program to protect the poor from the short-term, steep price rises could ignite widespread street protests and consequently social and political turbulence.

Hence, the first task of the Rini team is preparing a comprehensive social safety-net program within the draft 2015 state budget or implementation at the beginning of the 2015 fiscal year in January and building up a conducive public-opinion campaign for the painful energy reforms.

As Jokowi’s governing experience has been limited to the Central Java city of Surakarta and the capital city of Jakarta, he and vice president-elect Jusuf Kalla need to immediately implement confidence-building programs of action in such strategic areas as land acquisition for basic infrastructure such as roads, airports and seaports and power plants.

Instead of being embroiled in political bickering, scapegoating and blame games, it is now past the time for rhetoric and high time for swift action. It is the responsibility of the Rini team to thoroughly select top-priority programs for immediate execution that will have the biggest impact on building public confidence in the policy-making and implementing capability of the Jokowi administration.

Hence, the structure of Jokowi’s working office and the architecture of the upcoming Cabinet that the transition team will prepare should be designed for fast decision-making, yet with a high degree of transparency and accountability.

Put another way, the institutional mechanism of the president-elect’s working office should enable Jokowi and Kalla to provide effective leadership, and the Cabinet should be filled by ministers capable of providing the proper management and coordination of all reform measures.

One of the most important organizations that Rini and her team should prepare is the kind of a crisis-management mechanism directly under the president where well-coordinated action programs can be quickly decided and any problems in their implementation can be settled at the highest level.

The crisis center should serve also as a nerve or a war-room-like center to bring the political leadership face to face with the representatives of the business community and bureaucratic institutions at least once a month to frankly discuss and resolve any problems faced in the economic sector with the utmost sense of urgency.

 Any issues related to economic activities such as stalled budget execution, land acquisition, port clearance for imports and exports, anti-business rulings issued by local administrations, smuggling and other crucial reform measures should be settled quickly at the highest level of the executive branch.

The basic rationale of such a crisis-management mechanism is that the management of an economic crisis should run like the emergency center of a hospital where fast decisions and concrete programs of action are much more important than bureaucratic procedures or rigidities, where problems are resolved by executive fiat on the spot.

It is the center where political resolve is translated into bureaucratic resolve as the personal presence of the president in the chair will keep the bureaucrats on their toes as they have to be ready with answers to the president’s questions.

Last year, Yudhoyono’s economic think tank, the National Economic Committee (KEN), also recommended the establishment of a special government-business task force to serve as a crisis-management center to cope with more pressing economic challenges.

Jokowi made the right choice by appointing Rini as the leader of the transition team. With her past experience as, among other things, a senior executive at Citibank Indonesia, chief executive officer of the widely diversified Astra International business group and trade minister under the Megawati Soekarnoputri administration in 2001-2004, Rini well fits the bill to lead the transition office.

Rini is fully aware that without new major investment in basic infrastructure the economy will become increasingly less competitive and less attractive to new investment in manufacturing.

Further down the line, without new investment the manufacturing sector will become less competitive because its obsolete plant and equipment will make it grossly inefficient, unable to produce goods of higher added value and will render its products unable to meet changes in market preferences.

_____________

The writer is senior editor at The Jakarta Post.

Vincent Lingga, The Jakarta Post, Jakarta | Commentary | Wed, August 06 2014, 9:19 AM