Commentary: STT divestment clears pebble from Temasek's shoe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Russian Uraltrac equipment to enter Indonesia

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

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

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

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

The following is his report:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Small fuel price hike will trigger new uncertainty

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The politicking behind Krakatau Steel's planned sale

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Court ruling on Temasek reveals govt mismanagement

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

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

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

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

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

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

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

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

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

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

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

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

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

Sky-high rice prices require redesign of food security

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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