The week in review: Summits, pledges and reality

Vincent Lingga |The Jakarta Post | Editorial | Sun, 06/24/2012 7:18 AM 

Leaders of the G20 have pledged to take action to boost weakening world economic growth and support moves by eurozone countries to move toward a banking union to restore stability to the financial system, but they offered little new concrete aid.


The communiqué issued earlier this week after two days of talks in the Mexican resort of Los Cabos appeared to herald a shift in favor of the need to stimulate growth and will now put the focus on the summit of EU leaders later next week.

The G20 leaders appeared to recognize the risk that eurozone fears could spark turmoil across financial markets in the coming months, pledging to inject an extra US$456 billion into the International Monetary Fund to act as a firewall against further financial contagion.

They voiced support for the eurozone to take steps toward greater financial integration of the 17-member single-currency bloc, such as banking supervision, bank resolution and recapitalization, and deposit insurance.

The leaders vowed not to erect new trade barriers until 2014 to foster global growth.

However, the International Chamber of Commerce (ICC) strongly criticized the G20 leaders, pointing out that while the world economy was experiencing the worst crisis of the last 60 years, multilateral talks had stalled and protectionist measures had proliferated.

ICC Secretary General Jean-Guy Carrier quoted a research report of the Global Trade Alert during the G20 Business Summit in Los Cabos on Monday showing that the world’s richest developed and emerging economies had added about 225 protectionist measures over the past two years alone.

The rise in protectionist measures was also amply documented in recent detailed reports, prepared jointly by the World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD) and the United Nations Conference on Trade and Development (UNCTAD) at the request of the G20.

Anyway, most analysts have from the outset not put too much importance on the G20. After its widely recognized success as a fire fighter at the time of the financial crisis about three years ago, many observers have criticized the G20 forum mostly as a talking shop to let policymakers understand what their counterparts elsewhere are up to and why.

But then while there is a gap in global economic governance at leadership level, the G20 is still seen as best-placed to fill that space, one structure that people look to for guidance.

No wonder, many did not expect much from the gathering this week of global leaders, development experts, bankers, academics and activists in Rio de Janeiro held immediately after the G20 summit to celebrate the anniversary of the landmark Earth Summit of 1992.

The conference tried to address the linked problems of poverty, hunger, energy shortages and environmental degradation but the big gathering seemed to be overshadowed by economic and political crises around the world.

There are few expectations for concrete action or pledges of new aid to developing countries. The absence of key leaders from developed countries dashed the hopes for more concrete results.

Delegates said the constraints of the still-faltering global economy had dampened hopes and refueled the conflict between industrialized and developing countries that had hobbled international development and environment talks for years.

But Indonesia’s President Susilo Bambang Yudhoyono, one of the leaders attending the meeting, seemed not to be discouraged by the skeptics. He was instead still optimistic that the Rio summit would come out with a lot of firm action programs.

Yudhoyono briefed delegates from more than 190 countries on Indonesia’s programs to stop deforestation through a two-year moratorium on new permits for logging and exploitation of peat land in cooperation with the Norwegian government that pledged $1 billion in funding.

“We also launched a nationwide campaign to plant trees, which in the last two years have resulted in 3.2 billion trees being planted. We did this out of our own volition, but we also expect the world to support our efforts beyond rhetoric and finger pointing,” he said.

However, most environmental NGOs in Indonesia criticized Indonesia’s poor progress in reforming its forestry sector as deforestation has continued, thereby jeopardizing its campaign to reduce carbon emissions by 26 percent by 2020.

Even Norway’s Environment Minister Bard Vegar Solhjell was quoted by Reuters as observing that the moratorium itself would not be sufficient to achieve Indonesia’s climate change mitigation.

The $1 billion Norway has promised under the deal is contingent on policy change and proven emissions reductions from the forestry sector.

The conference, formally titled the Conference on Sustainable Development, but more popularly known as Rio+20, tried tackling big questions such as protecting the world’s forests and fisheries, weaning the world off fossil fuels and encouraging farming and economic growth that does not destroy the natural environment.

As Indonesia participated in the two important summits abroad, the nation witnessed an Indonesian Air Force Fokker F-27 aircraft crashing into the ground at the Rajawali military housing complex, near the Halim Perdanakusuma Airbase in East Jakarta on Thursday afternoon. All seven crew members and three civilians on the ground died.

Also on Thursday, the West Jakarta District Court handed down a 20-year prison sentence to Umar Patek for illegal possession of firearms and explosive devices and chemicals, premeditated murder in the 2002 Bali bombing and the 2000 Christmas Eve church bombings in Jakarta.

Floating regasification unit improves LNG supply, value chain

Vincent Lingga, Oslo | Fri, 06/15/2012 9:19 AM

Indonesia has been one of the world’s largest exporters of liquefied natural gas (LNG) since the mid-1970s, but the role of the clean-burning primary energy in the country’s electricity generation is still almost negligible.

The problem is that most of the big power generation stations are located in Java while most gas is produced on the outer islands, and Java does not have an onshore LNG receiving terminal, which costs hundreds of millions of dollars to build.

No wonder the two LNG plants at Arun in the northernmost province of Sumatra and in Bontang, East Kalimantan, have been tied to long-term (more than 25 years) contracts because the building of the loading and receiving terminals to handle LNG carriers require billions of dollars of investment.

But the launching last month of Indonesia’s first floating storage and regasification unit (FSRU) in Java bay will drastically change the supply and value chain of natural gas.

 The power generation station at Muara Karang, north of Jakarta, has begun taking in natural gas from as far as the Bontang plant because the short distance between the FSRU mooring in the Jakarta bay and the power stations can be covered by a submarine pipeline.

The FSRU takes deliveries of LNG from tankers and turns it back into gas (regasification) before pumping it to the power plant through the sub-sea pipeline.

The FSRU, named Nusantara Regas Satu, was built at the Sembawang yard in Singapore by converting an old LNG vessel owned by Golar LNG into floating regasification vessel-based LNG receiving unit.

The facility, which is also Asia’s first FSRU, is chartered by PT Nusantara Regas, a joint venture of two state companies — Pertamina oil and gas company and Perusahaan Gas Negara (PGN).

The FSRU with a storage capacity of 125,000 cubic meters enables the quick realization of gas purchases and obviates the need for shore-based LNG storage tanks and regasification facilities.

Later in 2013 or early 2014, the Nusantara Regas Satu will be joined by an even larger FSRU, with a storage capacity of 170,000 cubic meters, currently under construction at the South Korean Hyundai shipyard.

Earlier this year, PGN and Norway’s Hoegh LNG signed a 20-year contract, extendable by 10 years, under which the Norwegian fully-integrated LNG service company will provide PGN with an FSRU and mooring system offshore of Lampung, in southern Sumatra.

Different from the first FSRU in Java bay, which was converted from an old LNG tanker, the second facility will employ the first of Hoegh LNG’s new building regasification vessels.

“We have three FSRUs currently under construction at Hyundai and one of them will be moored offshore Lampung,” Hoegh LNG’s vice president Geimund Aasbo told The Jakarta Post in Oslo last week.

The project, scheduled to come on stream in early 2014, includes construction, lease and operation of an FSRU with an associated mooring system, a contract for pipeline and necessary infrastructure and a tie-in with an existing grid connected to the power station onshore.

“With more than 40 years of experience in LNG transportation services, Hoegh has been operating two FSRUs and five LNG vessels, all under long contracts, to energy companies in the global LNG value chain,” Aasbo added.

There are now 14 FSRUs operating worldwide with seven others, including the one destined for Indonesia, still under construction in South Korea.

The FSRU facility will greatly improve Indonesia’s energy security, especially because most of the hydrocarbon discoveries in recent years are gas, such as the Senoro and Matindok fields in Central Sulawesi with combined proven reserves of 2.4 trillion cubic feet, and the Masela block in the Arafura Sea, south of Papua, with reserves of 6.5 trillion cubic feet and the huge BP gas field at Tangguh in Papua.

 “I expect hydrocarbon discoveries in the eastern part of Indonesia will consist mostly of natural gas,” said Statoil Indonesia CEO Tor Fjaeran.

Though a newcomer in Indonesia’s petroleum industry, the Norwegian state oil company Statoil has been operating a deep-water Karama production sharing contract offshore West Sulawesi and has farmed into nine other concessions, all of which are offshore in the eastern region.

Natural gas is cleaner than other fossil fuels, and gas-fired power plants are relatively cheap to build, fueling a stronger demand for gas.

As LNG transportation has now been made much easier with the FSRU, it also allows LNG spot markets to expand.

The International Energy Agency (IEA), a watchdog for the developed countries, has estimated LNG trade to increase to more than 395 billion cubic meters in 2015.

Most LNG is still sold under long-term contracts that underpin the billions of dollars of investments required for liquefaction plants. But the massive expansion of regasification capacities has created bigger opportunities along the global LNG value chain.

We can imagine in the coming years a fleet of small tankers on regular runs across the country carrying LNG from Bontang, BP Tangguh plant in Papua, Shell’s Masela plant in the Arafura sea or Pertamina-Medco Senoro-Matindok’s plant in Central Sulawesi and supplying the gas to electricity plants, which are currently run on expensive diesel or fuel oil.

The FRSU infrastructure will make all that possible.

The author is a staff writer at The Jakarta Post.

Norway geared up for ‘big bang’-style trade and investment in Indonesia

Vincent Lingga, The Jakarta Post, Oslo | Wed, 06/13/2012 11:27 AM

Gunn Ovesen (left) and Trond Giske: (Courtesy of Innovation Norway)

Oil and gas-rich Norway is gearing up to enter Indonesia’s economy in a “big bang kind of way” through investment and trade, focusing on the hydrocarbon industry, marine and maritime services, hydropower, health care and the environment.

While both countries are still negotiating a comprehensive, strategic economic partnership agreement, an increasing number of Norwegian companies, with the full support of their government, are preparing to enter Indonesia’s economy in a major way.

“Indonesia needs deep-water technology in oil mining and, being a vast archipelagic country, it also needs to develop its marine and maritime industry. My country has a very strong competitive edge in both industries,” said Norwegian Trade Minister Trond Giske.

But, why now?

Norway’s Deputy Trade and Industry Minister Jof Jeanette Moen pointed out that over the past few years Indonesia had been the third-fastest growing economy after China and India within the prestigious Group of 20 major economies (G20).

“I think the future of the world will also be shaped by what happens to Indonesia and we want to play a part in that development”, Moen added.

Both the trade and industry minister and his deputy were among the main keynote speakers at a seminar in Oslo last Thursday on business opportunities in Indonesia

The meeting also presented Suryo Sulisto, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), Indonesian Ambassador to Norway Esti Andayani and Ananda Idris, a consultant well experienced in dealing with Norwegian businesses.

The seminar, which was attended by about 50 businessmen from across Norway, some of whom already possess good experience of doing business in Indonesia, was part of a series of preparations for the vigorous campaign to enter Indonesia’s economy.

The next big step will be the opening of an Innovation Norway office in Jakarta in August, which will serve as the “man on the spot” in Indonesia to help Norwegian companies on how to market products and how to invest in Indonesia.

Innovation Norway, a state institution with offices in more than 30 countries, plays a unique role in promoting trade, investment, technology innovation and even tourism, serving as the spearhead to help Norwegian businesses market their products or set up investment ventures overseas.

As a state company funded by the central government and county administrations, Innovation Norway is able to hire highly competent professionals to produce market intelligence studies and provide advisory services and technical assistance.

“We can even provide financing services [both loans and equity capital] to businesses with highly promising prospects. Once we enter a company, we serve as the catalyst to attract other commercial banks into joining the financing” said Innovation Norway’s CEO, Gunn Ovesen.

Norway has always pursued a prudent economic vision. Even though it is one of the world’s largest producers of oil, producing more than 2.2 million barrels a day and more than 110 billion cubic meters of natural gas a year, the country generates more than 90 percent of its electricity from hydropower.

The government has been pouring a good portion of its oil and gas export earnings into what Norway’s Finance Ministry claims to be one of the largest sovereign-wealth funds in the world, with more than US$550 billion in reserves for investment both within the country and overseas.

“Norway is the world’s sixth-largest producer of hydropower in the world, supplying more than 95 percent of our domestic electricity consumption of over 250 terrawatt hours [TWh] last year,” said Geir Elsebutangen, managing director of INTPOW, a government research and development agency focusing on renewable energy.

Elsebutangen added that Norwegian companies had also developed advanced technology in tunneling work for hydropower generation stations and other basic infrastructure.

“For a few months every year, most of our rivers are frozen, yet our tunneling technology can guarantee a constant supply of water to our hydropower stations,” he sad.

Elsebutangen, who gained years of experience working with the ABB construction company in Indonesia and other Asian countries, sees many potential sites for hydropower plants in Indonesia, especially those of small capacity.

“Tinfos AS has completed a mini hydropower plant near Makassar, South Sulawesi, with a capacity of 10 megawatts [MW]. This plant can be a model for other areas to generate renewable energy, while serving as a showcase for the public to realize how vitally important it is to protect forests,” he added.

The “big bang” declaration of Norway’s entry into the Indonesian economy will be capped with a visit by a business delegation in late November during which Norwegian companies will show their competitive edge in hydrocarbon, marine and maritime services and hydropower, as they seek joint-venture partners.

Norway has a population of only around five million people, barely half the population of Jakarta, but with gross domestic product (GDP) of over $420 billion and per capita income of more than $55,000,
Norwegian consumers have strong purchasing power..

Unfortunately, however, Indonesia-Norway trade has not grown well and has so far failed to achieve its full potential. According to official data at the Trade and Industry Ministry in Oslo, bilateral trade totaled only about $260 million last year, down from $295 million in 2010, albeit up significantly from $195 million in 2009, mostly in Indonesia’s favor.

Indonesian exports to Norway have consisted mostly of garments and accessories, consumer electronic goods and wooden products, while imports have consisted primarily of machinery and fish.

But bilateral trade will increase substantially in the coming years as more Norwegian companies sell technology, marine and maritime services and equipment.

Last January, Norway’s Hoegh LNG, one of the world’s largest fully integrated floating liquefied natural gas companies, signed an agreement worth more than $250 million with state-owned PT Perusahaan Gas Negara (PGN) to provide PGN with a floating storage and regasification unit (FSRU) and mooring system in Lampung under a 20-year charter, which is due to begin operations in early 2014.

Commentary: Bank consolidation should be top priority for central bank

Except for the plan to introduce multiple licenses for banks, we do not see how the forthcoming package of bank regulations, especially those relating to bank ownership cap, will fit into the banking architecture that Bank Indonesia launched in 2004.

The national banking architecture was designed to create a new bank landscape consisting of two to three banks of international class, three to five national anchor banks and 30 to 50 smaller banks with specialized services and thousands of rural or community banks by 2014.

The central bank has been trying persuasively since 2004 to speed bank consolidation in a bid to create fewer but stronger-capitalized banks because it is extremely difficult to effectively supervise so many banks.

But the number of full-service, city-based commercial banks remains quite high (about 120 now), yet most of them have a very low capital base.

But we greatly welcome the central bank’s plan to change the current system of a single license for a whole range of banking operations to a multiple-license system that will require banks to meet preset capital standards for obtaining a license for a particular kind of operations.

This multiple-licensing system should have been implemented immediately after the launch of the 2004 banking architecture to accelerate bank consolidation.

But instead of setting bank consolidation as the top priority for its regulatory framework, the central bank has been pronouncing, in bits and pieces, since April that it would soon restrict bank ownership by nationality and by category — finance and non-finance institutions and individuals.

We wonder why Bank Indonesia suddenly thinks it is now so urgent and imperative to shake up the ownership structure, while the biggest challenge facing the banking industry amid the increasingly globalized financial market should be good corporate governance and bigger capital base.

We do not have enough empirical evidence to prove that there are positive correlations between ownership cap by nationality, prudential bank management and good corporate governance, as long as the majority of owners are bank or non-bank financial institutions.

Look at how during the 1998–1999 banking crisis almost all the biggest local banks in the country had to be bailed out by the government, while only a few foreign-owned banks were plunged into severe financial distress.

Bank Indonesia may think, since the capital adequacy ratio (CAR) of all local banks is quite high now (over 16 percent), it is high time to tinker with ownership structures to curb the growth of foreign-owned banks.

But in the increasingly globalized financial market, the high CAR of our banks has little meaning because it is founded on very low capital base.

Indonesia is the largest economy in Southeast Asia, but its largest bank, Bank Mandiri, is still relatively unknown in the region and ranks only the sixth largest in the region in terms of assets.

The title of the largest bank is held by Singapore’s DBS financial service group, whose announcement of its plan to acquire Bank Danamon seemed to have prompted Bank Indonesia to hastily rewrite bank ownership rules.

Instead of restricting bank ownership by nationality and by the category of owners, the new set of regulations should focus on rules to ensure the highest standards of good governance and concerted efforts to accelerate bank consolidation.

Restricting bank ownership, even with a transition period of 10 to 20 years as some Bank Indonesia executives have hinted, could rock the banking industry because our financial market is not deep enough or big enough to absorb such massive divestment that has to be made by bank shareholders.

Ownership cap regulations would also give the wrong signal to investors, and such a negative perception is the last thing we need now in coping with the uncertainty of the international financial market due to the eurozone crisis.

Forcing banks to replenish their capital base should be the top agenda for Bank Indonesia because bigger capital is needed to absorb risks or shocks.

Politicians and analysts who demand severe restrictions on foreign banks should realize that our banking industry would not have recovered so quickly had it not been for the capital injection, the transfer of skill and expertise from foreign banks and foreign investors.

Even now the banking industry can still benefit greatly from the presence of strong, foreign banks with good reputation.

More importantly, though, is for the central bank to be able to direct foreign banks to support the top priority programs of our economic development through lending and other financial services, promote the best practices of good governance to local banks and companies and provide our economy with access to international finance.

Vincent Lingga, The Jakarta Post, Jakarta | Thu, 05/31/2012 7:30 AM

Commentary: Planned DBS-Danamon deal puts Temasek in the spotlight again

Vincent Lingga, The Jakarta Post, Jakarta | Tue, 04/10/2012 9:45 AM

The planned US$7.3 billion acquisition by Singapore DBS Group Holding of publicly listed Bank Danamon should be one more confidence-building step in Indonesia’s long-term economic advance, but equally it could turn into an ugly political controversy.

DBS chief executive officer Piyush Gupta made the business plan fully transparent in line with the best practices of good corporate governance by announcing it at a news conference here last week, but he has unintentionally set off what could be weeks of pointless political debates, whipped up by inordinately nationalistic grandstanding.

The transaction will not lead to any fundamental changes in terms of ownership, as both DBS, Southeast Asia’s largest bank, and Bank Danamon, Indonesia’s sixth-biggest, are by and large controlled by Singapore government investment company Temasek through subsidiaries.

But several narrow-minded and seemingly xenophobic lawmakers have embarked on what could develop into a nasty public-opinion campaign to sabotage the planned transaction by whipping up jingoistic sentiment.

As it happens, Indonesia’s largest banks (state-owned) have long complained about what they see as the regulatory discrimination they face in building operations in Singapore.

Misguided lawmakers and narrow-minded analysts may exploit these grievances as ammunition to strengthen their campaign against Bank Indonesia’s approval of the transaction.

But as both Singapore and Indonesia have a great deal at stake in the business plan, both governments should see to it that the planned takeover runs smoothly according to existing laws and regulations.

Poor handling of the issue could harm both countries.

Since DBS, already the largest in Southeast Asia, will never achieve its goal of being a leading bank in Asia without having strong positions in Indonesia, India and Hong Kong, Singapore’s government is well advised not to allow the local bankers’ complaints to sabotage the merger.

Simply ignoring these grievances could unnecessarily expose the planned DBS acquisition to noisy political posturing and set off weeks or even months of pointless public debates hyped by excessively nationalistic sentiments.

Singapore’s government should pay heed to the lessons learned from the Temasek experiences between 2006 and 2008.

Temasek decided in June 2008 to divest its entire 40.8 percent stake in PT Indosat and sell the asset to Qatar Telecom after suffering more than two years of bashing by politicians and trade unions in state companies as well as messy lawsuits.

On the other hand, however, the Indonesian government would look bad in the eyes of international investors if Bank Indonesia, the central bank, which has yet to approve the DBS-Danamon deal, succumbed to political pressure by delaying indefinitely the approval of the transaction.

As there is no current law in Indonesia against the DBS-Danamon transaction, refusing to ratify the deal could scare off new investors at a time when the country should be benefiting greatly from the investment grade it recently gained after a lapse of 14 years.

Fundamentally, the planned DBS acquisition is simply a normal business transaction.

It is Temasek’s strategy to build synergy between DBS with its extensive experience and expertise in corporate banking such as infrastructure, project and trade financing and sharia banking and Danamon, which has 6 million customers and operates more than 3,000 branches and 3,000 ATMs in Indonesia.

The strategy is certainly linked to the increasingly important role Indonesia, Southeast Asia’s largest economy, plays in the global economy, and is part of the DBS effort to gear up for the ASEAN Economic Community in 2015.

Indonesia, especially its banking industry, will benefit greatly from the transfer of skills, expertise in risk management and other good governance practices, along with greater access to sources of international finance.

Banks serve as the heart of the economy. 

Strategic investors and owners such as DBS, with good reputations and huge capital resources, will accelerate the operational restructuring of Bank Danamon to provide comprehensive financial services, notably credit — the lifeblood of the economy.

Experiences in other countries such as Thailand, South Korea and even Malaysia, which like Indonesia were hit by the financial crisis in 1997, point to the great benefits derived from the entry of major international banks with strong reputations and vast capital to the development of a sound domestic financial sector.

The issue could be politically sensitive because a bank is not simply a business entity in an ordinary sense, given its fiduciary responsibilities, the multiplicity of transactions it is involved in and its key function within the economy. 

Banks are institutions of trust. That is why the principles for good corporate governance for banks are much more elaborate than those for other commercial entities. 

It is also why not everybody who can put up adequate capital is allowed to have a controlling ownership of a bank.

Those who want to become controlling owners and commissioners of a bank have to pass the fit-and-proper test set by the central bank to assess their technical competence and integrity.

However, what narrow-minded analysts or xenophobic lawmakers may forget is that whoever is the controlling owner of Bank Danamon, it, like every other bank, is still legally obliged to play by the rules made by Bank Indonesia.

The week in review : $25b for artificial stability

Vincent Lingga, The Jakarta Post | Sun, 04/01/2012 12:43 PM

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The government, with its popularity eroded by corruption scandals, succumbed on Friday to popular outrage against its planned fuel-price increase by raising the amount allotted for fuel and power subsidies this year by almost 35 percent to Rp 225 trillion (US$25 billion).

The political compromise will further weaken the lame duck presidency of Susilo Bambang Yudhoyono and debilitate the policy-making capability of his government during its remaining 30 months in office.

The development is worrisome. Many more reforms are needed to strengthen the foundations of the nation to sustain high economic growth rates over the long term.

The nation has been gripped by increasingly rowdy political and economic debates and protests over fuel prices over the last three months, some of which turned violent with dozens of police officers and demonstrators injured and state and private property damaged. 

However, this costly exercise in democracy has served to only to strengthen the economy’s addiction to fossil fuels, thereby putting the state’s budget and its fiscal management as a whole at the mercy of highly volatile oil prices, which are entirely beyond our capacity to control.

This political decision will only create artificial stability at the expense of poverty alleviation, infrastructure development and renewable energy research.

The vigorous — yet pointless — debates and political bickering about the fuel-price issue miserably failed to enlighten the general public about the truth: Artificially low fuel prices will eventually lead us to a severe energy crisis through severe supply disruptions.

The issue is much broader than simply plugging the government’s deficit. There is a great concern about our deeper addiction to cheap fossil fuels that damage the environments and make the development of other renewable energy commercially unfeasible. 

We do not understand why the politicians of the opposition parties in the House — the Indonesian Democratic Party of Struggle (PDI-P), the Great Indonesia Movement Party (Gerindra) and the People’s Conscience Party (Hanura) — stubbornly refuse to acknowledge the severity of the nation’s fuel-subsidy problem.

More appalling was the utter shamelessness shown by the leaders of the PDI-P as they provoked their supporters to join street demonstrations over the last three days, fearing that the party would be on the losing side when the House voted on the fuel subsidy. 

It was a crass and pathetic politicking that marked a low for the nation’s developing democracy.

And even more flabbergasting were the number of economists and human right activists who, along with the PDI-P’s leaders, missed the point, alleging the fuel reform measure was only political grandstanding by the President.

The reality could not be more different. Yes, Yudhoyono could have appeased his critics and neutralized opposition by not adjusting the fuel subsidy and allowing the deficit to rise to an unmanageable level at the expense of economic stability.

However, the President’s conscience seemed to have forced him to stake his political legacy on proposing painful reforms for the long-term economic good.

Allowing the government’s deficit to exceed the ceiling of 3 percent of GDP set by law will increase Indonesia’s sovereign risks at a time when the government has been tapping the international bond market to finance the deficit.

Higher sovereign risks will increase the government’s borrowing costs. Worse still, the government might lose the investment-grade rating it only recently regained after a lapse of more than 14 years.

Yudhoyono’s biggest mistake — or rather his perpetual flaw — has been his indecisiveness and acute lack of courage to bite the political bullet, despite his term limits that will see him exit in 2014. He should have raised the fuel price last year, when he still had a strong political mandate and could have avoided bickering with the misguided lawmakers in the House.

The 2011 State Budget Law authorizes the President to adjust fuel prices whenever international oil prices rise by more than 10 percent over the average price assumed in the state budget.

Finance Minister Agus Martowardojo warned the public as early as last May that fuel subsidies had risen at an alarming rate along with the rising international oil price, urging the President to act immediately. 

We simply cannot understand how the government could have been so ignorant as to allow a stipulation written into the 2012 State Budget Law that prohibits the government from raising fuel prices. The President and his economic ministers should have realized the continuing unpredictability and volatility of international oil prices. 

In 2004, then president Megawati Soekarnoputri refused to raise fuel prices, despite steeply rising international prices — apparently in an attempt to gain more votes in that year’s presidential election.

Megawati was humiliatingly defeated by Yudhoyono, who was forced to raise fuel prices in March and again in 2005 to defuse the fiscal time bomb left behind by Megawati.

Yudhoyono, however, has apparently failed to learn from the political turbulence and massive protests he encountered when he raised fuel prices in 2005 and 2008.

The week in review: The fuel-policy uncertainty

Vincent Lingga, The Jakarta Post | Sun, 01/22/2012 7:00 AM

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For such an important policy reform that has been on and off the national agenda since late 2007, the debates on the need to limit subsidized-fuel sales that dominated the nation’s attention this week seemed pointless and a waste of time and energy.

As early as December 2007 then chief economics minister Boediono, who is now the Vice President, announced after a Cabinet meeting that the government was preparing a program which would restrict the sales of subsidized gasoline only to public transport vehicles, motorbikes and fishermen, thereby forcing private cars to use fuel sold at the commercial rate.

But the program, which would have been phased in initially in Jakarta, West Java and Banten provinces, was eventually buried under the indecisiveness of the government and opposition from the House of Representatives.

Tens of billions of dollars of taxpayers’ money continue to be converted annually into carbon emissions by private car owners. The government revived the idea in June and again in October 2010 but the plan was again shelved in February 2011, two months before it was supposed to be implemented, due to what the government said were technical reasons.

That plan was indeed technically unfeasible as it would have caused chaos in fuel distribution due to the institutional incapacity of both the government and Pertamina to prevent abuse as well as a lack of infrastructure because not all filling stations were equipped with high-octane fuel supply tanks.

Faced with such technical difficulties, the government should have gradually raised fuel prices, a scheme that has often been implemented in the past without serious risks of abuse. But nothing was done due to the lack of leadership of the Susilo Bambang Yudhoyono administration, already notorious for its indecisiveness. The narrow-minded House also supported the misguided energy policy.

Hence, fuel and electricity subsidies ballooned to more than Rp 250 trillion (US$28 billion) last year, or over 30 percent higher than the original budget allocation, the bulk of this largesse was enjoyed by middle class and high income citizens.

The government and the House again revived the plan to reduce fuel subsidies during the debates on the draft 2012 budget in the second half of last year and stipulated in the 2012 State Budget Law that fuel subsidies should be limited at Rp 210 trillion and set 37.5 million kiloliters as the ceiling for subsidized fuel sales, down from over 40.4 million kl last year.

Alas, the pathetic government failed to learn from its failure of last year. The 2012 budget law only stipulates that the sales of subsidized fuel should be reduced through restrictions. The stipulation does not mention anything about price rises.

Hence, the government announced early this year that starting in April, the use of subsidized fuel would be limited to public transport vehicles, motorcycles and fishermen, while private passenger cars will have to use high-octane (nonsubsidized) fuel or liquefied natural gas for vehicles (LGV) or compressed natural gas (CNG).

No one in the government or the House seemed to be rational enough during the 2012 budget debates to realize that such a program would encounter even more complex technical problems related to the installation of converter kits to vehicles and the inadequate supply of such kits.

Moreover, even in Jakarta there are fewer than 16 gas stations selling LGV and CNG.

Minister of Mineral Resources and Energy Jero Wacik admitted on Wednesday that the fuel-restriction scheme would lead to technical complications, signaling that the government might opt for a much simpler scheme – raising the fuel prices.

The problem, though, is the alternative scheme first must be approved by the House because the law allows only for a reduction of fuel subsidies through restrictive use, not outright price rises.

Proposing an amendment to the law for such a painful reform would again plunge the government into a rowdy political fracas, pointless debates and even bouts of political turbulence.

But that is democracy. We nevertheless still think a gradual price rise, even at the risk of some social unrest, political turbulence and slightly higher inflation is still better than allowing this “fiscal cancer” to grow. 

The tens of billions of dollars burnt off on our streets every year have been a missed opportunity to invest in health, education and infrastructure.

This year also may be the last opportunity to usher in such a painful, yet badly needed, energy reform, because next year all politicians will start gearing up for the legislative and presidential elections in 2014.

Even amid the hurly burly of the debates about the fuel subsidy issue and the sharp criticism by most analysts of the government’s indecisiveness, Indonesia’s government credit rating got another boost on Wednesday as Moody’s Investors Service followed an earlier decision by Fitch Ratings in December to upgrade the country’s sovereign rating to investment grade.

The next the day, Investment Coordinating Board Chairman and Trade Minister Gita Wirjawan announced an 18.4 percent increase in realized foreign direct investment last year to $19.28 billion.

However the government should not allow the higher ratings go to its head because the country is still struggling with poor infrastructure, bad governance and corruption.

The biggest impact of the rating upgrade will be felt mostly in the financial market, not in the real sector such as manufacturing.

In fact, the government could have its rating downgraded again if fuel subsidies are not held at a manageable level because the key factor for the upgrade is prudent fiscal management.