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.         

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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.

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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. 

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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.

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