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.

Bribes, poor roads hamper supply-chain management

Friday, April 18, 2008 Vincent Lingga, The Jakarta Post, Jakarta

Commercial deliveries are unpredictable because of conflicting local regulations, illegal payments and crumbling road infrastructure, according to a recent survey of domestic trucking costs by the Asia Foundation and the University of Indonesia's Institute for Economic and Social Research (LPEM-FEUI).

The study, conducted in Sulawesi, East Java, North Sumatra and East Nusa Tenggara, found truck drivers and transportation firms made regular payments to the police, officials at weigh stations and to local thugs at checkpoints along their routes.

Adding to trucking costs are the poor road infrastructure and cumbersome route licensing procedures imposed by regional administrations.

The reasons the roads are in such bad condition include the widespread practice of overloading trucks and inadequate maintenance work. Truck drivers simply bypass weigh stations by paying a noncompliance fee to the local officials.

These problems make the overall vehicle operating costs for trucks US$0.34 per kilometer, as against $0.22 in Vietnam, Thailand, Malaysia and China, the survey concluded.

The findings validated a complaint made earlier by the Food and Beverage Industries Association that hauling cargo from Jakarta to Surabaya required the payment of almost Rp 450,000 in illegal levies to officials at 14 scaling bridges between the two cities.
But it is like an egg and chicken game. Truck drivers claim they have to overload their trucks to be able to cover all the illegal levies they have to pay along the highway.

The findings of the survey show how seemingly hopeless the conditions of our road transportation services are and how incompetent the central government and regional administrations have been in coping with illegal levies on the highway.

Yet more damaging is how ignorant the government has been about the strategic role of efficient road transportation in logistics, as almost 70 percent of the country's cargo is hauled by trucks, and how crucial is superior logistics management to create efficient supply chains.

A 2005 study by LPEM-FEUI of 75 large export-oriented industrial companies at four of Indonesia's largest seaports in Java, Sumatra and Sulawesi concluded that logistics services accounted for an average 14 percent of total production costs, among the highest in Southeast Asia.

This finding confirmed what many businesspeople have long complained about; a high-cost economy that makes the country's exports less competitive in the international market.
The study found the high logistics costs derived mainly from poor infrastructure, illegal levies and arduous bureaucratic procedures.

International studies also have shown that logistics arrangements in Indonesia are still grossly inefficient, as evidenced by the high portion taken by distribution and logistics in the free-on-board prices of goods.

All these problems make Indonesia's logistics capability miserably low and consequently its supply chain grossly inefficient.

This is quite worrisome because efficient logistics -- low transportation costs, short transit times, reliable delivery schedules and careful handling of goods in cold storage chains -- are vital for trade and the smooth distribution of goods.

Globalization requires greatly increased coordination of transportation by road, rail, sea, air and lately also by an entirely new route to market -- the Internet. This makes logistics vastly more complex. The job of ensuring that all these things work together is known as supply chain management.

A study of 150 countries by the World Bank in 2007 concluded that facilitating the capacity to connect firms, suppliers and consumers is crucial in a world where predictability and reliability are becoming even more important than costs.

Being able to connect to global markets is fast becoming a key aspect of a country's capacity to compete, grow, attract investment, create jobs and reduce poverty, the World Bank said.
It is no coincidence that the most competitive economies also rank very high on the Logistics Performance Index drawn on the basis of the study. Most developed countries and Singapore, South Korea, Japan, China, India rank high on the index.

Many companies have reengineered their supply chains to gain a huge competitive advantage. What has made such giant retailers as Wal-Mart and Carrefour highly competitive is their superior logistics management. The market leaders all have supply chains that are more responsive to customer demand.

Things like transportation, purchasing and warehousing, once considered merely part of the cost of doing business and often managed as separate entities, are now seen by most managers as a strategic agenda.

Industrial companies cannot manufacture goods without the inputs they need and in the case of Indonesia most manufacturers still rely on imported materials and parts and components. Hence, if delivery times are expedient and reliable, manufacturers should not hold large inventories of inputs, thereby cutting their inventory costs.

Superior logistics management is the key to making Hong Kong and Singapore efficient shipping hubs for their neighboring countries. Besides their highly efficient port-handling systems, their auxiliary services like customs and freight forwarding are also smooth.

However, an efficient supply chain requires a minimum set of conditions, notably efficient transportation, expedient customs services and production standards to ensure the free flow of goods, services (including labor) and investments.

Without efficient logistics Indonesia will not be able to become part of the global supply chain.

Only credible contingency measures can reassure the market

Monday, April 07, 2008 Vincent Lingga , The Jakarta Post

Finance Minister Sri Mulyani Indrawati told an emergency news conference after an unscheduled limited Cabinet session on the economy chaired by President Susilo Bambang Yudhoyono last Thursday that the Indonesian economy was under control and that escalating inflationary pressures were manageable despite the soaring food prices and fuel subsidies.

In a stronger bid to reassure the market, Sri Mulyani put the government's money where its mouth is, stating the government would buy back in cash its bonds maturing between 2008 and 2013.

However, the market will remain jittery, nervously waiting for concrete, credible measures to maintain fiscal sustainability and check the runaway inflation, which cumulatively reached 3.41 percent during the first quarter alone, as against the 6.5 percent inflation target for the whole year.

Year-on-year inflation in March surged to 8.2 percent, already higher than Bank Indonesia's benchmark short-term interest rate of 8 percent.

No wonder that investors, already skittish due to the global financial turmoil, became more worried over what they perceive as higher sovereign risks of the government.

This is reflected in the increase in the risk premium on Indonesia's international bonds to 300 basis points (over the U.S. Treasury bonds) last month from 130 bp last year.

The government's domestic borrowing costs also have risen, as shown by the increase in the yield on rupiah bonds to more than 12 percent from around 9 percent last year.

This is truly worrisome because the government plans to raise Rp 117.80 trillion (US$12.8 billion) from rupiah and dollar bonds this year to help plug its budget hole.

The miserable failure to get a single bid for its zero-coupon bonds auctioned late last month showed how widely different were the government and market perceptions of fiscal sustainability and economic outlook.

The government claims the economic situation is generally healthy and that the underlying assumptions in the revised budget are not much different from the reality.
However, the market sees things differently.

Market players believe the state budget will not be sustainable as long as it remains helplessly strapped to the nasty roller coaster of increasingly costly oil. How could the government still claim the budget is anchored on prudent fiscal management when fuel, power and food subsidies will take up more than 23 percent of total spending this year?

How could the budget be seen as politically viable when energy subsidies alone will exceed budgetary appropriations for capital investment and social expenditure?

The state budget is a communication system, conveying signals to the market and the people in general about behavior, prices, priorities, intentions and commitments. Budget reforms therefore should take particular account of these characteristics.

Even without so many inimical external factors, the budget system is already adversely affected by multiple, converging uncertainties, entrenched patterns of expenditure, severe inflation and structural imbalances between expectations and resources.

The budget system must be built to cope with these realities.

Unfortunately, most of the contingency measures pronounced by the government focus on austerity and high budget discipline, which sadly have so far been the main weaknesses of the government.

None of the measures is designed to reduce fuel consumption or slash fuel subsidies, thereby leaving the budget a helpless hostage to the wildly volatile international prices.

Another problem is that the fiscal stimulus -- more than US$17 billion in budgetary allocations for capital spending this year -- may again come in fits and starts, ill-timed and beyond the bureaucratic machinery's digestive powers. Last year, for example, almost 60 percent of the budget appropriations for capital expenditures was spent in the last quarter alone.

Without significant progress in budget execution, the economic growth target of 6.4 percent -- as against 6 percent forecast by the ADB and the World Bank and 6.2 percent by Bank Indonesia -- will not likely be achieved because private and government consumption remains one of the main drivers of economic expansion, besides investment and exports.

How the government maintains its prudent fiscal management and implements more concerted efforts to bolster exports and investment to offset the impact of the weakening global economy will determine the government sovereign risks and investors' risk appetite regarding its bonds, which in turn will influence the costs of its borrowing.

Cash is king, money laundering is the game

Tuesday, March 25, 2008, Vincent Lingga, The Jakarta Post, Jakarta

Profit, according to auditors, is an opinion, a matter of definition. You can state profit as gross earnings or net income, after-tax profits or earnings before interest and depreciation, depending on which of your stakeholders you want to impress.
But cash is real, which makes it the king.

So when senior state prosecutor Urip Tri Gunawan allegedly wanted a bonus for a "job well done" he demanded it in cash and in American dollars. Gunawan was arrested by a special team of the Corruption Eradication Commission (KPK) early this month with US$660,000 in $100 bills in a carton in his van as he exited the home of Sjamsul Nursalim, the former controlling owner of the now defunct Bank Dagang Nasional Indonesia (BDNI).

Two days before Gunawan's arrest the Attorney General's Office decided to clear Nursalim of all charges of corruption and other crimes related to the Rp 28.4 trillion ($3.05 billion) in liquidity credits BDNI obtained from Bank Indonesia during the banking crisis in 1998.
Gunawan led the team investigating Nursalim.

Earlier in September, Irawady Joenoes, a member of the Judicial Commission, was arrested by a KPK team at a house in South Jakarta with $30,000 cash in his pocket and Rp 600 million in bank notes stashed in a bag. The South Jakarta District Court ruled last week the money was a commission from businessman Freddy Santoso who had just sold a piece of land worth more than Rp 46 billion to the Judicial Commission.

Joenoes was sentenced by an anti-corruption court last week to eight years imprisonment.
In March, 2007, a joint team of the KPK and the AGO searched the home of Widjanarko Puspoyo, former chairman of the National Logistics Agency (Bulog), who was then facing corruption charges, and found hundreds of millions of rupiah stashed into a big bucket covered with wet laundry in a bathroom.

The South Jakarta District Court sentenced Puspoyo to 10 years in jail in February.
In 2003, after Bank Indonesia's (central bank) board of governors decided to give about Rp 31.50 billion to the House of Representatives to "facilitate" the deliberation of a central bank bill and to fund a public opinion campaign to improve the central bank's image, the money was delivered to House members in rupiah notes.

A senior central bank executive carried the cash in a big suitcase to a room at the Hilton (now the Sultan) Hotel.

Bank Indonesia Governor Burhanuddin Abdullah and two other senior executives of the central bank have been declared corruption suspects in relation to the case.

These are just a few examples of big cash transactions that we know about. Numerous other huge cash deals involving ill-gotten money derived from corruption and other crimes remain unknown or simply ignored by the authorities.

Welcome to the land where big cash transactions are still the rule rather than the exemption and money laundering is the big game in town.

Cash deals are one of the most popular modes of transaction for corruptors and other big criminals because the anonymity of cash limits exposure, does not leave a paper trail and cannot be uncovered by tax officials.

But how can all these huge cash transactions have continued after the enforcement of the 2002 law on money laundering, which restricts big cash withdrawals and scrutinizes other forms of dubious dealings?

Indonesia's anti-money laundering efforts have remained feeble due to a lack of cooperation from the National Police and AGO. Even though the Financial Transaction and Report Analysis Center (PPATK), which in other countries is commonly known as the financial intelligence unit, has reported thousands of suspicious transactions to the National Police, only two or three people have been brought to court on charges of money laundering.

The PPATK has spent almost six frustrating years practically fighting single-handedly against money launderers with little support from law enforcement bodies such as the National Police and Attorney's General Office.

The corrupt mentality within the law enforcement agencies, such as the National Police, rather than inadequate technical competence to investigate complex financial transactions, is mainly to blame for the weak enforcement of the law on money laundering.

Cooperation between law enforcement agencies and financial service companies and other government institutions such as the customs and tax services and the stock market watchdog is vital for effective enforcement of the money laundering law because information sharing is the brain of the anti-money laundering drive.

PPATK chairman Junus Husen came out with a major disclosure in August, 2005, saying there were strong indications of money laundering involving hundreds of billions of rupiah related to the personal accounts of 15 non-commissioned officers and generals of the National Police.
But not a single case has reached the court.

The problem is the PPATK is only authorized to analyze reports on suspicious transactions from financial institutions and to submit money-laundering cases to the police for further investigation and prosecution.

President Susilo Bambang Yudhoyono should act firmly to strengthen cooperation among all law enforcement agencies in the anti-money laundering drive. This campaign is truly an important component in the fight against corruption, tax evasion and numerous other crimes. The crimes covered by the law on money laundering are quite diverse, hitting almost all major sources of dirty money including corruption, drug trafficking, smuggling, bribes, banking crimes and human trafficking.

It is also easier to construct criminal cases through the law on money laundering than the anti-corruption law, because the former legislation puts the burden of proof squarely on those suspected of involvement in suspicious transactions.

Entrepreneurship key to sustainable high growth

Monday, February 25, 2008, Vincent Lingga, The Jakarta Post, Jakarta

Entrepreneurship, hardly a popular subject of scientific study at universities here, was the central theme of Djisman S. Simandjuntak's oration at a ceremony inducting him as professor of economics at the Prasetiya Mulya business school in Jakarta last week.

Djisman cited the acute lack of entrepreneurial firms from 1997 to 2005, when the number of companies decreased by 1.1 percent a year, as one of the main weaknesses of Indonesia's economy.

From 1977 to 1996, the economy grew robustly (over 7 percent annually), and the number of enterprises, small, medium and big, increased by an annual average of 6 percent. But the pace of economic growth fell sharply from 1997 to 2005, along with the financial crisis and the decrease in the number of entrepreneurs.

Studies by the World Bank and various business institutes in Europe and the United States have found a positive correlation between a broad base of entrepreneurship and economic expansion.
Entrepreneurs contribute greatly to producing and commercializing high-quality innovations, spurring productivity growth and enhancing employment creation and dynamics, because creativity and innovation are at the heart of entrepreneurial behavior.

Entrepreneurship is important for the continued dynamism of the modern economy because it is entrepreneurs that are capable of identifying business opportunities and staking out their capital in business start-ups, against all the risks.

Yet many countries like Indonesia erect regulatory barriers that make it extremely difficult to start up a new firm. Costly regulations hamper the creation of new firms, especially in industries that should naturally have high entry rates, and consequently force new entrants to be larger.
Little wonder many SMEs in Indonesia continue operating in the informal sector (underground economy), thereby denying them easy access to low-cost bank financing and other public services and facilities.

The Jakarta city government, instead of creating an enabling environment for micro and small enterprises, has been working hard since early this year to kill the entrepreneurial spirit by evicting sidewalk entrepreneurs.

The Doing Business 2008 report from the World Bank, which rated 178 countries according to their performance in 11 categories for the ease of doing business, ranked Indonesia at 123rd. Among ASEAN countries, our performance was among the worst, better only than the Philippines.

Regulatory and administrative costs obviously hinder entrepreneurial activity, dampen investment and research and development, and stunt firm growth. They can push firms out of business by absorbing too much time and resources.

Even difficult exit conditions that make it costly for firms to wind down, such as lengthy creditor claims on assets or too rigid labor regulations on severance allowances, can discourage business start-ups.

Culture is another important factor for building up an entrepreneurial society, influencing career preferences and shaping attitudes toward risk-taking and reward.
Djisman cited an important role for the government in nurturing entrepreneurship, through formal education and training (including continued education), and fostering entrepreneurial attitudes.

In major developed countries, business schools at major universities also function as incubation centers for small entrepreneurs, where innovations and creative ideas are developed and converted into commercial products.

But in Indonesia most university graduates are acutely short of entrepreneurial qualities. Hence, they look mostly for paid jobs in the private or public sectors.

A recent survey by the Central Statistics Agency found more than 700,000 university and vocational college graduates remained unemployed in 2007, more than double the number in 2006. But the actual number of jobless university graduates could be much larger because many simply do not bother to register with local manpower offices as job seekers.

Entrepreneurship thrives mostly among SMEs. Even in industrialized countries, SMEs still account for more than 85 percent of enterprises and some 65 percent of total employment, according to the secretariat of the Organization of Economic and Cooperation Development.

The role of small businesses cannot be underestimated. Nor can the challenges they face, particularly in a world where markets are globalizing and large-scale enterprises dominate so much of the government's policy making.

Yet, if the government focuses more on SMEs, so much could be achieved and a broader equity could be improved in the owners of economic assets. By encouraging more SMEs to flourish, we can realize other economic and social objectives, such as expanding worker skills and alleviating local pockets of poverty.