The case against the rupiah

Yesterday President Susilo Bambang Yudhoyono tried to calm the society saying there is no fundamental reason for the downfall of the rupiah. He said he believes the rupiah will be stable like old days again. (But at which level?) Noted economist Faisal Basri even downplayed the recent rupiah depreciation saying it is just a cyclical and non-systemic situation.

Statistics show that our exchange rate was stable in the range of Rp8300 to Rp8600 only in the period of mid-2003 until April 2004. However, the rising price of oil and stronger demand for dollars put downward pressures on the rupiah since then, making it the weakest-performing currency in Asia. The weaker rupiah and rising global oil prices exerts upward pressures on consumer prices through import of fuels, foods, other commodities, and especially raw materials and machineries.

Surely this is the fundamental problem that results from our failure to lure in new investments, not just export-oriented but import-substitution industries as well. It would be naïve say the whole economy is better so we have nothing to worry or to say the recent rupiah fall as a mere cyclical trend.

It is clear that our economic fundaments are weak still and always subject to international pressures. Look at oil statistics. In January-February 2005, Indonesia booked a deficit of US$771 million in oil trading (export less than import), more than double the numbers in the same period last year of US$331 million. The real effect of higher oil price will be in the next few months, especially with higher prices for raw materials for export-oriented manufacturers.
It is true that in the period non-oil and gas exports increased almost 31%. But increasing prices for mining products was the key reason -- a vulnerable gain. If we look at the manufacturing sector, exports increased 23.8%, while material goods imports also increased significantly -- by almost 18%.

Since most of our export-oriented manufacturers are heavily reliant on imported raw materials, the margin will be squeezed along with the increasing oil price.

Data released by the Investment Coordinating Board (BKPM) last month actually give some hopes. The agency reported a 293% surge in new investment licenses for foreign direct investment. The problem is the time lag between licensing and when investment materializes. It could take years, mainly because of poor bureaucracy in all branches of government.

We can’t just discount these fundamental problems to hope for a stronger rupiah.

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Rupiah toward 10000

Indonesian Rupiah is moving toward 10,000 per US dollar as it ended sharply down to Rp9745 yesterday. In fact, Central Bank rate to buy US dollar at Rp9145 and sell US dollars at Rp10145. Look at Bank International Indonesia’s rate to buy US$ at Rp9675 and sell at Rp9825.

The stock market also depressed. Jakarta Composite Stock Index (IHSG) dropped 28 points on Monday to reach its lowest level in the last three months at 1019.875.

Market reacted negatively Central Bank’s decision to raise interest rate from 7.53% to 7.7%. The policy is designed to curb inflation, core target of BI’s policy, where the bank set at 6% +/- 1%. The fact that market reacted negatively should push government to apply other measures. We can’t simply rely on BI to curb inflation and strengthen rupiah’s value in the long run. Rupiah is a system so we need systematic approach.

We could start from the simple supply-demand theory. Take a look at Pertamina, the state-owned oil and gas company. Starting last year, Indonesia is an oil net importer and as national output continues to drop at the time consumptions keep growing, our import will increase accordingly. Even though in the past we were net exporter in terms of barrels, in value, we actually imported higher value refinery products like gasoline or diesel and exported lower value crude oil. In this sector alone, we need more US dollars to import fuels than in the past, in other words, companies like Pertamina will spend more rupiahs to buy US dollars.

It’s happening to almost all companies with import-related costs, whether to buy raw materials, capital goods, or pay debts. Most of these are related to industrial and trade policy. The bottom line is new equity investment either foreign direct or domestic that brings in capital to boost national output.

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Exxon vs Pertamina

International pressure, including from US President George Bush, is working well on ExxonMobil’s years of dispute with Indonesian government and Pertamina (state-owned oil and gas company).

Both parties resumed negotiation yesterday and an agreement is expected to be reached by May 20, right before President Susilo Bambang Yudhoyono's visit to Washington in late May. Despite pressures from local politicians to have ExxonMobil completely out of Cepu Block, the rich oil and gas fields onshore Central Java, a win-win solution is searched.

It was Bush, at the sidelines of APEC Summit in Santiago, Chile last year, who reminded Indonesia President Susilo Bambang Yudhoyono (SBY) on the dispute. As admitted by Sudi Silalahi, cabinet secretary, SBY then responded with instruction to his ministers to settle the issue.

And now, we have political analyst Rizal Malarangeng, brother of Andy Malarangeng (President SBY’s spoke person), as spoke person for Pertamina (state-owned oil and gas company) regarding negotiation with ExxonMobil on Cepu Oilfield in Central Java.

While it’s not a surprise, we don’t know exactly how Rizal (Ohio State University graduate) been appointed and who were the candidates for the job. Was it direct appointment from Chief Economic Minister Aburizal Bakrie? Was it by Pertamina’s board of director?

Two months ago, Freedom Institute, where Rizal is the director, was criticized for its support for government’s policy to raise fuel price. Freedom Institute is fully funded by Aburizal Bakrie, long before his appointment as minister by SBY.

After the fuel price, Rizal is dealing with Cepu Block, one of the largest oil and gas project in Indonesia. The block has 2 billion barrel of oil and 11 trillion cubic feet (TCF). It could be the second largest oil field after Duri, Riau province run by PT Caltex Pacific Indonesia (subsidiary of Chevron Texaco).

Rizal said a win-win solution on the dispute will lure in new investment up to US$3 billion. But he declined to disclose details of Pertamina’s offer.

Exploration license is the core of dispute between ExxonMobil and Indonesian government. Tommy Soeharto, son of former president Soeharto, once owned shares in the block but then sold its stakes to Exxon after failure to discover oil.

In early 2001, Exxon surprised Indonesian government with its announcement of huge oil and gas discovery in the block, which then triggered the dispute. In contrast with other oil exploration contract, the Cepu Block is under technical assistance contract supervised by Pertamina. The problem is the contract will expire 2010.

Pertamina insisted that it could operate the block without ExxonMobil after the license expired. Meanwhile Exxon, though agreed to share the fields with Pertamina, demands extension of the contract until 2030.

Exxon's request for a 20-year extension of its right to 20 percent of any oil produced from Cepu, was refused by the government in 2003. Recently, Indonesian parliament (DPR) also supported Pertamina to develop the fields without Exxon.

But during the process, there were conflicting interests in Indonesian side, since they open the door for new investor to work with Pertamina.

One of the most interesting names is PetroChina, a China company that aggressive in acquiring oil and gas field in Indonesia. US and China is competing fiercely in Indonesian oil and gas industry. Just last month, Unocal (the third largest gas producer in Indonesia) took Chevron’s (the largest oil producer in Indonesia) US$18 billion bid to control the company.

Under pressure to lure in more oil and gas investment, Indonesian government pushed Pertamina to resume negotiation with Exxon. According to Rizal, the negotiation resumed yesterday with targeted completion by May 20, 2005.

Exxon Mobil offered Pertamina 10 percent, but Pertamina asked for 35 percent, and then 50 percent, arguing that Tommy had forced it to sell in the first place. Exxon Mobil agreed to sell 50 percent of its current contract to Pertamina for half of its development costs, which it estimated at $450 million. Pertamina accused Exxon Mobil of inflating the figure.

Faced with the prospect of losing Cepu entirely, Exxon Mobil has agreed to negotiate a new contract, a 50-50 joint venture with Pertamina, to take over when the current contract expires.

During the process, there were conflicting interests in Indonesian side, since they open the door for new investor to work with Pertamina.

One of the most interesting names is PetroChina, a China company that aggressive in acquiring oil and gas field in Indonesia. US and China is competing fiercely in Indonesian oil and gas industry. Just last month, Unocal (the third largest gas producer in Indonesia) accepted Chevron’s (the largest oil producer in Indonesia) US$18 billion bid to control the company.

Should ExxonMobil and Pertamina settle the dispute, US companies will maintain their control on Indonesian oil and gas resources, especially with depleting gas reserves in Exxon's Aceh operation and a possible closure of the fields next decade.

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Payday

In a country where one third of the economy is controlled by state-owned enterprises with huge political intervention, the selection of its executives often neglects merit system. No matter how good is your professional achievement, if you never invest in political process you will end up only in private-owned enterprises.

No matter how bad is your track record, a close relationship with power holders, is surely valuable to be CEO of state-owned enterprise. And even if you made political investment but went to wrong party, you had risked your job.

Some might say, this argument is only valid under Soeharto’s 32-years authoritarian regime. Especially for those who believe reform (reformasi) movement has changed the way we govern the country.

But wait a minute! Is it a coincidence that different presidents have different CEOs of SOEs?

Look at Pertamina, the largest SOE in Indonesia. Soeharto had Faisal Abdaoe as the last CEO, then BJ Habibie with Martiono Hadianto, Abdurrahman Wahid with Baihaki Hakim, Megawati with Arifi Nawawi and Widya Purnama, and now SBY about to kick Widya out and will have new appointee there. First round already started with major shakeup in board of commissioners where Martiono now as the chairman.

And PT Telkom, the largest listed company in Jakarta Stock Exchange. AA Nasution under Soeharto and Habibie, then Muhammad Nazief under Wahid, and Kristiono under Megawati. In the last few months, many parties have tried to get Kristiono’s post.

The same could be seen in almost all SOEs, especially big companies like Bank Mandiri (the largest bank), Garuda Indonesia (flag carrier), or Jamsostek (the monopoly on social security). SOE Minister Sugiharto just installed new boards in Garuda and Jamsostek. Bank Mandiri will be the next. Partly because of poor handling of bad loans related to high profile businessmen or former military officers, and probably of strong affiliation with previous presidents (Wahid and Megawati).

Analyst Lin Che Wei is seen as the strongest candidate to lead Danareksa (largest investment bank). Che Wei is an advisor for Sugiharto. Is it because of Zas Ureawan’s (current CEO) poor performance? Is it because of corruption committed by the board? Is it because his close relationship with Taufik Kiemas (Megawati’s husband) and bet on looser candidate in presidential election?

Surely most of the executives in SOEs made political investments (not necessarily ideological) but some made right investment (to the winning candidate) and some wrongly and publicly supported the looser. It’s payday for those winning investors. It is the winner takes all.

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Misleading statements on the economy

Minister of finance Jusuf Anwar considered more than twice oversubscribed of government bonds offered internationally as a success. The Jakarta Post lauded and regarded the situation as patience does pay. In fact this is not a result of patience in the government side. The overwhelming demand was merely a result of higher coupon offered in the US$1 billion sovereign bond, meaning we have to carry more burdens.

Jusuf said that the 10-year bonds carried a coupon rate of 7.25 percent and a yield-to-maturity (which is an effective interest rate that the government has to pay to investors or bond holders) of 7.375 percent.

With such a yield, the bonds will have a spread of 302 basis points -- or 3.02 percent -- above the 10-year U.S. Treasury bonds, which currently carry a yield of 4.36 percent. It is also higher than the 6.85 percent yield on the $1 billion worth of 10-year global bonds the government sold March last year.

Market analysts have said that the ideal spread for Indonesia's global bonds should be somewhere around 2 percent, making it still attractive for investors but not too costly for the government.

In the last few days, some key economic ministers offered brighter picture of the economy. Look at Sri Mulyani (Bappenas chairwoman) who said this year economy will grow by 6%, higher than previous projection of 5.5%.

We should ask if the economy is better than last year, why then we issued the bond with higher interest, which reflects higher risk?

In my opinion, the economy is actually worse than last year. Look at rupiah value. Last week it traded at Rp9,535 per US dollar, which is 11.3% decrease from 12 months ago.

Our foreign reserves were US$37.4 billion in April 2004 and US$36 billion this month. Interest rates also on the move to higher levels. CPI is already above 3% in the first three months and 8.81% year on year (as of end of March).

Commenting on rupiah, chief economy minister Aburizal Bakrie simply said government is not comfortable with current depreciation and that Rp9,000 per US dollar is the best value. The full impact of rupiah depreciation and higher fuel prices could lead to higher CPI this year and weakening our currency even further.

The recent survey conducted by Bank Indonesia confirmed the worsening expectation of consumers shown by significant drop of consumer confidence index (CCI) to 91.9 from 120.4 in November 2004. Any CCI below 100 means consumers are pessimistic on the economy now and the future (at least for the next six months).

So, stop mislead people. Just work hard and create better policies.

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Increased activity spotted in two more volcanoes, another disaster?

Two volcanoes in the western part of the island of Java (the most populated island in the world with more than 120 million population) have registered increased activity on Wednesday, only a day after the Mt. Talang volcano erupted in West Sumatra, sparking fear that more terrifying natural disasters would soon rock the country that just severely hit by tsunami in Aceh.

A government official imposed an alert status for Mt. Anak Krakatau in the Sunda Strait on Wednesday morning after 32 mild earthquakes rattled the volcano's crater. An alert status is issued whenever a series of earthquakes in the area of a volcano occurs, followed by an increase in temperature.

"Over the past two weeks, mild earthquakes have occurred two to nine times a day, but suddenly today 32 earthquakes were registered," said Surono, a volcanology and geological disaster mitigation official as quoted by The Jakarta Post (www.thejakartapost.com).

Similarly, increased activity was also found in the Mt. Tangkuban Perahu volcano near Bandung, some hundreds of kilometers east of Mt. Anak Krakatau. While on normal days earthquakes from the volcano happened between two and seven times a day, on Wednesday 100 earthquakes were recorded, according to Surono.

On Wednesday, Government officials asked 150 local and foreign tourists to stay away from the crater of Mt. Tangkuban Perahu.

The volcano, a smoldering 2,076-meter high mountain located near densely populated Bandung city, last erupted two years ago. The other volcano, Anak Krakatau, last erupted four years ago, spewing hot ash and black smoke.

Syamsul has speculated that the Mt. Talang eruption and the increased activity on Mt. Tangkuban Perahu and Anak Krakatau were closely related to the series of huge earthquakes that rocked Aceh and Nias island recently.

Koran Tempo (www.korantempo.com) even reported today that nine volcanoes have shown increased activities recently. Two of them already put in alert status. They are Mt Lokon, near the beautiful Tondano lake and Dukono Mt in northern part of Halmahera Island in Maluku Islands.

Over a century ago, on August 26,1883, the island volcano of Krakatau, a virtually unknown volcanic island with a history of violent volcanic activity, exploded with devastating fury. The eruption was one of the most catastrophic natural disasters in recorded history. The effects were experienced on a global scale. Fine ashes from the eruption were carried by upper level winds as far away as New York City. The explosion was heard more than 3000 miles away. Volcanic dust blew into the upper atmosphere affecting incoming solar radiation and the earth's weather for several years.

A series of large tsunami waves generated by the main explosion, some reaching a height of nearly 40 meters (more than 120 feet) above sea level, killed more than 36,000 people in the coastal towns and villages along the Sunda Strait on Java and Sumatra islands. Tsunami waves were recorded or observed throughout the Indian Ocean, the Pacific Ocean, the American West Coast, South America, and even as far away as the English Channel.

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Floods isolated 120,000 people in Kalimantan

Heavy flood left 120,000 people in Kutai Barat regency, East Kalimantan (Borneo) living in isolation as almost 190 villages filled with sea of water from Barito River, the largest in the island. Far lower side of the river in Barito Kuala regency, South Kalimantan, at least 30,000 people also living under isolation with water everywhere around their houses.

Kompas daily reported Friday that Barito River’s water level increased by at least seven meters due to heavy rain, which caused the flood and cut most of transportation infrastructures in surrounding areas. At least nine bridges in the area are broken and most houses are in the water already. Some villagers flee to higher grounds.

Ismael Thomas, deputy regent of Kutai Barat said this is the worst flood ever in the area. Almost 70% education and healthcare facilities are dormant. The problem is most of the areas couldn’t be reached through land transportation to deliver foods and medicines.

To make things worse, people are left without electricity as five diesel-fired power plants also filled with water. Water also overflowing to rice (main staple) silos.

In the past, East Kalimantan and South Kalimantan were the centers for heavy rainforest cutting to feed plywood or pulp and paper plants in Indonesia. Unchecked logging and failed re-forestation disrupts the natural absorption and flow of rainwater from highlands, triggering floods and landslides.

Indonesia had lost more than 75 percent of its forests over the past few decades, leaving only 60 million hectares (148 million acres). In the past five years, some 43 million hectares of Indonesia's forests, or the equivalent of more than half of Kalimantan, has been damaged.

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Harvard alumni as President’s economic advisor

Harvard-educated economist Dr Sjahrir has been appointed as economic advisor for president Susilo Bambang Yudhoyono.

The chairman of New Indonesia United Party, summoned yesterday by the president, will give advise on economic implementation strategy for the cabinet including poverty eradication, employment, and investment.

Dr Sjahrir, owner and CEO of Sjahrir Securities, admitted his tasks will be, among others, settlement of disputes with Cemex Asia Holding (regarding PT Semen Gresik Tbk) and Karaha Bodas Company (US-affiliated company).

There were speculations that Sjahrir’s junior like Dr Muhammad Chatib Basri, noted economist from University of Indonesia, will also be appointed as president’s advisor on economic policy.

Sjahrir is known for his friendship with some noted businessmen like Peter F Gontha (former key figure in Bimantara Group led by Soeharto’s son Bambang Trihatmodjo) or Aburizal Bakrie (chairman and owner of Bakrie Group), now the chief economy minister.

Yudhoyono’s cabinet is heavily filled with US-graduated ministers. At least 10 ministers are US-graduated. They are Andung Nitimihardja (minister for industry, University of Pittsburgh), Sri Mulyani (national planning, Illinois), Sofyan Djalil (IT & multimedia, Tufts), Purnomo Yusgiantoro (mining & energy, Colorado School of Mines), Alwi Shihab (coordinating minister for social affairs, Temple and Harvard), Mari Elka Pangestu (trade, UC Davis), Bambang Sudibyo (education, Kentucky), Jusuf Anwar (finance, Vanderbilt), Hassan Wirayudha (foreign affairs, Harvard and Virginia).

It is not clear whether the president will establish National Economic Council, one of his presidential campaign plans. Some economists argued against such council since it would overlap with cabinet portfolios. Abdurrahman Wahid established such council in 1999 led by senior economist Prof Emil Salim (UC Berkeley-graduated) where Sri Mulyani was the secretary of the council. But Wahid’s successor, Megawati, preferred to had informal economic advisors such as senior economist Frans Seda.

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Where are Indonesians?

I was expecting to see just one Indonesian name in the recent Time magazine’s special issue The Time 100, list of men and women whose power, talent, or moral example is transforming the world.

So I decided to rush into page 49. I was expecting to see Mr Susilo Bambang Yudhoyono, our president, the man I thought would be in the list of Leaders. But I only found George Bush, Hu Jintao, Kim Jong Il, Barack Obama, Condy, and some strange names (from my perspective) to be considered Leaders and Revolutionaries. I could understand Bush, Jintao, Clinton, or Jong Il. But Indonesia, a country with 220 million people, might never heard of names like Obama, Malloch Brown, or Gordon Brown. Which part of the world do they have so much influence? Surely, not Indonesia!

I decided not to go on with Artists and Entertainers, cause I believe most of the names are people from Hollywood. So I moved on to Builders and Titans and Heroes & Icons, where for some reasons I skipped since I couldn’t think of Indonesian that fit into these lists.

Just to satisfy my curiosity, I jumped to Scientist and Thinkers. I was thinking great thinker like Cak Nur, one of the great Islam philosopher. But I found Lee Kuan Yew, Singapore’s senior minister. Minister Lee, at least according to Time, is The Philosopher King for Asia. I was bit jealous. Our tiny neighbor has at least one of its citizens in the list, while our great (just size?) nation, completely off the screen.

Then I asked for the last time, where are my fellow countrymen? Lucky (this is really Indonesian excuse) that Time is not an influential magazine in Indonesia, so people just don’t care. And probably this is Time’s mere marketing gimmick. But I couldn’t stop to think of our leaders, thinkers, scientists, and myself as journalist on that list. Hopefully, one of you will be in 2006 list.

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PetroChina to operate Batara Complex next month

Despite its exploration dispute in East Java, PetroChina is about to start commercial operation of its Batara Complex next month which capable to process 60,000 barrels of oil per day.

The new facility, built with US$318 million, is located in Berhala Isle, off-east Sumatra Island near to its oilfields in Jambi. PetroChina is one of key oil producers in Indonesia with 60,000 bpd, four times than when it started in 1997.

PetroChina is one of the most aggressive investors in Indonesian oil and gas sector. PetroChina boosted its share to 45% in Jabung Block, Jambi, which has proven reserves of 267 million barrels of oil equivalent (BOE) in six oil and gas fields. More than 70 percent of those reserves are as yet undeveloped.

Previously, PetroChina paid more than US$200 million to acquire stakes in six Indonesian oil fields from US-based Devon Energy.

Indonesia, one of the largest Asian oil producers, has become a focus of China's diversification away from its heavy reliance on Middle East oil. PetroChina's rival CNOOC, the third largest oil company in China, has paid nearly US$900 million to acquire oil and gas fields in Indonesia.

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Thousands flee as Mt. Talang erupts

After a series of earthquakes that have rattled many cities in Sumatra, the Mount Talang volcano in Solok regency, West Sumatra erupted on Tuesday, sending hot ash high into the air and causing residents living on its slopes to flee to safety.

The 2,572-meter volcano spewed hot ash 10 meters high at 3 a.m., causing a layer of ash 20 centimeters thick to settle over five villages on its slopes. No casualties have been reported so far.

Solok regent Gamawan Fauzi told The Jakarta Post by phone on Tuesday that some 20,000 residents in the regency's five villages -- Nagari Batu Alam, Bukit Sileh, Batu Bajanjang, Koto Laweh and Air Batumbuk -- have been evacuated to safer places following the eruption.

Chairman of the Indonesian Geological Association in West Sumatra, Ade Edwar, told the Post by phone from Solok that the eruption was likely triggered by the 6.7-magnitude earthquake that hit Padang on Sunday. The epicenter of Sunday's earthquake lies near Siberut island, some 115 kilometers west of the city.

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TNI to leave businesses in two years, No more comprador capitalists?

Indonesian military (TNI) said Tuesday it would abandon its lucrative enterprises within two years as part of reforms of the once-powerful armed forces.

"Whether (their assets) amount to one trillion rupiah or five million, they will no longer exist in two years," TNI chief Gen. Endriartono Sutarto quoted by The Jakarta Post today.

Sutarto urged government to balance the policy with an increase in the military budget and soldiers' welfare payments.

The general admitted that some of the businesses had produced "negative effects" even if they were profitable. He did not elaborate, but there have been allegations Indonesian military businesses have been involved in poaching, illegal logging and other unlawful activities.

Under laws recently passed by parliament (Law No.34/2004), commercial ventures acquired by the military during the rule of dictator Soeharto when the armed forces enjoyed a free hand must be surrendered within five years.

The erosion of the military's power after Soeharto's fall has also meant fewer opportunities to take advantage of the various businesses and foundations that it has run for more than five decades.

The Indonesian military's budget is among the lowest in Southeast Asia with the government meeting just about 30 percent of it. The rest is funded through business ventures. These businesses support military operations and increase the welfare of military personnel, their families, and civilians involved.

In the 2003 budget, military got Rp24.7 trillion from the state budget. They were asking for Rp50 trillion for the current year budget, but parliament only approved half of it.

General Sutarto’s statement indeed is good news. But what he really means is direct participation of military foundations in business activities. Critics say the military's involvement in business activities increases corruption and undermines military professionalism.

"There are no real business people in the military," says political scientist Indria Samego in an interview with Asia Times few years go. "They are all rent-seekers."

Samego described soldier-businessmen as "comprador capitalists" who restrict competition and promote corrupt and collusive practices.

Soldiers have their fingers in almost every industry with corporate wealth of the armed forces is estimated at more than $8 billion.

Take a look at these facts.

The army has Yayasan Kartika Eka Paksi-a charitable foundation-with more than 64 companies. Their businesses ranging from banking, forestry, telecommunications, mining, property, aviation, insurance, travel and even higher education. The foundation even has direct shareholding in four banks. Bank Artha Graha is the largest, where YKEP has 20% shares.

Other important subsidiary is PT Tri Usaha Bhakti (Truba). Truba is one of shareholders in PT Cilegon Fabricators, a joint venture with Ishikawa Jima (Japan) and Jurong Engineering (Singapore).

Truba also the largest shareholder in PT Truba Jurong Engineering (TJE) with 48% shares. The company is a leading engineering company in Indonesia. Since its establishment 25 years ago, TJE has become the leading power and industrial plant contractor in Indonesia. TJE has completed a large number of Industrial Plant construction that covers 12 Cement Plants, 8 Fertilizer Plants, 30 Chemical & Petrochemical Plants, 15 Oil and Gas processing facilities and about 20 Pulp & Paper Plants and many more.

Army Strategic Reserve Command (KOSTRAD), is one of the strongest business player in Indonesia. KOSTRAD-linked foundations are also a direct shareholder in several companies, such as Mandala Airlines and PT Bank Windu Kentjana.

In an interview with Tempo last year, Navy Chief of Staff Bernard Kent Sondakh admitted navy only has six companies, significantly dropped from 26 before the deliberation of Indonesia Military Law No.34/2004. Out of six companies, only one (land/building rental in Cilandak, Jakarta) that is really profitable with net income of Rp13 billion per year.

“While every Lebaran (Moslem holiday marks the end of Ramadhan/fasting month), we have to disburse at least Rp15 billion to our soldiers. So we still have to fill the gap,” he said.

Navy also has foundations that run education services from kindergarten to university. But Navy denied those foundations is regarded as business enterprises.

Navy will close down tens of military bases, which, according to Commodore Kent, utilized by his men to make money from sailors and fishermen.

Air force has two main business vehicles, Yayasan Adi Upaya and Inkopau, through which it control Bank Angkasa and PT Cardig Air (cargo services) among others. Just to get the sense of Inkopau’s business, visit their website www.inkopau.com. It is the money from this organization that used to build houses for air force soldiers.

Their business ranging from aviation (spare parts for aircraft, commercial and military), hotels, construction, general trading, military shoes manufacturing, and freight forwarding.

While it might be easy to surrender these businesses to private sector or government (let say under state-owned enterprises ministry), it is harder to strip off high rank officers’ informal protection on private enterprises in what Indonesian normally identify as beking or what analysts termed as comprador capitalists.

It is common practice that conglomerates in Indonesia have their military patron informally and secretively. This is the biggest challenge in the coming years for president Susilo Bambang Yudhoyono, a retired general known as military reformist.

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Autonomy rift disturb PetroChina

PetroChina’s oil and gas drilling activities in Bojonegoro, East Java, Indonesia is not resumed yet despite central government’s appeal to let the China company to continue its operation.

In a move to pave the way for PetroChina to resume its operation, Indonesian energy minister Purnomo Yusgiantoro had sent a letter to Bojonegoro administration saying local government is strictly forbidden to intervene and disturb oil and gas activities.

Purnomo said yesterday that there should be no problem anymore regarding PetroChina’s drilling activities. But Bojonegoro administration insists it will not allow such activities until PetroChina give 10% share in the company. Bojonegoro government reiterated yesterday that under Autonomy Law, local government should get 10% share for new oil and gas exploration activities.

Currently, PetroChina and Pertamina (Indonesia’s state-owned oil and gas company) engaged in oil and gas business in Bojonegoro, producing around 7,000 barrels of oil per day from two oil wells. Since March 25, 2005, Bojonegoro government blocked drilling activities for two new wells in Sukowati area.

The PetroChina’s case is another big test for Indonesia, which at one side needs to attract more investment in oil and gas businesses while on the other side have to deal with new autonomy rule.

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Pulping Mandiri’s board

Last week, Antara news agency reported that Sugiharto, minister for SOEs, confirmed his plan to reshuffle board members of state-owned banks next month. No matter how good their 2004 financial performance, they will be sacked still. Some might be replaced with strong reasons, others not necessarily so, let say only because of they are too long in that position.

Literally, Sugiharto said, board changes will be decided in the shareholders meeting. But we all know the practices, it almost 100% decided by the minister and his deputies and their superior powerbrokers. While in his early days as the minister Sugiharto promised to fully utilize merit system in promotions or demotions, that’s not necessarily be the case if his environment don’t supportive enough or needs to have someone in particular post.

Like and dislike are also real life and real politic.

Let’s take a look at Bank Mandiri, the largest state-owned bank in the country. No other SOE bank that has attracted so much attentions by the media than this bank in the last few months. What’s at stake? The board change. The new regime needs to have someone other than Neloe and his colleagues. Neloe has been served as Mandiri’s CEO since 2000 under Wahid presidency, survived Megawati’s presidency, and now seems near its end.

Don’t look at financial results. Share price, earnings per share, net income, tax, or other fancy indicators are all higher. So you can’t change the board if you look at these numbers.

Even if people mention about bad loans ratio, Mandiri’s non-performing loans (NPL) is well below national average. But poor handling on bad loans to Kiani Kertas and Raja Garuda Mas, both pulp and paper producers are too big to be neglected with US$200 million and US$600 million respectively. Supreme Audit (BPK) found RGM's problem in its 2002 audit, while Kiani in 2004 audit on Mandiri's portfolio.

Take a look at Kiani Kertas. From the beginning, when Mandiri acquired bad loans asset from IBRA, Central Bank, though agreed, had warned the bank to be careful. Kiani, now in the hands of retired generals Prabowo and Luhut Panjaitan, failed to get fresh capital injection as part of debt restructuring mandated by Mandiri. Kiani once owned by former president Soeharto’s golf buddy, Bob Hassan (soon be released from Nusakambangan), actually is a good asset where Mandiri could get more than enough to cover its loans should it fail to restructure. The problem is why Mandiri don’t do that?

We could ask the same question regarding Mandiri’s write-off and write-back of RGM’s US$600 million bad loans. We couldn’t understand why RGM deserved to get that while at the same time the company’s Sateri International acquired a dissolving pulp company in Brazil (August 2003) and APRIL (RGM’s pulp and paper division which also parent company for Riau Pulp/Riau Complex) build huge pulp and paper plant in Guangdong, China with US$1.98 billion. Last year, APRIL announced its plan to acquire 90% share at Shangdong Rizhao, a pulp and paper company in China.

I bet Mandiri knew exactly what’s going on out there, including RGM’s expansion overseas. Mandiri also knew very well so many investors have interest to inject US$50 million to Kiani. The fact that they didn’t do what they should means that Mandiri’s board is prepared to be pulped by their shareholders.

Other interesting fact is both Mandiri and RGM hired Credit Suisse First Boston (CSFB) as advisor. Mandiri appointed CSFB for its IPO in early 2001 toward the listing of Mandiri's shares in June 2003. During the period, Sateri International, a subsdiary of RGM (Mandiri's debitor), appointed CSFB as advisor and financier of US$112 million acquisition of Bacell SA, Brazil (later renamed Bahia Pulp SA) which was completed in August 2003.

What we don't know is whether Mandiri's decision to write-off (first in 2002), write-back (also in 2002), and partly write-off RGM's debts (2004) had something to do with CSFB's role. Neither we know if CSFB properly advised Mandiri on that matter. Unfortunately BPK's audit didn't disclose that. Media also missed that.

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Rupiah, who cares?

In the last 12 months, rupiah had lost its value by almost 11.7%. So if you are an employee, your income in US dollars decreased by 11.7%. Combine that with inflation of 7.2% (yoy) until February, you need to ask your employer to raise paychecks by at least 19% to keep your purchasing power in the same level last year.

But I don't think average companies in Indonesia will do that. The sad thing is, this is might be only the beginning. The impact of fuel price hike will take its full effect in the coming months.

In short, the economy is worsening. Others might argue the economy actually improved as stock prices increased dramatically in the last 12 months. Newspapers are in frenzy to run stories of how Jakarta Stock Exchange composite index everytime book new record, echoed by government officers that those records are results of right policy to attrack investors.

But, wait a minute. How many investors do we have in the market? Thousands? Hundreds of thousands? What about millions of workers with fix income? Do we really care about them?
Do we really have policies to strengthen rupiah?

Central Bank said it will further raise interest rates. Well, don't expect it would significantly improve rupiah. Our reserves at US$34.8 billion is simply too small for a country as big as ours. Look at Malaysia at US$68.8 billion, not to mention our tiny neighbour Singapore at US$113.9 billion.

Why we only have that amount? We spend millions of dollars for luxury villas overseas for our ambassadors. We support our beloved conglomerates to invest huge amount in China while at the same time our banks write-off their companies' debts here. Who cares?

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Syariah principle on Jamsostek, oops on cronysm

A staunch proponent syariah guy has been appointed as CEO of PT Jamsostek, the holder of monopoly rights of millions of Indonesian worker’s social security insurance and the largest player in Indonesian financial market with Rp33 trillions of assets under its management.

I didn’t realize when state-owned enterprises minister Sugiharto said few days ago that Jamsostek should implement more Syariah principles in its businesses. Hopefully the appointment of Mr Iwan Pontjowinoto is not a mere justification of Sugiharto’s decision.

We have to understand that Mr Pontjowinoto is the chairman of Syariah Economic Society (Masyarakat Ekonomi Syariah) where Sugiharto was one of its board members.
It is not clear what kind of syariah principles to be implemented at Jamsostek by Mr Pontjowinoto, a former managing director of state-owned investment banking company PT Danareksa, clearly not run with syariah principles in his tenure.
Neither is clear whether it means Jamsostek will significantly overhauls its investment portfolios, which are heavily in the stock market and financial market instruments.

But one thing is clear that Iskandar Z Rangkuti also appointed as director of Jamsostek in charge of investment. Rangkuti was former director of PT Bank Syariah Mandiri, a wholly owned subsidiary of state-owned PT Bank Mandiri. Bank Syariah Mandiri is running a bank according to syariah principles.
Before the formal assignment, Rangkuti told the press that he will introduce syariah mission into Jamsostek.

Should this happen, the law on worker’s insurance must be changed. Jamsostek is not only take care of Moslem workers, but other faiths, so by law, Jamsostek is a secular institution regardless of faiths. Should Jamsostek be directed according to syariah principles, there must be another institution for those who don’t want syariah principles, in other words we should strip off Jamsostek’s monopoly.

On the investment side, last year, Jamsostek invested almost 44% of its funds in bank deposits and 43% in bonds, both earning interests, which is not line with syariah principles. Any changes in the portfolio allocation will have significant impact on Indonesian financial market and syariah instruments will boost accordingly.

But since Jamsostek should return the funds to workers, government and board of directors of Jamsostek should ask first the workers whether they accept the syariah principles and its impacts on their investment.

Except that the appointment of new board has nothing to do with the new direction of Jamsostek or just a justification for Mr Sugiharto to put his friends there.
It is nice to expect that the syariah-leaning guys at the helm of Jamsostek will combat the corruptive mentality with syariah principles as well and to put corruptors in jail. That’s syariah.

Other figure, Tjarda Muchtar, appointed as director, is a Golkar (the largest political party in Indonesia) politician and a close friend of Manpower and Transmigration Minister Fahmi Idris. In combination with Mr Pontjo, the board changes, is only confirming the fact that nothing changed in government’s policy regarding SOEs. Forget about merit system. Juts like old days, it is just about political appointees.

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Batu Hijau haunts Newmont

Only few months after criminal charges on its operation in North Sulawesi, Indonesia, Newmont is entering new waves of lawsuits from its most profitable Batu Hijau, West Nusa Tenggara mining operation. The risks are high for the Denver-based company, since Batu Hijau contributed around 80% of Newmont’s consolidated profit last year.

A group, calling itself the People's Lawyers Union, or SPR, has alleged that PT Newmont Nusa Tenggara (NNT) tailings have damaged the environment in the area around its operations. NNT is an Indonesian unit of Denver-Based Newmont Mining Corp. Newmont has 45% shares in the company, which started its commercial production in 1999.

NNT’s total assets are approximately at US$2.1 billion at the end of 2004, the largest of Newmont’s operation worldwide. NNT sales last year were US$1.073 billion, with pre-tax income ofUS$524.6 million. NNT is the single largest contributor for Newmont’s consolidated pre-tax income of US$696 million last year.

Newmont has rejected charges by a local group of damaging the environment, reports the Jakarta Post yesterday.

In a fresh move, some workers reported to Indonesian police what they called the violation of overtime payments by NNT. The workers claimed unpaid overtime during 1999-2004 period reached 400 billion rupiahs or around US$42 million, popular online publication Detik.com reported yesterday.

But Newmont denied such charges saying there is no proof that the group represents residents of West Sumbawa (Batu Hijau is located here) and workers.

Currently both Indonesian government and local NGOs are in legal battle with Newmont for its operation in North Sulawesi which only has US$100 millions of assets.

The problem for Newmont seems intensified with the latest charges for its West Nusa Tenggara operation.

Last year, NNT produced 379 million equity pound copper and 396000 equity ounces of gold. NNT claimed its reserves of 6.3 billion equity pound of copper in Batu Hijau and 7.2 million equity ounces of gold.

Under the contract of work with Indonesian government, Newmont and other shareholders have to divest up to 51% shares of NNT to Indonesian government or Indonesian nationals starting by 15% by the end of this year and 51% by the end of 2010.

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Chevron made US$495 million profit in Indonesia last year

Chevron’s operation in Indonesia contributed US$495 million to the company’s consolidated profit last year.

According to its 2004 annual report, Chevron sales in Indonesia reached US$1.869 billion last year, slightly increased from US$1.759 billion in 2002. But the company’s after tax results increased from US$379 million in 2002 to US$495 million last year.

Chevron managed to increase its sales and after tax profit thanks to oil price hike in the last two years as the company’s output significantly cut down in 2002 after PT Caltex Pacific Indonesia, Chevron’s main subsidiary, transferred oil blocks with daily production of around 50,000 barrels to a company co-owned by local government in Riau province and Indonesian government.

The company’s merger plan with Unocal will strengthen its position in Indonesia, which is one of Unocal’s core areas for its international operations and represents a significant contributor to the company’s reserve and production base.

Unocal so far had invested US$5 billion to support its activities in Indonesia.

Indonesian government welcomed the Chevron-Unocal merger and saying it will not have negative impact for the nation’s oil and gas production.

Chevron won the race to acquire Unocal as other serious contender, the China National and Overseas Oil Company (CNOOC), is shopping around Indonesia to acquire more oil and gas assets. CNOOC is currently the second largest oil producer in Indonesia after Chevron.

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White-collar crimes without criminals

Indonesia is the land of Almighty God, not just Gods. Forgiveness is our routine. We have no humans like Eliot Spitzer. We pardoned all bankers committed crimes under the scheme drafted by international lawyers, government, and those bankers with the blessing of our judges, our parliament members, and our dearly friend IMF.

At least 80 banks were closed down in the midst of 1997-1999 financial collapses. Some bankers were forced to surrender their assets in exchange of no criminal charges, but others managed to escape. Indonesian people bear the burden of around US$60 billion, almost the same amount with total foreign loans disbursed to the country for few decades.

The leaders promised that such settlement will be the last and will not happen again. But only months after the massive banks closure, in 2000 another two big banks were in trouble. One, BII has to be injected with Rp14 trillions of government bond, while the other Unibank was closed down with Rp3 trillion lost for the state and nobody has been asked for responsibility for the burden.

Shortly after the closure of the bank, both Central Bank (BI) and Security Exchange Commission (Bapepam) announced that Unibank violated banking law and capital market law. Both institutions also identified the violations were criminal acts. But four years since then, we have not found any criminal from the bank.

And now, we have the Bank Global. The bank is almost the same like Unibank in the sense that both laws (banking and capital market laws) were violated. Main suspects are already identified. But please don’t expect too much. Without persistence coverage from the media, we could only imagine that we might end up with another forgiveness and no criminals to be put in jail.

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Privatization No, Sorry Yes!

What an ignominious statement. State owned enterprises minister Sugiharto said recently that government resumed privatization plan, with targeted fund to be raised up to Rp3.5 trillion for the state budget.

Shortly after assumed the cabinet post for SOEs, Sugiharto was reportedly asked his staffs for not use the privatization word anymore. Some experts then lauded Sugiharto by publicly condemned privatization and termed privatization as a fishy word. Look at Dr Rhenald Kasali’s article, Privatization No, Corporatization Yes!

The fact that his colleague, Chief Economy Minister Aburizal Bakrie, has openly speak about privatization means all other populist anti-privatization hubris will change their minds for the sake of money (budget and lofty fees) again.

For me, it is not surprising. Heavily identified as the closest ally of US, you can imagine the anti-privatization mood was just lip service. The mood will erode soon as all of us having sort of short memory on things.

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70 percent Acehnese in mental stress from Tsunami

Indonesia says 70 percent of Acehnese showing signs of mental stress from tsunami

JAKARTA (AP): More than three months after the Indian Ocean tsunami, 70 percent of survivors in Indonesia are showing signs of psychological problems, ranging from anxiety to depression, the government said Monday.

It said the absence of a functioning mental health system has hampered efforts to treat an expected 400,000 patients in Aceh province, which bore the brunt of the Dec. 26 earthquake-tsunami.

All efforts by Indonesian authorities and the international community are "still not yet adequate," the government said in a report presented at two-day seminar aimed at formulating a psycho-social program for tsunami survivors.

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Indonesian Muhammadiyah sent condolences for the pope's death

Muhammadiyah, the second largest Moslem organization in Indonesia, sent condolences to Catholic church yesterday for the death of Pope John Paul II.
In its press statement, the organization said not only Catholic mourn the Pope's death, but all the world, including Islamic world, especially remembering his strong support for Palestinians.
Deputy Chairman of Muhammadiyah, Din Syamsuddin, expressed the organization's hope that the new pope will continue the inter-faiths dialog started by John Paul II and to speak out on injustice faced by Afghanistan, Iraq, and Palestine.

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50 thousands attend mass for Pope in Kupang, Indonesia

Around 50 thousand people attended a mass celebrated to honor Pope John Paul II in Kupang, the capital city of East Nusa Tenggara, Indonesia.
According to Detik.com, Bishop Turang led the mass in the largest city of Timor island. Bishop Turang asked parishioners not to be sad, but pray the pope rest in peace.
In other city, Palembang, the capital city of South Sumatra province, local church will celebrate requiem mass for three consecutive days.

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Malaysian admire Pope John Paul II

Malaysian prime minister Abudallah Badawi said his country admire Pope John Paul II very much as a great spiritual leader with strong moral stance and open constructive dialog with other religions, including Islam.
Badawi said the pope had tirelessly campaigning for peace, human dignity, and justice regardless of faiths and religions, Bernama news agency quoted him yesterday.

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NGOs: Burst Exxon Mobil gas pipe adds to Aceh suffering

The public haven't forgotten the hundreds of thousands of Acehenese who lost their lives in the Indian Ocean Tsunami, and the difficulties faced by the survivors. However a new burden arrived on 23 March 2005 for the 820 residents of Rayeuk village in North Aceh who are suffering the effects of a gas leak from Exxon Mobil Oil Indonesia. The Mining Advocacy Network (JATAM), Forum for Environment (WALHI) and Oilwatch-Southeast Asia have decried the leak, which comes at the worst possible time for the villagers who are still in mourning.

The break in Exxon Mobil's gas pipe became an all-day spectacle for around 820 people forced to evactuate to a football field in Rayeuk village, about 30km from Lhokseumawe. At least 28 people were reported to be experiencing breathing difficulties and/or vomiting blood after inhaling the leaked gas.

"JATAM expresses the deepest concern regarding Exxon Mobil's gas leak, and demands the company and government take immediate steps to secure the health and safety of the victims", said Andrie S Wijaya, JATAM's manager of energy advocacy.

This gas leak continues the record of 18 gas industry accidents and 22 cases of oil pollution in Indonesian waters in 4 years. Frustratingly, not one of these cases has been dealt with through legal channels, oil spills etc have always been treated as mere accidents.

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