Tax incentive & efficacy

In a bid to boost investment, government launched a new tax incentive where certain projects and/or in certain areas will enjoy tax income break. But based on various surveys by different organizations, income tax is not an issue. Investors are willing to pay tax, but all they need is certainty and eradication of under the table payments.

This is not the first time government offers tax incentive. Back in 90s, Soeharto administration once offered tax holiday to certain projects. Kiani Kertas (that time controlled by Soeharto's golf buddy Bob Hasan), Tuban Petrochemical (controlled by Hashim Djoyohadikoesoemo, younger brother of Soeharto's son-in-law Prabowo Subianto), and Texmaco Perkasa Engineering (owned by Marimutu Sinivasan, one of Soeharto's favourite businessman) were among the receipients of tax holiday. But all of these projects almost bankrupt and even until now are struggling after almost 10 years. And most important, the facilicy failed to attract significant FDI.
Antara reported that nine types of investment would be eligible for tax income incentive. Investment in palm oil/cooking oil in Sulawesi, corn mills in Sulawesi, fish processing in Sulawesi, Maluku, and Papua, sugar plants outside Java, and cement in Papua are among them.
I'm not saying this is a kind of wrong medicine. I just sense the reemerging of cronyism in selecting companies which eligible to get.

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Tax holiday for new refinery projects

Investors are asking for tax incentives to build oil refineries in Indonesia. Minister of Energy Purnomo Yusgiantoro supported the idea saying the country needs new refineries to meet at least 70% of national fuel demand.

While no details of kind of tax incentives demanded, I suspect that would be in the form of tax holiday for five to 10 years as deliberated by Tax Law for certain projects. But I am not sure whether such incentive would help the country attract investors given countless of problems in the oil and gas sector, including the declining crude oil production from 1.4 million bpd in 1997 to about 1 million bpd as of today.

In fact, no new refineries were built in the last decade while domestic fuel consumption increased by 6% to 7% per year in average despite efforts to lure in investors. State-owned company Pertamina is the only company with oil refinery business in Indonesia with seven plants at combined capacity of around 1 million barrel per day.

Some of these plants are too old to keep up the demand as most of them built in early 1970s and 80s. It is predicted Pertamina's refineries could only produce 800,000 bpd at the maximum, leaving the gap of around 500,000 bpd as demand already reached 1.3 million bpd.

The refinery in South Sumatra, for example, has maximum output of 145,000 bpd, far below its installed capacity of 180,000 bpd. Major refineries in Cilacap (Central Java) and Balikpapan (East Kalimantan) were also built in 1970s. Unexpected shutdown at one of these refineries easily disrupt Indonesia's fuel supply.

That's why in the early 90s, Soeharto regime awarded dozen of licenses to investors in the oil refining business but none of them materialized. So far only one refinery project could be considered 'most likely' to be built. The project is planned by Pertamina with China's Sinopec with capacity to process 150,000 barrel to 200,000 barrel per day of crude oil. The project is located in Tuban, East Java. Iran will supply the crude as Indonesia's crude oil production is in decline.

There are hopes that the giant Cepu oilfield, adjacent to Tuban area, with capability to pump out 170,000 bpd would be the future crude supplier for Tuban refinery. But doubts linger on the immediate start-up of the project as negotiation between Pertamina and ExxonMobil is not settled yet. Most likely the first drop of oil from Cepu would be the end of 2008 the earliest.

Elnusa, Pertamina's subsidiary, is also planning to build a 300,000 bpd refinery in Java. The company is reportedly talk to three local tycoon, Salim, Djoko Tjandra, and Prayogo as possible partner in the giant project.

Early last month, local company PT Intanjaya Agromedia Abadi (who own this company? Director of Intanjaya is HS Mappasule) signed a memorandum of understanding with Texas-based International Global Technologies (using Google, no information about this company) to build a 400,000 bpd refinery in Parepare, Sulawesi Island. Both companies claimed to start the construction of the project by early 2006.

The Parepare oil refinery in South Sulawesi was initially licensed nine years ago, but development stalled during the 1997-98 economic crisis. The companies established a joint venture called PT Kilang Minyak Intan Nusantara (KMIN) which also planned to build a huge refinery in Batam Island.

No refinery projects heard from major oil companies like Shell, Exxon or Chevron mainly because of limited access to retail fuel market. Pertamina maintained its retail and distribution monopoly for petroleum products, until July 2004 when the first licenses for a foreign firm to retail petroleum products are due to be awarded to BP and Petronas of Malaysia. Shell opened its first gas station in Karawaci, near Jakarta recently to be followed by Petronas next month. But both companies would only sell un-subsidized fuels.

The government is still promising to open the sector to full competition by 2005, although progress has been very slow to date as reflected by uncertainty over when government would scrap the fuel subsidy policy. Should Tuban refinery would go on stream by 2008, the gap between local supply and demand that should be imported, would go up to 700,000 bpd. That would surely put a lot of pressure on the national economy and its weak rupiah currency.

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Oil deficit troublesome

I was expecting Jakarta’a traffic would be more relax once the government raise fuel price significantly. But it turn out to be an empty dream. The first week of price hike (almost doubled the gasoline price) no sign that people might drive down. That’s not make sense to me.
“This is the first week of the month when people still have money in their pocket. Just wait for another week,” said a friend.
But when the traffic jam is there while we had entered the second week of October, I look for another answer. A taxi driver gave better answer. He said on average people are driving 40 km two-way home-office which could consume 6 liter of gasoline at the most or Rp27,000 per day. Put an escalation of 50% for commuting and traffic, the cost would only goes to Rp40,000 per day.
Given the poor public infrastructure, no incentive for commuters to stop driving. Even though government would increase gasoline price again next year by another 30 percent, consumption will persist.
So, I am thinking of a step increase in parking tariff in cities might reduce people’s driving appetite. Let say for the first hour should be Rp10,000 instead of Rp2,000 and Rp3,000 per hour onwards. The money collected should be enough for the city administration to start seriously build the mass rapid transport system.
I am deeply worried about the country’s future in energy supply and its macroeconomy impact. Indonesian love big cars simply because they could pick up all family members in a car and traveling together over the weekend. But they use the same cars for commuting on working days as well with one or two passengers. That’s why traffic jams are so bad in cities like Jakarta. And the traffic jam cost the country oil deficit which is getting bigger, cause bigger cars need more energy.
Look at the latest statistics from Central Bureau of Statistics. In the January-August 2005, Indonesia’s crude oil surplus reduced significantly to US$137 million from US$244 million in the same period last year.
Take a look at trade balance in refined oil (gasoline, diesel oil etc). Indonesia’s deficit more than doubled from US$2.14 billion (Jan-Aug 2004) to US$5,22 billion in Jan-Aug 2005. Thanks to Indonesia's net export of gas at US$5.8 billion, the country's oil and gas trade balance still in surplus of US$731 million in that period. But the surplus heavily dropped from US$2.9 billion in the same period last year. No doubt that by the end of the year, Indonesia would book deficit in overall oil and gas trading.

The reason is clear, Indonesia imported US$6,43 billion of refined oil (fuels) in 8 months this year while it’s export only at US$1.2 billion.
And if we review the automotive market this year, there is no way that fuel consumption would drop. New cars sold in Indonesian market this year have reached 400,000 and could reach 600,000 by the end of the year. Last year, Indonesia ranked first in the world as the fastest growing market with 37% growth. At least 4 million new motorcycles hit the road last year and another 4.6 million to 5 million this year.
It is clear that automotive market is not affected by increasing fuel price in the last few years. Government should capitalize on that with higher tax, right?
Imagine if tax for new cars increased by Rp10 million per car, government could raise Rp5 trillion and Rp1 million per motorcycle could raise another Rp5 trillion. On top of that, government could implement fuel tax as well.
In the supply side, Indonesia desperately needs fresh investment to boost oil output. In May, output hit its lowest level of 927,800 barrel per day, far below OPEC’s quota of 1.425 million bpd.
Investors, mainly foreign investors, blamed Indonesian for not generous enough to give incentives for oil and gas activities, lack of legal certainty, heavy bureaucracy, confusing interpretation of autonomy rules, and social problems.
But a respected blogger gave me the following reasons why Indonesian should not rely too much on foreign oil and gas investment:
- Training and career planning for Indonesian working for foreign oil and gas company are limited to enabler positions. For the core expertise, Indonesian is limited to be an assistant, not key player.
- Indonesian has no access to proprietary technology.
- Indonesian executive promotions are camuflage and ceremonial. Indonesian executives at foreign oil and gas companies are mere puppets.
- Indonesia is regarded as cash cow (US$2 billion per year) to finance their expansion. Reinvestment in Indonesia is limited.
- Asking too many fiscal and tax incentives
- Don’t think they would support government’s intention to boost output. This is a nightmere. They are playing the cornering strategy to ask more incentives from government. Wanna proof? Santos in Jeruk, Exxon in Cepu, Chevron in Central Sumatra, and Unocal in Kalimantan.

So I think of Indonesian oil and gas companies. I only know some names. Pertamina, Medco, Energi Mega Persada, and Bumi Siak Pusako. I don't know whether we could count on these companies to reduce the oil deficit. Pertamina, with all its resources, should have play a leading role. But here we are. Pertamina is a sick man. What do you think?

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