Asia Times: Invest or not? Indonesia back in view


	April 20, 2002	atimes.com

Southeast Asia

Invest or not? Indonesia back in view
By Bill Guerin

JAKARTA - Indonesia's largest creditors, Japan and the United States, may well have different reasons for supporting Indonesia, but the Paris Club's decision last week to reprocess a tiny US$5.4 billion of Indonesia's national debt has given the battered economy breathing space and time for consolidation of medium term economic policies in the run-up to the 2004 election.

Though Jakarta's commitment to eradicate corruption and graft, and delays in the privatization program, were reportedly discussed at great length at the Paris Club meetings, there can be no doubt that the resulting agreement is a real feather in the cap for President Megawati Sukarnoputri's albeit painfully slow progress in regenerating market and investor confidence in her country. She had no hesitation, in the end, in implementing economic reforms insisted on by the International Monetary Fund (IMF), such as slashing subsidies for fuel and electricity which could well have led to widespread unrest and civil disorder.

As the IMF, the World Bank and the Paris Club continue with their full support of Jakarta's tight macro-economic program, there is growing confidence in Jakarta that at long last signs of recovery are more real than imagined. The stock market grew by 12 percent in the first quarter of this year as foreign players suddenly started to remember the enormous value still inherent in Indonesian blue-chip shares. The rupiah ended at its close on April 12, just when the Paris talks were under way, at 9,525 to the US dollar, almost a six-month high. There has also been some progress with divesting government-held chunks of the banking system, mainly the controversial, but successful sale of a 51 percent stake of Indonesia's largest retail bank BCA to the US-based Farallon. The Indonesian Bank Restructuring Agency (IBRA) said this week it also has four bidders lined up for the impending sale of Bank Niaga.

The government is still projecting growth of 4 percent this year. This alone would create more than 1.5 million new jobs. A recent Asian Development Bank (ADB) report, however, emphasized the need to spur economic growth on to even higher levels, and calculated that 7-8 percent growth is need to absorb the 3 million new graduates and workers who line up in the labor market each year.

The bad news swirls mainly around the mountainous levels of debt, the need for privatization to gather a real head of steam and problems involving some of the country's biggest multinationals. Servicing an estimated foreign debt of $71.4 billion and domestic debt of $64.3 billion will take up 40 percent of all government expenditures this year and income from exports was down to $56.03 billion in 2001, some 10 percent less than the previous year. A year-on-year inflation rate of 14.42 percent has hit the poor and the estimated 40 million jobless.

One sector in need of a boost from an improved investment climate is the mining sector: 33 mining enterprises have ditched projects to the value of $1 billion since the monetary crisis hit Indonesia in 1997. Legislation has played its part in bringing the industry to the edge of collapse last year. Government Regulation No 144 abolished value-added tax (VAT) on sales of non-processed coal, but mining companies still have to pay 10 percent VAT on purchases of capital goods or services, badly affecting their cash flows. Another body blow was Law No 34 that allows regional governments to levy new taxes and fees on commodities. In the case of coal, there are royalties of up to 13.5 percent to be paid from greatly reduced incomes.

On the other hand, 14 postponed mining exploration projects are to be resurrected this year, most of them in eastern regions of Indonesia, including North Sulawesi, South Sulawesi, and Kalimantan. Thirteen are gold exploration projects and one will look for new coal reserves.

Last year's weaker security conditions and the implementation of the new law on regional autonomy caused a temporary halt with foreign investors like Rio Tinto's gold mining company pausing for breath. Rio Tinto, along with BP, also had to contend with a very serious spat between themselves and the government. The central government may need to buy out a 51 percent stake in PT Kaltim Prima Coal (KPC) in a bid to resolve a prolonged dispute that has spooked investors. The East Kalimantan provincial administration claims Rio Tinto and BP have deliberately delayed a contractual divestment process and is suing them for $776 million. East Kalimantan Governor Suwarna has even threatened to mobilize locals to halt operations at the mine.

A Jakarta court froze BP's stake in the huge Tangguh natural gas field in Papua over the issue, but the decision was overturned and the divestment deadline has now been extended from March 31 to June 30. BP plans to invest $2 billion in a liquefied natural gas project to supply China with LNG. Rio Tinto assets were also frozen, preventing them from being sold or transferred.

The East Kalimantan administration, clearly flexing its muscles to test out its new autonomous authority, says KPC is asking for too much for the controlling stake, which the company is contractually obliged to sell to Indonesian entities. KPC and the central government have valued the company's total capital at $822 million, thus giving the 51 percent stake a paper value of some $420 million.

KPC's mines dig up an annual 15 million tons of coal most of it going to steel and electricity giants in South Korea, Japan and Taiwan. Indonesia last year produced more than 100 million tons of coal, of which some 70 million tons were exported.

Another international issue that has thrown up worrying issues for other energy companies with operations in Indonesia stems from an arbitration award to power producer Karaha Bodas. In 1998, Indonesia suspended plans for Karaha's geothermal power project in West Java and, as a consequence, Karaha won $261 million in damages through a Swiss arbitration panel in 2000, a ruling a US court approved last December. The Cayman Islands-registered Karaha, controlled by US energy companies, went for gold and tried to seize Pertamina funds in New York banks. Pertamina's lawyers persuaded the Central Jakarta District Court to slap an injunction on Karaha to stop it recovering the compensation and fined the energy company, despite a US court ruling that such a move was not proper. Karaha's lawyers want to block payments to Pertamina from foreign oil and gas companies with production-sharing contracts in Indonesia until Pertamina coughs up the money.

The dispute thus affects others, including ChevronTexaco, ExxonMobil and Unocal. ExxonMobil's Julia Tumengkol said the company was taking measures to counter the legal request to defer payments to Pertamina. The government needs to get this sorted out quickly as serious investment is needed in the sector to ward off future power shortages.

Karaha ownership is an interesting mix, with Caithness and Florida Power & Light holding 40.5 percent each, the Japan-based Tomen Corp with 9 percent, and 10 percent owned by PT Sumarah Daya Sakti, which is linked to Tantyo Sudharmono, the son of Suharto's former vice president Sudharmono.

Karaha is unlikely to resolve its dispute with Pertamina if Calenergy's experience is anything to go by. Calenergy, a unit of Midamerican Energy Holdings, was awarded $572 million by an arbitration panel, and managed to recoup its losses only by claiming $290 million in risk insurance from the US government's Overseas Private Investment Corp. OPIC was then reimbursed by the Indonesian government. Karaha has no such cover.

If Karaha and Pertamina can't reach an out-of-court settlement quickly, foreign investors will back off further interest in Indonesia's massive energy sector until Pertamina loses its monopoly in 2004.

Morgan Stanley (MS) and the Asian Development Bank (ADB) have both forecast a steady 3-4 percent gross domestic product (GDP) growth rate for the next two years, with the still high inflation rate and weak external demand likely to change for the better in the second half of this year. However, foreign investment last year slumped to $9.03 billion from $15.42 billion the previous year. Only 59 percent ($5.4 billion) of this was used for new projects compared with $10.16 billion in 2000. The number of projects approved fell to 1,317 from 1,524 in the same period.

These raw statistics bely the massive potential of Indonesia, particlularly as by 2003 at least 60 percent of duties within the Association of Southeast Asian Nations (ASEAN) will be zero and by 2010 it is planned to have zero duties all around. This represents an unrivaled opportunity for foreign direct investment (FDI) from major Western operators.

Certainly the current low investment-to-GDP ratio, 23.6 percent in 2001 compared with 32.3 percent in 1997, means medium-term economic growth is stunted by under-investment in infrastructure and equipment. Foreign capital inflows will remedy this and also bring a more competitive investment environment that encourages others to follow suit.

Indonesia's immense domestic market, its readily available labor force and abundant natural resources are, in any case, powerful motives for long-term investment. But given that China and ASEAN have signed a trade pact, Japan-ASEAN trade cooperation is under way and Indonesia is an ASEAN member, there is a good chance that any further delay by Western investors in the real sectors could see them sidelined further down the line. Japan, Taiwan and even China and India will reap the benefits of an Indonesian corporate infrustructure which allows them access to ASEAN and beyond.

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