I recently read a disturbing report that indicates that training for nurses and doctors in Indonesia is for sale. Admitted medical students are reportedly paying up to $2500 above tuition to gain acceptance with students with low grades paying more. Once accepted under-performing students are paying to pass their exams. Other reports indicate that doctors, nurses and midwifes are paying to secure scarce jobs in government clinics and hospitals. They work in them in the mornings and retreat to their own private clinics in the afternoon where they can be paid fees. Is it any wonder that Indonesians still mistrust their own medical institutions and doctors. They ask: have the best and brightest been educated ? Indonesia has actually created a wonderful, modern healthcare system. Unfortunately, its just not in their own country; its in Singapore where Indonesians spend over $3 billion a year. Those that have the means also seek medical care in Thailand, Malaysia, Japan, Europe and the US.
It doesn't have to be this way. In 2010, I visited the only internationally certified hospital in Indonesia, Siloam Hospital. The excellent private facility, established by the Riady Group, is hoping to expand to other Indonesia cities and is looking at worldwide models for cost reductions. They have an agreement with the Mayo Clinic for tele-diagnosis as well arrangements with an Australian medical schools that supplies faculty on short term assignments. You cannot tell the income level of their patients; they are given the same rooms and hospital gowns. Their staff seeks inspiration from a book, Fortune at the Bottom of the Pyramid, by C. Prahalad, that argues that commercial success can be reached serving the overlooked market of the world's poorest citizens. Siloam's cardiac department is seeking to drive the cost of open heart surgery below $3000, a level achieved by an Indian hospital. Whereas this would still be out of reach for most Indonesians, it would be affordable to the middle class, estimated to be 30-40 million people.
Changes to Indonesian policy have begun to make it easier for foreign investment in healthcare, but nationalistic obstacles remain. Foreign doctors cannot practice in the country and investment rules are still too restrictive. But, a number of Indonesian private equity funds have begun to look seriously at the sector, giving rise to hope that combined with more foreign interest some deals can be arranged. Why not give foreign educated doctors work permits for 5 years similar to the those that were created for foreign managers in Indonesia's oil industry. Medical tourism would seem to be a natural for Indonesia. A first class diabetes or cancer treatment facility in Bali or in the hills above Bandung or Bogor would be very successful. Establishing the public's trust will require overhauling medical school curriculums and hospital management, upgrading the continuing education of the current doctor pool through certification requirements (I have met US educated Indonesian doctors who confess they have no motivation to keep up their specialty certifications) and opening the sector to foreign investment and management.
The US is uniquely qualified to assist in meeting the healthcare aspirations of Indonesians because so much of our system derives from private capital and our medical science is world renowned. Already organizations such as Johns Hopkins and Duke University are creating medical schools in Singapore and in Duke's case, consulting on the construction of hospitals in Dubai and India. Indonesia should be courting them but they aren't or at least not yet. The right conditions would bring a tremendous amount of private capital to this sector, freeing government resources to focus on healthcare for the poor. I am convinced its a path that is good not just for Indonesia but for the US as well. Leaving things as they are, with medical careers for sale to unqualified students and billions spent in Singapore, will continue a perversion the country can ill afford.
Wednesday, May 2, 2012
Friday, March 9, 2012
New Indonesian Mining Divestment Rules
Is Mining Divestment Such a Benefit to Indonesia?
Indonesia is following a worldwide trend of pushing out foreign ownership of mining assets. A March 8 Reuters story began "Indonesia will take more of the profits from its vast mineral resources by limiting foreign ownership of mines". But, is that what necessarily happens when more of the share of an enterprise is owned locally? How can the government be so sure that it will benefit when it may not be the one owning the shares? How can it guarantee that a local company or shareholders on the bourse won't just invest their profits somewhere else, developing a new mine in Kazakhstan, or buying US real estate? I am troubled by divestment rules in Indonesia just as I was in the 1980's when the Japanese owned US landmarks like Rockefeller Center and there were shrill jingoistic demands that they be made to divest. (Turns out the Japanese bought high and had to sell low, and nothing changed with the properties or the revenues earned by the government)
The background to this is a Feb. 21 regulation that requires all foreign investors in mining to divest 51% of their shares within 10 years of starting commercial operations. "The aim is the state has to get more. For new investment it will be simple, but for existing investment there must be re-negotiation," Mining Minister Jero Wacik told Reuters. However, the Director General for Mining, Thamrin Sihite, stated that this new requirement would only be for new contracts and extensions of existing contracts. The Deputy Minister for Trade told reporters that this change shouldn't be an issue: "We still believe, even with only 49 percent, it (the mining sector) is still very alluring, still very lucrative for everybody." The Executive Director of the Indonesian Mining Association, Syahrir Abubakar, begged to differ: "I'm sure foreign investors will not invest in the mining sector anymore in Indonesia. This policy will threaten Indonesia's mining investment climate." Abubakar is probably right, ROI in mining often takes more than 10 years; giving up half your profits as well as control within that time frame may be unworkable for certain mining projects.
The government's two principal arguments for divestment are: more revenue for the state and more incentives for local companies. Clearly, who owns what number of shares in an enterprise should have little effect on government revenues. Aren't taxes and royalty payments the same whether the majority of a mining enterprise is owned locally or not. Assuming the mine was profitable, the only situation where the State would gain would be if it owned the mine itself. So a local province, state-owned company, or the national government would have to put up its own money (or borrow it) to buy shares and presumably, the foreign shareholders would have to agree on a "fair price". If one were looking for a simple mechanism for divestment as Minister Wacik explained in the above quote, this negotiation would be among the worst examples. Newmont Mining - whose existing contract best approximates the new regulation- has had a long and tortuous path to meet its 51% divestment obligation (and remains 7% short) and Freeport, with a much different contract, may have difficulty selling the 9.3% stake it has offered to sell locally. (It should be noted that Newmont has had 20 years to divest, not 10.) But is the potential revenue from owning shares -- the government still earns significant tax and royalty revenues--worth all the trouble and the uncertainty it breeds in the investment climate ?
The second reason for requiring a divestment, incentives for local companies, makes one wonder what kind of business community Indonesia is now trying to build. Is it one in which local and foreign investors are treated equally, as stipulated in the 2007 Investment Law, or one in which only local firms are allowed to do certain activities and foreign firms are penalized. How far has Indonesia moved from its post colonial mentality of distrust of foreign investment, and does it not recognize the positive role foreign companies have played in building communities, local businesses, training people, raising standards, and supporting the country in international forums. Cannot local firms be "incentivized" in a more neutral way, or is the politics of pride of ownership so overwhelming that grave risks to the investment climate and a sense of fairness are overlooked. Significant properties and businesses in NY are still owned by Dutch and English interests (part of our colonial heritage) but no one cares anymore. Finally, there are many Indonesian mining companies already in operation, mostly (but not exclusively) in coal. Over time, they are developing the expertise and financial clout to move into the hard rock major leagues (gold, nickel, copper, zinc etc.) where foreign ownership has been dominant. But why should the government enable them through divestment? Cannot it be allowed to occur naturally and through the principle of competitive advantage? What if they aren't ready to assume the mantle? Are divestment measures also a vehicle for politically connected local firms to buy into existing operations at a discount ? That might have been expected in a previous era, but Indonesia is now a functioning democracy trying to end such anachronistic practices.
One can understand the government's desire to keep more money in Indonesia through vehicles such as capping foreign ownership or requiring local processing of all mining products (a measure instituted in the 2009 mining law). But time and again, we have seen that such protectionist measures have unintended consequences. If over all investment drops in mining (especially in precious metals) because its not profitable to raise capital with a 10 year divestment period, how can that be good for the country? Mines, especially the large ones funded through foreign investment, have been proven to be huge employment and development engines and are among the highest taxpayers in the country. Also, if local processing has to be coupled with measures to limit imports of similar products (as may be expected), inflation will rise and Indonesian products will be less competitive and employment will sink.
Mining players from resource-hungry countries whose record on the environment, local community, labor relations, and human resource development is spotty, are willing to enter Indonesia on just about any terms. What a shame if that was the final outcome of these new rules.
This cautionary tale deserves to end on a positive note. That is, experience has taught that the Indonesian government has been practical in modifying new rules that are not working. Not in every case, mind you, but often enough for one to say that perhaps that will be the case here. I certainly hope so.
These views are those of the writer and do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members.
Indonesia is following a worldwide trend of pushing out foreign ownership of mining assets. A March 8 Reuters story began "Indonesia will take more of the profits from its vast mineral resources by limiting foreign ownership of mines". But, is that what necessarily happens when more of the share of an enterprise is owned locally? How can the government be so sure that it will benefit when it may not be the one owning the shares? How can it guarantee that a local company or shareholders on the bourse won't just invest their profits somewhere else, developing a new mine in Kazakhstan, or buying US real estate? I am troubled by divestment rules in Indonesia just as I was in the 1980's when the Japanese owned US landmarks like Rockefeller Center and there were shrill jingoistic demands that they be made to divest. (Turns out the Japanese bought high and had to sell low, and nothing changed with the properties or the revenues earned by the government)
The background to this is a Feb. 21 regulation that requires all foreign investors in mining to divest 51% of their shares within 10 years of starting commercial operations. "The aim is the state has to get more. For new investment it will be simple, but for existing investment there must be re-negotiation," Mining Minister Jero Wacik told Reuters. However, the Director General for Mining, Thamrin Sihite, stated that this new requirement would only be for new contracts and extensions of existing contracts. The Deputy Minister for Trade told reporters that this change shouldn't be an issue: "We still believe, even with only 49 percent, it (the mining sector) is still very alluring, still very lucrative for everybody." The Executive Director of the Indonesian Mining Association, Syahrir Abubakar, begged to differ: "I'm sure foreign investors will not invest in the mining sector anymore in Indonesia. This policy will threaten Indonesia's mining investment climate." Abubakar is probably right, ROI in mining often takes more than 10 years; giving up half your profits as well as control within that time frame may be unworkable for certain mining projects.
The government's two principal arguments for divestment are: more revenue for the state and more incentives for local companies. Clearly, who owns what number of shares in an enterprise should have little effect on government revenues. Aren't taxes and royalty payments the same whether the majority of a mining enterprise is owned locally or not. Assuming the mine was profitable, the only situation where the State would gain would be if it owned the mine itself. So a local province, state-owned company, or the national government would have to put up its own money (or borrow it) to buy shares and presumably, the foreign shareholders would have to agree on a "fair price". If one were looking for a simple mechanism for divestment as Minister Wacik explained in the above quote, this negotiation would be among the worst examples. Newmont Mining - whose existing contract best approximates the new regulation- has had a long and tortuous path to meet its 51% divestment obligation (and remains 7% short) and Freeport, with a much different contract, may have difficulty selling the 9.3% stake it has offered to sell locally. (It should be noted that Newmont has had 20 years to divest, not 10.) But is the potential revenue from owning shares -- the government still earns significant tax and royalty revenues--worth all the trouble and the uncertainty it breeds in the investment climate ?
The second reason for requiring a divestment, incentives for local companies, makes one wonder what kind of business community Indonesia is now trying to build. Is it one in which local and foreign investors are treated equally, as stipulated in the 2007 Investment Law, or one in which only local firms are allowed to do certain activities and foreign firms are penalized. How far has Indonesia moved from its post colonial mentality of distrust of foreign investment, and does it not recognize the positive role foreign companies have played in building communities, local businesses, training people, raising standards, and supporting the country in international forums. Cannot local firms be "incentivized" in a more neutral way, or is the politics of pride of ownership so overwhelming that grave risks to the investment climate and a sense of fairness are overlooked. Significant properties and businesses in NY are still owned by Dutch and English interests (part of our colonial heritage) but no one cares anymore. Finally, there are many Indonesian mining companies already in operation, mostly (but not exclusively) in coal. Over time, they are developing the expertise and financial clout to move into the hard rock major leagues (gold, nickel, copper, zinc etc.) where foreign ownership has been dominant. But why should the government enable them through divestment? Cannot it be allowed to occur naturally and through the principle of competitive advantage? What if they aren't ready to assume the mantle? Are divestment measures also a vehicle for politically connected local firms to buy into existing operations at a discount ? That might have been expected in a previous era, but Indonesia is now a functioning democracy trying to end such anachronistic practices.
One can understand the government's desire to keep more money in Indonesia through vehicles such as capping foreign ownership or requiring local processing of all mining products (a measure instituted in the 2009 mining law). But time and again, we have seen that such protectionist measures have unintended consequences. If over all investment drops in mining (especially in precious metals) because its not profitable to raise capital with a 10 year divestment period, how can that be good for the country? Mines, especially the large ones funded through foreign investment, have been proven to be huge employment and development engines and are among the highest taxpayers in the country. Also, if local processing has to be coupled with measures to limit imports of similar products (as may be expected), inflation will rise and Indonesian products will be less competitive and employment will sink.
Mining players from resource-hungry countries whose record on the environment, local community, labor relations, and human resource development is spotty, are willing to enter Indonesia on just about any terms. What a shame if that was the final outcome of these new rules.
This cautionary tale deserves to end on a positive note. That is, experience has taught that the Indonesian government has been practical in modifying new rules that are not working. Not in every case, mind you, but often enough for one to say that perhaps that will be the case here. I certainly hope so.
These views are those of the writer and do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members.
Prof. Widjojo Passes Away
One of Indonesia's heroes has passed away. Professor Dr. Widjojo Nitisastro, leader of the "Berkely Mafia" (a group of young Indonesian economists educated at UC Berkely in the 1960's under Ford Foundation aegis, became the economic architect of President Suharto's New Order. Under his leadership Indonesia's economy not only averaged 7% growth, but significant segments of Indonesia's population rose above poverty. All of us in the business community owe him a great debt and we send our sincere regards to his family.
Tuesday, February 14, 2012
Regions Demand More
Indonesia’s fourth President Abdurrahman Wahid, (“Gus Dur”) once told a small group in NY that federalism in Indonesia was a “dirty word” but that Indonesia would have to implement it under different name. Gus Dur was referring to the first few years of Indonesia’s independence when it was called the United States of Indonesia and was using the federal system. The USI broke down quickly amidst secessionist demands (as well as other reasons too numerous to articulate here) and the country went back to its first model, a unitary republic with everything centralized in Jakarta. Gus Dur’s view is still the prevailing one: Indonesia is unlikely to create a federal model even though it could profit from having one. The perception of enduring secessionist tendencies remains in many policy maker’s minds. The pressure for local decision making was relieved following the passage of decentralization and revenue sharing laws in 1999 under President Habibie (who directly followed President Suharto) The implementation of these laws has brought more revenue and wealth to Indonesia’s resources rich provinces. As opposed to the Suharto era when over 60% of all bank deposits were in Jakarta, today its just the reverse. Habibie’s policies were visionary in that they understood that the country could not develop adequately with Jakarta calling all the shots. Today the growth evident in Indonesia’s regions is attracting investment but has also created regulatory confusion. The implementation of these laws has created a good deal of uncertainty in the extractive sector where legacy contracts created under a centralized authority can be in conflict with local regulations and interpretation. Indonesia’s regions, especially those endowed with natural resources, are demanding more of a share of revenue. They see huge infrastructure needs not being met with their restricted budgets. The battle has already begun with regions first wanting to own shares of mines and oil and gas fields and now a larger shares of royalties and tax revenues. Among the consequences for business are permit and contract renewal delays and more uncertainty. Drilling rates drop and production targets are not met. As regions and municipalities increasingly chart their own destinies Indonesia has to reconcile the many regional/central anomalies into a coherent system, of course, without using the word “federalism”.
Thursday, January 19, 2012
Changes to Capital Minimums/Moody's Upgrades Indonesia
Background: An inquiry from a member currently in Indonesia exploring a joint venture revealed that the effective minimum capital requirements have recently jumped from $100,000 to $1 million (10 billion rupiah).
The Investment Coordinating Board (BKPM) is now interpreting the 2008 Law on SME’s (micro, small and medium enterprises) to classify any foreign investment as “large scale” and is applying a minimum of $1 million (US dollars) for initial capital. This is apparently occurring somewhat at the request of the SME Ministry. According to my sources, BKPM is unlikely to make public reference to this new minimum as its own Investment Law of 2007 makes no mention of investment minimums and gives “national treatment” status to a joint venture company (PMA), putting it on par with local companies (PMDN). It has begun to communicate the new minimum in private.
AICC has confirmed this directly with the current Chairman of BKPM, Gita Wirjawan (concurrently Minister of Trade), who said he lobbied for a lower cap when the law was proposed.
Comment:
AICC considers this an unfortunate development. In these difficult economic times some of the best emerging opportunities for US-Indonesia business collaborations are likely to start as small joint venture businesses.
For more details on this this issue as well as read a brief report on AICC's December 18-23 Congressional Staff Visit to Indonesia click here.
Moody's Upgrades Indonesia to Investment Grade
Moody’s Investors Service has today (January 18, 2012) upgraded Republic of Indonesia’s foreign and local-currency bond ratings to Baa3 with stable outlook. In the press release today, Moody's stated the key factors supporting this action were (1) Moody’s anticipation that government financial metrics will remain in line with Baa peers (2) The demonstrated resilience of Indonesia’s economic growth to large external shocks (3) The presence of policy buffers and tools that address financial vulnerabilities and (4) A healthier banking system capable of withstanding stress.
According to Christian de Gusman, Moody's Lead Analyst for Indonesia mentioned in the press release rationale for the upgrade is Indonesia’s cyclical resilience to large external shocks points to sustainably high trend growth over the medium term. Robust growth has been accompanied by the continued health of its external payments position, supported by increasingly large flows of foreign direct investment, while inflationary expectations are becoming better anchored at a more stable and historically lower level.
"Having the Investment Grade from two Major Rating Agencies (Fitch and Moody’s) shows that Indonesia is gaining stronger acknowledgment due to its strong economic performance, amidst highly uncertain condition in the global economy. I believe, Indonesia could achieve a better performance in 2012", says Darmin Nasution, Bank Indonesia Governor.
The Investment Coordinating Board (BKPM) is now interpreting the 2008 Law on SME’s (micro, small and medium enterprises) to classify any foreign investment as “large scale” and is applying a minimum of $1 million (US dollars) for initial capital. This is apparently occurring somewhat at the request of the SME Ministry. According to my sources, BKPM is unlikely to make public reference to this new minimum as its own Investment Law of 2007 makes no mention of investment minimums and gives “national treatment” status to a joint venture company (PMA), putting it on par with local companies (PMDN). It has begun to communicate the new minimum in private.
AICC has confirmed this directly with the current Chairman of BKPM, Gita Wirjawan (concurrently Minister of Trade), who said he lobbied for a lower cap when the law was proposed.
Comment:
AICC considers this an unfortunate development. In these difficult economic times some of the best emerging opportunities for US-Indonesia business collaborations are likely to start as small joint venture businesses.
For more details on this this issue as well as read a brief report on AICC's December 18-23 Congressional Staff Visit to Indonesia click here.
Moody's Upgrades Indonesia to Investment Grade
Moody’s Investors Service has today (January 18, 2012) upgraded Republic of Indonesia’s foreign and local-currency bond ratings to Baa3 with stable outlook. In the press release today, Moody's stated the key factors supporting this action were (1) Moody’s anticipation that government financial metrics will remain in line with Baa peers (2) The demonstrated resilience of Indonesia’s economic growth to large external shocks (3) The presence of policy buffers and tools that address financial vulnerabilities and (4) A healthier banking system capable of withstanding stress.
According to Christian de Gusman, Moody's Lead Analyst for Indonesia mentioned in the press release rationale for the upgrade is Indonesia’s cyclical resilience to large external shocks points to sustainably high trend growth over the medium term. Robust growth has been accompanied by the continued health of its external payments position, supported by increasingly large flows of foreign direct investment, while inflationary expectations are becoming better anchored at a more stable and historically lower level.
"Having the Investment Grade from two Major Rating Agencies (Fitch and Moody’s) shows that Indonesia is gaining stronger acknowledgment due to its strong economic performance, amidst highly uncertain condition in the global economy. I believe, Indonesia could achieve a better performance in 2012", says Darmin Nasution, Bank Indonesia Governor.
Sunday, January 15, 2012
2011 Review
By most measures, Indonesia had a banner year. Continuing 6%+ economic growth leading to at least one investment grade sovereign rating (Fitch) and strong performances in world forums (APEC, G20, World Economic Forum, ASEAN Summit, East Asia Summit) characterized 2011. Fears of inflation going into the year never materialized and the rupiah began and ended the year near 9200 with very little volatility. Consumer demand continued to be the major engine of growth and as in 2010, the lack of new infrastructure and slow downs in the US and EU were the main constraints. Indonesia’s growing middle class achieved more attention through record sales of cars and motorcycles and huge orders for Boeing 737‘s by a local private airline. Indonesia’s central bank added just enough fuel with a 50 basis points drop to 6%. Its major stock market was the only major emerging market to experience real gains (3.2%) while the overall leading emerging market index fell 20%. Coal led commodity exports as well as mining investment but lingering uncertainty in oil/gas and hard rock mining(gold, copper, etc.) over contracts and recovery issues kept the sector underperforming as a whole and starved for significant new investment. Politically, 2011 saw the early emergence of challengers to the Presidency with Aburizal Bakrie(Chairman of Golkar), Prabowo (son-in-law of Suharto), and Hatta Rajasa (Coordinating Minister for Economic Affairs) all but formally announcing their candidacy. President SBY’s Democrat Party stumbled over corruption allegations of several senior officials. SBY’s approval ratings fell precipitously during the year.
US-Indonesia relations were boosted by several high profile events (APEC in Hawaii, G20, and East Asia Summit in Bali) at which Obama and SBY met as well as many other activities under the umbrella of the Comprehensive Partnership. OPIC (Overseas Private Investment Corporation)acknowledged Indonesia’s rising star status by hosting a regional conference in May in Jakarta, and the US State Department’s entrepreneurship initiative brought several leading US venture capitalists to judge Indonesian talent. Indonesia’s ambassador to the US, Dino Patti Djalal, and BKPM Chairman, Gita Wirjawan, were very active in cementing ties through innovative investment and cultural events: an investment forum in DC featured 4 provincial governors, Indonesia hosted a batik design competition for Americans, and Ambassador Djalal gathered over 5,000 on the Washington Mall to set a world record for number of people playing the angklung, an Indonesian musical instrument (officially acknowledged by Guinness Book of World Records). Although US companies operating in Indonesia continued to have their share of difficulties (centered primarily on tax, contract, regulatory ambiguity, and rule of law issues) and lack of infrastructure is a major constraint, most reported good earnings and several sizable direct investments were announced (Proctor & Gamble, GM, Chrysler). Boeing won its largest order ($20 billion) in its history from Indonesian-owned Lion Air. Indonesian products in the US continue to have good demand but its paper products are being hampered by NGO boycott campaigns. After shifting his Cabinet in the third quarter, the SBY government finally pushed through an important new law on land acquisition and announced modifications to its fuel subsidy policy that bodes well for the future. Ongoing corruption cases and rising religious intolerance marred an otherwise strong governmental performance.
US-Indonesia relations were boosted by several high profile events (APEC in Hawaii, G20, and East Asia Summit in Bali) at which Obama and SBY met as well as many other activities under the umbrella of the Comprehensive Partnership. OPIC (Overseas Private Investment Corporation)acknowledged Indonesia’s rising star status by hosting a regional conference in May in Jakarta, and the US State Department’s entrepreneurship initiative brought several leading US venture capitalists to judge Indonesian talent. Indonesia’s ambassador to the US, Dino Patti Djalal, and BKPM Chairman, Gita Wirjawan, were very active in cementing ties through innovative investment and cultural events: an investment forum in DC featured 4 provincial governors, Indonesia hosted a batik design competition for Americans, and Ambassador Djalal gathered over 5,000 on the Washington Mall to set a world record for number of people playing the angklung, an Indonesian musical instrument (officially acknowledged by Guinness Book of World Records). Although US companies operating in Indonesia continued to have their share of difficulties (centered primarily on tax, contract, regulatory ambiguity, and rule of law issues) and lack of infrastructure is a major constraint, most reported good earnings and several sizable direct investments were announced (Proctor & Gamble, GM, Chrysler). Boeing won its largest order ($20 billion) in its history from Indonesian-owned Lion Air. Indonesian products in the US continue to have good demand but its paper products are being hampered by NGO boycott campaigns. After shifting his Cabinet in the third quarter, the SBY government finally pushed through an important new law on land acquisition and announced modifications to its fuel subsidy policy that bodes well for the future. Ongoing corruption cases and rising religious intolerance marred an otherwise strong governmental performance.
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