FREE TRADE DEAL AT LAST. WHO'S GOING TO USE?

                              Let the flag follow the trade

It’s a curious cluster – Jamaica, Luxemburg, Costa Rica and Jordan.  Squashed in the middle at 73 is Indonesia.  It’s a lousy rank on the World Bank’s Ease of Doing Business Register because it shouts at potential investors:  Beware!  Yet Australians are being urged by their government to take risks.

Simon Birmingham is a perpetual grinner.  This makes the SA Senator ideal for dealing with Indonesian politicians and business folk who prefer smiling to stern. 

The Minister for Trade, Tourism and Investment is doing high-fives at a distance having scored the free-trade goal which eluded his four predecessors.  But pity his wife Courtney.

This is probably the response when she asks if he’d like a coffee:  ‘I’ll consider putting it on the table once the situation resolves itself, for a breakfast beverage forges closer people-to-people relationships and creates a pivotal framework to unlock our bi-lateral partnership particularly when we share a common geographic zone which has many unrealised possibilities ....’ 

By the time he’s come up with an answer, Mrs B would have driven their two girls to school and the kettle would have boiled dry.

That’s how it was last week when Birmingham took almost half a one-hour webcast to tell 1,600 well-informed participants facts they knew well.  His job was to launch the Indonesia-Australia 

Comprehensive Economic Partnership Agreement which has taken ten years of often stumbling talk to shred tariffs between the two neighbours. 

The imbalance is stark. Last year Australia imported AUD 3 billion worth of Indonesian products and sent commodities valued at AUD 6.7 billion the other way.  Jesters quip:  ‘Indonesia has great potential – and always will.’

West Australian Phil Turtle, chair of the Australia – Indonesia Business Council which hosted the show, is also a cheerful guy, hampering his task of prising anything specific out of the garrulous Birmingham.  He never succeeded.

Apart from his instinct to maunder, the minister – along with the corporate world - doesn’t know how the IA-CEPA will work post-pandemic.  It might be a splendid achievement which benefits all – or a good idea which doesn’t function, like the Covid-19 app.

The polis on both sides and the business folk who have been pushing for this logical deal deserve applause.  Talks often snagged well-charted cays careful captains would have avoided.

The most recent was just 18 months ago when Scott Morrison reckoned steaming behind Donald Trump and recognising West Jerusalem as Israel’s capital was a smart idea.  Though not the Indonesian negotiators.

Palestinian leaders pushed Muslim countries to ban Australian imports if the embassy was moved.  Indonesia isn’t an Islamic state but officially 88 per cent of its 270 million citizens follow the faith.  

Someone with a little knowledge of such issues pointed out the sensitivities.  Morrison slammed the engines into reverse by saying no embassy move from Tel Aviv until there’s a peace settlement.  The talks were refloated.

The big stuff looks OK. If all goes well in the next few years there’ll be more Ozzie grains flowing into Indonesian silos, and cattle running into feedlots.

The deal includes a 575,000-head quota, expanding four per cent annually.  This should give pastoralists a more certain market than the on-off, up-down situation they’ve been facing.

That’s provided Black Sea growers and Indian buffalo farmers don’t undercut the Australian price or that the ultra-nationalists don’t start shouting that our wheats are contaminated and haram.  These are the sort of tactics used in the past to thwart competition.  

Tariffs are cudgels in trade brawls.  Eliminating them is like banning knuckledusters – the thugs just turn to knives.  There are ministerial regulations, VATs, import licences, luxury taxes, quarantine rules and wharf delays in the isolationists’ armoury.

Although the IA-CEPA boosters claim Indonesia will now send us furniture, fish and fabrics, they could have done so anyway. The 2010 ASEAN-Australia-New Zealand Free Trade Area agreement eliminated tariffs on most goods from developing countries.  Few exporters have been interested because the Australian market is finicky and too small, one Aussie consumer to every 11 Indonesians. 

Cars are also included, but there’s a problem under the bonnet.  Australia wants electrics. There are plans for Indonesia to start production, but factories are still tooled to make internal combustion engines.

More encouraging is the deal allowing tertiary educators into the archipelago. Monash is the most ambitious, led by pro-vice-chancellor Professor Andrew MacIntyre. 

It’s set to open post-grad courses in Jakarta in late 2021, making it the first foreign branch campus in Indonesia.

Although other nations have long allowed overseas educators onto their soil, (Monash is already in Selangor in Malaysia, Suzhou in China and Mumbai in India)  paranoid administrations have resisted, knowing foreigners usually have better standards and higher qualifications than local academics, drawing students seeking quality.

The uni hopes for 2,000 master’s students, 1,000 executive education students and 100 doctoral candidates in the next decade. Grads will get Monash degrees.

Absent from the on-line rah-rah was former investment banker Thomas Lembong, the Harvard-educated one-time Trade Minister, now head of the Investment Coordinating Board.  

Although he lasted less than a year in the ministry, he was an articulate and enthusiastic promoter of free trade. This delighted the Australians though not Indonesian protectionists urging the government to crimp imports and put more energy into making the Republic self-sufficient.  The latest idea being promoted by President Joko Widodo is to create intensive farming ‘food estates’.

During the talks the Indonesians sought jobs for nurses, maids and construction crews - extending people exports beyond Hong Kong, Singapore and Malaysia.  

Indonesian workers are often multi-skilled, willing and prepared to live in remote areas.  Here the nervous negotiators fearing a domestic political backlash (cue unions and Pauline Hanson) took a tough line.

The IA-CEPA does boost quotas on work and holiday visas, eventually allowing entry for 5,000 Indonesians a year. Till Covid-19 arrived, visas were unlimited for most European backpackers who labour on market gardens and farms.  Make of that what you will.

Overall this FTA is a leap forward for Australian primary producers and a shuffle ahead for courageous others.  At this stage, it’s difficult to see many benefits for Indonesian shoppers unless the deal is backed by massive and consistent promotions highlighting Aussie quality and raising awareness of origins.  The flag of friendship might then follow trade.

 (Covid-19 update:  As the mainstream media generally ignores the health crisis next door we report more than 70,000 officially confirmed cases and close to 3,500 deaths.)

(First published in Pearls and Irritations, 14 July 2020:
https://johnmenadue.com/duncan-graham-let-the-flag-follow-the-trade/

CLEARING HURDLES, KEEPING ROADBLOCKS

                               This bus isn’t moving fast

It’s not too difficult for outsiders to get the gist of Indonesian economics.  That’s because terms, like ‘administrasi, deficit, bangkrut, fiskal’ and others have been pinched from English and tweaked.

The latest is ‘omnibus law’, a favourite with President Joko Widodo in a bid to slash and compost the vines of red tape that strangle the business landscape.  The problem is few understand the meaning so use their default setting – suspicion.  

Labour unions are opposing government reforms designed to make investors feel easier about leaving their deposits in Southeast Asia’s biggest economy.  Consolidating legislation would certainly help, though only if the public servants agree to implement.

As changes could lead to a reduction of stamping and photocopying tasks among the Republic’s almost five million bureaucrats, Widodo’s enthusiasm isn’t widely shared.

He reportedly said it would take half a century to revise each law individually, so why not make a bundle, call it an omnibus and drive it through the Parliament? 

There are more than 1,200 articles in 80 laws the President thinks need to be bashed aside by the bullbar. “Start now,’ he said. ‘It could all be done in 100 working days.’

He’s about the only person who thinks that timetable practical.   Workers fearing lower wages and loss of entitlements have been protesting, disbelieving government claims of more jobs through foreign investments. 

 Around 70 per cent of the nation’s workforce is informal; insecurity is widespread along with its twin, distrust.

The big end of town is being offered cut price tickets to jump on the omnibus.  In exchange for a comfy seat business tax will drop from 25 per cent to 20 per cent within three years.

That sounds fair enough – though only till it’s remembered that many entrepreneurs have refined the art of keeping their duties, fiscal and moral, to a minimum by sending profits overseas.  A lower rate on next to nothing is not a big inducement. 

According to the OECD ‘tax revenues are low relative to other emerging economies … (and) compliance remains a major challenge.’  Indonesia’s tax-to-GDP ratio is 12 per cent, less than half that of Australia’s.

VAT is applied where a business keeps records.  For a meal in McDonald’s, or any chrome and plastic eatery with a till, expect a tax and service charge of 21 per cent.  Use a streetfood stall or local café and there are no additions.  Cash still reigns - many shops won’t accept credit cards.

The omnibus bill is the latest bid to boost the tax take while reducing costs.  An earlier attempt thumped the nationalism drum, appealing to the megarich to repatriate the earnings they’d parked abroad in return for dropping tax avoidance prosecutions.

As patriotism is not a relative of capitalism the results were unimpressive. At the time (2017) it was reported that only 32 million were registered taxpayers and less than nine million submitted returns.  The Republic’s population is 270 million.

The government reckoned it could collect about one thousand trillion rupiah (US$ 74 billion) from two million rich listers, but got run down by reality.  Less than 150 trillion rupiah was recovered from just one million citizens.

These measures, though fine in intent, don’t tackle the key issue that’s wounding the nation’s economy and international reputation.

Last year Phil Turtle, National President of the Australia-Indonesia Business Council, had the courage to be blunt.  He told the Australian Parliamentary Joint Standing Committee on Treaties:  

“When I'm talking to Australian businesses about contemplating Indonesia, it's a bit like the real estate saying —location, location, location — it's corruption, corruption, corruption.”

Indonesia ranks 89 in Transparency International’s corruption perception index.  Australia is in 13^th place.

Despite these flaws there’s no outward evidence of a looming financial crisis.   Widodo’s first five-year term (2014-2019) was marked by huge infrastructure projects largely funded by loans from China and Japan.

Toll roads, railways, ports and airports have been built at astonishing speed. A new US $31 billion capital in Kalimantan, the Indonesian province on Borneo Island, is being planned to replace polluted, overcrowded and sinking Jakarta.  Almost 70 people have died in city floods this wet season. 

Last year the nation owed US $383 billion in foreign debt, a rise of 7.2 percent on the previous year. Bank Indonesia appeared unworried, claiming the increase came from government borrowings.
This year the United Arab Emirates offered US $23 billion for more infrastructure and energy projects.  The money will go into a new sovereign wealth fund, also part of the proposed omnibus laws.

Inflation seems to be under control.  The government forecast three per cent last year but the figure was 2.72.  Sudden food and fuel price jumps have triggered mass protests in the past so keeping the economy stable is a political necessity.

While the Anglosphere has been obsessed with the trivial doings of the regal Brits, Indonesians have been gripped by tales of oligarchs steering luxury cars around taxation roadblocks.

They’ve allegedly been hiding their Mercedes and BMWs ownerships by registering them in the names of lowly employees.  Most couldn’t raise the down payment on a motor scooter yet on paper they’re proud owners of Ferraris.

Bemused foreigners might ask how these vehicles could get into the country without owners paying duty, and then escape detection when driven around Jakarta.  One who didn’t was Ari Askhara, president director of the government-owned airline Garuda Indonesia.

He was sacked after allegedly smuggling a disassembled Harley Davidson motorcycle and Brompton folding bicycles on a new Airbus A330-900 being delivered to the airline.  The manifest apparently listed the parts in the names of employees, but someone dobbed in the boss.  

Revenge or conscience?  If the latter then things are looking up.

First published in Pearls and Irritations, 27 January 2020:
https://johnmenadue.com/duncan-graham-this-bus-isnt-moving-fast/

PERCEPTION IS REALITY

If the watchman’s restrained, investors flee                                  

An Indonesian friend involved in a messy divorce was advised by colleagues not to hire a lawyer.  Instead he should bribe the judge more than his estranged wife was paying.

Being a moral person he refused, believing it’s every citizen’s duty to help purge corruption from the nation.  He paid an attorney and lost his case.

A local personal pain but one indicating a national ill making investors quake.  Surreptitiously sliding an envelope across a desk anywhere in the Archipelago is risky business for Australians – home and away.

Bribing a public official is a crime here in the Republic and over there in the Commonwealth; the dirty deal may have been done any place between Sabang and Merauke, but a prosecution can be launched anywhere between Perth and Sydney.

The penalties are harsh: Up to ten years in an Ozzie prison, or a fine of AUD 1.78 million – or both.  Drug runners get less.

President Joko Widodo frequently says he wants funds from foreigners to help boost the economy. So who to dial should a joint venture turn to custard through corruption?

Not the

 Komisi Pemberantasan Korupsi (KPK - the Corruption Eradication Commission) if its authority gets weakened by lawmakers.  Even if the proposers deny changes will neuter the Commission’s powers, the view from afar is likely to be negative.
As the seers say, perception is reality.

Access to the rule of law delivered impartially is important to overseas entrepreneurs; if the scene’s not clean they just trouser (or handbag) their wallets and head to international departures.

Giving evidence to the Australian Parliamentary Joint Standing Committee on Treaties in Perth earlier this month Louise McGrath, national manager of the Australian Industry Group said:

“When companies aren't sure of the risk they simply don't invest. If we look at the numbers, I think New Zealand is the beneficiary of our greatest investment overseas because it's very low risk.

“We're not taking the high-risk and potentially high-rewards investments into places like Indonesia … (when) the environment seems risky, companies simply don't invest in that market.”

The committee is examining the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) signed in March though yet to be ratified by legislatures in both nations.

Other witnesses stressed that the Indonesian government will have to tackle corruption and the “regulatory chill” of excess red tape seriously if it wants to entice Australian dollars.

Last year the Badan Koordinasi Penanaman Modal (BPKM - Investment Coordinating Board) fell short of its investment target of Rp 765 trillion by nine per cent.

Phil Turtle, National President of the Australia Indonesia Business Council, told the committee:  “The elephant in the room is corruption.

“When I'm talking to Australian businesses about contemplating Indonesia, it's a bit like the real estate saying —location, location, location —it's corruption, corruption, corruption.”

Two years ago research by Transparency International Indonesia suggested corruption added about ten per cent to production costs. It also claimed that 17 per cent of businesses collapsed because competitors bribed officials.

TII’s Corruption Perception Index puts Indonesia in 79^th place, a marked improvement since 2014 when President Widodo was first elected.  In that year it ranked 107.  As teacher report cards say about bright laggards:  ‘Improving, but could do better if he tried harder.’

The TII added: ‘Corruption is present in all three branches of government in Indonesia and is one of the major constraints on the political leadership’s capacity to govern effectively.
‘Political corruption is particularly pervasive, and Parliament is widely considered the most corrupt institution. Similarly, bureaucratic corruption is rampant and a large part of the population reports paying bribes for services.’
It also noted the KPK’s ‘stellar performance’ and society’s ‘positive view of the government’s efforts to fight corruption.’  That was before law changes were proposed.

At present Indonesia doesn’t feature in the top 20 nations where Australian investors feel comfy about depositing cash and assets.

According to Australia’s Department of Foreign Affairs and Trade, while the US and the UK remain the most favored places for Australians to park dollars, pledges to Asia have increased dramatically over the past decade.

Recipients include China, Hong Kong, India, Japan, Korea and Taiwan; investment in this cohort has more than tripled from AUD 108 billion to AUD 395 billion.

Though not Indonesia;   Southeast Asia’s largest economy gets only AUD 10.7 billion from its southern neighbor.  That’s less than half of one per cent of the AUD 2. 5 trillion posted abroad.
If the keen but concerned traders like Mr Turtle are correct, Indonesia needs a clean place to lure dollars from Down Under. That means maintaining a watchman ready and able to keep the environment corruption-free.

First published in The Jakarta Post 15 October 2019

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EAST JAVA AND WESTERN AUSTRALIA STAY THE DISTANCE

Sister Act: Siblings in trade and aid                                   

Western Australian public servant David Edwards was keyboarding in his ground floor Surabaya office when friends phoned from the nearby US Consulate General.  Their message was grim: Hundreds of demonstrators were heading his way determined to cause trouble.

The Americans were the West’s watchmen in the East Java capital so their intelligence was likely to be sound.  Edwards and his three Indonesian colleagues grabbed the most important files and rushed to safety at a nearby hotel.

The protestors roared in and trashed the premises.   Phone lines were ripped out, windows smashed and computers thrown on the floor. 

But the thugs’ bid to divorce Australians and Indonesians has boomeranged; this month (Aug) a pioneering regional relationship celebrates its silver anniversary.

It was September 1999 when the Regional Director of the WA Trade Office was urged to flee; yet again Indonesia and its southern neighbor were not enjoying marital harmony. 

Some claimed rent-a-mob agents with other agendas had recruited the vandals.   However many were genuinely angry that Australia was supporting the East Timor referendum approved by President B J Habibie.

Destruction of the Surabaya office came at a bad time.  The Asian financial crisis had hit Indonesia and President Soeharto quit. So did hundreds of Australian businesspeople. 

Outraged by Indonesia’s failure to protect its guest WA considered closure, though that would have shown mob rule dictates policy.  Instead the staff shifted into the Australian Embassy.

It was not a happy move.  The Jl Rasuna Said fortress, often a destination for demonstrators, was no longer the open and friendly center once located in Jl Thamrin.

The trade office eventually found a discreet Jakarta high-rise address.

The original accessible shop-front displaying goods and cheerful posters was Australia’s only visible presence in Surabaya, so an easy target.  It had been opened to put substance into the WA-EJ Sister State Agreement first signed in 1990.

Till then relations had been handled by national governments, but local politicians and businesspeople saw the benefits of regional administrations dealing direct, by-passing the filters of Jakarta and Canberra.

The reasoning made sense.  State and Province are physically close.  WA ships megatonnes of wheat and other agricultural produce to Surabaya’s Tanjung Perak. More trade loomed as Indonesia prospered.  EJ’s huge industries saw export opportunities, particularly furniture and household goods.

Not all hopes have delivered.  Upbeat forecasts have been dragged down by the gravity of global economic forces beyond local control.  Some ideas, like sharing TV programs never went to air because players failed to appreciate cultural differences.

Yet the agreement has survived for 25 years and recently resuscitated after a spell in a political emergency ward, justifying celebrations last week (21 Aug). These will continue with gatherings and conferences for the rest of the year.

The office has a new boss, Chris Barnes, formerly managing director of PT Icon International Communications in Jakarta. .

Despite reports that the operating budget will be cut, there’s guarded hope for a return to the glory days when events were well attended by equal numbers of Australians and Indonesians chinking glasses and building trust.

What’s been achieved? Little in dollar terms because late last year a WA government razor gang spotlighted the stand-alone office, then costing more than AUD $600,000 [Rp 6 billion] a year.

Its effectiveness in trade was being eclipsed by success in supporting non-business organizations like the Karya Mulia School for deaf children and specialist visits by the Autism Association.

Solar and wind power projects in remote villages have also been welcome. Sport has been a big winner, with tours by basketball youth groups and soccer teams. 

There have been two-way visits by scientists, academics and public servants.  Cultural groups have performed in both countries – all organized under the loosely worded Sister State umbrella.

Apart from the aid projects tangible outcomes have been “a bit scarce” according to Phil Turtle, the WA chair of the Australia-Indonesia Business Council.

Attempts to sell lupins to replace soy beans imported from the US to make the highly nutritious bean cake tempe have so far been unsuccessful. This will be a tough market to penetrate requiring long-term perseverance, something that Australians don’t always do well.

More successful has been the export of seed potatoes, which have boosted yields in EJ’s fertile vegetable-growing uplands and the transfer of dairy technology.

The office has survived largely because WA Premier Colin Barnett’s bid to close was met with howls of protest from a chorus of powerful people, including his own Liberal Party colleagues. 

It seems many believe there are more important things to neighborly relationships than buying and selling grains and groceries, and that the future still looks promising as boundaries blur between trade and aid.

 “Trade and investment was always the priority for both sisters,” said former regional director Martin Newbery.  “However I must say more was achieved in terms of people to people and cultural exchange than in trade. “

It was a reality accepted by EJ Governor Soekarwo and WA Governor Ken Michael when the agreement was last resigned.  Although briefly recognizing the trade benefits they stressed issues of friendship and mutual understanding, adding:

“This is a relationship that has changed peoples’ lives in a positive way.”   So trade and aid can be siblings, not rivals. Now to bring the office back to Surabaya.

 [Disclosure: The author received two travel grants under the agreement to explore media partnerships.]

(First published in The Jakarta Post  28 August 2015)