Confusing signals<\/p>\n
Set against the spirit of deregulation which has long been the
\nhallmark of the Indonesian government, the recent official comments on
\nthe protection of petrochemical plants are ringing out confusing
\nsignals. Minister of Investment Sanyoto Sastrowardoyo has guaranteed
\ntariff protection for the US$ 1.6 billion olefins industry of PT Chandra
\nAsri. However, Coordinating Minister for Economy and Finances Saleh
\nAfiff and other economics ministers, such as Minister of Industry Tunky
\nAriwibowo and Minister of Finance Mar'ie Muhammad, contend that the
\ngovernment will not provide protection indiscriminately for all new
\nindustrial plants, let alone upstream industries, because such a measure
\nwill affect downstream industries.<\/p>\n
Earlier in June, when the latest package of deregulation measures was
\nlaunched, the government explicitly ruled out import tariff escalation
\nfor the products of new industrial ventures.<\/p>\n
Tariff protection for petrochemicals would surely affect the whole
\nmanufacturing industry because those materials are used not only for
\nmaking plastics and synthetic fibers but also for numerous other
\nproducts. We can hardly mention a single manufactured product that does
\nnot use plastics either as parts or components or packaging materials.
\nThat is why any tariff protection for this industry, especially when the
\nprotection is granted without specified time limits, raises so great a
\nconcern.<\/p>\n
The arguments for justifying tariff protection for petrochemicals are
\nclassic: big contribution to deepening the roots of the manufacturing
\nindustry, big investment, high technology, high capital costs due to
\nhigh interest rates, saving of foreign exchange, extra spending on basic
\ninfrastructure and long gestation (pay-back) period.<\/p>\n
But industrial users of petrochemicals contend that domestic
\nproducers actually need no tariff protection provided they can produce
\nas efficiently as their counterparts overseas and if their debt-equity
\nratio does not exceed the commercially viable level. In fact, domestic
\nplants enjoy advantages in the form of cheap raw materials
\n(hydrocarbons). Moreover, even if local products are 10 to 15 percent
\nmore expensive than imports, industrial users still prefer local
\nsuppliers as local procurement can minimize storage costs through just-
\nin-time deliveries.<\/p>\n
The first question then is why upstream petrochemical producers
\ndemand protection. The answer can be traced to the gross inefficiency of
\ndomestic producers. Their capital costs are unusually high. This is not
\nonly because they often have to bear the costs of basic infrastructure
\nbut mainly because the owners often depend almost entirely on borrowing
\nto finance their projects. Past experience shows how sponsors have often
\nmarked up their investment requirement to gain larger-than-necessary
\nloans because part of the loans were used for putting up their equity
\ncapital.<\/p>\n
The next question is why the government has given protection to
\nalmost every new petrochemical plant and will most likely provide
\nsimilar treatment to new ones. The answer lies partly in the
\ngovernment's determination to strengthen the structure of the
\nmanufacturing industry, sometimes without full consideration of the
\ncosts. Another factor is a dilemma the government often encounters.
\nWithout protection, domestic petrochemical producers will surely not be
\nable to compete with imports and will encounter trouble with repaying
\ntheir big debts to banks. That may cause another big wave of bad debts,
\ngiven the extensive exposure of major banks, including state banks, to
\npetrochemical projects.<\/p>\n
We even get the impression that the current rush to build
\npetrochemical projects, despite the prediction of a market glut by
\nalmost all international analysts based on the huge capacity expansions
\nin South Korea, Taiwan, Singapore, Thailand, the Middle East and China,
\nhas been prompted by the official commitment to giving investors
\nprotection.<\/p>\n
Another reason behind the government's \"generosity\" may be found in
\nthe names of the investors. The upstream and intermediate petrochemical
\nplants already producing and those still under construction are owned by
\nonly a few business groups, which are controlled by tycoons with strong
\npolitical connections. In fact, the various petrochemical companies are
\nall inter-linked with each other through cross-share ownership.<\/p>\n
Then, if it is almost certain that the olefins industry and other
\nprojects, such as the planned aromatics plant, will get tariff
\nprotection, what is the point of our arguments? In fact, the point is
\nlittle more than taking the opportunity to express our hopes. Those
\nbeing that the protection will not be very high, will be given only
\nafter thorough investigations into the structure of the costs of the
\nproducing companies, and granted only for a specified period of time.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/confusing-signals-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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