Inflating project costs<\/p>\n
Minister of Finance Mar'ie Muhammad's remarks early this week about
\nthe increasing tendency among Indonesian businessmen to mark up the
\ncosts of their investment projects reconfirmed the findings of the
\nrecent investigations into several large bad loans. It also endorsed the
\nconclusion of a recent study by the World Bank that pointed out the
\ngross inefficiency of investments in the country.<\/p>\n
Noted economist Sumitro Djojohadikusumo also has often warned of the
\ndangers of the unusually high incremental capital-output ratio (ICOR) in
\nIndonesia. Sumitro estimated ICOR -- the ratio of capital invested to
\nthe volume of output generated -- at 4.9, compared to a range from 3 to
\n3.5 in other Southeast Asian countries. That indicates the high cost of
\nIndonesia's economy.<\/p>\n
But while the World Bank and Sumitro referred to the macro-conditions
\nthat cause the high-cost economy such as red tape, misallocation of
\nresources and corruption, Mar'ie specifically talked about the practices
\namong businessmen who inflate the costs of their investment projects.
\nAt first glance, one may simply reject such practices as entirely the
\nbusiness of the investors themselves because it is the businessmen who
\nbear the risks of their investments.<\/p>\n
However, as the finance minister explained at the national conference
\nof the Indonesian Society of Accountants in Bandung early this week, the
\nmarkup of project prices causes huge losses for the government and even
\nthe public.<\/p>\n
An investment project whose capital costs are marked up obviously
\nrequires a higher amount of depreciation, thus resulting in smaller
\ntaxable income. The prices of its products also should be set higher
\nthan those of a similar project implemented with normal costs, thereby
\nharming the interests of consumers. Since big projects usually are
\nfinanced mostly by loans from private and state banks they also cause
\nmisallocation of resources at the expense of more productive and
\nefficient investment ventures. Then, such projects face bigger risks of
\nfailure, resulting in bad loans.<\/p>\n
Businessmen usually mark up the prices of their investment projects
\nin their loan applications in order to finance their projects entirely
\nwith loan funds. For example, since a businessman usually is required to
\nput up at least 30 percent of the cost of his project in equity capital,
\nhe marks up the price of his project at least by 30 percent in order to
\nobtain loan funds equivalent to 100 percent of the project costs.
\nObviously, he will use 30 percent of the loan funds as his equity
\ncapital in the project.<\/p>\n
However, such markup practices actually are not so sophisticated as
\nto make them extremely difficult for bankers to detect. Therefore, such
\npractices are possible only with collusion between the businessman and
\nthe credit officers of the lending bank. Moreover, since investment
\ncredits are normally disbursed in phases, according to the stage of
\nproject implementation, and big projects depend mostly on imported
\nequipment, such practices could be detected during the pre-shipment
\ninspection of imports by PT Surveyor Indonesia and its subcontractor,
\nSociete Generale de Surveillance (SGS). In fact, SGS has often uncovered
\nover-invoicing of oil mining equipment imported by mining contractors in
\nIndonesia.<\/p>\n
Mar'ie's warning of the adverse impact caused by the markup of
\ninvestment project costs deserves the great attention of banks,
\nconsultants and other professionals involved in project proposals and
\nimplementation. Such practices, if allowed to go on unchecked, will
\nadversely affect the very foundations of our economy. This is especially
\nso because private investors have been allowed to operate in public
\ninfrastructure such as power generation, telecommunications, highways,
\nairports and seaports, which were previously monopolized by state
\ncompanies.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/inflating-project-costs-1447893297",
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"sponsor": "Okusi Associates",
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