Costly chemicals

The June 4 deregulation package exempted ethylene, polyethylene, propylene and polypropylene, the building blocks of plastics and synthetic fibers, from the scheduled tariff reductions. It might be a simple coincidence that these chemicals, of which almost US$800 million was imported last year, are all produced by companies controlled by politically-well connected businessmen -- Prajogo Pangestu, Sudono Salim, Sigit Hardjojudanto, Bambang Trihatmodjo, Sudwikatmono, Henry Pribadi and Ibrahim Risjad.

Immunity from the tariff reduction schedule allows the import duty on ethylene and propylene to remain at 25 percent and the duty on polyethylene and polypropylene to stay at 40 percent until both are cut to a maximum 10 percent in 2003. The ASEAN Free Trade Area then comes into full operation with a tariff range of 0 to 5 percent on almost all manufactured goods.

Last February, when the finance minister and the industry and trade minister slapped a 25 percent tariff on ethylene and propylene, which are produced by PT Chandra Asri, the protection was supposed to be removed at the end of this month, but the ministers have since had to eat their words. Even the seemingly temporary tariff caused controversy by contradicting Indonesia's economic reform process.

With polyethylene and polypropylene both protected by a 40 percent tariff, the government considered the ethylene and propylene tariff increase a win-win policy. The polyethylene industry is, after all, dominated by Chandra Asri's annual capacity of 300,000 tons and PT Petrokimia Nusantara Interindo (Peni) with 450,000 tons. The polypropylene industry is controlled by PT Tri Polyta with an annual capacity of 340,000 tons. The Indonesian shareholders of Chandra Asri and Tri Polyta are almost identical, comprising Prajogo, Bambang, Henry Pribadi, Salim and Sudwikatmono. PT Peni is owned jointly by Sigit and BP Chemicals.

Given the large imports of upstream and midstream chemicals, temporary protection of the petrochemical industry is warranted to curb import growth amid the worrisome increase in the current account deficit. The deficit is estimated to reach $8 billion this year, almost 4 percent of the gross domestic product.

However, permanent protection until 2003, as effected by the latest reform package, retards efficiency and, consequently, the competitiveness of domestic industry. Given the wide use of plastics and synthetic fibers by manufacturers, the tight tariff protection will increase costs for numerous downstream industries.

The protection is raising eyebrows as well because most upstream and midstream chemical plants are controlled by a few politically-well connected businessmen. For example, the country's aromatics center, which will start manufacturing paraxylene, benzene and olefin feedstocks in Aceh in 1998, is controlled by Hutomo Mandala Putra through his Humpuss Group. The manufacture of ethylene dichloride and ethylene glycol is controlled by Sudwikatmono, Salim, Risjad and Bambang. Plastic film is dominated by Henry and Risjad.