Costly chemicals

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.