Don't throw in the towel on customs or reform

Richard B. Ness, President Director, PT Newmont Pacific Nusantara, Jakarta

Two weeks ago, when a team from the IMF was in Jakarta reviewing the effectiveness of customs procedures in Indonesia, I was dismayed to read an article in which a senior editor of The Jakarta Post effectively threw in the towel on reform (Feb. 5) The author wrote very convincingly on the serious problems with professionalism and corruption in the Customs office.

But instead of demanding change from the government his answer is to give up on any effort at reform and ask for overseas intervention, in the form of hiring a pre-shipment inspection (PSI) firm to supplant customs as the border guards of Indonesia.

Yes, the indisputable fact is that when a foreign company performed their PSI service from 1985-1997, the state realized higher income from tariff collection. But that was in the days of extremely high tariffs on imported goods and was done at great cost to existing investors who had to shoulder expensive storage bills in ports of export as a result.

With the ASEAN Free Trade Agreement (AFTA) coming into effect this year, close to 87 percent of all imports will be zero-rated or less than 3 percent tariffs. So to point the finger at the Customs office saying that state revenue is decreasing because of their lack of professionalism is missing the point at best and disingenuous at worst. Tariff income for the state should be decreasing in order to boost the competitiveness of the Indonesian marketplace. That is the way the global market works.

The fact that the nature of potential revenue collection from tariffs has changed ignores the issue of what tariffs actually do to the Indonesian economy. Tariffs act as protection for the local economy, much to its detriment. By erecting and enforcing tariffs on imported goods, the local producers and manufacturers need not be competitive.

The value realized by Indonesia through AFTA is that out of necessity, the local business will become more competitive because of the reduction and elimination of tariffs. But the crux of the problem is not whether Customs brings in enough revenue for the state through tariff collection, but whether Indonesia as a market is still competitive. It is clearly not. It is the non- tariff barriers to trade that are the most destructive forces affecting the generation of state revenue.

More income-generating businesses will leave Indonesia this year because of the absurd levels of corporate taxes and the heaping on of additional transactional taxes than because of problems with importation. Is the answer to hire public accounting firms to conduct tax collection for Indonesia because there are problems in the Tax office? No. But somehow, Customs has become the tar baby and pre-shipment inspection is the issue with which vested interests hope to hang it.

Instead of looking at the vast array of non-tariff barriers to trade and the knock-on affect that they have on the generation of revenue for Indonesia, let's focus on the Customs office and the proposed supplanting of that office with a foreign firm.

No doubt some Indonesian Customs Officers have ethical problems. Stories abound of the reclassification of imported items in order to place the item into a higher tariff bracket. Or the stories of the officers coming to the office of an importer a year after the original tariff was paid for a "post-entry audit" finding that too little duty was paid on a suddenly reclassified item. The stories that are not heard are those of the Customs people who are trying to professionalize the operation. Customs Director General Permana Agung said that over 200 officers have been suspended this year for "violating their professional standards". That sounds like a step in the right direction.

Perhaps he should be encouraged to do more. Is bringing in a foreign company going to help Customs achieve the professionalizing their workforce? No -- if the system functions as it did during the Soeharto years. Instead of adding value to the state through the enhancement of human resources, the PSI firm will simply replace the Customs service, adding no long-term value to the state and providing no lasting value beyond the money they bring in. And that's another important point: The foreign company that ran PSI from 1985-1997 assessed the amount of money due to the state, they didn't collect it. Customs and the Ministry of Finance ended up collecting the money.

The PSI services of the foreign company are not free. From available data during the final years of its service to Indonesia, it appears that it was being paid close to $250 million per year for the services rendered. That massive pay out came from the income that was produced for the state out of collected tariffs, purportedly.

But Customs, which has 11,000 officers and 130 ports to protect, operates on $27 million per year. Would the foreign firm be willing to perform their service for $27 million per year? And what kind of service would Indonesia receive for that amount?

These are important questions to ask considering that the entire premise of bringing in a foreign company to run the Customs function is that Indonesia is incapable of reforming itself. But let's pay the people we hire 10 times as much as we are willing to pay our own Customs office to perform the task.

After four years of lip service, it's important for Indonesia to stand its ground on reform and look to improve its competitiveness globally. A process started in 1998 that, if carried to its conclusion, will result in a much stronger nation. But it seems, everywhere you turn, the process of reform is being rolled back. And in this case the rolling back of reform is being advocated by people who were once its staunch proponents.

And what of the importers who are allegedly screaming for the PSI scheme to come back? I assumed that they were the businesses that import or export materials. But then I met such people, some from large textile manufacturers. They were very much against the PSI arrangement, believing it was only going to add to red tape.

When the Customs Office assumed the role of export watchdog two years ago there was a huge kerfuffle with a backlog of exports sitting on the docks of various ports -- for which Customs was blamed. The issue with the backlog of exports revolved around Customs requiring that the export quota holder be the same as the manufacturer of the goods being exported. In other words, no more middle men holding quotas or selling them to potential exporters. If you want to export, then you must hold the quota for that product. A simple attempt at reform.

It turns out that one of the biggest groups from "industry" that supports the re-imposition of PSI are these middle men who have made their living indulging in rent-seeking and whose fortunes are being threatened by the minor attempts at reform being implemented by the Customs office.

The motivations of most of the pro-PSI players are clear and most of those motivations are honest. There are people being hurt by Customs that would feel immediate (but perhaps not lasting) relief if the PSI arrangement came back.

For all the winners in any given policy debate, there are losers as well. Many major companies suffered under the PSI arrangement. During the darkest days of the monetary crisis, my company invested US$2 billion in the development of a mine in Sumbawa. If that type of investment was under the old PSI scheme, we would have been required to store our goods in the port of export until the foreign PSI people were able to get to them to inspect the materials. The storage fees alone would have amounted to millions of dollars per year, not even factoring in the massive costs incurred during project delays.

So for the companies that are continuing to invest large amounts of money on big projects, such as BP with the Tangguh Project in Papua, or ExxonMobil with their Cepu project, will suffer as a result of the re-imposition of the PSI arrangement. It's ironic that the only people still willing to invest large amounts of money in Indonesia are the ones who will be hurt by this program. Perhaps that is what the representatives from the textile company meant by "another layer of bureaucracy"?

For the record, since we started construction of our mine in 1997, the year PSI ended, we have never had a single problem with the importation of hundreds of millions of dollars of equipment to run our mine. We have yet to experience even a delay in shipments of imported materials and the Customs office has dealt with us in a very fair and professional manner. But now, it seems, with the re-imposition of PSI, we will be experiencing delays and incurred costs at a time when staying competitive in the world metal markets is already difficult.

But the fact that my business will be hurt by the PSI arrangement coming back into play is only one reason why I am responding to the above article. The other reason is a sincere belief that PSI is not the answer to Indonesia's problems and, in fact, it only allows the real problems to go unaddressed.

Reform in the economy is needed now. The business community has waited long enough for economic recovery. Running away from reform is a problem that is going to become more commonplace as time passes. And that is the danger with the seemingly inconsequential decision to bring in foreigners to do Custom's job for it. Indonesia needs to stand its ground and demand that their Customs office do a better job. Start with reform at the borders and work back into the center, for that's where the real problems lie right now. Customs and the problems that some investors are facing with that office is only the tip of the iceberg in terms of necessary reforms.

Culpability for the current problems at the border lie across many government agencies, and that the importers themselves have a great deal of blame to bear as well. Why not throw the smugglers who are caught in jail? Cancel licenses of the corrupt agents and prevent them from doing further business in this country. After all, corruption is a two-way street. The time has come to demand reform from the government and to build a better, wealthier and more competitive Indonesia in the process.