Don't throw in the towel on customs or reform

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.