Protecting Chandra Asri

Protecting Chandra Asri

Controversy and the PT Chandra Asri Petrochemical Center seem
to be inseparable. Waves of heated debates have accompanied its
US$1.6 billion olefin project since 1991. The latest one was set
off when the company told the House of Representatives last week
that the plant would not survive if its products were not
protected from imports by tariffs of between 35 percent and 40
percent.

The request for high tariff protection obviously seems strange
now because the catchword among the business world over the past
four weeks has been "we should gear up for free, open trade".
That theme is related to the startup of the World Trade
Organization, which will manage and administer the new
multilateral trade system next month.

The government itself has been drumming up enthusiasm among
the private sector to prepare itself for the consequences of the
agreements reached by the economic leaders of the Asia Pacific
Economic Cooperation forum in Bogor, West Java, last month on
free trade in the region by the year 2020 at the latest. That
means the business sector should be geared up for fiercer global
market competition.

The company's request for high tariff protection strengthens
our suspicion that the revival of the olefin project in 1992 was
designed primarily to tap the highly protected domestic market.
This suspicion is to a certain extent reasonable because the
domestic shareholders of the project are such politically-well
connected businessmen as Prajogo Pangestu, Bambang Trihatmodjo
and Henry Pribadi. Moreover, these businessmen and a number of
other powerful entrepreneurs are also the owners of chemical
plants that produce intermediate materials.

The company's arguments that the costs of the project were
higher than for similar projects overseas are in part legitimate
because the investors have to bear almost all the capital costs
of supporting basic infrastructure. But we wonder whether these
additional costs could not be offset by the local availability of
naptha -- the feedstocks for the olefins. Other major olefin
producers, such as Singapore, South Korea, Taiwan and
Japan,depend almost entirely on imported raw materials.

Such high tariff protection is obviously not conducive to
strengthening the competitiveness of the manufacturing industry
as a whole, given the extensive use of plastic materials for
numerous industrial products. If ethylene, propylene and
polyethylene were granted high tariff protection, the cascading
impact on the downstream industries would be quite damaging
because intermediate petrochemicals, which are currently produced
by plants also owned by politically well connected businessmen,
have been protected by high tariff walls.

The government has yet to decide on Chandra Asri's request and
Minister of Industry Tunky Ariwibowo said his office is still
assessing the problem. And the current debates show an
encouraging trend towards more transparency within the
government-decision making process in that several ministers have
publicly stated their views about issues related to such
politically-well connected business groups. In the past, most
ministers "preferred safety" by avoiding comments that might
antagonize powerful business conglomerates.

Minister of Investment/Chairman of the Investment Planning
Board Sanyoto Sastrowardoyo, for example, has been fully
consistent with the statement he made last August about the need
to protect the olefin plant in view of its strategic importance
to the manufacturing sector. But Minister of Finance Mar'ie
Muhammad, referring to the government's deregulation policy
package last June, clearly ruled out the possibility of such high
tariff protection.

We think the government would ring a confusing signal if it
fully approved Chandra Asri's request. But tariff protection of
up to 20 percent for a maximum five-year period may be
justifiable if Chandra Asri is willing to fully disclose the
structure of its costs. If Chandra Asri cannot compete with 20
percent tariff protection there must be fundamental flaws in its
olefin plant. After all, domestic industrial users are sure to
prefer local procurement to imports if the price difference is
not very large because local purchases speed up deliveries and
can reduce their inventory costs.