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.