Rising utility prices: Something we have to give

Rising utility prices: Something we have to give

Jati Hidayat, Business Analyst, Jakarta

Economics is the study of how to manage unlimited wants with
limited means. Nobody can have everything, and all of us must
make choices -- remember that when we scream foul at rising
utility prices or the privatization of our state companies.

It takes money to suppress prices at certain levels.

Fuel subsidies alone cost the government Rp 30 trillion
(US$3.3 billion) last year. Similarly, when the state maintains
companies with questionable management credibility (Semen Padang)
or an obsolete business model (Indosat) on its balance sheets, it
foregoes potential cash receipts at today's values and instead
will be stuck with elusive future dividends.

Maintaining subsidies and canceling privatization basically
mean that scarce resources -- money -- are diverted from one
destination to another.

Should the government really forsake cash that could be used
to build public schools, just to name one example, to appease
large consumers of energy (read: big business) and vested
interest groups around state-owned companies?

That said, we must ask whether it is possible for the
government to cut down its other major expenses, so that perhaps
it can, or should, maintain its subsidies and waive the
privatization of state companies altogether.

This directly brings us to domestic debt, the government's
single largest routine expenditure, costing approximately Rp 60
trillion per year on interest payments alone.

The government's domestic debt burdens come from two closely
related areas: the annual coupons/interest carried by bank
recapitalization bonds and from the principal value of the bonds
themselves. Of course, the major blow will be when the bonds
actually mature.

The necessary but painful bank recapitalization program was
carried out to keep the corruption-riddled banking sector afloat.
But yes, the costs were, and still are, huge.

As an illustration, the Habibie government allocated Rp 170
trillion, in the form of recapitalization bond issuances, to bail
out four state banks that later merged to form Bank Mandiri,
while providing a mere Rp 1 trillion for public education in
1998.

The nasty catch is that there is no easy shortcut in dealing
with these bonds once they are issued.

A radical rescheduling of maturities without taking into
account the bonds' net present values or an overly aggressive
financial re-engineering to reduce the domestic debt stock may
undermine the banking sector again, since these bonds are the
dominant assets of the bailed out banks.

In other words, we cannot write down the value of the recap
bonds -- or the banks' assets -- without causing significant
impact on the banks' financial well-being.

What is a burden on the government's budget on one side of the
equation is also a life-support system for practically the entire
banking sector on the other.

Is our desire for cheap fuel so strong that it is worth
risking a banking panic?

But trade-offs, or sacrifices, are precisely the crux of the
matter.

The recapitalization program, as well as many other aspects of
the ongoing economic reform, feels repugnant because the
government has failed to prosecute those who destroyed the
banking industry -- thus our economy -- through corruption. The
pain of necessary economic reforms has not been evenly shared.

The failure to prosecute many former bank owners, who
defaulted on billions of dollars of short-term liquidity loans
extended by the state, is an insult to the collective sense of
justice.

This is not to mention the indication that some of these
debtors grossly misused the loans in the first place.

The government added salt to the wound by announcing its
intention to "release and discharge" some of those former bank
owners weeks apart from the decision to raise prices in order to
reduce the budget deficit.

The sternness we saw (so far) in the decision to cut subsidies
was totally absent when the government dealt with wealthy
defaulters -- this process is riddled with inconsistencies,
question marks and innuendoes of corruption, if not the real
thing.

The same story goes with regard to all the high-profile
corruption cases. Justice has been ignored in the pursuit for
some semblance of economic reform and political consolidation.

If the government continues to make these types of trade-offs,
it is unavoidable that the public will soon lose the taste for
further needed economic reforms.

Ideas and policies endorsing such reforms, often painful
initially, will loose credibility. They will be taken hostage by
the government's political shortcomings. Already, one much quoted
activist, writing in a recent edition of Tempo magazine,
basically charged that structural reforms are a sign of
"economics fundamentalism".

Opportunistic and populist politicians, meanwhile, have
already smelled the public's mood and the political snowball
against economic reforms is forming.

Their determination to block reforms is real, much more so
than the will to fight corruption. President Megawati, blessed
with the magic of genealogy, may survive all this, of course.

We only hope that needed economic reforms will too.