Sticky business

It seems to be the National Logistics Agency's (Bulog) turn now to get its hands sticky helping the state-owned IPTN aerospace company. The agency has agreed to buy about 110,000 tons of glutinous rice while Thailand is in turn to procure two CN-235 airplanes from IPTN. That means Bulog will have to spend a large part of the subsidized loan it is getting annually from the central bank to pay for the counter-trade deal.

The counter-trade deal currently being hammered out between Bulog and IPTN and Thailand reminds us of the counter-purchase policy Indonesia introduced in 1982. The policy was launched when the country's balance of payments was under severe pressure. It required foreign suppliers to buy Indonesian commodities equivalent in value to the goods they were selling to government and state company-funded projects. The external balance in the early 1980s had reached such a critical state that the policy was followed in 1983 by the shelving of billions of dollars worth of projects and the devaluation of the rupiah. All these measures were designed to curb import growth and, at the same time, boost exports.

The counter-purchase policy was administered by the counter- purchase section at the export directorate of the trade ministry which regularly announced the export commodities available for purchase by foreign bidders of government projects. Obviously, the policy angered foreign companies because most foreign bidders for government contracts had no experience in selling items such as rubber, coffee, or plywood. No wonder the policy failed to increase exports much. Since the late 1980s we have heard virtually no more of counter-trade transactions.

Counter-trade takes several forms: Pure counter-trades, counter-purchases, offsets, barters, switch-trading and buy- backs. But all these transactions are very complex processes because they require arduous negotiations and involve more than two parties. Therefore such a deal is generally struck as a last resort. That is why, for example, we would not be able, even if we tried very hard, to trade in our CN-235 planes for soybean from the United States of which we need more than 500,000 tons every year. Only countries extremely short of foreign exchange will contemplate such trades. In the 1980s, for example, counter- trades were made mostly by countries in eastern Europe.

Counter-trade deal also requires sellers to offer generous price discounts to offset the additional costs of transactions. high insurance premiums, brokerage fees etc. In view of its complexity and high transaction costs, a counter-trade deal very rarely generates repeat orders.

Most manufacturers avoid selling their products through counter-trade not only because of the complexity and the costly, time-consuming negotiations involved but also due to the unfavorable impression made about the merchandise involved. Goods sold under such a barter-like deal are tainted with the stigma of being unable to compete in the open market.

Having pointed out the disadvantages of counter-trades, we wouldn't want to suggest that the counter-trade deal which will involve Indonesia's purchase of 110,000 tons of glutinous rice from Thailand in return for the sales of two CN-235 planes is entirely negative. But we do feel that the transaction will carry additional costs.

The deal will force Bulog to order a huge amount of glutinous rice -- equivalent to more than 18 months of consumption. It is important to note that it is not glutinous rice, but ordinary rice, that is the national staple and heavily weighs in the consumer price index. Glutinous rice is used mainly for cakes. Though the delivery of the glutinous rice can be scheduled according to need, Bulog will eventually have to swallow all of the imported sticky rice. It doesn't have the option, for example, to replace the glutinous rice with ordinary rice in case of poor harvests, for example.

Yet while Bulog gets its hands sticky with glutinous rice of doubtful use, the state IPTN aerospace company is making the sales it is desperate for. It is a pity that IPTN has failed to lobby for export credit financing which is crucial for promoting airplane sales. Hopefully, the two CN-235s will perform well enough in Thailand to generate new orders; this time, hopefully placed as normal business transactions.