Sugar smuggling again

The controversy in the past three weeks over sugar smuggling in to Java serves only to validate the public's perception of how grossly corrupt is Indonesia's governance and how vulnerable is the world's largest archipelago country to contraband trade.

The rampant smuggling also demonstrates how well-designed policy instruments often fail due either to technical incompetence and corruption within implementing institutions or an acute lack of inter-ministerial cooperation.

Minister of Industry and Trade Rini Soewandi painfully discovered during an incognito visit to Jakarta's Tanjung Priok port on Monday that almost 180 containers (around 3,758 metric tons) of sugar apparently smuggled in from Thailand and India, had been at the port's warehouses for more than six weeks. Yet the customs service had not been able to track down the owners nor the origin of the containers.

The Tanjung Priok customs service contended that it had yet to trace the origin and importers of the commodity because the consignment had been shipped to Tanjung Priok from the North Sumatra seaport of Belawan as inter-island merchandise, which is thus outside its jurisdiction.

This argument simply did not make sense. The Ministry of Industry and Trade had decided in early 2002 to control sugar imports in a bid to protect local sugarcane farmers by licensing only five state companies, all based in Java, to import sugar according to government quotas. The government also imposed an import tariff of Rp 700 (US$0.08) per kilogram and tightly controlled the inter-island trade of local and imported sugar through a system of approved traders.

Port, customs and trade officials in Belawan could not have been so technically incompetent that they were unable to ascertain that the sugar had been smuggled in from overseas. They could have simply checked the identity of the importers against the five state companies licensed as sugar importers or, if it was inter-island merchandise, checked the list of government approved traders.

Even if the sugar had proper documents, local port and customs officials in Belawan and Tanjung Priok should have been suspicious about possible smuggling because commercially it makes no sense at all to ship sugar, destined for the market in Java, through North Sumatra. One also should feel flabbergasted to hear that the North Sumatra trade officials had licensed the sugar consignment as inter-island merchandise without, apparently, knowing its origin. After all, North Sumatra's sugar output is barely sufficient just to meet its own needs.

There should not have been any doubt at all that the sugar had been smuggled into the country because the licenses for the importation of 405,000 tons of sugar for this year were issued only on Feb. 16, while the 180 containers had been unloaded as inter-island merchandise at Tanjung Priok between Feb. 7 and March 20.

Sugar smuggling remains an annual phenomenon during the months before the sugarcane milling season in the country which begins in May and lasts until August. In early 2002, the association of sugarcane growers, suspecting that foreign sugar had been entering the country illegally, either through physical smuggling or under-invoicing of prices, raided freighters unloading imported sugar at the Tanjung Emas port in Central Java and the Surabaya port of Tanjung Perak in East Java.

A similar wave of sugar smuggling also took place in the first quarter of last year.

Analysts have urged the government to ease the controls on sugar imports and trade, arguing that the big difference between local and import prices has provided a lucrative margin for smugglers and that market-distortion measures such as special import and trading licenses are highly vulnerable to abuse by the corrupt officials.

The dilemma though is that while the country still depends on imports for almost 50 percent of its domestic needs of 3.7 million tons a year, local sugarcane farmers should be protected from unfair competition caused by smuggling or dumping practices by foreign producers.

It would be ill-advised and premature now to lower import tariffs or the ceiling retail price of sugar in a bid to discourage smuggling because local sugar is still not competitive due to technical and regulatory problems and the low yield of domestic sugarcane farms.

But the high tariff protection can achieve its objective only if the policy is supported by a high-powered, anti-smuggling, inter-ministerial taskforce. In the long-run, however, domestic sugar will remain uncompetitive if the government does not implement a well-designed national sugar policy covering such measures as pricing, credit financing, and business relations between growers and refineries.

This policy should be followed by production development programs encompassing research and development to create new high-yield varieties for irrigated and rain-fed land, the provision of extension services to farmers and the implementation of reliable soil surveys in provinces outside Java to find new areas suitable for sugarcane.

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