with Suryo B, Chairman, Sulisto, KADIN (Indonesian Chamber of Commerce and Industry)
Indonesia is in an interesting situation, possessing abundant resources and yet the country is importing energy. With GDP approaching $4 trillion by 2030 and energy demand increasing, clearly this is an untenable situation. Why is Indonesia in this position and what is should be done?
It is the biggest irony that Indonesia is sitting on top of some of the most abundant energy resources in the world and yet cannot provide energy security to its population. Something needs to be done and this will require the right energy policy to correct this situation.
Indonesia is the world’s largest producer of palm oil because during Suharto’s time, he proposed incentives and stimuli both fiscal and monetary to make this industry attractive for investors. Today we are reaping the rewards of this policy. This is what is required of Indonesia’s energy policy. You have to make the industry attractive enough for investors to enter and take risks. Oil and gas is high-risk, capital intensive and demanding technical expertise.
Investors have not seen Indonesia as attractive in comparison to other countries in the region. Papua New Guinea currently has a lot of intensive E&P work because the terms and conditions of the tax regime, PSC rules and production splits are attractive for investors. Indonesia must look to successful regional examples and adapt its policies. Indonesia must start off by comparing what neighbouring countries offer with the terms and conditions offered in Indonesia. We must ask ourselves why exploration is now very active in Papua New Guinea, Vietnam and off the coast of West Africa.
Looking especially at the oil and gas service industry, Brazil, Norway and Mexico have developed their local industry in such a way that they have become dominant in providing supporting services for oil exploration and production. I have not yet seen this taking place in Indonesia the way I had expected. The government has not given the local industry enough opportunities or done enough work in promoting joint ventures with international companies to generate technology transfer. Over the last 40-50 years Indonesia has consequently missed the boat in this development. There are some strong Indonesian companies, but I feel that we could have done much more to promote them.
As a nation, we cannot depend on foreign supplies of machinery, equipment and services. The local industry must be developed in tandem for a sustainable energy future. Local capabilities do not mean 100% Indonesian content – we are very open to joint ventures and partnerships. It makes a lot of sense to benefit from the cost savings of hiring Indonesians. There should also be training schools to allow Indonesian entrepreneurs to understand better the nature of the oil and gas business.
As the country where Shell first developed and as the pioneer of the PSC model, Indonesia is no stranger to the oil and gas industry. What has gone wrong since Indonesia was at the forefront of the oil and gas industry?
In my opinion, Indonesia is currently lacking the expertise at the decision making level. There needs to be a better understanding of the oil and gas industry’s expectations. Without this business perspective, government authorities will stifle the industry through excessive regulation or taxation. Government instead needs to work harder on mitigating some of the financial risks for upstream companies in order to encourage investment. It is the failure of the government to improve the investment climate for the oil and gas sector which has led to the lack of exploration activity in the country today and the continuing decline of national production.
Growth cannot occur without the right investment climate. The right policies need to be put in place. The upstream climate needs to become more attractive. Indonesia needs to take care of bureaucracy, provide better services, fewer regulations, and faster customs procedures in order to reignite the industry. Under the current status quo, unless Indonesia makes new discoveries and invests in enhanced methods of production, Indonesia’s production will continue to decline.
What are the policies which are most harmful at the moment?
What is seriously lacking in Indonesia at the moment is gas supplies for industry and this adversely affects business. Our domestic industries need gas in order to grow and be competitive in the region. This is a serious matter. The irony is that Indonesia remains a major gas exporter. Why are we exporting overseas when the domestic industries are crying out for gas and are even willing to pay international prices? Indonesia has signed contracts with countries overseas for gas prices which are far lower than companies are willing to pay over here.
The second issue to resolve is fuel subsidies. The Indonesian business community cannot understand why we have to subsidize low fuel costs in Indonesia as it is such a financial burden for the government. Our advice is to increase the fuel price to market price immediately. Whether you increase the price by 5 cents or $1 you will have the same reaction from the people therefore we advise the parliament to get rid of fuel subsidies in one go and end this false economy.
By cutting fuel subsidies it will save the government around $25 billion per year. This can be invested in infrastructure, subways, the best ports, airports, mass transportation systems. It is simply a matter of telling the people that with the money saved the country will have the best public services, infrastructure and educational grants etc in the world.
Having been elected in 2010 and holding office until 2015, what would you like to achieve in the rest of your time in office?
Part of KADIN’s work is to provide government with a better understanding of the industry and persuade them to come up with the right energy policies. Representatives from the oil and gas industry are often slightly timid about speaking candidly about the issues they are facing, because they worry about upsetting government. KADIN, as an independent organization, plays a crucial role in providing an honest appraisal of the operational environment for government. However, KADIN can only do so much; it is the government making the decisions.
KADIN is a partner of the government and wants to become an effective partner, providing valuable inputs. We also need to look after the national interest of Indonesia and promote government’s policy among investors. The organization is therefore finding a balance between the stakeholders.
Personally speaking, I would like to see Indonesia growing faster than it is at the moment. The country has the capacity if only certain elements are fixed. There is no reason that Indonesia cannot have energy security, have good infrastructure and once this is done Indonesia can be one of the top 5 countries in the world terms of economic performance.
What would be your message to investors looking at Indonesia?
I advise you to come to Indonesia and look at the country more closely. Indonesia has always been underrated and companies can make a fortune in this country. Among the world’s emerging countries, China is already saturated; India is becoming less attractive, whilst countries like Brazil, Turkey and Indonesia have huge and growing potential. Of these, Indonesia has the largest population, huge natural resources, a young dynamic population and a growing market. Investors should appreciate the challenges of doing business here and find ways to unlock the market potential. There is an old Chinese saying, where there are dangers there is a fortune to be made.