Global Demand for Seafood Tests Indonesia’s Sovereignty

Since April 1, Thailand has closed its Andaman Bay for commercial fishing and will maintain the policy until June 30. In a similar maneuver, China will adopt a moratorium on fishing in its waters from the Yellow Sea to the East China Sea and the South China Sea from May 1 to September 1.

Altogether more than 250,000 fishing vessels will be affected, and many of them will venture further to catch fish to avoid the costs of stopping operations completely.

To put this into context, China is the world’s largest net exporter of seafood, while the number one net importer of seafood is the US. However, China will soon become the world’s biggest seafood importer due to a rise in its people’s average income. China’s import volume has grown by 8 percent annually.
By 2020, the Chinese government projects that as marine resources deplete, the country’s fisheries production will shrink to around 10 million tons, a contraction of 3 million tons compared to its 2015 volume.

Growing Chinese demand for seafood, however, will stress existing global fisheries stocks unless proper sustainability measures are rigorously applied.

In comparison, the US government recently enacted a rule on seafood traceability seeking to prevent imports of illegally caught fish. However, major US seafood companies have filed a lawsuit against the government, claiming that the policy will increase operational costs by up to US$1 billion per year – because in practice, large volumes of US seafood are exported to processing hubs mainly in China and then reimported by US companies.

Witnessing these dynamics, the global demand for seafood will impact countries with relatively healthy fisheries stocks, including Indonesia.

Overfishing and illegal, unreported and unregulated fishing (IUUF) has been a global problem for decades but it is only recently that the Indonesian government has increased its awareness of sustainability challenges in its maritime domain, as part of President Joko “Jokowi” Widodo’s global maritime nexus vision

Indonesia’s zero-tolerance of poaching has quickly shaped the policy debates in the regional, and to some extent global, trade in seafood. Up to two years ago, Indonesia’s seafood entered the world markets without proper accounting and controls.

Thailand, with its Thai Union Group, is the largest canned tuna exporter in the world, but it imports 90 percent of its tuna sources, mainly from Indonesia. In the past, a large number of Thai fishing vessels operated illegally in Maluku waters, employing migrant workers in slavery-like conditions, exposed only after the Indonesian government slapped a fisheries licensing moratorium and transshipment ban in late 2014.

Thai Union’s revenue in 2014 stood at $3.44 billion, completely dwarfing Maluku’s regional revenue from fisheries, which amounted to less than $1million that year.

Stark numbers have also emerged in Merauke in Papua, where the Chinese fishing firm Pingtan Marine Enterprise Ltd (NASDAQ: PME) has operated in the rich waters of Arafura. In its public investor presentation, PME reported a decline in revenue from $233 million in 2014 to $60.7 million in 2015. The report detailed that 156 of their Chinese-flagged fishing vessels stopped operating in Indonesian waters following the moratorium policy, a bizarre statement given that foreign-flagged vessels have been banned from operating in Indonesia since 2005.

PME claims that a vessel operating in Arafura can earn a net income up to $1 million per year, which as it happens equals Papua’s total revenue from fisheries in 2014.

Reforms are underway to realign the gap in Indonesia’s seafood potential with actual performance. Those who have benefited from shady past practices dislike such reforms and continue to fight policies implemented by the government, claiming that such policies have “hurt” exports and the industry.

It is naïve to only see the performance of Indonesia’s seafood industry through its export figures. Domestic seafood consumption should instead top our concern, since protein from cattle will not be enough. Indonesia still largely imports its beef, despite the fact that its prices have been volatile and lower income groups cannot afford to buy it.

Hence, people will resort to seafood as an alternative source of protein. The Indonesian Central Statistics Bureau (BPS) has reported a deflation trend from 2014-2016 for fish prices in the domestic market, meaning fish has become more affordable for consumers.

As is the case for China, Indonesia needs to realize that prioritizing domestic demand will be a challenging task with 260 million mouths to feed, the fourth-largest population in the world after China, India and the US.

Making sure that there is enough fish caught by Indonesian fishermen for generations to come, through proper sustainability measures, is the only way to ensure the President’s vision of making the “oceans the future of the nation” a reality.

What is it with the beef import quota?

I think the beef import quota corruption case is going to the wrong directions. Instead of focusing about the case and the economic impact of the underlying import quota policy, most of the media’s focus is increasingly becoming on the women or the sex scandal surrounding it. I’m kinda pissed with the whole spin and I feel that I (at least) have the obligation to unpack the real issues that we should be debating instead of ‘proper’ nicknames for Javanese or Arabic girls.

Moving on. I think we firstly need to look at the structure of our beef market. Second, the implications of the import quota policy and of course, the ongoing corruption case on the beef import quota.

What needs to be in our urgent attention is that the current average price of beef in Java is about Rp. 85.0000-95.000/kg (USD 8-9/kg), and this is a significant jump from last year’s average price which is about Rp. 76.000/kg or Rp.60.000/kg in 2010. You look at the numbers (Ministry of Trade website), and you would see that there is roughly an increase of 20% in beef prices in just two years. Not normal.

Production-wise, if we look at the cattle sensus data, the number of beef cattle have shown an increasing trend. If we have an abundant of cattle why is the price so high? I need to quickly point out, provided that our data is valid, the production data shows the number of available cattle, not the number of meat available for consumption. The data that is largely missing is the number of meat stock we have in our abattoirs or traders (the middle supply chain).

Simple beef supply chain

We import beef in two forms: live beef cattle – so you can put them in feedlotters and make them plump (productivity counts), and frozen meat. Percentage-wise, we import about 60% of our import quota for live cattle, while 40% of our imports are frozen meat. We also limit the places where the imported beef can enter in our territory (only in certain ports), so it doesn’t disrupt the local market. You do want the poor cattle farmers to increase their welfare, no? No? You want cheap beef instead?

Now we go a bit to the rationale for the import quota. Basic microeconomics (for which I have mostly doodled during class – sorry Prof) tells us that if we have the price according to the world market (Pw), you have suppliers willing to sell at a cheaper price (and perhaps better quality too), while the local suppliers can’t compete and can only supply a small amount at that price. So let’s say the government imposes a quota and there is going to be a limit on how many beef products are available on the local market. Thus, this gives the opportunity for local cattle farmers to compete but alas, consumers might have to bear the more expensive price (Pq) as quotas affects the price indirectly. Voila, increase of producer surplus and decrease of consumer surplus, yadayadayada. The difference between quota and tariffs, the government can get the revenue from the tariff, but if it’s a quota – then whoever becomes the importers can get all the profit.

Import Quota

So who decides which importers can import the beef?

Now this is where the beef gets juicy (horrible pun, sorry).

In  January 2013, the Corruption Eradication Commission (KPK) caught red-handed the handing over of money from Juard Effendi and Arya Arby Effendi, two executives from PT Indoguna Utama (a well-known beef importer), to Ahmad Fathanah (AF) – known to be the close acquaintance of Luthfi Hasan Ishak (LHI), the president of the Prosperous Justice Party (Partai Keadilan Sejahtera) at the time. Now the case is on trial and what is at stake is the government’s credibility in setting the import quota policy, as well as PKS’ credibility as a major Islamic party that sells itself as a clean and corruption-free party – with die hard grass root sympathizers (more on this political Islam aspect on another blog post).

But it’s not that easy for KPK as well. In order to prove that the importers paid a sum of money to AF and LHI to get the beef import quota, they need to prove that LHI in fact has an influence over the Ministry of Agriculture (with Minister Suswono, a PKS cadre, at its helm) – to give a recommendation for Indoguna as an importer – which is later decided in a coordination meeting between related ministries (i.e. Ministry of Trade and Ministry of Industry). In this meeting, apart from deciding which firms have the license to import based on the listed criteria, the government also decides the quotas – which have been decreasing for the past two years (compared to 2010).

Quota Influence Cycle

Seeing that this is quite a challenge, that’s why KPK (along with the help of PPATK) also use the Money Laundering Law on the suspects because the burden of proof shifts to them – they need to prove that the flow of money and all the financial transactions that goes through them is legit. And this is where the “many women of AF” story gets messy and convoluted the beef import story because there’s so many unanswered flow of money that goes to these women through AF.

Since the beef import quota case is still on trial, it is too early to know whether any of the suspects are going to jail or if any other actors are going to be implicated. But what we do know now is that the whole import quota policy is based on an unreliable production data, driven by a self-sufficiency policy that is not adding any value to cattle farmers, nor giving the consumers affordable meat.

With rising income in Indonesia, you’ve got an increasing demand but you’re limiting the supply and you expect things to be cheap? Do the math.

The BP Migas Tsunami

Some bad news and good news for the Indonesian oil and gas industry. After the unexpected ruling from the Constitutional Court (Mahkamah Konstitusi – MK) to dissolve BP Migas – the state’s regulating body for upstream oil and gas and contracts – many were left in limbo with questions regarding the status of the existing contracts and of the future of the industry as a whole. The good news is, perhaps this is could be an opportunity for governance reform in the industry. Oh and, perhaps good news for lawyers as well as their billable hours may increase.

The crux of the matter lies in Article 33 of the 1945 Constitution, in which the Court believes that with the structure of BP Migas after the 2001 oil and gas law, the state is unable to utilize its natural resouces to maximize its benefits for the welfare of the people. The Court argues that BP Migas is unconstitutional because BP Migas prevented the State from exercising directly its full authority over its oil and gas resources and with the signing of the Production Sharing Contract (PSC) the State lost its freedom to make regulations or policies contrary to the contents of the PSC.

In a way I believe the Court had a point, because BP Migas wasn’t the only regulator as contractors would still need to liaise with the Upstream Oil and Gas Directorate under the Ministry of Energy and Mineral Resources (“MEMR”). It’s cumbersome for contractors at times because you had to go to both BP Migas and MEMR anyways. Calling BP Migas as a regulating body would not be entirely correct, in my opinion. They are the executing legal entity to enter into PSCs with oil and gas contractors (and they negotiate on behalf of the government to agree on the contract’s terms).

Now, with the “tsunami” ruling that swept everybody off their feet, the government needed to act quickly to ensure that in the aftermath of the tsunami, there’s a continuity in the oil and gas industry. They issued Presidential Regulation No. 95/2012, stating that the responsibilities of BP Migas is now transferred to a temporary working unit (Upstream Oil and Gas Business Activities Implementation Unit – UPKUHM) under the direct supervision of the Minister of EMR, and all contracts will remain in effect until they expire or until such other dates may be agreed.

Thus, as Prof. Hikmahanto argued in his Kompas op-ed (do note that he was also consulted by the government during the court process), with the MK ruling, the government is actually exposed to the liabilities of the contract. He cautioned, with this arrangement in effect, the government is in hostage of potential legal problems and this beats the purpose of the “maximizing benefits for the welfare of the people” argument.

The 2001 oil and gas law is currently being revised, but with this ruling, the ideological battle is locked and the law must be revised accordingly. If I can draw on Prof. Hikmahanto’s op-ed correctly, there would be at least two options to move forward: A) nominate a state-owned enterprise to act on behalf of the government so that it can exercise its petroleum resources – i.e. Pertamina like the pre-Reformasi era; or B) a total overhaul of the oil and gas law and apply the mining licenses regime into the oil and gas industry.

Costs and benefits are a bit murky at this point of time, but we know the precedent in option A and how difficult it is in implementing option B. Pertamina isn’t exactly “clean” from corruption and that is what prompted the oil and gas law in 2001 (separation between the regulator and the operator). Meanwhile, knowing the track record of how Laws in Indonesia are legislated together with DPR, the longer the oil and gas law revision will take, the longer that the government will be exposed of the liabilities of the contracts. Not to mention whether it is truly practical to implement a licensing regime in the oil and gas industry.

Funny thing is, the group of proponents of MK’s ruling are the same proponents who proposed the 2001 oil and gas law in the first place – Islamic groups such as Muhammadiyah and Islamic political parties PAN, PKB, PPP, PK, PBB – who were dominant during Reformasi and made Abdurrahman Wahid the President (read Lin Che Wei’s analysis here).

One should be curious to understand why they would repeal what they proposed earlier – if not for dubious political motives and not for “the welfare of the people”.

All that money…for what?

I was browsing through the 2013 budgetary note from the Ministry of Finance and made this chart (sorry, too lazy to translate it into English):

Obvious thing that I wanted to point out is how wasteful we are for spending our money on mostly energy subsidies (fuel and electricity) which amounts to a total of 274.7 trillion IDR. I made an argument about why I’m against fuel subsidies previously on my other post, but this time I’m going to mention a bit about measuring impact. If Indonesian politicians and/or decision-makers finally had some sense to lift the subsidies, would they spend the money wisely into developing good programs for its citizens?

Program evaluations are not something novel for development work – since the taxpayers of the donor countries would like to scrutinize whether the aid money they’re giving goes into the right directions (or else it’s better to be spent in their own countries). And so, the eval wonks should have something similar to the “impact chain” tool to measure whether what they’re doing  is indeed helping the world to be a better place.

So let’s say you want to distribute some boats for some needy group of fishermen, you don’t only give them the boat put perhaps some capacity development to teach them how to fish better (inputs). The tangible output would be the new boats themselves, and the outcomes would be an increase of their catch when they go out to sea, which subsequently lead to an increase to their welfare (impact). Of course this is an over-simplification and the real stuff would involve baseline data, rigorous methodologies, and resources (time, money and the right brains – oh hey, maybe an MPP degree would help). But doing evaluations is indeed a worthwhile exercise because in the end you get to find out which programs deserve to stay and which ones deserve to be terminated.

Now, how often do we hear the results of the program evaluations made by the government (assuming that they are even evaluated)? Do we even know what are all the programs that the government actually oversees?

The thing is, government spending increases year by year, and it is quite a common knowledge for Indonesians that it is usually spent late in the year. Some attribute it to procurement issues, but most of the time it’s just poor planning. And they can’t make better plans if they don’t evaluate the previous programs beforehand.

Shedding some light on land acquisition in Indonesia

I am nearing the end of my public policy studies in Singapore and I am very happy with my thesis/report on land acquisition in Indonesia. I was finishing it for the past few weeks, hence the recent absence of blog posts. I should be happily blogging again after I finish one more paper on Political Islam in Indonesia.

Screenshot of my thesis cover

I gave a presentation to UKP4 on my research (since they are my client) and here’s some excerpt on what has been causing delays in land acquisition in Indonesia:

  • Information Asymmetry: Lack of information and understanding about the project, and clarity on how much land and when exactly landowners are getting compensated may cause resentment or protests which subsequently delay the whole process of acquiring land. Finding the rightful parties entitled for the compensation (not limited to those who own the legal title) also prove to be difficult. This gives room for land speculators and ill-intentioned third parties to come in as well.
  • Difficulty in Negotiating Compensation Price: Landowners would want to be compensated based on the market value of their land, but the government is reluctant to do so because it is safer to pay the compensation based on the NJOP (Nilai Jual Objek Pajak) value. This is because the previous Presidential Regulation No. 65/2006 was ambiguous in providing a legal basis for market valuation and the usage of appraisers.
  • Financing Gaps: There is often a difference between the estimated costs for acquiring land and the actual payment given to landowners. Relying in government funds to pay the difference would mean to wait for the next budget cycle and this causes another delay (not to forget that this irritates the landowners because they’re waiting to be compensated).
  • Government Asset Swaps (ruislaag): The difficulty in acquiring land/properties which belong to the central/local government is that you need to find suitable land for relocation and of similar value to “swap” it with. For the Lebak Bulus MRT depot, it is hard to find land for relocation for the Lebak Bulus sports stadium and the police housing and academy.

In the 45-page full report I explained the shortfalls of the new Land Acquisition Law (Law No. 2/2012), the details on the causes of delays as well as the recommendations to “debottleneck” the delays.

I am more than happy to share the report, but let me wait to get clearance from my school and the client beforehand.

The Middle Class Illusion

In my urban intervention class the other day, we were talking about poverty and inequality in cities. The general assumption that you have of the “middle class” is the majority of the population that lies in the middle with incomes usually defined between $2 to $10 per person per day (in PPP terms). Hence, you would imagine the bell curve.

I would guess that most people would define themselves as belonging in the middle class, but are you really?

I mean, if you have a car, a smartphone, you eat out a lot, you hang out with your friends in cafes (though not necessarily expensive), are you not living above the middle class line? The definition of the middle class is indeed tricky, and us wonks sometimes have high hopes with the “middle class” as the harbingers of change (with the assumption that they are sufficiently educated and demands better government services with the taxes they pay).

However, the “true” middle class may lie largely just above the poverty line hence they are struggling to stay above it and thus most of the middle class are ignorant and largely only care about themselves (i.e. caring about policies that will benefit them), as any self-maximizing individuals should be. I guess there are exceptions of the good Samaritans, but how many of them are really there?

Then there are those who say that they are the middle class, but in fact they live pretty much well-off compared to the rest of the population. They are in the illusion that they belong to the middle class because they still see people who are wealthier than them, while the truth is they’re pretty much upper class.

To quote Sedláček in his interview with Der Spiegel:

We are clearly not communists by nature, but we are definitely communitarians. Only a truly egomaniacal person can live happily in a society in which he is the only rich one. Man has a need for fairness and, therefore, for a fair distribution of wealth.

It’s okay to be rich, seriously. But let’s just be honest and say that you are, instead of pretending that you’re middle class and sneer about others not having the same consciousness as you are. If you do, you’re not trying to build equality but instead you’ve distanced yourself from the masses and have become the new elites that you’ve despised.

Diagram on the Fuel Subsidies Debate

Here’s my quick note on the back-and-forth debate regarding the fuel subsidies:

My fellow wonk friend Taufik wrote an article questioning those who are against the policy, whether they are only looking at the short-term welfare effects by keeping the low fuel prices. Agreeing with Taufik, the economics are clear here, scrapping fuel subsidies is the way to go. However, the political aspects remains to be tricky.

A caveat, the diagram above is a simplification of the real world situation in Indonesia. It is easy for policymakers to sit on the pedestal and argue that in the long-run we are maximizing welfare by removing the unsustainable subsidies. The truth is, the visibility of how welfare and equity are achieved really depends on where that money is being spent elsewhere, and how fast it can reach to the disadvantaged groups of society.

Therefore, those of you who are in disagreement, I would say that it is better to scrutinize the government more on Indonesia’s social welfare programs that targets better for the poor and investment on the public transport system – as the welfare effects are greater for society.

Take note, however, the government will not be winning any trust points with the citizens if they don’t prioritize correctly – such as establishing the anti-pornography task force over dealing with corruption.