Jakarta is served by the Soekarno-Hatta International Airport. Since 2004, Jakarta, under the governance of Sutiyoso, has developed its new transportation system, which is known as "TransJakarta" or "Busway" and in 2007, Jakarta will establish its newest transportation system, the Jakarta Monorail. Jakarta also is the location of the Jakarta Stock Exchange and the National Monument.

Jumpstart For Jakarta   by Carl Delfeld

Pie Cutters and Pie Bakers

There are two types of political leaders: pie cutters and pie bakers. Pie cutters attain and maintain power by slicing the economic pie to placate opponents and reward friends. Pie bakers focus on making the economic pie larger so that the whole country moves forward.

Indonesia's President Yudhoyono, a combination of General, intellectual and bureaucrat, has been a little of both during his first 11 months in office. But with the economic crisis caused by a weakening rupiah, a stock market swoon, and budget busting petro subsidies, he needs to quickly plant himself in the pie baking category.

The Oven is Ready

Many would categorize Indonesia as a relatively poor country but I beg to differ. I have toured Indonesia from tip to tip and it is a country with many assets and great promise. Rich in natural resources, a talented and young population, strategically positioned to benefit from Asian growth, a size three times the that of Texas and the world's fourth largest population. As a relatively young democracy and developing economy it lacks an important ingredient for economic growth: capital and a fiscal system to allocate it wisely.

Let's focus on just one important Indonesia asset that could dramatically jumpstart its economy and stock market while unleashing resources for badly needed education health and infrastructure. This asset is oil and natural gas. There has been much in the press about the staggering burden of the fuel subsidies: $7 billion in 2004 and about $14 billion expected by 2005. A bargain must be struck quickly: sharply reduce the fuel subsidies and in turn, increase spending on education and health projects such as urgent polio immunization programs.

Light the Fire

But perhaps a more important issue than the fuel subsidies is that Indonesian energy production is far below its potential.

The way that oil production has been handled over the past few years is worse than a blunder and is close to a crime. Indonesia has 10 billion barrels of proven and potential oil reserves and 180 trillion cubic feet of proven and potential reserves. Nevertheless, Indonesia, Asia's only member of OPEC, became a net importer of oil in 2004.

Signs that the Ignition is Broken

This production shortfall is primarily due to insufficient investment and delays in awarding exploration and production contracts. Let's look at one example, Exxon Mobil's Cepu block project. Exxon Mobil has operated in Indonesia for a century and invested $17 billion in the country, agreed to explore the dormant Cepu area years ago and by using advanced technology, found proven oil reserves of 600 million barrels and 1.7 trillion cubic feet of gas. Prepared to invest $3 billion to develop the project, it has been waiting for two years to move forward as Indonesia's state-owned energy company Pertamania has been haggling over issues such as the government's insistence on a $400 million up front signing bonus. That's right, it wants $400 million from Exxon Mobil before it risks $3 billion of shareholder capital to develop the Cepu block. Meanwhile, Indonesia's oil production levels have fallen to less than 900,000 barrels a day!

At peak production, Cepu would provide the GOI about $2 million per day in revenues, add 180,000 barrels a day in daily production and eliminate gas shortages in East Java. There are other projects that could be moved forward and in total could lead to baking an economic pie that could help lift all of the Indonesian people. Moving ahead with these projects would jumpstart the economy and bolster the confidence of foreign investors and capital markets. This is certainly a better option than sharply raising interest rates that choke economic growth and makes badly needed capital even more expensive.

The Fire is About to be Set

Our intelligence indicates that due to financial pressures on the Indonesian Government, a 30- year production sharing agreement will be signed this week. This will be a big step forward in solving Indonesia's energy shortfall and reassure international investors of the government's commitment to market reform. I believe the markets will respond favorably to this news and we suggest the closed-end Indonesian Fund (IF) as the best vehicle to invest in Indonesia. It is managed by Credit Suisse Asset Management and has come down from a March 2005 price of $6.99 and a premium of 8% to net asset value a current price of $5.76 and a discount of 2% to net asset value. The Indonesia stock market was up 47% in 2004 and is now trading at about 11 times earnings which is in line with the MSCI Emerging Markets Index.

Stoking the Fire for Bigger Pies and Future Abundance

Indonesia has taken the brave step of opening its financial services sector to majority investment by international investors; let's also open up other areas such as infrastructure and power. The most important reform to make Indonesia more attractive to international capital is to set up a transparent and clear approval process to cut out red tape and corruption. Then reinvigorate a previously announced plan to privatize some of Indonesia's 145 largest state-owned companies to increase their profitability and raise more government revenue. Finally, why not follow ten other countries by putting in place a flat tax to rein in bureaucracy, stymie corruption and stimulate growth and productivity.

Cutting fuel subsidies, addressing pressing social needs, increasing oil production and privatizing state-owned companies will put Indonesia back on the track of prosperity and progress.

About the Author

Carl Delfeld is head of the global advisory firm Chartwell Partners. He served on the Executive Board of Directors of the Asian Development Bank in Manila and is the author of The New Global Investor. For more information go to http://www.chartwelladvisor.com