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Jakarta Post
The Jakarta Post
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Jokowi toying with price controls: How far will he go?

  • Rendi A. Witular

    The Jakarta Post

Jakarta | Tue, August 18, 2015 | 06:36 am

While the shockwave from a government intervention into the price of cement in mid-January has yet to abate, recent signs have emerged about the penchant of President Joko '€œJokowi'€ Widodo to resort to price controls as the easiest way to nurture his popularity.  

When Jokowi ordered state-run PT Semen Indonesia, which controls a 44 percent market share, to reduce cement prices by around 5 percent, many then believed it would only be a one-time policy issued at a time when the President'€™s popularity was waning after the general he nominated to lead the National Police was declared a graft suspect.  

But the price-cut policy has apparently served as a precedent. Jokowi has churned out an ensuing series of price controls on staple foods, fuel and toll roads, to name a few.  

Jokowi ordered in mid-June to cut toll road fees by between 25 and 35 percent for 16 days during the peak traveling seasons of Idul Fitri and the school holidays in July. According to Danareksa Securities, the fee cut has translated into a decline of between 1 and 2 percent in potential revenues and a cut of between 2 and 3 percent in the EBITDA (earnings before interest, tax, depreciation and amortization) of state-run toll operator PT Jasa Marga.

 While the impact seems small for the size of the company, the policy has sent a chilling message to infrastructure investors. Toll road investors will now have to price in the risks associated with Jokowi'€™s intervention in fees despite already having operated in a challenging environment. Financial risk in the operation will undoubtedly widen as Jokowi can at any time order another fee cut as he pleases for maintaining his grounds for support.

Unlike in the toll road business where the recent impact of the fee discount is miniscule, Jokowi'€™s intervention in the price of cement has already taken a severe toll on the industry. Publicly listed Semen Indonesia saw its net profits contract 20.63 percent year-on-year in the first half of the year on weak sales, lower margins and soaring costs. Revenues also dropped 1.9 percent.

The government apparently told Pertamina to shoulder the subsidy '€” robbing Joe to pay Jill.  

The price cut policy is cited by the company to be among the causes of the poor performance, saying: '€œSales volume dropped 4 percent and prices cannot increase. In fact, prices were lowered in January.'€

Because Semen Indonesia has the biggest market share and broadest distribution network, its peers were confronted with no other options than to follow the company'€™s move and they dropped their prices accordingly. Lower profit margins have eventually squeezed the industry.

The event has also illustrated the expanded risks state companies have to confront. It may not be something surprising in the foreseeable future if Jokowi demands publicly listed state-run Bank Mandiri and Bank Rakyat Indonesia (BRI) to cut interest rates on their loans at the expense of their margins.

Publicly listed state telecommunications giant PT Telkom can at any time be instructed to cut fees at the expense of its bottom line, while publicly listed flag carrier Garuda Indonesia will risk selling tickets below market price during the busy Idul Fitri holiday to keep the public happy.  

At this current time of economic turbulence, when the people'€™s purchasing power is in freefall, price controls have become even more imminent, particularly when Jokowi lacks a grand design and concrete steps on how he can achieve his economic ambitions. Even worse, most of his prescribed solutions have hinged on nothing but shortsighted visions.

Jokowi'€™s instruction to have state energy company PT Pertamina bear a whopping loss of Rp 12.5 trillion (US$919 million) to keep the prices of fuel below market prices has served as a stark example of how this administration has used price controls at their worst to indulge private vehicle owners.  

Late last year, Jokowi announced an end to fuel subsidy allocations '€” the government'€™s biggest ever conspicuous spending that had been nurtured for more than three decades. A market mechanism was thus introduced to determine the prices of the once-subsidized Premium and diesel fuels. But the commitment turned out to be a disappointment. The government apparently told Pertamina to shoulder the subsidy '€” robbing Joe to pay Jill.  

Another example of price intervention worth noting is on food. Jokowi signed a presidential regulation on price controls for staple foods and certain commodities in mid-June.  

The policy will not only be applied during the fasting month of Ramadhan, when the nation regularly sees its highest demand for food, but also during certain times when the government deems the commodities included in the policy as being '€œtoo expensive'€. The commodities include rice, soybeans, tempeh, chili and shallots, sugar, cooking oil, wheat flour, beef, chicken, eggs, milkfish, mackerel and tuna.

Many may agree that price interventions might well be acceptable to some extent for certain types of staple commodities in order to cushion the poor from the impact of high prices or to curb inflation, but how government officials translate the policy on the ground is horrendous.

Last week, at a time when the nation was gripped with soaring beef prices caused largely by mismanagement of imports and distribution, the graft-ridden National Police launched a crackdown on feedlots in Greater Jakarta, accusing them of hoarding the commodity. In a bid to help stabilize beef prices, the police ridiculously told the companies to immediately sell the cattle that were still below minimum weight for slaughter.  

Agriculture Minister Amran Sulaiman, who was involved in the crackdowns, even told several feedlot companies to immediately unload their beef at a price far below the market or risk being shut down.

 Such measures may not only distort the market but also scare away business owners who have to bear the brunt of the government'€™s incompetency.  

Many are now waiting for Jokowi and his newly appointed coordinating ministers to display their qualities in prescribing far-sighted and comprehensive policies, instead of resorting to shortcuts to resolve every problem. What kind of perception does this administration want to forge, if what it is good at is merely taking the easiest route around?

 The author is a staff writer at The Jakarta Post.