Lake Maninjau, a beautiful example of Indonesian mismanagement and negligence

This is a pic taken during my biking trip last month to my parents’ hometown of Maninjau, West Sumatera. The lake, situated in an elevated mountainous terrain, is located 70km (a 3-hour drive) to the northwest of the capital city, Padang.

The view is breathtaking and this is absolutely a heavenly place for biking. The air is very clean and cool also. Temperatures could drop down to 17'c at night, and rise still to a cool 21'c in the sunlight.

Each breath feels as though your lungs are being cleansed of all the dirt and germs accumulated from Jakarta’s polluted air.

But unfortunately despite all its natural beauties, Maninjau has seen little progress over the years. I remember visiting the place in the 1980's. There were so many western tourists in the area, enjoying the lake and its surroundings.

I had come there again several times in the 1990’s and early 2000’s, and overtime I noticed a gradual decline in the number of tourists coming there.

The hotels that sprung up in the 1980s now look like ghost hotels with very few guests. Let alone jet ski rentals, it’s even hard to find a bike rental there now.

In fact I reckon if we take out the handful of new luxury houses in the area (which probably belonged to the local men and women who made successful livings in the big cities), GDP growth in the region has probably been negative.

Of course the devastating earthquake which happened there in 2009 did heavily impact the local economy. But the decline in tourism actually started way before that. I couldn’t find tourism data specific for Maninjau, but BPS data for West Sumatera does show a decline in foreign tourists staying in (non-rated) local hotels (the kinds you find in Maninjau).

According to some locals, the flux of western tourists (often wearing scantily clad bikinis) was not welcomed by the conservative village elders in the area.

Not to mention the cleanliness of the lake has also been badly preserved. Whereas 10 - 20 years ago the water was fresh and clean, now it is brownish and rather filthy. One reason was that local fishermen have been throwing in fish food that contains polluting chemicals.

It is just unfortunate that the local government didn’t do enough to stop a foreseen environmental degradation in one of the province's biggest landmark. Just what have they been busy with?

Now with the tourists all gone, life looks tough for many of the locals. Some youths can be seen extorting small change from cars passing by the area (a sight I didn’t see in the 1980s). Others I saw playing guitar in the warungs, and sometimes they shout offensive words when a non-local (like me) passes by.

Having personal ties with this place, I feel saddened to see all the tourism potential of Maninjau going to waste. But hey it’s just one of the many realities of 21st century Indonesia. Governments are expert in mismanagement and negligence. Those in office only care about one thing: recuperating money spent during their elections.



Disclaimer: The views and writings posted in this site is provided as general information only and should not be taken as investment advice. They are solely the opinions of the author and do not represent the opinions of firms affiliated with the author.

Oil prices and wishful thinking

This is a screenshot of a TV talkshow I did this week discussing oil prices. Basically my message was that there are three main channels through which rising oil prices affect the Indonesian economy: the balance of payments, the fiscal balance and inflation.

The risk on the first two are somewhat lower now compared to 2008. But what should be watched is the latter: inflation. If the discrepancy between subsidized and non-subsidized fuel prices continue to grow, we could see rampant misappropriation of subsidized fuel. This could lead to chaotic scenes of fuel supply scarcity which leaves the government with little choice but to abruptly hike prices (as in 2008).

So what the government should do now is take pre-emptive measures to prevent such worse case scenario from happening. However given a chronic leadership deficit, they are ditching plans to ration subsidized fuel and are opting for a more subtle strategy: wishful thinking (hoping the problem would go away by itself).



Disclaimer: The views and writings posted in this site is provided as general information only and should not be taken as investment advice. They are solely the opinions of the author and do not represent the opinions of firms affiliated with the author.

Jakarta traffic: Yes, we're probably doomed

The solution to Jakarta’s traffic woes is well-known; the question is: will it be implemented?

Not long ago, the National Geographic Channel made a film about Jakarta in its Megacities episode. It highlighted the growing challenges facing the city (namely traffic, floods & population growth) and what the authorities are actually doing about them.

The film showed some of the successes in combating floods (with the operation of the Eastern Flood Canal) and also presented many forward-looking views on improvements planned for the city.

For a moment there it had me. After watching the film, I became a bit more optimistic about Jakarta's future as a place to work and live in.

Unfortunately that optimism quickly died-down upon my commute to work in the following days.

Recently state owned rail company PTKA announced to its customers that the speed of the trains is being deliberately slowed-down for safety reasons; i.e. to reduce the occurrence of accidents.

The result is of course chaos: train schedule delays have become unbearable. And for me, taking the train to work now could mean arriving 40 minutes late at the office, everyday.

Adding cream to the coffee, on December 14 they announced the cancellation of over 40 commuter train schedules due to “maintenance”, resulting in more hardship for commuters.

Honestly, seeing all this waters down what’s left of my hope on the city’s future. The commuter rail should be the answer to the city’s traffic problems, but in reality it’s been getting far less attention that it deserves.

When a dentist says the solution for your toothache is to just stop eating, that likely means he or she has no clue what to do.

Slowing down trains in the hope of reducing accidents very much corresponds to this analogy. It shows that rail officials are helpless—up to the point of ignoring the basic notion of progress (which is getting from A to B faster, not slower).

Of course the above example only shows a small part of the city’s (and nation’s) broader infrastructure and transportation problem, which stems from a mix of mismanagement, corruption and most importantly a lack of political will by those in charge.

Speaking of which, the latter is leading us to a very dangerous leadership deficit. The norm is to shelve unpopular policies for as long as possible, if not avoid them altogether.

For example, planned train tariff hikes have been cancelled numerous times due to popularity concerns. This obviously deprived us of the resources needed for rail development and problem fixing.

Furthermore the reform of transportation fuel subsidies (which have been causing a serious misallocation of resources) also remains a controversy that has dragged on for years.

Even up to now, we have yet to see concrete action being taken on the subsidies (apart from recent political show meetings and the all too familiar formation of taskforces), although it’s pretty clear that they contribute greatly to excessive use of private vehicles thus traffic gridlocks in the capital.

It is very ironic indeed. The train company is reportedly struggling to come up with 9 trillion rupiahs for making 400km of new rail-lines in Java. But actually that amount is ridiculously small: it’s not even 2% of the money spent on fuel subsidies since 2005.

So it’s no wonder the statistics show passenger train travel miles only growing by a snail-pace 4% per year (in 2004 – 2008), while registered passenger cars and motorcycles grew by a staggering 17 percent per year.

Politicians always portray Jakarta’s traffic woes as a massive and very complex problem. But actually the solution is far simpler than rocket science: limit the use of private cars and build a reliable public transport system (which every other major city in the world has done).

The real problem is that no one is there to make unpopular decisions, so that the mess is only left to grow bigger, bigger and bigger.

If this continues, then we better brace ourselves. Because total gridlock is probably coming.

Disclaimer: The views and writings posted in this site is provided as general information only and should not be taken as investment advice. They are solely the opinions of the author and do not represent the opinions of firms affiliated with the author.

Saigon and my AK-47 experience

Last weekend I went on a trip to Vietnam and tried out shooting this AK-47 in the jungle near Ho Chi Minh City.

This was a very exciting experience; mainly because I was aware that the AK is a legendary weapon. This machine gun has transformed the history of many countries; put up & toppled many dictators and has been used in countless revolutions and atrocities throughout the world.

So my hands were shaking with excitement (and respect) the minute I held that gun. The shots were surprisingly loud even though I was wearing ear-protection. But after 2 rounds, I asked the instructor to put it on auto and then fired away a whole clip. Must I say that was probably one of the most exciting 10 seconds of my life.

My trip to Vietnam was also full of other surprises. I didn't expect to see Ho Chi Minh city being cleaner, neater and more pedestrian friendly than Jakarta.

Many luxury cars and 2-door coupes wandered around which kinda reminds you of Singapore. Old cars were very hard to find; perhaps this had something to do with fact that gasoline there was sold at an equivalent of around Rp8,000/liter, which is double Indonesia prices.

Many people say Saigon is "Jakarta in the 1980's". I disagree. Although it has fewer high-rise buildings, it seems much better organized.

Vietnam has a GDP per capita of around $3000 ppp dollars, lower than Indonesia at $4000. However the vibe there feels very different... everybody seems to be busy doing something; whereas in Jakarta u can't help but see many young people hanging around on the street, wasting time doing nothing.

This dichotomy shows up in the statistics; Vietnam's GDP growth can easily exceed 7%; whereas here we only get 6% in the luckiest of years.

Interestingly all the progress in Vietnam is happening despite it still being a communist country. This makes me wonder whether democracy is really a gift or a curse for Indonesia.

Yesterday I returned to Jakarta, and today it's back to the sadness of seeing many stalled reforms. Sadly with Indonesia facing a status quo and acute leadership deficit, it could be a matter of time before the tables turn and the country becomes "Vietnam thirty years ago."



Disclaimer: Any views and writings posted in this site is provided as general information only and should not be taken as investment advice. They are solely the opinions of the author and do not represent the opinions of firms affiliated with the author.

Blame it on the rain-doctor?

In Indonesia, rain-doctors have managed to stand the test of time--partly due to a serious mispricing in their pay-system.

Recently an important and expensive outdoor event I attended was ruined by the rain. The band, food and drinks already paid for, all went to waste as water poured down relentlessly.

It was clearly the organizer's fault. After all, rain had come down every afternoon in the three days prior to the event. And weather forecasts on the internet clearly said it was going to rain that day. But the show went on anyway without adequate precautions, and a lot of money went down the drain.

What surprised me was that most of the people I spoke to were very permissive of the screw-up. One of my friends didn't blame the organizer, but pointed the finger at the pawang-hujan/dukun or rain-doctor. She said the doctor wasn’t powerful enough.

At first I thought she was joking, thus I asked her if she really thought rain-doctors are still relevant in this 21st century. Surprisingly she defended the myth with vigor, as if defending a religion.

Okay, of course people are free to choose whatever they do or do not believe. And I respect that. But personally, I think that as modern day individuals, we should never believe in something without at least questioning it and trying to explain it with simple logic.

So I put on a provocative status update on facebook, and gathered dozens of responses from my friends about this rain doctor myth. Unsurprisingly, many were from die-hard believers.

My question was simple: If rain-doctors really exist, how come Indonesia still has droughts in poor harvests many regions? Why has the government been wasting money building irrigation systems knowing it could simply hire rain-doctors to do the job?

One friend of mine answered that there's a limitation to how far rain-doctors can make the clouds travel.

But that didn't make sense to me. Rain-doctors supposedly have powers to command ghosts/spirits that aren't constrained by the laws of nature. Here one believes in rain-doctors, yet say that the ghosts can get tired from walking too much just like us humans? Frankly, to me that just doesn't add up.

Another friend of mine told me about a 3-hour rule: rain-doctors are only able to delay the rain for 3-hours. So ghosts not only have distance constraints, but also working-hour constraints. Maybe ghosts don't like to work overtime... which also doesn't make sense.

I said in my opinion, the only reason there’s a 3-hour rule is probably because most outdoor events last 2-3 hours. If the dukuns had set a 24-hour rule, the probability of rain occurring within such a longer time frame is substantially higher. They would hence risk their reputation and people may stop believing in the myth if too many failures occur.

Meanwhile if they had set a half-hour rule, event organizers would see little use in hiring rain-doctors given that most events last 2 - 3 hours. The pawangs would then be out of the job, and the myth would disappear.

Another friend said: If rain-doctors were a hoax, how come they’ve managed to remain part of our culture for hundreds of years?

Well in my opinion this is due to at least two reasons. Firstly, hiring dukuns have become a tradition and this strengthens the demand side for rain-doctors. Secondly, there isn't a proper reward-punishment scheme for rain-doctors and this strengthens the supply side.

Indonesian culture is full of mysticism (just turn on the TV and you'll see). In case an event is messed up by rain, society blames the event organizer (EO) for not hiring a rain-doctor, not for failing to google the weather forecast and take necessary precautions.

Like the EO whose gig got ruined by the rain, his friends and employer would have directly blamed him had he not hired a dukun. So for an EO it's always nice to have a rain-doctor by his side, to make as a scapegoat in case it rains.

Meanwhile on the supply side, there will always be plenty of rain-doctors for hire. Anyone can be a rain-doctor as long as he can convince enough people that he possesses heavenly powers.

Why’s that? Because the remuneration system for rain-doctors is faulty. If it doesn’t rain, the rain-doctor gets paid in full; and if it does rain the rain-doctor gets paid little. So like a coin toss: heads I win, tails you lose! Who wouldn’t want a pay-scheme like that?

In my opinion, a rain-doctor’s pay scheme should be like a futures contract. If it doesn’t rain the doctor gets Rp2 million, but if it does rain he has to pay an equivocal penalty.

Better yet, it should be like purchasing an insurance or CDS contract. The EO pays the doctor Rp2 million, but if it rains the doctor pays a Rp100 million penalty to compensate damages! More likely than not, if such proper pay-schemes applied, the number of people who dare to take up the doctor's job would diminish fast, and the myth would be history in less than a month.

Again, people are free to choose what to and what not to believe. I’m not asking anyone to change their beliefs. Maybe someone out there has clever counter-arguments to all the points I’ve raised here... and that’s fine. May aim in writing this article is to make sure that if we do believe, we have a strong reason to do so.


Disclaimer: The views and writings posted in this site is provided as general information only and should not be taken as investment advice. They are solely the opinions of the author and do not represent the opinions of firms affiliated with the author.

The truth about unit-linked insurance products

My wife and I was recently offered a number of unit-linked insurance products; i.e. products that combine savings with insurance. They go like this: If I die before a certain age, my family will get a lump-sum of money; but if I survive past that age, I'll be able to recollect my premiums which have grown in size (as if I had been saving for all that time).

The key question that popped into my mind was: should i buy this or invest by myself in the stock market instead? I did some analysis and came up with several conclusions. So I thought they would be worth sharing.

The first thing my broker gave me was a spreadsheet indicating the expected amount of cash pay-offs for the next 30-years or so. This is where my first objection starts: The expected cash benefits given in the "illustration" from the brokers appear too optimistic. It assumes a very high return on investment (e.g. 70%, 50%, etc.) in the first five years of participation.

In my view, even if the insurance company invests all its funds in the stock market (and they don't), the average return on investment should be around 12 - 15% per year i.e. the rate of nominal GDP growth. Projecting exorbitant returns consecutively, with no reversals in subsequent years, is unwise if not fraudulent. So be sure to discount the cash pay-offs that's illustrated by the broker. You're likely to get far less than the number they're tantalizing you with.

The second thing you need to know about unit linked products is that they beat investing on your own only if you die young! By my calculation, the insurance product i was offered paid-off better than investing on my own if I were to die at age 48 (I'm now 30). If I were to die at a later age (the life expectancy of Jakartans is I think around 65), the insurance product would have made me worse off than investing by myself.

I know we have no way to ascertain our time of death; but if you think you're not at high risk of dying young, do consider investing on your own in the stock market or mutual funds instead.

Thirdly, don't overlook the "real value" of the pay-offs that they're giving you. My insurance broker boasted of me getting Rp 2.1 billion of rupiahs at retirement age; but what will that amount be able to get me?

When you deflate that figure with inflation, billions suddenly don't look that attractive anymore. For example if inflation averages 7% per annum, Rp2.1 billion in 2033 would be equivalent to only Rp360 million today. That is roughly the price of an entry-level Honda Accord. And that's the optimistic scenario. If Indonesia experiences another crisis and inflation averages 9% (which I think is very possible), the figure goes down to Rp220 million... which is not even enough to buy a Ford Focus or Mazda3!

Many brokers aren't forthcoming about this inflation aspect. There are probably many ordinary people out there (non-economists) that dream of being able to buy a mansion with the billions they supposedly will receive at retirement age. They've been duped big time. And they'll find out the hard way that a billion rupiahs in 2033 will only go as far as a Toyota Avanza!

So with no disrespect for the many honest and hard-working insurance brokers out there, do give thorough consideration before purchasing your unit-linked insurance product. Not everyone needs it; i.e. it may or may not be right for you.

A return to the stone-age?

Those who think fuel subsidies should be maintained at all costs should prepare to return to the stone-age.

With the parliamentary inquiry on fuel prices forthcoming, many are still debating whether the government really should have raised fuel prices back in May.

A member of parliament was recently quoted as saying: “Di Rusia harga BBM setara dengan Rp9.000-an tetapi pendapatan per kapita warganya rata-rata sudah mencapai 9.000 dolar AS, demikian pula Azarbaijan harga BBM di sana setara dengan Rp9.000-an dengan pendapatan penduduk sekitar 4.000 dolar AS. Lha kita rata-rata perkapita masih dalam kisaran 2.000 dolar AS,” (Taken from Pos Kota, 29 Juni 2008).

That argument is totally rubbish. Keep it simple: what makes fossil fuel any different than a car or an LCD TV? I own a Honda because I can’t afford a BMW. I don’t go to the government asking for subsidies to buy BMWs. The same logic goes for fossil fuel which now has become a luxury commodity: If the majority of Indonesians can no longer afford to use fossil fuel for cooking, then they should switch to burning charcoal!

Last week’s crash of an Indonesian military plane serves as a reminder of how impotent governments can be when they cut down on spending to allow for burgeoning fuel subsidies. Which brings us back to the question: Can the government allow fuel subsidies to grow indefinitely if they wanted to? Let’s take a look.

Based on the 2008 APBN-P, Finance Minister Sri Mulyani has Rp990 trillion to disburse this year. Say that she abides to parliament and says “I will maintain fuel prices at all costs!” But to appease bond investors and prevent capital outflow, she puts a cap on the budget deficit. This means she has to cut down on discretionary spending whenever fuel subsidies swell along with rising oil prices. How far can she go?

Well, to maintain the existence of the government itself, there are several expenditures that she can’t cut down:

- Civil Servant Salaries: Rp130tn.

- Interest Payments: Rp95tn (cut this and you’ll end up with a whole new mess).

- Transfer to regional governments: Rp292tn (cut this and provinces will start to rebel).

All that spending sums up to around Rp515tn. This means the minister has around Rp475tn left to slash if oil prices keep rising. Quite a lot, eh? Not really… some Rp125tn is already set to be used for fuel subsidies and Rp60tn for electricity subsidies, so this means she actually has only Rp290tn to spare. How long will this last? For the sake of simplicity and being conservative, we assume that every dollar per barrel rise in oil prices would worsen the deficit by around Rp1tn. So what would happen if Indonesian crude prices reach $150/barrel (WTI = $160/barrel)?

Make way for cutting down some Rp55tn or roughly 20% of available discretionary spending. What should go? Say we cut defense and security spending again in half and save Rp15tn. Prepare for more army planes falling out of the sky and violent demonstrations to be left without guard.

Violent students and professional demonstrators can proceed freely on their rampage of destruction… as the police have no budget to dispatch officers. Across the seas, the police and navy would also have no money for patrols. Pirates will roam freely in the Malaka straits, creating a Somalia-like heaven for hijackings. But don’t worry, we still have Malaysia to come to the rescue… but maybe at the expense of letting go another Island .

Wait, we still need Rp40tn more. Let’s cut education and health spending by one quarter, we’ll save a good Rp20tn. Public schools will start charging higher tuition, drop-outs will increase and enrollments will decline. But that shouldn’t matter much, children will be dying anyway as the Posyandus close and there are no more cheap vaccines available. Prepare to see increased prevalence of medieval era diseases such as polio, tuberculosis, malaria and many other nasty stuff.

We’re still Rp20tn short. Let’s tell the department of public works to cut down their budget by as much. No more construction and maintenance for roads and irrigations. National roads will be in dire straits, so the time needed to carry logistics between provinces will double as trucks get rammed into potholes. Supplies to remote markets will be disrupted and inflation will blow sky high. Meanwhile lack of maintenance on irrigation would lead to more frequent crop failures, precipitating a surge in food prices and widespread hunger.

If you think all that isn’t bad enough, try: ICP = $200/barrel (WTI =$210/barrel).

All this probably won’t happen in 2008 because we’re already half way through the year. But it could easily happen next year if the status quo on fuel prices remains. The higher oil prices surge, the farther we’re thrown back to the stone age. Therefore, subsidized fuel prices must be allowed to float.

Our respected members of parliament should realize this and stop exploiting the fuel price hike issue for self-righteous political gains. Both the technocrats and politicians are dancing on thin ice. Sooner or later they will have to draw the line, and that line should’ve been drawn long ago.