Alaksir Jakarta blog

The government just announced yesterday they will increase cigarette excise tax by about 15% starting next year. Interesting thing I’ve been noticing about anti-smoking activists’ stance with regard to cigarette taxation:

Cigarette tax in Indonesia is among the lowest in the world, making it easy for the poor and the young to smoke

And taxing it up to the roof will force smokers to quit and make them as well as everybody else healthier, this line of reasoning goes. And yet,…

Cigarette smoking is addictive because nicotine is an addictive substance

But if smoking is so addictive, how does increasing cigarette price make smokers quit rather than turn them into thieves? After all, I don’t think I have heard of a drug addict quitting for financial reasons. Perhaps nicotine is simply not as addicting as it is cranked up to be, since smokers appear to be reasonably responsive to economic (dis-)incentives like consumers of most other products.

Here are some of the usual points that anti-smoking activists have frequently brought up in relation to smoking and cigarette tax:

• Smoking is an addiction that somebody takes up, basically, without their consent
• Government should increase cigarette tax to the max to get smokers to quit

The two just don’t add up to me. And another crucial point they continue to bring up, as this article points out is…

• Most smokers are poor

So if I am getting this right, they actually want the poor to pay disproportionately higher tax? Isn’t that what regressive taxation is all about?

Honestly though, it is not true that cigarette is too cheap in Indonesia, at least not to most Indonesians. Anti-smokers will say the tax rates here, at 37.5-55% of the price of a pack of cigarettes are too cheap in comparison to those in other countries. However, the rates don’t actually say much about how affordable actual cigarettes are to the locals.

There might be several ways to identify the affordability of cigarette, but obviously not by simply measuring how much of its price goes to the state coffers. One would be by measuring how much labor is required to buy it, which this paper tries to do (see page 5). Here’s a reproduction of data for selected countries, including Indonesia, from the paper:

From this perspective, cigarette is actually about one and a half times as expensive to the average Indonesians than it is to the average Briton, two times relative to the average Thai and three times as compared to the average Australian.

Another way would be to identify the cost of cigarettes relative to per capita income, which is described in this paper. Again, from this perspective, the price of cigarette in Indonesia is not among the lowest in the world, as it takes up a greater share of most people’s income here than in higher income countries.

Anyway, to answer the question posed by this post’s title, I guess it depends on how effective it is to actually reduce smoking by increasing cigarette price. But as far as taxation goes, I’m finding it hard to agree with imposing any tax that puts a disproportionate burden on the poor.

Central Kalimantan Governor, Agustin Teras Narang, said that the planned development of the railway track in the province will commence in May this year.  The track, which is to be the first railway track in Kalimantan, will facilitate coal transportation from the northern part of the province directly to the seaport.

According to the Governor, Japanese company Itochu Corp. will be investing Rp7.6 trillion (about US$710 million) to finance the project.  The company will be granted the right to operate the track for a period of 30 years after the project is completed.

The first phase of the project consists of a 185 km track originating from Murung Raya Regency to the South Barito Regency.  And the second phase, which is expected to be completed in 2012, will pass the provincial capital Palangkaraya and connect the track to the seaport, spanning a length of about 700 km.  Upon completion, the entire track is expected to support an annual transport capacity of about 20 million metric tons of coal.

Previously, South Korean companies Posco Co. Ltd. and Canatect Co. Ltd., which had planned to invest on the same project to connect the track on the East Kalimantan side, stated that they were postponing the investment, citing the global financial crisis and declining coal prices as the reason for the postponement.  The original plan was for the East Kalimantan project to begin in November last year before the construction for the Central Kalimantan track kicks off this year.

Governor Narang also said that the construction of the Trans Kalimantan road project that connects West, Central, South and East Kalimantan is set to be completed by September this year.  The 2,900 km road project costs Rp4 trillion (about US$360 million), which is financed jointly by the governments of the four provinces.

Central Kalimantan is one of the major coal producing regions in Indonesia with proven reserves of about 4 billion tons of mostly metallurgical coal.

President Susilo Bambang Yudhoyono presided over a ceremony that marked the much awaited opening of the free trade zone within Batam, Bintan and Karimun islands on Monday.

Batam island, part of the Riau Islands Province, was designated as a bonded zone by a Presidential Decree of 1992, but its legal status as a full-fledged free trade zone was only recently formalized in 2007, and later government regulations that validated its implementation.

The area’s economically strategic location at the gateway through the Malay Straits had been acknowledged since the early 1970s, but poorly coordinated development efforts and power struggles with within the government over the control of the area hampered its true potential as the nation’s growth center.

With an average of 30% in annual growth of new investments, Batam today serves as a major logistics and manufacturing base for prominent global industrialists including McDermott International, AT&T, Bechtel, PerkinElmer, Seagate Technology, Babcock & Wilcox, Matsushita, Hitachi, Sanyo, Nippon Steel, Hyundai, Sony and Philips.  Hosting about 1.5 million visitors each year, it is also the second most popular international tourist destination in Indonesia after Bali.

Batam shipyard at Batam City.

Indonesian flagship airliner Garuda Indonesia Airways will delay holding an IPO it originally scheduled for Q3 this year.  The company’s CEO Emirsyah Satar cited unfavorable market conditions as the reason for the delay.

Garuda originally planned to use the initial offering to raise funds to settle its debts amounting to about Rp5 trillion and to finance its purchase of new fleets.

Fifty new Boeing 737 NGs are planned to arrive at company hangars this year and ten new Boeing 777-300Rs next year, which Satar said will not be delayed as the company has another financing strategy.

Boeing 737 NG (photo boeing.com)	Boeing 777-300R (photo boeing.com)

Satar added that Garuda estimates a 24% growth over 10 million last year due to the addition of 18 new routes served by the carrier.

PT Telkom Tbk. this year will be focusing on optimizing its Flexi CDMA network throughout Indonesia, according to company spokesperson I Nyoman G. Wiryanatha.  According to him, the CDMA network provider has already achieved 95-98% call success rate, thanks to its ambitious expansion over the last few years.

Wiryanatha added that the company’s network optimization project will begin from East Java, as the province contributes significantly to the company’s national revenue structure.  Telkom Flexi currently has a subscriber base of over 4.3 million in East Java, making it the third biggest cellular provider in the province.

According to the Bank Indonesia Governor, there is no reason for the Indonesian central bank to intentionally delay divesting from its subsidiaries as mandated by Law No. 3 of 2004 on Bank Indonesia.  The transitional period within which the central bank is required to divest from its subsidiaries stipulated in the Law will expire this year.

He said, “We are going to speed things up.  We are not trying to delay this thing deliberately.  In fact, the sooner the better.”

According to Boediono, the central bank and government authorities are currently working to determine the best procedures to carry out the divestment process.  He promised that the divestment will take place this year.

As of end of 2007, Bank Indonesia owned 55% of PT Jaminan Kredit Indonesia, a government-owned credit underwriter focusing on small businesses and cooperatives.  Their ownership was further diluted to 22% following the government’s initiative to inject Rp1 trillion to the company to expand credit to small businesses.  The central bank also owns 82.22% of PT Bahana Pembinaan Usaha Indonesia, a government-owned financing company also focusing on small businesses and cooperatives.  In addition, it also partly owns the Indover Bank, which was recently declared bankrupt by a Dutch court decision due to lackluster performance amid a growing crisis.

Property insurance and reinsurance are starting to tighten up policy sales as the threat of widespread flood reemerges.  Reinsurance companies have begun reining in treaty (policy) limits and increasing deductibles, while insurance companies scale back from underwriting new policies, according to a spokesperson of the Indonesian General Insurers Association (AAUI), Julian Noor.

Noor fears that insurers would eventually stop covering flood risks.  He said there are three things that exacerbate flood in Jakarta: coastal flood tide, actual degree of precipitation in Jakarta, and that in areas surrounding the city.  Given these three factors, widespread flood throughout the city will almost be certain.

Insurance and reinsurance companies suffered approximately Rp4 trillion in losses due to the major flood in Jakarta in 2007.

New investors are still willing to set their foot here in the land of floods and earthquakes.  December last year saw 12 new investors–six of whom Indonesian and the other six foreign–entering into an agreement to invest at the Jakarta Nusantara Bonded Zone (KBN).  The KBN is a government owned company that runs manufacturing bonded zones at Cakung, Marunda and Tanjungpriok, all in North Jakarta.

The new investments are worth US$14.8 million in total, and will create an estimated 7 thousand new manufacturing and logistics jobs.  One of the new investors is a garment manufacturer under the South Korean chaebol, Hansol, which will be investing in a new 5,500 hectare manufacturing facility here, after divesting from its Guatemalan operation.

According to Operations Director at KBN, Eddy Ihut, only three companies operating within the KBN zones have had to lay off their employees since the current crisis began, which is a pretty impressive performance these days.

A total of 155 companies operate within the KBN; 120 of which are export-oriented manufacturers and 35 provide logistical services.  Most of the products manufactured here are exported primarily to other Asian countries.

Bank Indonesia economist Wiwiek Sistowidayat said that about US$500 million of foreign money has entered Indonesia through the stock market during the last few weeks.  Sistowidayat added that an additional US$5 million made its way to the economy to purchase the government’s sovereign bonds.

Several weeks ago, Bank Indonesia Governor Budiono predicted that foreign funds will return to the market as investors decide to buy up undervalued stocks that offer good returns.

Government electricity company PT Perusahaan Listrik Negara (PLN) is issuing Rp1 trillion (US$85 million) bonds and Rp500 billion (US$42 million) Islamic bonds or sukuk from today until 16 December.  Following this offer, the bonds will be listed in the Indonesia Stock Exchange on 12 January next year.

The company plans to use the cash raised to construct electricity generators and transmission facilities to meet its 10,000 MW electricity supply target by 2010.  Underwriting the bonds will be PT Danareksa Sekuritas, PT Trimegah Securities and PT Indo Premier Securities.