Saturday, March 3, 2012

What ‘Rising Star’ Indonesia Could Learn From the World’s Richest Country, Qatar

In the circles of top economists and international businesspeople, Indonesia today is considered one of the “stars” of the world economy. For many Indonesians, especially those in government, this international recognition has caused feelings of pride. But before we get too excited, it should be understood clearly why Indonesia has been given this status.

It is not because of what Indonesia is today. And how could it be? After 66 years of independence, Indonesia remains one of the poorest countries in the world. According to official government statistics, more than 30 million Indonesians live on or below the official poverty line of Rp 233,740 ($28) per month. And it is commonly understood that more than 100 million Indonesians live on less than $2 per day.

Indonesia is recognized because a few years of good GDP growth and low inflation have helped international circles realize what it could be, considering the size of its population, natural-resource wealth and endowment of highly fertile arable land.

However, no analyst will ever fail to mention that what Indonesia could be will only materialize if it succeeds in significantly upgrading its infrastructure. The country’s inadequate and dilapidated transportation systems, and the absence of a clean drinking-water distribution system or a wastewater collection and treatment system, make just sustaining the current economy a tremendous challenge — let alone growing it.

The Indonesian government values this tremendous infrastructure challenge at around $200 billion. Meeting it would require an overhaul of Soekarno-Hatta International Airport, an enlargement of Jakarta’s Tanjung Priok port, development of a mass transportation system for Jakarta and new roads and railways to better connect the various cities of the archipelago with each other and transportation hubs. But the fact that the government has already come clean that it is not able to finance this — it says it could possibly finance a third and that all the rest would need to come from private investors — makes it doubtful that the required improvements will materialize anytime soon.

This is unfortunate, all the more so if we consider that between 1980 and 2009, Indonesia exported on average 601,000 barrels of crude oil per day, plus 1,028 billion cubic feet of natural gas and 59,644 metric tons of coal annually.

A calculation using historic prices corrected for inflation shows that these fuel-mineral exports were worth approximately $485 billion. In other words, since 1980 Indonesia has been making on average 16.2 billion of today’s dollars every year, just in fuel-mineral exports. And this begs the question why it is that Indonesia’s infrastructure is either broken or absent.

Surprisingly enough, Qatar, the country that today is considered the “star” of the world economy because of what it is, not because of what it might one day be, started its meteoric rise only once its fuel-mineral exports reached the level of Indonesia’s average since time immemorial.

Historically, the economy of the Gulf state of Qatar was based on fishing, pearl diving and small-scale regional trade. Since the 1940s it had been exporting some oil from its Dukhan field, but only in modest amounts. Between 1970 and 2000, Indonesia’s fuel-mineral exports were on average 167 percent of Qatar’s ($16.6 billion on average versus $6.5 billion).

During the 1990s, however, Qatar began to make serious work of the exploitation of its massive North Field. Lacking the technological and managerial know-how to run large crude oil and natural gas operations, it began a cooperation with various international oil and gas companies to develop the field, offering them around a quarter of the proceeds. Because of the resulting increase in production, in 2000 the value of Qatar’s fuel-mineral exports surpassed those of Indonesia for the first time.

The state of Qatar held the majority share in overall production, which opened up a range of opportunities. The country spent the additional revenue on development of industries that could increase the value of the natural resources before export. So it expanded its refining industry to above and beyond local needs, such that more expensive finished fuel products could be exported rather than crude oil. On top of this it built a large-scale chemical industry that processes the products from the refining industry to further increase their value.

Qatar also established a large gas-to-liquids industry that turns its natural gas into high-quality finished fuel products. In these projects, too, Qatar cooperated with multinational oil and gas companies, but again demanded a majority-ownership share.

All this gave Qatar the financial ability to venture into developing other industries not directly related to crude oil and natural gas. Modern steel and aluminum smelters have been built. And currently a state-of-the art infrastructure is being developed with the aim of making Qatar the preferred destination for international manufacturing firms: a new international airport, a new deep-sea port, a railway system to connect the country’s industrial centers, a metro system for the capital, Doha, increased power generation and water management capacity, and new roads, schools, universities and hospitals.

The success of this strategy is undeniable; in 2011, Qatar became the richest country of the world on a GDP per head basis.

Of course, the day-to-day needs of a country like Qatar are much smaller than those of a massive country like Indonesia, which has left Qatar much more able to invest its natural resource income. But the case at hand is not one of looking backward, it is one of looking forward.

Indonesia needs to significantly upgrade its infrastructure, for which it says it lacks most of the money needed. The example of Qatar shows that if Indonesia organizes its natural resources industries in the right manner, it does not need to be this way.

Indonesia has simply handed over its natural resource wealth to multinational corporations, settling for minor payments from them in the form of income tax. The American oil and gas company Chevron receives 92.5 percent of the crude oil it produces in East Kalimantan, 90 percent of what it produces in the Makassar Strait, 80 percent in Rapak and Ganal and 100 percent in East Ambalat.

ExxonMobil, also from the United States, receives 100 percent of the gas produced in South Lhoksukon and North Sumatra Offshore; it will receive 76 percent of the Natuna gas field currently under development and 100 percent of the Surumana and Mandar Blocks. Fifty percent of Indonesia’s biggest production site, the Mahakam offshore field in the Makassar Strait, is owned by Total from France and 50 percent by Inpex of Japan.

If Indonesia were to emulate Qatar, it could free up billions of dollars of additional revenue for the state immediately — enough to build and establish what the government admits is needed in the years to come.

Fortunately, it is not too late for Indonesia, for even after decades of production it remains a country with massive natural resource wealth: It has the second-largest tin reserves in the world, the fifth-largest gold reserves, the sixth-largest nickel reserves and the eighth-largest copper reserves. Its crude oil, natural gas and coal reserves remain some of the biggest in the world. Unlike in most other crude- and natural gas-producing countries, around half of Indonesia’s crude oil and natural gas basins remain unexplored.

If Indonesia adopts the right vision for its natural resources, it still has an excellent chance of realizing its potential.

By Idries de Vries analyst of economic and geopolitical affairs. Jakarta Globe

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