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Food agency has become indispensable

Far Eastern Economic Review - July 30, 1998

John McBeth, Jakarta - Just a few months ago, Badan Urusan Logistik Nasional was the government-run monopoly everyone loved to hate. As late as April, the logistics agency for basic foodstuffs, better known as Bulog, was the prime example of all that was wrong with doing business in Suharto's Indonesia. Its elite-enriching, market-distorting ways put it atop the International Monetary Fund's hit-list of monopolies to be dismantled.

Yet today, far from being a pariah, Bulog has become a saviour – the key to feeding the half of Indonesia's 200 million people who have slipped below the poverty line. As the importer and distributor of six staple commodities that it sells at subsidized prices, Bulog is now seen as indispensable, even by the IMF. Under Indonesia's latest agreement with the Fund, signed in June, subsidies on rice, wheat, corn, soybeans, sugar and fishmeal could cost up to 15 trillion rupiah ($1 billion) in the fiscal year to April 1.

Even more startling than its newly heroic role, Bulog is signalling a desire to break away from its corrupt old ways. Its chairman, Beddu Amang, has announced plans to call open tenders for all future food purchases, a revolutionary act for an organization which has virtually never signed a contract. "Beddu is reforming himself more than a lot of other people in government," says one close acquaintance. "He's trying to get ahead of the curve before the pressure comes on him."

For the past three decades, Bulog has awarded lucrative import and distribution rights to former President Suharto's associates – in particular the Salim Group of ethnic-Chinese tycoon Liem Sioe Liong. These sweetheart deals are widely seen as having generated a flow of political and private funds for Suharto and senior bureaucrats. "Bulog has been hijacked and abused, but it can be reformed," says an official with an international agency.

But the pressure to reform has not diminished Bulog's vulnerability to abuse. Sources close to the agency claim that Bulog has been pressed by two prominent figures in President B.J. Habibie's new administration to channel rice imports through a favoured pribumi businessman. Sighs an Indonesian agricultural expert: "They have seen how Bulog was used to make money for others, so now they want to make money too." He was alluding to Bulog's previous practice of allowing import agents to negotiate a price with suppliers and then charge a commission of 10%-20%. For rice, the agents were mainly the Salim Group, although in January Suharto family members belatedly joined the rice-trade gravy train.

Beddu, who rarely gives interviews, didn't deny the political pressure he faces when he spoke to the REVIEW in mid-July. "How do you know?" he laughed as he sipped tea and snacked on rice cakes. "I'm the one who knows and I've never told anyone about that." Still, he insists that the days of Bulog's so-called "silent operations" are over. "I think everyone already knows our position, that we will tender, so I don't think they want to interfere any more," he says. "I think they will restrain themselves from doing something or asking us to do something that is no longer acceptable."

Even if Beddu can prevent Bulog from being used as a moneymaker for the politically connected, he will still have plenty to worry about. In recent months, Bulog itself has met increasing difficulty in getting financing for food imports. "We have to negotiate with the suppliers, we have to convince them our letters of credit are good and we have to ask international banks to guarantee them, which costs a lot of money," says Beddu, describing a financing process that now takes two weeks instead of five minutes.

In some cases, the agency has had to secure central-bank guarantees for letters of credit to fund food imports. In others, it has had to guarantee payment by depositing funds in an escrow account in Singapore. These delays have often meant the last-minute postponement of shipments, with suppliers rerouting Jakarta-bound vessels to other destinations even while they were loading.

While the funding difficulties have caused delays, they have not prevented Bulog from importing enough rice. Even though stocks are adequate, however, keeping prices affordable for Indonesians is proving the greatest concern.

To keep the price of rice at 2,200 rupiah (17 cents) a kilogram, or double what it was last year, Bulog has had to bear the brunt of the rupiah's 80% depreciation and annual inflation approaching 80%. If it didn't, rice would cost 4,500 rupiah a kilogram, out of reach of many poor consumers. (Most rice is home-grown and sold by private traders. To maintain the price at an affordable level, Bulog injects rice into the market if shortages appear.)

Bulog's role in ensuring supplies and stabilizing prices is now considered crucial to prevent further social unrest. Indeed, some analysts feel it was a mistake for the IMF to insist on limiting Bulog's control to rice and on scaling back subsidies for food and other essential goods at a time of economic crisis. Even IMF officials say privately that it's not the agency but its practices which were at issue. "Going after Bulog was never going to straighten out the economic situation," says a Western commerce expert. "But it did have great significance in the overall effort to remove monopolies."

However, the symbolic significance of going after Bulog was quickly overtaken by the ensuing uncertainty over food supply and prices. When the rupiah weakened dramatically against the dollar early this year, fears of rising prices led to hoarding, panic buying and rioting. Since then, the collapsing currency, widespread turmoil, a fall-off in private trade, and poor harvests due to drought have sent food prices soaring.

Of the staple foodstuffs Bulog controls, rice is the most socially sensitive commodity. So for now, Bulog is needed more than ever to sustain rice stocks in its 1,500 warehouses across the country. (In mid-July, Bulog's rice stocks stood at 2.4 million tonnes.)

To sustain stocks, the agency is having to import more rice because its domestic procurement this year is likely to hit a 20-year low of 250,000 tonnes, compared with 1.5 million-2 million tonnes during a normal year. In 1997-98, Bulog shipped in 3.5 million tonnes. In the fiscal year to April, it is expected to take delivery of another 3.1 million tonnes. More than 14 years after attaining self-sufficiency, Indonesia finds itself once again the world's largest rice importer.

In a recent study, economists Steven Tabor, H.S. Dillon and Husein Sawit calculated that Bulog will need 3.2 million tonnes to meet demand over the eight months to the start of the next main harvest in March 1999, while reserving an additional 1 million tonnes as a hedge against international shortages. Another 1.2 million tonnes will be required to supply Indonesia's 4 million civil servants with rice under a practice that dates back to the Dutch colonial era.

While economists don't quibble with government subsidies for rice and soybeans, which are widely consumed by the poor, they are critical of subsidies on sugar, wheat and fishmeal. Plans to remove these subsidies have been put on hold until next year.

Imported sugar takes up an estimated 12% of Bulog's total subsidy bill. Bulog used to sell sugar at prices well over the market rate, using some of the profits to subsidize rice. But since the rupiah's collapse, there has been a subsidy for sugar, with large beverage and food manufacturers apparently reaping the benefits. About two-thirds of imported sugar is used in confectionery and processed food, goods destined for middle-and upper-income consumers. Asked why sugar is subsidized, Bulog Chairman Beddu shrugs. The government sets the subsidy, he says, and Bulog just implements it.

The same criticism applies to subsidized poultry feed, much of it imported soybeans and fishmeal. As prices of both imports continue to soar, poultry production has plunged from 6 million to about 2 million tonnes over the past year. Officials say the subsidy is necessary to keep small chicken farmers afloat, but only the large poultry producers – some with access to hard currency – have survived the economic crunch and can benefit from the subsidy.

Wheat products have a 24% share of the subsidy bill. The Salim Group's Bogasari Flour Mills processes 85% of the 4 million tonnes of wheat Bulog imports each year. Like sugar, wheat products are mostly consumed by the wealthiest third of Indonesians.

However, there's a complication in the no-subsidy argument here. Subsidized flour goes into making instant noodles. The Salim Group's Indofood is the world's biggest producer of instant noodles, which are sold so cheaply in Indonesia that they had become the staple of many of the urban poor. But the price of instant noodles recently shot up by 50%, largely because of increased packaging and cooking-oil costs. Unable to afford the price hike, some of those poorer consumers have been shifting back to rice. If the government proceeds with its plan to phase out subsidies on flour, Indofood will be forced to raise retail prices again – and the demand for rice will increase as a result.

Bulog will probably have to brace itself for more changes when the economic crisis recedes and pressure for reform returns. Economists Tabor, Dillon and Sawit are looking for a one-to two-year phase-out of rice rations for civil servants, the elimination of Bulog's rice-import monopoly, and the restructuring of the agency itself into autonomous regional food units which would operate more like commercial enterprises. And buried in the latest accord between Indonesia and the IMF is a requirement for international-standard audits of Bulog, which will give reformers a better idea of how to proceed.

Beddu himself envisages the agency competing with the private sector during harvest seasons, while fulfilling its social mission of supplying rice at affordable prices for the rest of the year. "We're talking here about the welfare of the people," he says. "I'm not sure if free-market mechanisms will want to distribute rice to the whole country." Even its harshest critics acknowledge that keeping prices stable for low-income earners will take Bulog off the IMF's most-wanted list.

[On July 24, AFX-ASIA reported that the government will soon ban exports of subsidised commodities such as sugar and cooking oil. Industry and Trade Minister Rahardi Ramelan said "If companies are found to be exporting these subsidised commodities their actions will be categorised as smuggling". In a separate report, the news agency quoted Ramelan as saying that farmers will be permitted to sell sugar direct to the market. In the past, they had to hand their whole crop over to manufacturers, who later paid them 65% of the proceeds of the sale of the finished product - James Balowski.]