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The new electricity law

Friday, September 11, 2009

The House of Representative recently passed the new electricity bill. The bill is perceived by the media as a real attempt to liberalize the electricity sector in Indonesia. But is it true that the law is an attempt to liberalize the sector? How does the law protect investor?

Under the new law, electricity provision are segregated into generation, transmission, distribution and retail and the private sector is allowed to participate. The question is of course, in which segment can the private sector participate and what are the incentives, rights and obligation?

I will return with the discussion later. In the mean time, you can have a look at the new law here (in Bahasa).

 

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The Social Cost of Cigarette (and its advertisement) in Indonesia

Thursday, September 10, 2009

Pramudya has been very kind in providing us a commentary on the recent Constitutional Court Decision on Cigarette Advertisement in his post. I agree with him that the negative externalities arising out of cigarette must be borne by the consumer and that -- given the explicit contribution to income -- dealing with tobacco industry in Indonesia would not be easy.

A research by Achadi et.al. quoting WHO suggests that around 10% of mortality in Indonesia annually (200,000 deaths) are caused by tobacco. 61% of other deaths are caused by non communicable diseases which may be related to active or passive cigarette consumption. Another shocking discovery quoted by Achadi's research is that more than one in two household in Indonesia has at least one smoker, and 98% of them smokes at home. What this means is that they pollute the air in their home and affects their children.

What are the health cost to children who are passive smoker? A research in the UK shows that at a worst case scenario where everybody smokes at home, the health cost per child would be 16.000 GBP per year. If broken down into the number of cigarettes (20 per day and remember that british cigarettes contained filters, non-cloved and are typically milder than Indonesian), the cost would be around 62 to 92 GBP per cigarette. What it means is that in order to offset the negative adverse effect of a cigarette to children, each will have to be priced around 62 Pounds (or at a current rate, around IDR 1.000.000,00). I think this figure still does not include the opportunity cost for getting sick.

The cost of a Dji Sam Soe cigar is around IDR 750. But that's not the true cost. It will raise health insurance premium, dental care, house insurance premium (cigarette butt is a little friend for the big fire), car insurance, cleaning costs, retirement fund and many other items I cannot list down since I am not an economist. And remember, smoking near babies may cost another 62-92 pounds per cigarette (excluding opportunity costs).

If smokers are unable to pay these costs, this will go to the state's expenditure. Which means, in the end of the day, non smokers will be paying for the true cost of every cigarette through their tax.

I don't smoke but occasionally I bring cigarettes as souvenirs. Makes me feel guilty :(
Okay, from now on, no more cigarette for souvenirs.

 

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Behavioral Monkeynomics

Tuesday, September 8, 2009

First of all, a hat tip to my Canadian friend who referred me to this article at Science Daily: "Monkeys Follow Economic Rules Of Supply And Demand".


Cécile Fruteau placed food containers with highly-desired pieces of apple in two groups of South African vervet monkeys. For the monkeys there was just one problem: only one in each group could open the food container. This monkey had a low position in the rank order and was therefore scarcely groomed. However, as soon as she acquired the power to hand out apples she was valued more and was groomed a lot by the rest of the group. Yet she could only enjoy that privilege briefly; the researchers placed a second food container that could be opened by another low-ranking female. From that moment onwards the market value of the first monkey was halved, and she was therefore groomed half as often.


Lessons for mankind:
  1. Its not how you look, but whether you have apples or not
  2. Male (monkeys) are materialistic. No gender question here
  3. Beware of your competitors!


This one is most surprising:

A change in price - grooming for less long if there is another monkey that supplies apples - is only possible if a negotiation process takes place. Many economists assume that such negotiations can only take place if they are concluded with a contract. However, the vervet monkeys do not have the possibility to conclude such binding contracts and yet they still succeed in agreeing to a change in price for a service.


We, humans, should be ashamed of this fact. Monkey market can be very efficient even without a contract. Look at how their 'informal institution' can streamline transaction cost. No need for complicated regulations, monkeys can agree to reach amicable settlement that would bring welfare to their kind. If this were human, they would have to conclude a contract which will take sleepless nights no negotiate, pay a lot of money to the lawyers, file a claim to the court, bribe the judges, and in the end of the day, no one gets the apple.

 

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Indonesia needs a strong water services law

Monday, August 31, 2009

Following is my latest op-ed at the JP:


Indonesia Needs a Strong Water Services Law

Mohamad Mova Al `Afghani , Dundee , UK | Mon, 08/31/2009 11:56 AM | Opinion

The current condition in the water and sanitation sector is bleak. Only 31 percent of the urban population and 17 percent of the total population had access to piped water. Around 80 million Indonesians lack access to sanitation, contributing to 100,000 deaths annually and economic losses of up to US$6.3 billion.

The water law that was enacted in 2004 comprehensively regulates water as a finite natural resource. However, of all the law's 100 articles, only one (Article 40) specifically regulates water and sanitation services.

Meanwhile, the implementing regulation of Article 40, Government Regulation No. 16/2005 on the Development of Drinking Water Provision Systems (PP-16) regulates water and sanitation services only generally.

There are several possible reasons for this. The first is that the government perceives water services as a local problem and as such considers municipalities to be primarily responsible for water services. The second reason is that in order to avoid the law from being invalidated by the Constitutional Court, the Water Law does not regulate services specifically, but instead broadly and vaguely.

Indeed, the water law does not contain the word "privatization" but it does suggest at Article 40 that the "..private sector, as well as the cooperatives and other members of the society" may participate in the development of water services. Of course, some investment in water supply infrastructure can be small if they occur in rural areas.

However, in cities, water projects can be worth millions of dollars and involve multinational corporations and foreign lenders. It is certainly inadequate to regulate both these operations under the same article.

It is worth noting that the governance of water as a resource is different from water services, even though they are interrelated. The governance of water resources encompasses the management of groundwater, rivers, wetlands, lakes, catchments areas, effluent discharge and how water is allocated to competing interests such as the industrial, residential, farming and hydropower sectors.

The governance of water services is different as it deals with water supply and sanitation infrastructure (sewerage), as well as the rights and responsibilities these utilities have and what roles local government plays.

The interconnection between *services' and *resources' only comes where water is abstracted from the environment by the utility and returned to the environment as waste.

Due to the complexity of the governance of water services, some countries regulate them in a specific law. In the UK and Scotland, they are regulated under the Water Industry Act, and in South Africa they are regulated under the Water Services Act. France does not have any specific water services law, however, models of private participation are regulated explicitly through multiple legislations. These legislations, backed by the court, which can act as a quasi-regulator, explicitly acknowledges the legal relation between municipalities, consumers and concessionaire holders and regulates their rights and responsibilities.

The water services law has important functions for both consumers and investors. It protects consumers from disconnection or limitation of supply (in Indonesia, disconnection is allowed by PP-16, while in the UK and South Africa it is illegal to disconnect), it establishes a consultation mechanism for tariff setting, sets out transparency requirements and regulatory accounts, sets quality standards for drinking water and details consumer rights.

In Indonesia, the laws do not define what the "minimum standard of services" is, as it is defined in a contract. In many other jurisdictions, these standards are not subjected to market mechanisms through contracts but are a matter of statutory obligation. The reason for this is because a sub-standard service is a public health issue which requires state intervention.

Note that one of the functions of the water services law is guaranteeing the property rights of the water utility. Without sufficient regulation, investors mainly depend on contracts. The political character of water services sometimes presses local governments to assume control of some rights of utility providers, such as denying tariff increases, or even striping them off their concessions when they lose popular support.

The problem in Indonesia is that the government views private participation to be desirable in the water sector, but the Constitutional Court and the civil societies are very reactive to the idea. So the parliament and the government regulate privatization discreetly in order to avoid the wrath of the court and civil society.

In effect, privatization happens without adequate statutory oversight. This has strong implications for consumers and investors. For consumers, this means that their rights to enjoy good quality, uninterrupted water supply at an affordable rate and their rights to complain and to request compensation for substandard services is not legally guaranteed, but is simply a matter of private arrangements enumerated in a contract.

For investors, this means that their investment relies only in the mercy of local government in honoring their contract. If there is a dispute between the government and an investor, the court and tribunals will be left in the dark, as there are no clear rules that regulate the settlement of disputes. Hence, without a water services law, their investment will be at risk.

 

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Why is a speed limit rule effective?

Sunday, August 23, 2009

I had a discussion with my Canadian friend a few days ago. I told him, that I grew skepticial about the role of law in society. I explained, that it is very difficult to establish causation (or strong correlation) between a particular law and behavioral changes intended by the law. Put it simply, it is hard to argue that a particular law has any meaning at all in practice.

After discussing for several minutes, my Canadian friend then uttered that Canada has recently changed its speed limit rule. After the speed limit rule was altered, he said everyone in Canada complied to the rule despite the fact that the effort to socialize the rule is very minimum. Nevertheless, the news spread rapidly and everyone complies.

My friend then went on to explain that in Canada, a driver's license means a person's life. Without a car, it is difficult to travel from one place to another, and in order to be able to drive a car, one will need a driver's license. So when your driver's license is revoked, you'll be paralyzed.

Ah, so now I understand that for Canadians, a driver's license is everything. No wonder they quickly complied to the new speed limit rule. But... what if Canada has a more developed network of train systems? What if people had more choices of transport other than private cars? What if Canada is not as big as it is today, but shrinked and compressed to the size of Madura Island? Would the people there complies to the speed limit rule the way they do today?

I think economics might give a little enlightment. If there is no other alternative of supply (no substitute) and the good is a necessity of life, then the demand is inelastic. In this case, the police can act as a monopolist, it can charge a very "high price" such as imposing rigorous and expensive test for acquiring a driver's license and lowering speed limits. Drivers would have no other option but to "buy" the goods, that is, to comply with it. Of course, at some point if the pricing gets too high, for example if the police lowers the speed limit unreasonably in highways, drivers will think twice using cars and compel themselves to innovate in other means of transports.

In Indonesia, the case is different. People here have a variety of options for transportation in addition to private cars. Public transport is abundant and cheap. So the demand may not really be that strong for a driver's license. I guess the implication would be that people's compliance to traffic rules will be less than in Canada.

Of course, the explanation above still does not take into account that there are 'illegal' supplies of driver's license. If the black market is strong, then the police's monopoly power will decrease because the goods is easily obtainable at cheaper prices. Hence, there will be less incentive to comply.





 

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Is Privatisation Irreversible?

Monday, August 17, 2009



I took this picture at the Edinburgh Train Station Yesterday (Aug 16, 2009)

 

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The rivers are our brothers

Tuesday, August 11, 2009





Here's a quote from what is believed to be a speech of the Indian Chief, Seattle. If you are familiar with property rights theories and the tragedy of the commons, this speech offers another perspective in looking at the environment.

How can you buy or sell the sky, the warmth of the land? The idea is strange to us. If we do not own the freshness of the air and sparkle of the water, how can you buy them?

Every part of this earth is sacred to my people.

Every shining pine needle, every sandy shore, every mist in the dark woods, every clearing and humming insect is holy in the memory and experience of my people. The sap which courses through the trees carries the memories of the red man.

The white man's dead forget the countryof their birth when they go to walk among the stars. Our dead never forget this beautiful earth, for it is the mother of the red man.

We are part of the earth and it is part of us.

The rocky crests, the juices in the meadows, the body heat of the pony, and man--all belong to the same family.

So, when the Great Chief in Washington sends word that he wishes to buy land, he asks much of us. The Great Chief sends word he will reserve us a place so that we can live comfortably to ourselves.

He will be our father and we will be his children. So we will consider your offer to buy our land.

But it will not be easy. For this land is sacred to us.

This shining water that moves in the streams and rivers is not just water but the blood of our ancestors.

If we sell you land, you must remember that it is sacred, and you must teach your children that it is sacred and that each ghostly reflection in the clear water of the lakes tells of events and memories in the life of my people.

The water's murmur is the voice of my father's father.

The rivers are our brothers, they quench our thirst. The rivers carry our canoes, and feed our children. If we sell you our land, you must remember, and teach your children, that the rivers are our brothers, and yours, and you must henceforth give the rivers the kindness you would give any brother.


This part criticizes the "white man":


We know that the white man does not understand our ways. One portion of land is the same to him as the next, for he is a stranger who comes in the night and takes from the land whatever he needs.

The earth is not his brother, but his enemy, and when he has conquered it, he moves on.

He leaves his father's graves behind, and he does not care.

He kidnaps the earth from his children, and he does not care.

His father's grave, and his children's birthright, are forgotten. He treats his mother, the earth, and his brother, the sky, as things to be bought, plundered, sold like sheep or bright beads.

His appetite will devour the earth and leave behind only a desert.

I do not know. Our ways are different from your ways.

The sight of your cities pains the eyes of the red man. But perhaps it is because the red man is a savage and does not understand.

There is no quiet place in the white man's cities. No place to hear the unfurling of leaves in spring, or the rustle of an insect's wings.

But perhaps it is because I am a savage and do not understand.


This part is teological prediction:

One thing we know, which the white man may one day discover, our God is the same God. You may think now that you own Him as you wish to own our land; but you cannot. He is the God of man, and His compassion is equal for the red man and the white.

This earth is precious to Him, and to harm the earth is to heap contempt on its Creator.


This one, predicts the fall of the "white man":

The whites too shall pass; perhaps sooner than all other tribes. Contaminate your bed, and you will one night suffocate in your own waste.

But in your perishing you will shine brightly, fired by the strength of God who brought you to this land and for some special purpose gave you dominion over this land and over the red man.

That destiny is a mystery to us, for we do not understand when the buffalo are all slaughtered, the wild horses are tamed, the secret corners of the forest heavy with scent of many men, and the view of the ripe hills blotted by talking wires.