July 1st, 2014:

http://www.insideindonesia.org/challenging-times-for-big-tobacco

Andrew Rosser

Billboard from Mataram- author’s own

Indonesia’s major tobacco companies—Sampoerna, Gudang Garam, Djarum and Bentoel—face challenging times as new policies on tobacco control come into effect this year. Under the New Order, the Indonesian government did very little to control the production, marketing, sale and use of tobacco. As a result, these companies have for decades rated among the country’s largest and most profitable. But during the era of democratic reform, Indonesia’s tobacco control lobby—the most prominent members of which are the National Commission for Tobacco Control, the Indonesian Consumers Association, the Jakarta Citizens’ Forum, the Indonesian Heart Foundation, and the Indonesian Cancer Foundation—has grown stronger. It has sought to bring Indonesia in line with international standards when it comes to regulating tobacco. The industry now knows that it has a fight on its hands. Consequently, companies are engaging significant financial and political resources in order to prevent further regulatory restrictions that might compromise their bottom line.

New controls on big tobacco

In early May, Sampoerna announced that its net revenue growth had fallen sharply over the previous year due to declining sales of hand-rolled cigarettes. In a press statement, company President Paul Janelle said that he remained ‘optimistic’ about the future, noting that profit growth was strong. But he also said that 2014 would be ‘full of challenges’ because of greater competition and the implementation of new tobacco control policies. A few days later, the company announced that it would shut two hand-rolled cigarette plants in East Java and lay off almost 5000 workers. Sampoerna’s difficulties may be nothing more than a blip caused by changing consumer preferences away from hand-rolled to machine-produced cigarettes. However, Janelle’s reference to regulatory changes indicates that other factors are working against it as well.

In late May, media outlet Tempo.co reported comments by a stock market analyst that investors were ‘becoming reluctant to bet their money on tobacco stocks’ because tougher tobacco control measures were ‘expected to hamper the growth of the tobacco industry’. If this is the case, it suggests that big tobacco is in for a more challenging time, not just in terms of selling its products, but also raising capital to finance its operations.

Since the fall of the New Order, consecutive governments have continued to encourage tobacco production. At the same time, however, they have gradually tightened restrictions on the marketing, sales and use of tobacco products as calls have grown for stronger measures to address the country’s tobacco epidemic. According to the most recent figures, in Indonesia 67 per cent of men and four per cent of women use tobacco, with devastating effects for the nation’s health and productivity.

Among the main policy changes have been a ban on cigarette advertising in the electronic media (except between the hours of 9.30pm and 5.00am); the identification of tobacco as an addictive substance in the 2009 Health Law; the establishment of ‘smoke free areas’; requirements for tobacco companies to include pictorial health warnings in cigarette advertising and on cigarette packets; and restrictions on tobacco company sponsorship of music concerts and sporting events. The latter include bans on the use of company or product logos and brands (including brand images) in sponsorship material and tobacco company sponsorship of events covered by the media. The government has also introduced a new regional cigarette tax of 10 per cent. Some of these changes are still being implemented. For instance, the regional cigarette tax only came into effect earlier this year. The requirement for pictorial warnings only came into effect on 24 June 2014.

Tobacco control advocates argue that the government’s tobacco control policies remain weak by international standards. In particular, they note that the government has refused to ratify the World Health Organization’s (WHO) Framework Convention on Tobacco Control (FCTC). Government tobacco control policy consequently does not include at least two key protections common in many other countries: (i) a comprehensive ban on tobacco advertising, promotion and sponsorship and (ii) restrictions on the sale of individual cigarettes. The latter is necessary to limit tobacco companies’ ability to sell their products to children and the poor.

The structural power of big tobacco

The operating environment for the tobacco companies has clearly changed, as Janelle’s comments indicate. Gone are the days when almost no controls were imposed on big tobacco. Despite this more challenging environment, it would be a mistake to underplay big tobacco’s future prospects. These companies continue to hold enormous economic power and political influence in post-authoritarian Indonesia and are consequently well positioned to resist the efforts of the tobacco control lobby. Tobacco companies are major investors, employers and taxpayers, giving them considerable structural economic power, particularly in relation to the government’s budget. Tobacco taxes accounted for between 4.8 and 7.7 per cent of the Indonesian government’s total annual revenues between 1998 and 2010, according to the Tobacco Control Support Centre.

Tobacco companies are also very well-connected. Laksmiati Hanafiah, the former General Chairperson of the Indonesian Heart Foundation and one of Indonesia’s leading tobacco control advocates, claims that tobacco companies have been a key source of campaign finance for all presidents since Habibie. At the same time, they are well-organised through a series of industry associations, the most prominent of which is the Indonesian Cigarette Manufacturers’ Association (GAPPRI). Finally, they have the ability to mobilise popular forces—most notably tobacco farmers—to support their cause, engage in public protests and more generally act as the public face of the tobacco industry, giving their cause popular legitimacy.

Tobacco companies have considerable resources at their disposal to fight the introduction of further tobacco controls and water down existing ones. Tobacco control advocates have successfully used the court system to combat previous tobacco industry efforts in this regard. In 2011, for instance, they defeated an attempt by a group of tobacco farmers to challenge legal recognition of tobacco as an addictive substance. But they lack big tobacco’s economic power, political connections, organisational capacity and ability to mobilise popular forces.

Health Minister Nafsiah Mboi, a strong proponent of tobacco control, recently warned tobacco companies to make sure they include pictorial warnings on cigarette packaging before the June deadline, apparently concerned that they are dragging their feet on this reform. She also criticised House of Representatives speaker, Marzuki Ali, for lobbying President Yudhoyono against ratifying the FCTC because parliament was still in the process of discussing a tobacco bill. Nafsiah, clearly exasperated, told the media that, “[l]awmakers were voted in by the public to represent and protect the people, it is very sad that the House Speaker chooses to side with the tobacco industry instead of his constituents.” Such outbursts from the Health Minister illustrate the ongoing struggle for tobacco control, even where the required regulations are already in place.

A new government, a new approach?

The upcoming election of a new president in July is unlikely to change the balance of power between the tobacco companies and tobacco control advocates. Neither of the two presidential candidates—Joko Widodo and Prabowo Subianto—smokes. But Widodo’s party, the Indonesian Democratic Party of Struggle (PDIP), relies on support in key tobacco-growing areas such as Central and East Java, while Prabowo Subianto has sought to woo tobacco farmers through his leadership of the Indonesian Farmers’ Association (HKTI). Neither candidate has declared a clear policy position on the issue of tobacco control during the election campaign so far. However, for both individuals, there is a political logic to moving slowly in this area.

Big tobacco is entering more challenging times in Indonesia. But the industry is likely to remain a powerful economic and political force for the foreseeable future, given both its lobbying capacity and politicians’ willingness to engage industry support for their own political needs. This will doubtless be to the detriment of the health of millions of Indonesians.

Andrew Rosser (andrew.rosser@adelaide.edu.au) is associate professor of development studies and an Australian Research Council Future Fellow at Adelaide University.

http://www.insideindonesia.org/business-and-politics-in-indonesia

Presidential candidate, Prabowo Subianto, and Golkar Chairman Aburizal Bakrie campaigning in Senayan- Mietzner

What are the institutional mechanisms that make these (often illicit) transactions an ongoing feature of Indonesian politics? More broadly, what are the consequences of increasing business-state overlap for public policy, both good and bad? This special edition of Inside Indonesia goes some way toward addressing these questions. The articles investigate the connections between public office and private capital in contemporary Indonesia, with a view to understanding the institutional landscapes that exacerbate, or limit, predatory politico-business alliances.

The edition opens with a timely economic overview from Hal Hill, a long-time observer of Indonesia’s political economy. A welcome change from the many negative characterisations of Indonesia’s corrupt government, Hill sketches out the remarkable economic progress the country has made over the past decade. Hill emphasises that, against the odds, economic policy makers have in many instances avoided political influence and put Indonesia on a stable path of economic growth. But he also highlights Indonesia’s pronounced and worsening inequality, arguing that it leaves the door open to populist appeals and politicised policy interventions. On the eve of Indonesia’s presidential election, Hill lays out five challenges for a new administration, including reduction of fuel subsidies and reform of the bureaucracy. He does not consider either Prabowo or Jokowi a ‘reform champion’ when it comes to economic policy, but is hopeful that the victor will surround himself with a ‘professional’ and experienced cabinet.

Eve Warburton’s article shifts gears and turns our focus to Indonesia’s political landscape. Warburton maps out the varied ways in which democratic institutions have become sources of capital generation for state officials and their business partners – or for entrepreneurs that have entered office directly. Collusive state-business alliances are motivated partly by personal enrichment, but also by how expensive it is to take part in Indonesia’s democracy. The business transactions that now feature so heavily in national and regional politics can have serious consequences for social policy and economic development, and for the quality of democratic institutions more generally.

Ward Berenschot and Darmawan Purba report on the recent gubernatorial elections in Lampung Province, where a single company dominates the local political economy. They describe how Sugar Group Companies (SGC) bankrolled one of their own company insiders to run for governor. Companies like SGC often claim they are compelled to cultivate political allies because they must face Indonesia’s notoriously unpredictable rules and corrupt rent seeking from state officials. But the authors make a powerful case that these business-state pacts are self-reinforcing, and only perpetuate regulatory uncertainty. Berenschot and Purba propose that enforcing transparency around campaign financing would help limit collusion on the scale witnessed in Lampung.

Teri Caraway and Michele Ford’s article provides insight into how local governments have become sites of contestation between labour and business. Wage disputes motivate both sides to lobby local government officials. Businesses use their influence behind closed doors. But, as the authors demonstrate with a case from Bekasi, during election season labour unions sometimes posses significant bargaining power, as political candidates try to win their support and leverage union networks.

In their articles, Danang Widoyoko and Patrick Anderson detail the nature and consequences of corrupt forest licensing. Danang, former Director of Indonesia Corruption Watch, looks back at an election in West Kalimantan, and the way that one candidate manipulated forest licenses to extort funds for his campaign. This case reveals the tragic environmental consequences of the symbiotic relationship between politics and business in resource rich regions.

Patrick Anderson from Forest People’s Programme reminds readers of the immense progress that environmentalists and anti-corruption activists have made in order to prevent cases like that described by Danang. The Corruption Eradication Commission has now turned its attention to the oil palm sector, with many arrests of company staff and state officials already underway. But Anderson argues that prosecutions alone are not a sufficient deterrent. There must be serious reform of the electoral system and the corrupt bureaucracy if Indonesia is to stamp out predatory deals between local governments and oil palm companies.

Andrew Rosser examines how some of Indonesia’s largest corporations continue to stall reform in the health sector. Important legal changes impacting the sale of cigarettes have been on the horizon for some time, and are imperative for a country where, according to the World Health Organisation, over 400,000 people die each year from tobacco related illnesses. Rosser shows that tobacco companies continue to use political connections within the parliament and in political parties to stall regulations that threaten their bottom line.

Finally, Anna Peterson takes a look at reform of one of Indonesia’s most important regulatory institutions. The Supreme Financial Audit Agency (BPK) is tasked with monitoring irregularities in the financial reporting of government organisations, and is thus key for preventing many of the illicit business transactions outlined in this edition. Peterson looks at how, despite much progress, the governing board remains politicised, primarily through members’ ongoing connections with political parties. As such there is much public skepticism about the capacity of the BPK board to fulfill its role.

Corporate lobbying, political extortion, and bribery are ubiquitous features of Indonesia’s evolving democratic political economy. Of course, such practices feature to different degrees in many democracies around the world. But Indonesia’s rising socio-economic inequalities, critical environmental damage, and its relatively young and fragile democratic institutions, mean that addressing illicit state-business transactions is a matter of urgency.

While the articles in this edition tend to paint a bleak picture, each also identifies forces for change – local entrepreneurs-cum-politicians who bring business acumen and efficiency to their new position in government, anti-corruption activists, progressive parliamentarians, just to name a few. Of course, the critical question now is who will lead a new administration, and which presidential candidate has the political will to reform the business of Indonesian politics.

Eve Warburton is a PhD candidate in the Department of Political and Social Change at the Australian National University. Her thesis focuses on politics and policy making in Indonesia’s natural resource sectors.