Luhut Pandjaitan has deep ties with President Joko Widodo. He was one of the main business partners in the President’s furniture business PT Rakabu. In 2009, the two formed a joint venture, PT Rakabu Sejahtera, to produce prefabricated wooden doorframes, decks and flooring (Jokowi was mayor of Solo at the time). The main advantage of the venture was that Jokowi needed wood supply and Luhut was looking to add value to his timber business. The two developed a strong relationship from that experience. “We started a business together and we became friends and grew to trust each other,” Luhut says. This friendship has evolved into Luhut becoming the energy and defense advisor to Jokowi.
His furniture joint venture is only one of many accomplishments of Luhut—he is something of a renaissance man. He is a retired four-star general, with 30 years of service in the military, with an expertise in Special Forces. After retiring in 1991, he served as Indonesia’s ambassador to Singapore. Earlier, he served as the Minister of Industry and Trade during the Abdurrahman Wahid presidency. He is the owner of the privately held PT Toba Sejahtra, a business group with interests in coal, energy, agribusinesses and power plants.
One of the main issues facing the country is the fuel subsidy. What are your plans on this issue?
The transition team is calculating how much the government will raise the fuel price, but the figure for gasoline is Rp 3,000 and we are calculating what it will be for diesel fuel. It is a certainty that Jokowi will cut the fuel subsidy. While he had several scenarios, raising the price by Rp 3,000 should save about $14 billion. We will have more money for building infrastructure, like roads and ports, and for healthcare. We will have an additional $4 billion to help the poor. So, in the future, the well-off can no longer enjoy this subsidy.
In 2016, we should save $20 billion and have an accumulation of $60 billion by 2018, all of which could boost infrastructure development. If this happens, we could help the economy and create jobs. We could develop the downstream industry for raw materials. In palm oil, our downstream industry only accounts for 47% of total production, while Malaysia it has reached 120%. We could create jobs and earn more tax revenue by developing the downstream industry. With the fuel price increase there will also be no more fuel smuggling. The huge gap between fuel prices here and in neighboring countries such as Singapore and Malaysia, has made smuggling economically viable. In other words we are creating smugglers by maintaining a subsidized price.
Which infrastructure development should be prioritized if there are more funds available?
Electricity is number one, I think. How can you achieve 7% to 8% growth in the next five years if we have an electricity shortage? How are we going to build smelters as well?
How far will the new government go to reduce the energy subsidy?
From my perspective, in the end, there should only be $4 billion allocated for fuel subsidies for the poor, and the rest should be linked to the market price. We should also reduce subsidies for electricity. We spent Rp 107 trillion for electricity, because most of it is generated by diesel. The price for diesel-generated electricity is 31¢ per kilowatt-hour, while the coal-generated cost is just 4¢. The previous government maintains a high cost that makes it hard for newcomers to invest in lower cost power plants.
We built a power plant in Palu and when we wanted to expand our capacity to 2x50 MW the permit only allowed us for 2x17 MW because there was an existing 420 MW diesel generated power plant there. PLN should be clear about this. How can we grow the economy if we’re lacking electricity? The rule of thumb says if the GDP is growing by 5% then the electricity output growth should be 10%, but we have never achieved such a rate. A solution is giving better incentives to those who want to invest, like raising the buying price from PLN so that the investor could more easily make back their investment. This would spark new investment. We are already subsidizing Rp 107 trillion after all.