Thursday, December 6, 2007

an article on the current situation in Aceh

Far Eastern Economic Review
November 2007

The Rebirth Of Aceh
by Oakley Brooks

Just three years after the tsunami turned much of downtown Banda Aceh, Indonesia into a wasteland, the city has swung to the other extreme. Today it has the feeling of a boom town, thanks to$8 billion in aid from the Indonesian government and foreign donors. The question remains, however, whether this money can jumpstart the province's return to its historical role as one of the key entrepots of the region. After the construction dust settles, Aceh should emerge with the best trading infrastructure in Indonesia. Across the province, foreign-funded work crews are busy upgrading ports, airports and roads. A four-lane, United States-funded highway will run down the devastated west coast. Spread across Aceh's four million inhabitants, the aid is three times larger in per capita, inflation-adjusted terms than that spent in post-World War II France, the largest beneficiary of the American Marshall Plan.

None of this would be possible, of course, without the 2005peace agreement between Jakarta and the Free Aceh Movement. As well as bringing stability, the deal will provide the province with upwards of $3 billion a year in special disbursements from oil and gas fields now controlled by the central government. Also on the plus side of the ledger is Aceh's rich volcanic soil, which should give it an advantage in agricultural exports. And it sits in a strategic trading location at the tip of Sumatra, a maritime crossroads between India, the Middle East and Southeast Asia.

The obstacles to development are considerable, however. The 169,000 lives lost to the tsunami may have captured the international community's attention, and loosened its purse strings, but the 30-year separatist conflict left deeper scars by preventing investment in both infrastructure and human capital. Remedying these long-term deficits will take sustained effort.

Healing the Wounds

Aid money can build infrastructure, but it also creates its ownheadaches. The huge influx of donor cash has led to localizedinflation and a culture of handouts. Educated, English-speaking Acehnese are in high demand at NGOs, and so enjoy generous salaries. Less-skilled workers can also take lucrative posts driving sport-utility vehicles for the NGOs. But these jobs will not last forever. Investors will be watching to see whether the animal spirits of the local economy begin to stir.

The conflict, as it's called in Aceh, killed an estimated 15,000 people, and systematic terror by government and rebel troops after 1999 left large swathes of the province traumatized. The situation sent business people scurrying for Jakarta and Malaysia; in rural areas, workers and small tenant holders fled their land. Some of the best Arabica coffee country in the world, in Aceh's central highlands, went to seed, along with oil palm, rubber and cocoa plantations throughout the province. Oil and natural gas installations serving fields in the eastern part of the province were often under siege. People who stayed tended a subsistence economy; any substantial business moved 500 kilometers east, to the North Sumatra provincial capital of Medan.

One indicator of problems is that Acehnese are not taking up construction jobs, forcing firms to hire migrants from North Sumatra and Java. The unemployment rate in the province has helds teady at 12% during the boom as the workforce expanded by 5%. Analysts worry about long-term worker participation, especially among ex-combatants. In a World Bank survey among veterans of the Free Aceh Movement, most said they preferred "trader" over roles like "laborer."

Others have visions as grand as Aceh's economic planners. "We're waiting for an industrial company to invest here," says Hasan, a former rebel. He and some friends occasionally sell crushed gravel to construction sites in Banda Aceh to make ends meet. But they also spend a lot of time sitting in the local coffee shop.

The 5,000 or so former rebels, along with much of Aceh's youth, remain poorly educated. The former group was living in the jungle, sometimes burning schools to retaliate against the Indonesian government. And as the economy worsened in thep rovince, fewer people could manage fees for schools that were left.

"The priority is definitely how to improve the quality of our human resources," says Rahman Lubis, head of the planning arm of the Aceh government, who ticks off projects to map skills deficits and send students abroad for university. Close to one-third of Aceh's bulging budget is to be dedicated to education.

Whatever their shortcomings of talent and education, Acehnese have a unique pride and resilience, grounded in a strong Islamic faith that came to the fore during a harrowing last few years. There's an ongoing debate in the province and throughout Indonesia about whether conservative Islamic social norms in Aceh (adultery, for instance, is sometimes punished by public lashing) will hurt the business climate. It's impossible to answer definitively, short of some multinational admitting it skipped the province for its Shariah laws.

But so far the Acehnese brand of faith seems to have helped the province more than hurt it. "These are copers," says Sasha Muench, an economic development specialist who spent two and a half years working in Aceh. Today, with the Indonesian army and rebels behaving themselves(under the scrutiny of the aid community) fear has subsided.

But economic dysfunction remains and it presents in myriad ways. A post-tsunami packaging and branding program aimed at rebuilding local products specified that packaging had to come from Medan, the only place a quality wrapper can be sourced.

"There's still so much trouble involved in doing business here,"says Tarmiyus, the principal in Pt. Pontia Agro Pratam, a construction supply firm which he has been operating from Medan since the tsunami.

"The biggest problem is the lack of capital," he continues. "The banks are so tight." Banks in Indonesia have been notoriously stingy since the Asian financial crisis, and in historically volatile Aceh they are even more conservative. The loan-to-deposit ratio, expressed as a percentage, is hovering around 25% in the province (up some since the tsunami), compared to 65% at the national level last year.

In the plantation agriculture sector, which many development and government officials are pegging to lead Aceh back into the export market, growers are at a stand-still because of the credit situation. They suffered wide-scale defaults as workers left plantations in fear. "We're all basically blacklisted by the banks right now," says Sabri Basyah, a palm-oil plantation owner who is the secretary of the estate growers association in Aceh. Other residual realities from the conflict era include extortion by ex-Free Aceh Movement members and armed highway robberies. The local paper, Serambi, tends to amplify their chilling effectby splashing cartoon re-enactments across the front page. Meanwhile, proceeds from Aceh's oil and gas fields - shared by the province and Jakarta - continue to dip as the reserves there are exhausted.


Optimism Returns

Nevertheless, the development community has seeded a broad return of basic family businesses - roadside convenience shops, cafes, farming operations - and helped spawn new service companies, such as automobile rental companies and Internet providers. And in the traditional Islamic spirit, the money has spread through family and friends throughout the city.

Now, herds of brand new buzzing motorbikes clog the streets, where bulldozers once ploughed the piles of post-tsunami debris like huge drifts of snow. The new look and feel of Aceh has some well-placed leaders dreaming of a bright, cosmopolitan future - a 21st century economy to complement Singapore and Malaysia, just across the Straights of Malacca.

"The origins of Aceh are as a trading hub; Acehnese pepper went to Boston," says Said Faisal, the economic chief of the Indonesian government's reconstruction agency in Aceh. An Acehnese by birth and trained in the insurance industry in America, Mr. Faisal recalls the Acehnese glory days before Dutch colonial meddling, when the sultanate was a key locus of IndianOcean trade, and European emissaries curried favor in Banda Aceh. "The roots are there. And I don't see any obstacles to bringing it back. In five years, the Acehnese will build back the ability to make relationships with the international community."

Aceh Governor Irwandi Yusuf, who's had a dizzying two years of his own, rising from imprisoned Free Aceh Movement leader to democratically elected executive, is juggling a bevy of economic initiatives, from stamping out corruption to halting illegal logging to courting international investors. Meetings with him are punctuated by aides seeking his signature on letters ofapproval for myriad causes and ventures.

Talented Acehnese who fled the province are also returning to win reconstruction contracts and provide consulting work. Achmad Fadhiel worked as a consultant with the International Finance Corporation after the tsunami. He's stayed on to be the CFO of government-owned fertilizer firm Iskander Muda.

"I had mixed feelings," says 42-year-old Mr. Fadhiel, who worked as a corporate banker in Jakarta for 18 years. "It was the same airport terminal building in Banda Aceh as when I left [in 1973,at the age of eight]. But it's about social responsibility. After many years in the banking industry I can give people some advice about financing. I'm having a lot of informal chats."

Everybody seems to be watching the movements of the talented and wealthy among the Acehnese diaspora-pegged at around one million people spread from Malaysia and greater Indonesia all the way to an enclave in Harrisburg, Pennsylvania. The re-entry of expatriates will send a strong signal to international investors about the health of Aceh. And, equally important, it will spur local businesspeople to take the leap into industries like agricultural and seafood processing and packing, a logical first step in adding value to the Aceh economy. "The question is will the spirit of entrepreneurship come back?" says Paul McMahon, a consultant with the Indonesian reconstruction agency who is organizing an Aceh venture fund for small and medium businesses.

The closest thing to a 21st century reality in Aceh is the port of Sabang on the island of Weh, which thrusts out of the ocean15 kilometers northwest of Banda Aceh. It's the best situated harbor in the province, deep, sheltered and facing the open ocean at the mouth of the Malaccas. Established as a free tradeport by the Dutch at the turn of the last century, today a steady stream of container ships cruise to and from Singapore, Malaysia and China, tantalizingly close but still out of reach.

Sabang promoters are looking to change that. Last October, Irish outfit Dublin Ports agreed to spearhead a major upgrade of the port to accommodate container ships. With modern docks, Sabang could theoretically grab a piece of the trans-shipment trade in Asia from the backed-up gateways in Singapore and Penang, Malaysia and Shanghai. Sabang officials, including new Mayor Munawar Lisa, a former Free Aceh Movement official educated in the U.S., would also like to restore the island's free-trade zone status (which led to steady car imports as recently as 2003).

And island leaders want to redevelop Sabang's whitewashed, Dutch-era stucco shops into a brand-name shopping mecca, centered around a new high-rise hotel. That would complement the island's international backpacker tourism at beach bungalows tucked away in some of Weh's sleepier coves. Already, downtown Sabang has a whiff of international flair, the colonial architectural lines melting into a gold-accented mosqueon the hill above town. There's wireless Internet in the central business district. Divers first discovered the island's reefs in the 1980s and with only light damage from the tsunami, Weh has hosted NGO workers and adventure travelers since early 2005.

Aceh's international connections got a further boost this fall with a new direct flight to Kuala Lumpur. But more than a year after the Irish announced they would build the port, they've still not been able to hash out an agreement with local authorities that will allow Dublin Ports to begin work on the international docks.

It's an indicator of the pace of business in Aceh, as the democratically elected government put in place early this year finds its legs. Still, a Dublin Ports official maintains the limbo period is comparable to other international deals he's worked on, and the company is committed to investing in Aceh. "We're prepared to wait," he says. Asking that his name not be used, he says he hopes docks to serve local Acehnese trade will open at the end of 2008.

So far the only notable trade item of late in Sabang has been a late-model, red Ferrari, which mysteriously showed up in August and led to some wild speculation among locals about the owner. Right now, the port still isn't duty free and with the taxes not paid on the car, it sits in hock with customs officials.

It, even more than the hustle of downtown Aceh, is an apt marker of the hopes of a place emerging from a dark period, and the realities it is slowly overcoming.



Mr. Brooks is a free-lance journalist based in Aceh.

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