Indonesia's Presidential Airplane Purchase

Indonesia's State Secretary Office decided to purchase a new 737-800 Boeing Business Jet as the presidential airplane. It costs the country about Rp 800 billion (= USD 90 million). The cost is about 0.06% of the 2011 national budget. I heard this issue being discussed on the Sindo Radio on Friday, February 10th: whether it is fair and essential for Indonesia to purchase such airplane.

The Presidential Office's spokesperson cited efficiency and security as the two main reasons.  A Jakarta Globe article reports that the ROI is 35 years.

Operational cost of either rental or purchase, associated with fuel and personnel, should be approximately equal, so we can ignore this factor. We don't know the annual rental cost of airplane rented from Garuda Indonesia, which is currently used by the President. Let us call this variable x. The cost of airplane purchase - let us call it y - is obviously more expensive. The 35 years ROI roughly means

35x = y.

Given that y = Rp 800 billions, then a fair rental cost should be x = Rp 22.86 billion annually, or Rp 62.6 millions per day. The State Secretary Office should release the airplane rental cost data so that people can make informed opinion about the government's decision.

1. Income Per Capita perspective. The 2011 income per capita for Indonesia is USD 3469. Thus, the annual expense of Rp 22.86 billion is equivalent to what 730 Indonesians make in a year, or about 400 families. Based on this, the cost is reasonable. Even if the airplane lasts only for 20 years, the cost is still reasonable, as it means the cost is equivalent to 1278 Indonesians make in a year.

2. Investment perspective. If this money is instead invested by purchasing its own Government Bond, which has about 6% annual interest, then the amount of money at the end of 35 years would be

Rp 22.86 billions (1 - 1.06³⁴)/(1-1.06) = Rp 2292 billions.

The Rp 800 billions will have grown by about 3 times over 35 years. This is the future value of the money spent on buying the airplane and the decision does not look bad on this perspective either.

If, however, the Rp 800 billions payment is made as soon as the airplane is delivered by Boeing, then the future value will skyrocket to Rp 6150 billions in 35 years. It will have grown by about 8 times over 35 years. This payment scheme is the more likely scenario, and if this is the case, then the decision looks much worse. It would be good if the State Secretary Office releases information on the purchase payment schedule.

Rp 6150 billion could be spent on building a highway over 10 years. Assuming an interest rate of 6%, it is equivalent to spending Rp 467 billions per year for 10 years. The cost of building 1 km of road in Indonesia is about Rp 10 billions, so the decision to spend Rp 800 billions on the airplane is equivalent to cancelling a construction of 46.7 km x 10 = 467 km highway that will be useful for 35 years.

3. Leadership perspective. The absence of long term investment perspective is missing in this decision. I calculated in my previous blog that the Jakarta traffic jam costs about Rp 1 trillion monthly. The Rp 6.15 trillions value of the airplane purchase is equivalent of prolonging the Jakarta traffic jam by 6 months.

Another aspect is leadership. In a country where the majority of people live with a salary of USD 289, it is bordering on unethical to spend Rp 800 billion on a presidential airplane. The President could address the nation weekly on teve instead of zooming around the country in a luxurious airplane. These weekly addresses could be more effective when put in Youtube so that young Indonesians can listen on their computer tablets.

The airplane purchase does not give a good example to the government officials. In a country where people try very hard to conform to one another, the purchase decision does not set a good example.

All things considered, I doubt the purchase decision can enhance efficiency of the President's job since travel efficiency is a small part of his overall job efficiency. As for ensuring the security of the President, there is already Indonesia's Secret Service to guard him 24/7. Furthermore, I always wonder how secure the communication system in the Boeing presidential airplane, given that it will be designed and manufactured in the US.