Friday, July 13, 2012

Indonesia's a land of opportunity, but it's not for the faint of heart

Be prepared for endemic corruption and official U-turns.

WHEN expat Australian businessman Iain Shearer wanted to expand his Indonesian company recently he needed to import a small tool from Canada.

In the customs office at Jakarta's Soekarno Hatta airport, the official opened the box, filled in forms and consulted his supervisor as Shearer looked at the posters stuck on the windows warning against paying bribes. And then the officer named the duty fee.

''He assessed it at the highest rate, he overstated its value and then he said it was an item that was going to be used for a particular purpose which added another tax,'' Shearer recalls. The duty added up to 2½ times the cost of the item itself.

''Then he stood there and smiled. My business partner had to go and bargain with him to get it out of customs.''

Shearer's experience will be familiar to anybody who has tried to do business in Indonesia.
''No public servant here is paid a wage that he can live on,'' says Peter Fanning, chairman of the International Business Chamber, ''and all the myriad requirements for fees aren't regulated''.
People who require bureaucratic permission of any kind are therefore vulnerable to outlandish claims for fees or ''facilitation payments''. As Shearer puts it: ''Anyone who has the ability to say 'yes' or 'no' will abuse that.''

Australia's businesses are being urged to move into Indonesia. When Julia Gillard and Susilo Bambang Yudhoyono met in Darwin for the second of their annual get-togethers earlier this month, both put the call out.

In his remarks over dinner, the Indonesian President invited ''even more Australian investors to Indonesia'', saying he hoped Australia would soon rank in Indonesia's top 10. Gillard welcomed the invitation, particularly encouraging Australians to invest in the country's poorer eastern region.

Their joint communique trumpeted that ''great potential exists to promote trade and investment links''.

Statements of great potential are perhaps even truer now than when Paul Keating made them in the 1980s and '90s.

Indonesia is a fast-growing (6.5 per cent per year) and consumeristic market of 240 million people on Australia's doorstep. Two of the three major ratings firms have recently upgraded it to investment status, it's part of the G20 and its sharemarket is booming.

But beneath the headline figures, the shiny cars on Jakarta's roads and the rapidly increasing asset prices, lies what some business figures say is a nightmare.

Philip Shah, a long-time Indonesia resident and consultant to new investors says: ''It's an exquisite jungle. A wild west with much more occupancy.''

The 2012 Ease of Doing Business report puts Indonesia 129th in the world, between Honduras and Ecuador, and slipping. This year's Failed State Index had Indonesia on the danger list.

Transparency International's measure of ''perceptions of corruption'' found 43 per cent of people think graft is worsening. This perception means, for example, that most individuals try not to pay any tax because they assume it will be stolen by officials. This has profound effects on the health and education systems and the physical infrastructure the country can afford.

But according to Australia's ambassador to Indonesia, Greg Moriarty, there is one risk that towers above all. ''The major challenge, if I can summarise it in one phrase, is regulatory uncertainty,'' he said in a recent speech in Perth.

Moriarty has put better business links as his top priority as ambassador, but he cannot sugar-coat this reality.

''It's a problem that has been increasing in recent months, and I fear we are unlikely to see any significant improvement in this uncertainty at least until after the 2014 election.''

Uncertainty for foreigners affects different sectors of the economy in different ways - consulting firms can be 100 per cent foreign owned, for example, but accountants must be attached to a local partnership.

Regulations and fees are also often vague, conflicting, overlapping and subject to interpretation, allowing bureaucrats to shop for the one that pays them the most.

According to Fanning, even the government organisation set up to facilitate investment, the BKPM, or Investment

Co-ordinating Board, often acts as a gatekeeper.

''They almost look for ways in which particular activities fit within the restrictions rather than give the benefit of the doubt,'' Fanning says.

There are a number of reasons for this regulatory overburden. One is nationalism - knocking overseas companies is politically popular. There is also the apparently sincere belief that restricting foreign investors will help local industries fill the gap.

A former finance minister, Rizal Ramli, says Indonesia's endemic culture of money politics also plays a part. Regulatory blockages can be cleared or circumvented with the right bribe, and that money filters through to the nation's corrupt political elites, who use it to pay for the votes that keep them in power.

''Instead of serving the greater national cause, these policies are tailored by the political elite to create rent-seeking opportunities,'' Ramli wrote in The Jakarta Post.

Even more confusing than the situation at the national level is the plethora of regulations and licences issued by local governors, even mayors. The decentralisation that happened after Suharto's ouster in 1998 conferred on them enormous power, and the semi-regular corruption cases brought against them suggests money politics is also prevalent at the local level.
Perhaps worst of all, though, are the sudden retrospective changes in regulations.

Recent presidential decrees forcing mining companies to divest majority ownership and smelt metals onshore are well known, as is the sudden quota imposed on cattle imports.

Another example is an under-reported change which has disturbed some of the biggest and most powerful companies in the world.

In 2010, Government Regulation 79 retrospectively altered contracts, some of which had been in place for nearly 30 years, allowing oil and gas companies to claim cost recovery for high-risk activities.

The new rules are likely to reduce the returns to companies, and also introduced some bizarre restrictions, including a discriminatory one which means they can claim less recompense for the salaries of executives from India, for example, than they can claim for Australians or Americans.

The Indonesian Petroleum Association, representing 100 or so oil and gas exploration companies, challenged the law in Indonesia's Supreme Court. Its submission suggests the sudden change in existing contracts could lead to a capital strike. ''The decline of oil and gas investments [in Indonesia] in this recent decade was not caused by the international oil price or diminishing capital, or the still significant estimated oil reserves, but … by uncertainty in the legislative framework,'' the lawyers' submission says.

''Who will dare to invest his/her money in Indonesia if there is no surety that the government of the Republic of Indonesia as host will honour its commitments?''

But the Supreme Court earlier this year denied the association's claim and, according to Shah, is yet to explain its ''terse rejection''.

London-listed mining company Churchill would sympathise. It is now seeking $2 billion compensation from Indonesia in the International Centre for Settlement of Investment Disputes after a local governor removed without compensation its licence to mine what is estimated to be the seventh-largest undeveloped coal deposit in the world. The governor gave the licence to a company majority-owned by a powerful ex-general and candidate for Indonesia's presidency, Prabowo Subianto. The courts backed him at every step.

Problems aside, Australian companies are making a success of Indonesia. Moriarty says the embassy is aware of 400 doing business there, including 38 ASX-listed miners with an interest in 120 projects. ANZ and Commonwealth banks are expanding rapidly.

Iain Shearer insists that, despite the frustrations, ''the opportunities are amazing if you've got the right idea''.

Geoff Gold, of the Gold Consulting Group, said big companies with deep pockets and reserves of patience were able to make a go of it, as were Australian suppliers with a unique product the Indonesian market wanted. Smaller players clever or lucky enough to find good local partners were in the third category of success.

He is ''very positive'' about Indonesia but insists it's high risk, and not a place for quick gains.
''Too many come with a limited plan and knowledge and burn through capital without making headway,'' he says.

''A lot of smaller companies spend $2 million in two years before they start asking for advice … then they need another $2 million or they should go home.''

Shah compares investing in Indonesia in certain sectors such as oil and gas to gambling at a casino: ''You need to know you are speculating and recognise the risk-reward profile - high-risk, high reward.''

Shearer has been in Indonesia for 8½ years but says, for the first 5½, ''I was bashing my head against the wall''.

Despite his recent success, he would probably not do it over again. ''It's not for the faint-hearted,'' said a well-connected observer. ''If this is your first and only shot at developing an overseas aspect to your business, I'd say, 'Go to Singapore'.''

By Michael Bachelard Sydney Morning Herald Indonesia correspondent.

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