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Indonesia Under Review


Indonesia Under Review

October 2012

Bank Indonesia has continued to maintain the interest rate at 5.75%, all the while the Indonesian economy has continued its strong growth. This has resulted in increased attention to Indonesia’s uniquely positioned economy and substantial growth potential, one such example being the recently well-circulated McKinsey Report.

 
Politics

The result of the Jakarta Gubernatorial election runoff has been a clear win for Joko “Jokowi” Widodo, the current mayor of Surakarta. The outcome is a blow for the ruling Democrat Party, and a significant milestone for the Indonesian Democratic Party of Struggle (PDI-P), and possibly for the allied Great Indonesia Movement (Gerindra) Party and its presidential candidate Prabowo Subianto. It remains to be seen how effective Jokowi will be in governing Jakarta, considering the comparative complexity to Surakarta introduced by the house of representatives, presence of large businesses, and potential influences of parties who supported his candidacy.

The Law on the Special Territory of Yogyakarta is notable for affirming the Sultan’s position as the provincial Governor, and barring him from holding membership in any political party. Although it appears that this restriction may not prevent Hamengkubuwono X, the currently serving Sultan, from participating in the upcoming presidential elections (potentially through being nominated by a different party).

The draft 2013 budget has been circulated, and includes proposals for increased infrastructure spending, to be financed by debt, but also aspects that have been described as populist, which does not come as a surprise considering the early preparations for the 2014 presidential election. Of note is the planned increase in the subsidized electricity rates starting in 2013.

The populist policy aspects have similarly been visible in adjustments of import duties and taxes (such as tax holidays for select investments) to discourage imports and spur on domestic industry, and the introduction of other trade barriers, such as the Indonesian National Standards (SNI) that are currently seeing active introduction across a wide range of goods. In the press, a lot of the credit for such policies, the latest being discussion of capping foreign control over palm oil plantations, goes to Hatta Rajasa, the Coordinating Minister for Economic Affairs, an in-law of President Susilo Bambang Yudhoyono and a potential vice-presidential candidate.

An upcoming issue is whether the deforestation moratorium (REDD+) will continue, and the effectiveness of its implementation thus far. This will be particularly significant since the decisions will be made in the context of priorities increasingly shifting to the effects of the worldwide economic conditions and the upcoming Indonesian presidential election.

Issues faced by Bumi Resources are likely to have significant implications, not just for the company and its highly prized subsidiaries, but also for Aburizal Bakrie’s presidential ambitions, perception of Indonesian business partners by foreign investors, and, perhaps most importantly, for putting a spotlight on good corporate governance for Indonesian businesses.

 
Corruption

The Bank Century case has once again demonstrated its remarkable staying power, with recent allegations about meeting with the President on the matter and the always-present calls for further investigations of impropriety during the bailout. As such, the case is something to be aware of, if not for its substance, but for its notability as a favourite topic in some political circles. In the meantime, efforts to recover criminal proceeds from foreign jurisdictions based on the December 2010 decision against Bank Century Directors continue against the backdrop of political bickering.

Siti Hartati Murdaya’s arrest for the alleged bribery of an official in connection with her plantation businesses is a significant development in the operation of anti-corruption legislation and enforcement practices. Not only is it notable due to her high profile, but the fact that, aside from several notable exceptions, the prosecution of alleged private sector bribe payers, and those ordering their subordinates to make the payments, has not been a prevalent feature of Indonesian law enforcement against corruption cases, including those cases investigated by the Corruption Eradication Commission (“KPK”). Also of note is her claimed defence that the bribe was extorted by the official, something that is likely to resonate with the experience of the business community, and will be notable in how this aspect is addressed by the courts.

The Democratic Party has continued to face problems in its ranks, with its Chairman, Anas Urbaningrum becoming embroiled in the case of bird flu vaccine procurement as part of the continuing fallout from the conviction of the former Democratic Party treasurer Muhammad Nazaruddin for corruption.

Of note is the conviction and sentencing of Miranda S. Goeltom to 3 years over the distribution of travellers checks by Nunun Nurbaeti (who has also been sentenced, to 2.5 years) to lawmakers (28 of whom have been sentenced) that resulted in Miranda’s appointment as Senior Deputy Governor of Bank Indonesia. However, the question remains as to who financed, and benefited, from her appointment.

The de-centralization of corruption courts has unfortunately had the expected effect, with problems surrounding the quality of the judiciary that is available, and the inevitable outcome that a number of regional corruption court judges have now themselves been arrested for receiving bribes. As always, this is an issue of building basic institutional capacity, especially considering the very low amount of payments involved in the recent cases.

The National Police has pulled its investigators who have been seconded to the Corruption Eradication Commission (KPK), in an apparent act of retaliation for the KPK’s investigation into the procurement of driving simulators by the police. The immediate effects will be disturbance of the KPK’s investigative abilities, since it has been reliant on the police for investigators rather than having an ability to hire its own personnel.

An interesting note is a comment by Denny Indrayana, the Deputy Minister of Law and Human Rights, who opined that lawyers defending corruption suspects are corrupt themselves. Which one would hope was an over-enthusiastic, albeit misplaced expression of support for anti-corruption efforts rather than an expression of an approach to the operation of the justice system. Indeed, the Deputy Minister was quick to clarify the distinction between lawyers who follow the letter of the law with those who abuse the system.

 
Business

The Churchill Mining case is now before the International Centre for Settlement of Investment Disputes (ICSID) in Washington D.C., with the company having reoriented itself for prolonged litigation, and the Government of Indonesia having appointed a number of high level officials to represent itself. For Indonesia, the risk appears to be not so much in the initiation of such investment treaty proceedings themselves, but in the fact that the reputation of Indonesian institutions as being opaque at best and pervasively corrupt at worst will be a deciding factor in such cases, and will serve to create a precedent both for similar future disputes and as part of the international perception of Indonesia’s investment climate.

Newmont Nusa Tenggara has announced that it plans to offer its shares to the public, after the currently on-going divestment process is completed. And there have been similar comments from Freeport, although will less specificity, considering the on-going contract renegotiation process.

Renegotiation of previous generation mining Contracts of Work has seem some progress, however, Freeport, Newmont and Vale are still in negotiations, with the Government maintaining a position that the royalties should be raised to 10%. At the same time, there have been comments that certain elements of the government may support a temporary suspension of royalties to assist coal mining companies, who are currently facing significantly depressed prices. This initiative has so far been rejected by the Ministry of Finance. The practical implications of the mineral and coal price declines have been the shakeout in the industry which is starting to lead to asset sales, which may further increase as the less well-placed players begin to feed increasingly tougher financial conditions.

It now appears that the 2014 unprocessed mineral export ban will be relaxed, according to recent comments by Deputy Energy and Mineral Resources Minister Rudi Rubiandini, so as to allow a more realistic timeline for the construction of smelting plants.

The Chevron clean-up case continues apace, with the latest development being a challenge to the Attorney General’s Office’s right to probe the environmental clean-up project and the associated cost-recovery issues under the production sharing contract. In the meantime, four of Chevron’s employees have been detained over the matter.

The Telkomsel bankruptcy case is notable, but not unexpected, considering the previous Manulife debacle that unfolded along similar lines. The issue is the ability to initiate bankruptcy proceedings in relation to a solvent company based on a claim for payment under a contract that is in dispute. Hopefully the state ownership and wide customer base interests present in the Telkomsel case will spur on a revision of the Bankruptcy Law and court procedures rather than the previous practice, as seen in the Manulife decision being overturned on a technicality, of what would essentially amount to special treatment being afforded to Telkomsel while other businesses remain subject to the threat of such bankruptcy proceedings.

Of some note is a case that previously attracted significant public and international attention and highlighted the at times problematic defamation laws and prosecutions. The case culminated in the acquittal Prita Mulyasari by the Supreme Court, in the matter of defamation of, or as the court held a mere complaint regarding, Omni International Hospital.

 

Legislative Changes

The Law on Land Acquisition for Public Interest Development has seen the issuance of an implementing Presidential Regulation, which notably excludes already on-going projects from being subject to the new regime until the end of 2014. The implementing regulation is a welcome development in that it will introduce procedural certainty into the new land acquisition regime, however, issues with the length of the process continue to remain. A further legislative instrument that is expected is the implementing regulation by the National Land Agency (BPN), while, in the meantime, BPN has shown signs of increased activity with the issuance of a regulation that expands the authority of Land Bureaus.

A new Ministry of Trade regulation on franchising has been issued to introduce a requirement that 80% of raw materials be domestically sourced (with a possibility of obtaining exemptions). Furthermore, another regulation is expected to be issued to restrict the number of outlets owned by a franchisor or master franchisee to 100, in an effort to encourage engagement with local businesses. In relation to franchises, and the specificity of the permitting regulatory framework, it would also be advisable to keep abreast of the on-going cases of 7-Eleven and Lawson, which have allegedly exceeded their permitted business activities.

The domestic sourcing trend is notable, and has emerged in relation to a number of business areas. For example the Ministry of Industry has also recently issued a regulation setting out guidelines for the use of domestic products and services in the construction of electricity infrastructure.

Of some note is the issuance of a price benchmarking regulation for crude oil by the Ministry of Energy and Mineral Resources, which creates a similar framework to that applicable to the pricing of coal.

A revision of a capital markets regulator (Bapepam-LK) rule has introduced a tracing requirement to disclose ultimate beneficial shareholder ownership starting from the end of the year. An outstanding issue is that this may not be practicable or possible, and the regulation does not fully address how such tracing is to be accomplished. Nonetheless, with this provision Bapepam-LK has the basis to monitor the issuers’ and public company’s principal shareholders and controlling shareholders.

Of some note is a Supreme Court regulation that all corruption and high profile criminal cases have to be recorded (audio and video) at the district courts as of the start of this December. Hopefully such developments will set the scene and ultimately be accompanied by increased availability of court transcripts and decisions to the public.

Of note are the guideline process for geothermal electricity purchases by the National Electricity Company (PLN), which have recently been raised to 10-18 cents, depending on region, by the Ministry of Energy and Mineral Resources.

The Presidential Regulation on Government Procurement has seen an amendment with a few adjustments, although the issue continues to be how such regulations are implemented in practice by the institutions.

The Minister of Finance has revised a regulation governing asset depreciation for forestry, plantation, and farming businesses, which provides a higher level of detail than the previous 2008 regulation on the subject matter.

 

[Last update: 2012-10-01 10:36:15]

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