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Message from the Board


Message from the Board

December 2012

As 2012 draws to a close we look back on a year of steady business growth and at an unfortunate start to a period of increasingly haphazard populist legislation that can be expected to prevail until the 2014 Presidential Election (currently scheduled for 9 July 2014, following the 9 April 2014 House of Representatives election). 

This year has also seen a certain degree of labor unrest, and more importantly an emergence of labor unions that are independent. For the first time, the labor unions have their own funds to organize protests and appear to no longer be beholden to political or business interests. This has resulted in a disproportionately dangerous situation, where, even though labor costs typically contribute single digits percentages for most businesses (except for services and industry with legacy or efficiency issues), the widespread strikes and particularly the forced “sweeping” practices pose a serious threat of disruption. This is not an issue that will resolve itself, and it should be noted that smaller unions can be expected to be controlled by external/larger unions, resulting in situations where an agreement reached with a local union that does not satisfy the larger union will not be sustainable. The result is that agreements reached by unrelated companies with unrelated unions will have an impact on business, with the current hot issues of outsourcing and minimum wage being the factors of immediate concern.

 

A Growing Market 

Nonetheless, Indonesia’s substantial population, whose prosperity is steadily increasing, and ample natural resources have proven to be an attractive business environment for both foreign and domestic investment. At a time of turmoil in more developed markets Indonesia presents a potentially more appealing proposition than some of its peers – an economy driven by growing domestic demand rather than exports, with a domestic resource base, and a market that is growing organically rather than due to, and arguably in spite of, government policies. 

Combined with substantial market opportunities presented by a wide range of sectors that have yet to be developed, including even basics such as agriculture, there is ample room for continued business growth in the years and decades to come. However, there are underlying reasons for the continued existence of such opportunities that themselves present challenges, such as infrastructure bottlenecks and excessive and inefficient bureaucracy (combined with at times opaque legislation and the often-resulting corruption).

This raises the question of whether slow project completion can be overcome in time for Indonesia to take advantage of the economic recoveries in the US and the EU. Or whether the delays will result in it being a mere spectator while becoming one of the BRIC countries will once again be postponed and other countries in the region are able to better position themselves to benefit from a return of worldwide growth.

 

Infrastructure 

Underdeveloped infrastructure has been a major bottleneck for Indonesian development, even in light of the impressive economic growth that has stayed at or above 6% and is expected to continue. The problems span a range of sectors, with power generation probably being one of the few examples where substantial development is currently occurring. Transport infrastructure poses one of the greatest challenges and has come to the fore in an ever more pressing manner due to the growing prosperity of the population that has resulted in increased vehicle ownership and an increased need to transport raw materials and finished products.

Infrastructure development is supported by a number of programs, such as the Public Private Partnership framework, the supporting Infrastructure Guarantees, the Business Viability Guarantees for electrical power projects, and the recently revamped land acquisition for public interest development framework that consists of a new law and a number of implementing regulations. Nonetheless, this has so far not been sufficient – the projects are taking too long to complete, not least because of the one to two years that it takes to conduct land acquisition even under the revised framework (which notably will not apply to currently stalled projects until 2014).

 

Corruption 

A degree of success has been achieved in the fight against corruption, and it can now be said that higher-level courts and most top-level officials are no longer corrupt. At the same time the Corruption Eradication Commission (KPK) is increasingly active, with a recent notable case being the naming of the Minister of Sport as a suspect in an investigation. However, corruption at lower levels, and in the regions, continues to be a major issue, as does the opposition to the KPK, which manifested itself from certain factions within the Police during the ongoing investigation into Police procurement corruption.

The factors that enable corruption also take a heavy toll, causing uncertainty due to opaque legislation and an excessive bureaucracy that operates much slower than regulated and often acts in an arbitrary manner. Other aspects of corruption also affect private sector relationships, due to the increased uncertainty caused by being unable to rely on the judiciary to be competent and impartial in the settlement of disputes.

Corrupt practices themselves have adapted and transformed in recent times, with a shift to rent-seeking behavior rather than payment for obtaining an advantage. Which in turn makes business operations more susceptible to disruption unless the bureaucracy is navigated with a view of potential risks and a realistic view of timelines. This requires companies who implement compliance policies and particularly those who are subject to extraterritorial anti-corruption legislation to take a much longer-term strategic view rather than merely having a reactive approach.

 

Pre-Election Policies

The election season has started over two years before the actual election, and has so far had the effect of a range of populist policies being introduced, notably with little consideration for their regulatory impact. These have ranged from the particular focus on the natural resources industry in the form of a 51% divestment requirement and the domestic processing obligation, to policies driven by similar sentiments in manufacturing (SNI standards and domestic sourcing requirements), retail (restrictions on franchising), business ownership (particularly in relations to banks), as well as broader self sufficiency goals that for instance underlie the new Food Law.

The next phase of pre-election changes will be the increasing reluctance of many high-level officials, not just the cabinet members, to make any significant decisions or issue any substantive policies. Since, due to the currently unpredictable outcome of 2014, the uncertain consequences of such decisions post-2014 will make them hesitant to take any risks. Another aspect of this will be the increased self-interest, which may manifest itself as a lack of participation or even as active sabotage, as certain individuals seek to advance at the expense of their peers and superiors.

However, even the uncertainty introduced by the populist policies is itself uncertain, and there appears to be some ongoing backtracking on both the mining divestment and the processing obligations. Arguably not least because elections, particularly at the local level, will require funds and a demonstration of development, which in turn requires projects to transition from being mere pieces of paper and a trade in favors into operating businesses that provide development and generate cash. 

A notable legislative change, which has notably come from the Constitutional Court rather than the legislators, is the dissolution of BP Migas, the independent oil and gas contracting agency, on the basis of populist reasoning that called for increased government ability to regulate the industry and for more development to be carried out by state owned enterprises (SOE) rather than foreign contractors under Production Sharing Contracts (PSC). The outcome appears to be a transition to a framework of oil and gas licenses being issued to SOEs, who will then enter into PSCs on their own behalf. Unfortunately, the reality of such an arrangement is that there will be very specific beneficiaries who will extract significant profits by manipulating the license tenders and then allocating the PSCs from the SOEs, while there will be no practical improvement in the development of domestic oil and gas business.

 

2014 Presidential Election 

Presidential hopefuls continue to comprise a large, ever expanding, and increasingly diverse group, and it is probably too early to comment on the chances of any specific candidate beyond the fact that they are considered as being qualified to serve as President. What is notable is the emergence of independent candidates as strong contenders, largely due to the public’s disappointment in the ever-prevalent corruption scandals and insufficient development.

A recently published poll by the Indonesian Survey Institute highly ranks a number of candidates without strong party affiliations, notably including the former Minister of Finance and current Director of the World Bank, Sri Mulyani Indrawati in the top five while not ranking either Prabowo Subianto or Golkar’s Aburizal Bakrie. This shift in focus away from parties to individuals is something to monitor in the coming months, as the independent candidates start to cooperate with smaller parties, then look to assemble coalitions, and ultimately gain the support of larger parties at a later stage.

 
 

17 December 2012, Arief Tarunakarya Surowidjojo

 

[Last update: 2012-12-18 12:15:00]

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