October 21, 2009

Indonesian reform the path to investment

ERIC ELLIS

PESKY corporate regulators sniffing around the business? Stock exchange on your case? Not in Jakarta, where it's plain sailing for all manner of corporate governance fiddles.

Indonesia's peak regulator, the Capital Market and Financial Institutions Supervisory Agency, known as Bapepam by its Bahasa acronym, has rarely seen a deal it didn't like. Bapepam doesn't really do punishment.

It doesn't even do much wrist slapping. Little wonder, then, that Bapepam rulings are regarded as a standing joke among investors in Jakarta.

So Indonesia, long regarded as one of the world's most corrupt countries, can seem a shadowy den of thieves.

What's new?

Well, what's new is that the country is back on investors' radars, as it tries to reform itself from brutal dictatorship to robust democracy. Indonesia has been getting some good reviews recently, rightly getting top marks for its peaceful transition to democracy, wobbly though it remains. Save some notable duds forced on him by political horsetrading, President Susilo Bambang Yudhoyono has a reasonable technocratic team at hand, which he can strengthen after yesterday's second term inauguration.

The sharemarket is one of the world's best performers this year. Indeed, Indonesia's lustre is such that commentators like to describe it as the newest member of the emerging BRIC economies - Brazil, Russia, India and China - the countries you can't ignore if you are a global corporate player.

It's not so much that Indonesia would replace India as the ''I'' in BRIC, but more that it adds another massive market - BRIIC, if you will.

But democracy and reform aren't just about enfranchising all the villagers from Sabang, on Indonesia's north-western tip of Sumatra, all the way to Merauke in far eastern Papua.

It's equally about creating, empowering, securing and insulating the institutions that come alongside reformasi - the judiciary, civil service, parliament and then consumer rights, market regulation and, as importantly, corporate governance and shareholder transparency. And this is where Indonesia has a long way to go before it again attracts serious investment, before it is elevated to BRIICdom.

So, why should Australian business care? Well, because if you believe, as Kevin Rudd in Jakarta this week urges us too, that Indonesia is a worthwhile place to invest, to encourage civil society - because failure evokes the unthinkable, the brown peril, a failed state on our doorstep - you need to know the type of environment in which you are risking funds.

The path to Indonesian profits is littered with carcasses, scams and ugly clashes between foreign investors and domestic potentates. Make good money in Indonesia, and you risk a powerful rentseeker arriving to steal your business and shut you down, by manipulating state agencies.

France's Carrefour supermarket chain arrived a few years ago and shook up Indonesia's contemptuous local retail scene, controlled by crony businessmen. Coincidentally, Carrefour suddenly found itself subject to an investigation by Indonesia's monopolies agency, the KPPU - an institution that didn't exist a decade ago and an official of which was jailed this year for taking money.

Recourse in the courts? In Indonesia, court actions are opaque, take years and cost this year's profits, and next year's too. Ask anyone who has tried to win a case in the notorious South Jakarta judiciary.

Too often justice in Indonesia is an auction - offer a bent judge some cash for a settlement and he'll take the offer to the other side to better it, and so it spirals. Indonesians ruefully joke they have the best legal system money can buy.

Bumi Resources, Indonesia's biggest publicly listed mining group, recently faced a rare probe by Bapepam, which finally acquiesced after months of shrill complaints from grumpy minority shareholders to look at recent related-party deals.

Bumi, controlled by the powerful Bakrie family whose patriarch Aburizal Bakrie is a cabinet minister and would-be political kingmaker, secured an urgent meeting in June with Bapepam after its chairman Fuad Rahmany, had waved through two earlier controversial Bumi deals but said he'd be continuing the investigation. Suddenly, the third deal was fine or, as reported in the Jakarta Post, "Fuad made the about-face after a closed-door meeting with Nirwan Bakrie, a co-owner of Bumi, and Ari Hudaya, the Bumi president director".

So what happened in the back room? Shareholders will never know.

Bapepam falls under the purview of a Finance Ministry run by one of Indonesia's star performers, Sri Mulyani Indrawati. A former International Monetary Fund executive, the cleanskin Mulyani is credited with having turned around Indonesia's image.

She has been SBY's best appointment, cleaning up the putrid customs and tax departments, both notorious dens of corruption, her reforms attracting opposition from cabinet colleagues such as Aburizal Bakrie. (Bakrie recently told Reuters that Mulyani "doesn't understand a thing about the real sector. But [as] finance minister [she] is good, as a cashier she's good.'')

Investors say Bapepam and other state agencies are in dire need of overhaul by Mulyani, deploying the same zeal she used to tackle other iffy parts of the government.

After SBY's landslide re-election, she has more of a mandate to give regulators a Taser or three to go and clean up the business sector.

If she can, the serious money will follow.

Eric Ellis writes for Forbes from Asia.