23 November 2007

Unease grows between Jakarta and Singapore
 

Resentment and envy still appear to underpin a testy relationship, writes Eric Ellis

ASIDE from Bali and the brothels and business parks bordering Singapore, the city-state's investors, like Australians, have never felt particularly comfortable in Indonesia.

While its bankers shelter billions in Indonesian loot from prying Jakarta investigators, it is generally regarded as a country best avoided, a corrupt swamp of intrigues on Singapore's pristine doorstep. And Indonesians return the suspicion with scorn. Former president B.J. Habibie once described Singapore as a Chinese "red dot" in an Islamic archipelago, a toy-town so insignificant that were it to suddenly vanish, Jakarta would not notice it missing.

That was 1998, and Indonesia was in no state to be patronising. The rupiah had lost 80% of its value, collapsing the economy. The post-Soeharto political vacuum would be exploited by religious extremists and - as Indonesian nationalists see it - by Singaporean Government funds in a $2 billion bottom-fishing trip accumulating state assets on the cheap: major banks, marquee property and, most controversially, Indonesia's two leading mobile phone carriers.

Nine years and several presidents on, a nasty fight between Jakarta and Singapore over those telcos suggests resentment, or envy, still informs the relationship, while raising questions about how economies manage the investments of sovereign wealth funds.

Much bitterness bubbles around Telkomsel and Indosat, the carriers that control 80% of Indonesia's mobile phones market. Offshoots of Singapore's Temasek Holdings bought in soon after Megawati Soekarnoputri became president in mid-2001, when Indonesia was on its knees.

Temasek's state backing gave the deals a foreign policy hue, while Indonesia was consumed by terror, and the Bali-bombing terrorists threatening to absorb skittish Singapore into its Islamist caliphate. But Temasek's boldness has been rewarded. Its 56%-owned SingTel Optus owns a 35% share of Telkomsel, now worth an estimated four or five times its original investment, while its 100%-owned STT Telemedia controls 42% of Indosat, with a similar multiple. SingTel gets 20% of its profits from Indonesia.

But perhaps not for much longer. After a long probe into the mobiles market, measured per user as one of the world's biggest and, with margins approaching 60%, most lucrative, Indonesia's anti-monopoly agency this week demanded Temasek sell at least one of the two interests. It fined eight Singaporean affiliates and demanded tariffs be slashed after accusing both operators of fixing prices.

It is the second time in a year that Temasek's deal making has upset a powerful neighbour, prompting a coup in Thailand last year after taking then prime minister Thaksin Shinawatra out of his family business. The huge paper losses there stained the reputation of Temasek's technocratic chief executive Ho Ching, wife of Singapore Prime Minister Lee Hsien Loong. As in Bangkok, Temasek denies wrongdoing in Jakarta, and is challenging the ruling in court.

Singapore's official broadcaster described the ruling as a "foregone conclusion that had left political watchers, businessmen and international investors shaking their heads over the unpredictable nature of doing business in Indonesia". 

Disagreeable though it is for Singapore Inc, tussles between business and regulators are inevitable. As Richard Pratt and Amcor doubtless rue, troubles are inescapable when governments decree functioning and consumer-friendly competitive markets. Moreover, the very existence of "independent" institutions such as the KPPU, the Bahasa acronym for Jakarta's competition commission, was what investors demanded Indonesia create to rid itself of corruption and cronyism, and the policy-by-personal-fiat that marked Soeharto's 30-year kleptocracy. (Indeed, were the KPPU's rulings on cross-ownership applied in Singapore itself, state-owned Temasek might be in a pickle there, too. Temasek companies control Singapore's two leading mobile operators, and have a substantial stake in the third. But the same Government that owns Temasek only instituted a competition commission less than three years ago, after Indonesia, and insists it provides full and fair competition.)

But this being Indonesia, where few things are ever as they appear, there are intrigues and wrinkles.

The KPPU ruling was light on detail, and comes amid unresolved diplomatic dramas that have poisoned bilateral affairs. The most contentious has been Jakarta's desire to extradite errant businessmen from legal exile in Singapore. Merrill Lynch found recently that 33% of Singapore's 55,000 millionaires were Indonesians controlling $US87 billion ($A98.78 billion) in assets on the island, fuelling a colossal property boom.

Jakarta sees an extradition treaty with a reluctant Singapore as essential to its anti-corruption effort, so it can go after corrupt officials and businessmen who have salted ill-gotten gains in Singapore banks. Jakarta is also miffed that Singapore is extending its borders, demanding that traders stop shipping Indonesian sand for Singaporean reclamations. With the economy doing well, Indonesia is confidently reforming itself into one of Asia's most robust democracies. From environment policy to Middle East peace prospects, Jakarta is again projecting authority as an Asian power.

There have been intrigues aplenty during the KPPU drama. This week I was handed a document that purports to be a working brief for a Russian oligarch's plan to buy Temasek's Indosat share, citing the connivance of two Indonesian cabinet ministers and their staff, known collegiately by the Russians as "teams". Parts of the "Project Indosat" document seem a nod to Le Carre. It describes a stage-managed campaign of protests, financed by the Russians, against the Singaporean ownership of Indosat to force its divestment. Naturally, millions would be paid to named government officials whose lobbying and influence would nail the deal.

The document's veracity is impossible to establish, but there is a PhotoShop feel about it, which has not stopped the Temasek-friendly Singapore media reporting slabs of it. The fact that it is being proferred by Singapore-friendly backroom "consultants" skilled in "the dark arts" suggests scepticism is the best policy. But the fact that it is being whizzed into Jakarta inboxes is eloquent testimony of the battle's nastiness.

Another intrigue concerns Indonesian Welfare Minister Aburizal Bakrie, a great survivor from the Soeharto era. He is not mentioned in the document, but lobbyists point out that a junior telco owned by his family has big expansion plans. Indonesia has one-third the mobile penetration of Singapore, suggesting much room for new players, but the inference is clear. A lobbyist told me that some KPPU members are close to Indonesian Vice-President Jusuf Kalla, whose family business had a 10-year joint venture with SingTel in a struggling telco centred on Bali and Indonesia's eastern islands. Kalla's group recently bought out SingTel, which lost money on the deal. Kalla is seen as the champion ridding Indonesian telcos of their Singapore partners. He is also contemplating a tilt at the presidency in 2009.

Alongside the legal campaign, Singapore has - untypically for the reclusive Temasek group - mounted a public relations blitz. Its lavish lunch briefings of the past year are famous among Jakarta's poorly paid local scribes. But in arguing that Temasek's offshoots operate independently of the Government and the parent and that there is no conflicts of interest, the Singaporeans sometimes shoot themselves in the foot. A lawyer insisting on this independence is a director of another Temasek company and a member of Parliament representing the long-ruling party.

The Singaporean campaign claims the ruling will backfire on Indonesia's foreign investment aspirations, describing it as a politically inspired legal travesty. This may well be right - Indonesia's legal system is light years from perfect and rumours swirl around some KPPU commissioners. But that is also a self-serving argument as Indonesia enjoys its highest foreign investment since the mid-'90s, mostly in the resources sector where the law is as quixotic as ever.

Still, the matter is shaping as a test case for Indonesia's evolving institutions, and a setback for Singapore's efforts to spread beyond its mature economy.

President Susilo Bambang Yudhoyono pledged not to intervene, and underlined the KPPU's independence. But it is clear among the ruling elite that Singapore Inc is no longer so welcome in Indonesia - Temasek is also being pressured over two banks in which it has invested - and as the deadline nears, its exit from not-so-happy investments will probably come down to price.

The proceeds will end up in places such as Australia, where the welcome mat, and the legal system, are not so soiled.

Eric Ellis is South-East Asia correspondent for Fortune magazine