Expect greater investor scrutiny to combat corruption in 2015
Felice Iskandar and Ian Barclay
The Jakarta Post
The year 2015 will bring unprecedented new foreign investment to Indonesia but fear of corruption will mean heightened scrutiny of Indonesian businesses.
Foreign investors have renewed their interest in Indonesia expecting a more transparent environment conducive to investment under President Joko 'Jokowi' Widodo's administration. Government efforts to move away from the opaque business practices that have dominated the business landscape in the country's recent past can be seen in the mining sector, where it aims to simplify the licensing process, increase disclosure of mining contracts and improve coordination between the central and local governments.
As investors' expectations are met by concrete government efforts, the resulting increase in confidence has seen US companies alone prepared to invest approximately US$61 billion into the country's economy over the next five years.
Foreign investors, new and old, are looking to invest in Indonesia's non-traditional sectors, expanding their horizons beyond natural resources. Attention is now focused on infrastructure, agriculture, consumer goods, education, healthcare and finance, as the country's growing middle class supports its economic development. The optimism surrounding the country's prospects looks set to stay for the foreseeable future.
That's the good news. But, investment opportunities in Indonesia do not come without significant risks, which can easily stop deals in their tracks. While foreign investors remain concerned about bureaucratic red tape, currency risk and political instability, it is the ever-present threat of corruption that really keeps them awake at night and causes many to walk away from potential ventures.
Corruption in Indonesia has long been highlighted by the NGO Transparency International (TI), which ranks countries based on the perception of public-sector corruption. Only Vietnam, Laos, Papua New Guinea, Cambodia and Myanmar rank lower in the neighborhood. Inherent difficulties in measuring corruption, questions around TI's data sources and its focus on public rather than private sector corruption may allow investors to ignore Indonesia's consistently low ranking.
However, they cannot afford to dismiss US anti-corruption laws and enforcement authorities. These past years, we have seen charges brought by US authorities against several international companies active in Indonesia for violating the Foreign Practices Corrupt Act (FCPA). The FCPA is a US criminal law that prohibits US companies and companies with links to the US from bribing foreign government officials.
In December 2014, three senior executives at Alstom SA, the French power company, agreed to pay a $772 million criminal penalty for bribing Indonesian government officials and a state-owned electricity company to secure two power plant projects. The bribes helped Alstom secure the $118-million Tarahan project and the $260-million Muara Tawar project. Earlier the same year, in March, Marubeni Corporation, Alstom's Japanese partner in the above-mentioned projects, was also required to pay an $88-million fine.
Other big business names have also had their fingers burned: in December 2012, Allianz SE, the German insurer, was fined more than $12.3 million by US regulators for making improper payments to Indonesian government officials. Similarly, in March 2010, Innospec Inc. (formerly Associated Octel Corporation), a specialty chemical company, agreed to a $40.2 million settlement with US and UK authorities after charges of improper payments to government figures.
The prospect of heavy fines and reputational harm for failing to comply with anti-corruption laws makes foreign investors jittery and rightly cautious, pushing investors to use firms like ours to closely scrutinize the backgrounds of individuals and firms they are considering investing in, acquiring or partnering with. For every billion dollars of investment, millions are spent analyzing and investigating potential business partners and on specialist anti-corruption lawyers to structure deals to avoid engaging businesses with questionable backgrounds or making illegal payments to government officials.
In recent years, we have seen unprecedented interest from investors looking to acquire companies or expand their existing businesses in Indonesia. But time and time again, these efforts are prevented by the discovery of corruption in various forms, undisclosed political and government relationships or other red flags.
Fear of corruption puts Indonesian businesses under the microscope, which often results in increased due diligence and the discovery of other issues equally likely to scare away a foreign partner. These range from environmental or human rights abuses, sanctions violations, to money laundering or accounting fraud.
As we enter 2015, Indonesia is firmly back on foreign investors' maps, but Indonesian businesses should not presume it will be easy to secure or keep their foreign partners. If you are a corrupt businessman or firm then expect increased scrutiny from foreign investors and once they have completed their due diligence don't bank on them queuing up at your door. The risks for them are just too high.
Felice Iskandar leads Stroz Friedberg's Indonesia research team. Ian Barclay is a managing director at Stroz Friedberg based in Hong Kong and head of the firm's Asian operations. The views expressed are their own.
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