indonesia - final paper
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Indonesia:
A Country Analysis
Prepared by:Adnan Gilani
Jorge MartinezDavid Panzer
Manuel RodriguezCaroline Sheu
April 24, 2000Bus. 487: The Politics & Economics of Development
Professor Marvin Zonis
With thanks toCNA Financial,
Deutsche Bank,Diamond Technology Partners,
and Pfizer for their generous support of this research.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY...........................................................................................................................................4
ANALYTICAL FRAMEWORK.................................................................................................................................5
ECONOMIC GROWTH..............................................................................................................................................8
MACROECONOMIC STABILITY..............................................................................................................................................8BANK & E NTERPRISE RESTRUCTURING...............................................................................................................................11COMPETITIVE ADVANTAGE...............................................................................................................................................14
POLITICAL STABILITY.........................................................................................................................................16
JUDICIAL, LEGAL, AND CIVIL SERVICE R EFORM.................................................................................................................16DEMOCRATIC INSTITUTIONS & THE POLITICAL SYSTEM.........................................................................................................20DECENTRALIZATION...........................................................................................................................................22
APPENDICES.............................................................................................................................................................25
APPENDIX 1 -- MAP OF I NDONESIA..................................................................................................................................25APPENDIX 2 -- OVERVIEW OF ASSESSMENT........................................................................................................................26APPENDIX 3 -- MACROECONOMIC VARIABLES.....................................................................................................................27APPENDIX 4 -- IMF-MOTIVATED REFORMS......................................................................................................................28APPENDIX 5 -- STRUCTURE OF TRADE...............................................................................................................................29APPENDIX 6 -- 1999 ELECTION R ESULTS.........................................................................................................................30APPENDIX 7 -- RISK MANAGEMENT IN INDONESIA................................................................................................................31APPENDIX 8 -- PROJECT LOGISTICS...................................................................................................................................32
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EXECU T I VE S U MMARY
As many of our interviewees characterized Indonesia, “It’s too early to invest today,
but too late tomorrow.” While we disagree that Indonesia will be much improved in
the near future, we recognize that great rewards can often be achieved during times
of great risk. However, based on an analysis of the factors in our model, our outlook
for Indonesia over the next four years is pessimistic.
Although Indonesia has achieved macroeconomic stability, it will be difficult for the
country to achieve sustainable, long-term growth. There is still substantial cost and
effort associated with bank and corporate restructuring, and it is not clear that the
Indonesian government has the political willpower and clout to overcome the pain
(economic costs and political opposition) associated with restructuring. The debt
overhang will continue to hurt existing enterprises and even new ventures.
Furthermore, Indonesia has limited competitive advantages compared to its
neighbors in Southeast Asia, especially in the area of technical and manufacturing
capability.
Fortunately, Indonesia’s transition from the Suharto dictatorship has thus far been
remarkably peaceful. President Abdurrahman Wahid has been a strong force for
political stability. However, much work remains. The high level of corruption and the
inherently slow nature of complicated judicial and legal reforms will make it a difficultenvironment for foreign investors. There is also substantial risk associated with the
upcoming transition from Wahid to a new government, whether it occurs as part of
the 2004 elections or earlier. Finally, the decentralization of government power to
the provinces, intended to address regional dissatisfaction (including separatist
movements), entails a sweeping reform of Indonesia’s government structure. This
will introduce further uncertainty, especially since it is not clear that the provinces
have the necessary capabilities to govern effectively.
For these reasons, which are analyzed further in this paper, we conclude that there is
high risk and limited opportunity for foreign investment in Indonesia over the next
four years, especially compared to opportunities in other countries.
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AN ALYT ICAL F R AMEW O R K
In order to analyze the opportunities and potential for future investment in Indonesia,
we developed a model that incorporates factors that impact the country’s economic
and political prospects. As Indonesia seeks to overcome the lingering effects of the
1998 economic and political crisis, progress in these areas is critical and a minimum
requirement for external investment.
Investment
Opportunity
Economic
Growth
PoliticalStability
Judicial, Legal and
Civil Service Reform
Democratic Institutions
& the Political System
Decentralization
Bank & CorporateRestructuring
MacroeconomicStability
Competitive
Advantage
ECONOMIC FACTORS -- The currency crisis that began in Thailand in mid-1997 soon
spread throughout Southeast Asia, and by early 1998, Indonesia’s economy had
severely deteriorated. In 1998, the GDP fell 13%, inflation was 66%, and the
Indonesian Rupiah fell 66% versus the dollar. In 2000, Indonesia is still working
through the effects of the crisis and addressing the substantial economic weaknesses
that the crisis revealed.
We hypothesize that investment opportunity depends on macroeconomic stability in
the country, which is a prerequisite for economic growth and realizing investment
returns. Furthermore, the country must conduct bank and corporate restructuring to
address the ramifications of the crisis. This is essential for the country to have ahealthy financial climate and a viable corporate sector. Finally, for Indonesia to be
an attractive investment opportunity, the country must offer compelling competitive
advantages or other reasons for investors to single it out.
While Indonesia has now regained macroeconomic stability, we conclude that
substantial economic, banking and corporate restructuring remains. Furthermore,
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Indonesia’s past competitive advantages are now less attractive, although investors
that bring the necessary skills can reap rewards while participating in the
development of new capabilities in Indonesia.
POLITICAL FACTORS -- Indonesia experienced a unique form of the Southeast Asia
crisis. Whereas most of Indonesia’s neighbors had introduced political reforms prior
to the crisis, Indonesia had not. As a result, the economic crisis was the impetus for
dramatic political reform, i.e., the dissolution of the 30-year Suharto dictatorship.
Today, Indonesia is attempting to build a functioning democracy. This requires the
reform and/or creation of numerous institutions, such as the judiciary and local
government. It has also become clear that the sometimes oppressive dictatorship
helped to suppress ethnic and religious tensions. Now that these tensions have risen
to the forefront (in the form of secessionist demands and occasional mob violence),
Indonesia must adopt a form of government that recognizes the diversity of its
population, empowers the populace and provides channels for grievances to be
resolved.
Indonesia has broad plans for judicial and legal reform. The country is also gaining
experience with democratic institutions and the devolution of power away from the
central government. We anticipate that this will be a lengthy process, with a lot of
“learning by doing.” As such, there will be lower levels of political stability over the
next several years, and foreign investors must deal with this unpredictability.
OTHER NOTES -- Our model does not consider a category of “social factors” to be a
primary concern when evaluating investment opportunity in Indonesia. The reason is
two-fold. First, we see minimal risk in this area. Although there was an increase in
poverty during the 1998 crisis, the government’s relief efforts proved to be very
effective. Many observers found Indonesian society to be surprisingly resilient in the
face of the crisis, due to population mobility, strong extended families and the
abundance of foodstuff that results from Indonesia’s tropic location.1 Furthermore,
during the Suharto years, education was of primary importance; in fact, the Minister
of Education was typically the most powerful cabinet member. Second, we found
that some social factors (e.g., corruption, the implications of religion) were best
incorporated into other areas of our model.
However, there is one latent social factor that may impact Indonesia in the future and
thus merits a mention. During our interviews, we were told that Indonesia is
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suffering from an unacknowledged and severe AIDS epidemic. If this is the case, and
the government may acknowledge this in the near term, there will be broad
ramifications for the allocation of government funds and for the country’s social
structure.
In the remaining sections of this paper, we analyze each factor contributing to
Indonesia’s economic growth and political stability. While the depth of analysis is
limited by the allotted space, this paper explores the key factors that will shape
Indonesia’s future and impact the opportunity for foreign investment. We also assess
the short term and long term outlook in each area in order to draw conclusions about
the prospects for future foreign investment in Indonesia. (Our long-term horizon
extends through 2004, the date of the next presidential elections.) Each factor also
includes a description of key indicators and the implications for investment.
As suggested in the Executive Summary, we believe that opportunities in Indonesia
are best evaluated in comparison to opportunities in other countries. Although this
paper does not conduct such a comparative assessment, such analysis should be
integral to the decision process of a prospective investor.
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E C O N O M I C G R O W T H
MACROECONOMIC STABILITY
Short Term Outlook : Indonesia has overcome the macroeconomic effects of the1998 crisis, allowing the government to focus on deeper economic restructuring and political reforms.
Longer Term Outlook : The current signs of economic growth are misleading,because they are merely the inevitable “bounce” following the economic crash. Theeconomic situation remains precarious, because the government has limited fiscalleeway as a result of its huge debt burden. Lasting economic growth will depend onforeign investment and trade, which we suspect is five years away, due to the needfor broad restructuring.
Key Indicators: GDP growth, levels of foreign trade and investment, and progress ineconomic restructuring.
Implications: Investment opportunities as the economy rebounds, but fiscalausterity and political-economic risk limits the potential.
At the least, Indonesia’s macroeconomic environment is solid and stable, and there
are signs that it is recovering from the crisis of 1998. This is good news -- compared
to Indonesia’s other challenges, the macroeconomy is now of little concern. Key
macroeconomic indicators have recovered from the crisis, as shown in the charts in
Appendix 3. Inflation is negligible (-0.9% in 1999), the Rupiah is trading within a
narrow range, and domestic interest rates have fallen. Interest rates and the foreign
exchange swap premium have returned to their pre-crisis levels (domestic rates are
6-7 percentage points above international rates).
The recovery is attributable to two actions: sound monetary management, combined
with the initiation of significant institutional reforms (see “Bank & Corporate
Restructuring”). However, the current signs of GDP growth (3-4% in 2000) are widely
believed to be driven by an increase in domestic consumption, which is a short-term,
unsustainable affect. Non-oil exports have been weak, despite the decline in the
Rupiah since 1997, so exports are not providing a simple path to recovery.2 Also,
total investment contracted by 21% in 1999, and it will take substantial progress in
corporate restructuring and improvements in investor confidence for investment to
rebound.
In the aftermath of the crisis, the economy has significant excess capacity, which is
contributing to the recovery as assets are once again made productive. This over-
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capacity has several implications. For growth to continue, assets must be returned
to use, assuming there is adequate domestic and international demand. However,
some of the excess capacity resulted from unwise, and potentially corrupt,
investments prior to the crisis. As a result, there is a need for corporations to
restructure both their real and their financial assets. While international investmentis needed to provide working capital and to help resolve corporate debt issues,
international investors also need to contribute management expertise and
technology.
Recognizing that foreign investment is critical to future growth, President Wahid is
actively encouraging Asian investors to invest in Indonesia, and in 1998, Indonesia
reduced regulatory barriers to foreign investment. However, foreign investment has
not recovered to pre-crisis levels. (FDI was $4.7 billion in 1997, but -$397 million in
1999.3) Furthermore, domestic investors, who moved their funds to Singapore during
the initial stages of the crisis, are just starting to repatriate their funds. Some such
investors appear most interested in reacquiring their bankrupt companies at bargain
prices, with little intention of necessary restructuring, in order to reestablish the
“fiefdoms” that they enjoyed before the crisis. (The IMF has complained that such
debtors are often viewed as victims rather than perpetrators.)
As the economy recovers, the poverty rate is slowly declining. The rate had doubled
to 20% between Feb. 1996 and Dec. 1998 as the economy fell into disarray during
the crisis. Although the rate is now stable and perhaps declining, estimates are that
it will take more than five years for poverty to fall to its pre-crisis level.4
A large portion of Indonesia’s economy revolves around oil and gas exports (16% of
total 1998 exports). However, in response to the slump in oil markets in the mid-
1980s, Indonesia promoted non-oil/gas exports and has thus reduced its dependency
on oil and gas. In 1998, Indonesia’s main trading partners were Japan, the U.S. and
Singapore, which together accounted for almost half of Indonesia’s imports and
exports. Indonesia’s primary imports are intermediate goods (75%), especiallyindustrial raw materials and spare parts.5
Government debt is quite high as a result of the crisis. Debt increased from 23% of
GDP in March 1997 to 94% of GDP in March 2000. Three-fourths of the increase was
associated with bank restructuring program. Government debt service payments will
absorb over 50% of government tax revenues in future years.
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In 2000, the government anticipates a budget deficit of 4%, a level achieved through
increases in taxes and tax compliance, restructuring of foreign debts, and an
unanticipated surge in oil prices. Indonesia will must take on additional foreign debt
(up to $9 billion) to finance half of this deficit. (Indonesia recently rescheduled $6
billion in existing debt for another 10 to 20 years, leading to an S&P downgrade to“default” status.) The government plans to finance the remainder through asset
sales by the bank restructuring program (IBRA). This is an area of significant risk,
because as described below, political disagreements and the apprehension of foreign
investors hinder the asset sale program. As a result, the government could face a
funding crisis. However, the United States and other countries have committed
themselves to Indonesia’s recovery (and maturation into the world’s third-largest
democracy), so assistance will likely be available in the event of future difficulties.
Organizations such as the IMF are using the release of funds as a club to force the
government to finally implement much-discussed reforms. For example, the
government has pledged itself to a reduction in fuel subsidies, which is critical to
introducing greater market forces and reducing the budget deficit. However, the
plan has been delayed by disagreement over the most equitable approach. Thus far,
the government has been unable to achieve agreement in this area, and it has
frequently abandoned announced plans. It is clear that the necessary economic
reforms depend heavily on the political environment. (See Appendix 4 for an
overview of IMF-motivated reforms.) For this reason, economic stability depends on
the ability of President Wahid to structure a governing coalition that is committed to
the difficult, but essential, economic reforms.
In summary, we believe that Indonesia’s macroeconomy has stabilized and is on the
rebound from the crisis. However, there are two areas of significant political-
economic risk. The first concern is the fiscal strength of the Indonesian government,
especially in light of its need to manage debt resulting from the crisis. The second
concern is the political will to implement difficult economic reforms. While the
country currently offers a stable economic environment, potential investors must
recognize that lasting economic growth is possible only if the government
implements the necessary reforms and regains the confidence of foreign observers
through wise economic policies.
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BANK & ENTERPRISE RESTRUCTURING
Short-term outlook: Restructuring will continue at a slow pace, likely just fast enough to appease foreign lenders such as the IMF. Many changes will be cosmetic.
Long-term outlook: Bank and corporate restructuring will achieve momentum.However, this depends on judicial reforms that guarantee the rule of law and
regulatory reforms that enforce corporate/bank accountability, as well as a highdegree of political resolve to spur the process
Key Indicators: Asset sales by IBRA and progress in bank privatizations.Dissolution of the most insolvent banks. Transparency of bank reporting.
Implications: As long as bank restructuring does not progress, companies won’t haveaccess to local lending, and doing business in Indonesia will be more expensive andrisky. Slow corporate restructuring would also delay the interconnected bank restructuring, and it would hinder the formation of a flourishing domestic businesssector.
Our interviewees frequently emphasized the same point: one of the most important
short-term objectives must be to restructure the banking industry and corporations.
Currently, Indonesian companies cannot access credit, and no modern economy can
operate without credit and financial flows. Improved corporate creditworthiness,
which is crucial to achieving sustained economic growth (and avoiding a repeat of
the conditions that precipitated the crisis), will require debt and operational
restructuring. Also, corporate and bank restructuring are so linked that the progress
in one, or lack off, inevitably impacts the other.
BANK RESTRUCTURING:Although everyone recognizes the importance of restructuring the banking sector, it
is now more than two years after the crisis and the work has just begun. As a result
of the crisis, 66 of the 160 private banks were closed. The state took over twelve
banks and, together with the owners, recapitalized eight more. IMF involvement was
also critical to the unfolding of events in the banking sector. In response to the crisis,
the IMF required Indonesia to reduce liquidity, which increased the number of
bankruptcies and further damaged the banking sector. The IMF recommended
closing the initial 14 banks. Since each of these 14 banks was partially owned by amember of the ruling Suharto family, their closure demonstrated that no bank was
safe from closure or government takeover. Therefore, many banks and companies
transferred their remaining assets to foreign countries, especially Malaysia, further
worsening the situation.
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As a result of the bank closures and state intervention, private domestic banks
account for only 15% of the banking system today versus a historical 50%. At the
same time, state banks now account for 75% of the liabilities of the banking system
and 90% of its negative net worth, making the state the most important player in the
industry by far.
Another important player in the restructuring process is the Indonesian Bank
Restructuring Agency (IBRA), an independent agency created to restructure troubled
banks and their assets. Today, IBRA is the third largest non-bank financial institution
with assets worth more than US$ 60 billion. The process of liquidating assets, other
than cars and paintings, has been terribly slow. The Astra automotive group was a
significant asset to be sold. This disposal occurred only in March, and it required two
auctions, since the first winners finally withdrew after deciding the situation was
untenable. Non-official sources have told us that the main obstacle to restructuring
is the political implications, since most of the assets were owned by large, powerful
conglomerates that are trying to recover them at an significant discount.
The shift of banking assets to the state was a required measure in the short run to
prevent a total collapse. However this is neither desirable nor healthy for long-term
development. The bank reform process will encounter the following challenges over
the next several years:
Restructuring and privatizing state banks: Bank restructuring is an urgent issue-- the monthly cost of not restructuring banks is estimated to be least US$ 600
million. But progress is slow. For example, the government has not followed through
on its plans to merge four banks with Bank Mandiri. The IMF recommends that half of
the remaining state banks should be privatized by the end of 2000, with all privatized
by the end of 2002. One of the major obstacles is that responsibility falls
ambiguously between the Ministry of Finance and the Ministry of State-Owned-
Enterprises. As long as there is not a specific, motivated institution responsible and
accountable for privatization, we do not believe there will be much progress.
Increasing bank supervision: Bank distress was caused to a large extent by a
total lack of supervision by the central bank. This led to one of the most expensive
bank bailouts in world history, over 50% of GDP. The following scenario illustrates a
common technique that contributed to the crisis.
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Company X would estimate the cost of a project to be $100M. Theywould tell the bank, owned by the same corporation as Company X, thatthe project cost was $600M. The bank would lend $150M, thusapparently this new project (or company) had a D/E of .33, which mightseem reasonable. Company X would invest $100M and deposit $50M intheir accounts (in foreign banks when things turned sour). The result is
a company with negative equity (and nothing to lose in case of bankruptcy). 6
Accelerating asset recovery: As mentioned, IBRA has a huge amount of assets
under its control. Liquidating them is urgent to restore the assets to productive
owners and generate revenue to assist in the bailout. However, this liquidation is a
particularly complex and sensitive task. Liquidation has to be done with no political
interference and in a truly transparent way. If this is accomplished, it will set
standards of transparency for the rest of the banking industry.
CORPORATE RESTRUCTURING:Corporate restructuring is not at a standstill due to a lack of framework but due to a
lack of implementation. By June 1999, only 80 bankruptcy cases had been
registered, compared to thousands in Korea. Even though bankruptcy laws have now
been revised, most court rulings have proved to be contentious and arbitrary.
Corruption of the judiciary is a key obstacle. Under Suharto’s regime, judges and
many other officials would purchase their positions (i.e. the chief of police position
was worth $2 million). After buying his position, a judge has to recover his
“investment” by issuing rulings based on bribes. This process seems to be impactingbankruptcy cases: all of the bankruptcy claims made by banks have gone to one
Jakarta court, with the same judge presiding and the same lawyer defending. For
example, Bankers Trust filed a case requesting payment of $50 million because of
fraud committed by the borrower. Not only did BT recently lose the case, but it was
forced to pay $50 million in damages to the defendant!
In summary, bank and corporate restructuring is critical to Indonesia’s success.
Assets held by the government must be transferred to the most productive owners,
and companies must have access to credit. The regulatory environment must be
transformed to prevent the illicit dealings that led to the crisis. Until these issues are
addressed, the Indonesian banking and corporate sectors will be inhospitable to
foreign investors. At this time, we believe investors still face great difficulty in
choosing viable partners and suppliers, in conducting domestic financial transactions,
and in operating in the capricious regulatory and legal environment.
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COMPETITIVE ADVANTAGE
Short Term Outlook : Government reforms will (rightly) transform the naturalresource extraction industry, introducing uncertainty for current and potentialinvestors in Indonesia’s most prominent sector.
Longer Term Outlook : Investors will start to capitalize on two key opportunities:filling in the gaps in Indonesia’s industrial structure and selling to the lucrativedomestic market.
Key Indicators: Domestic purchasing power and the composition of imports/exports.
Implications: Foreign investors must supply management and technical skills andmust overcome several disadvantages compared to other Southeast Asian countries.
Indonesia’s historical advantage has been in its abundance of natural resources. As
shown in Appendix 5, a large portion of Indonesia’s exports consist of fuels, ores and
metals, as well as agricultural products such as timber and food products. Because it
lacks value-added industries to transform these raw commodities prior to export,
Indonesia is missing an opportunity to earn additional revenue and increase the
productivity of its workforce. Instead, the country must import an unusually high
proportion of value-added, manufactured goods, many of which are produced by
neighboring countries utilizing Indonesia’s raw materials. (As noted earlier,
intermediate goods, especially industrial raw materials and spare parts, comprise
75% of Indonesia’s imports.) As shown by the chart in Appendix 5, Indonesia’s
scarcity of value-added industry is especially evident when comparing exports by
Asian countries.7
Indonesia’s lack of domestic value-added industries has constrained international
investment in the past. For example, the Astra automotive group must import a
large proportion of its components from foreign sources, allowing it to focus primarily
on vehicle assembly in Indonesia. However, some observers report that the lack of
value-added manufacturing could be an area of opportunity for foreign investors who
are able to supply capital and, more importantly, technology.
While Indonesia has abundant natural resources, they will not be as easily exploited
as in the past. The Indonesian national government is increasing supervision to
avoid past abuses (ethical and environmental), to ensure that contracts are awarded
without corruption and to ensure that the public collects its share of royalties.
Furthermore, with their increasing autonomy, provincial governments are especially
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interested in ensuring that foreign investors deliver a high return (royalties,
infrastructure investments, etc.) to the local region. In fact, as regions gain authority
through the decentralization process, there are examples of regions imposing
stringent requirements on existing and new investors, a policy that seems to have an
aspect of retribution to redress past inequities. For example, Newmont Miningrecently agreed to pay disputed back taxes to a local government. To settle the
dispute, Newmont also agreed to contribute $1.5 million to establish a community
foundation and another $1 million annually for community development.8
Several factors make Indonesia attractive for international investment. The
workforce is literate, motivated and amenable to hierarchical organization, as
attested to by foreign corporations currently doing business in Indonesia.
Infrastructure, especially on the central islands of Java and Bali, where 62% of the
population resides (on only 7% of the country’s total land area), is in adequate shape.
While travel can become more difficult as you move away from Jakarta, it is still
adequate for a developing country, and the government is continuing to make
investments (to the extent that its fiscal limitations allow). Of course, transportation
in more remote regions, particularly among the many islands, is much more difficult.
Finally, the sheer size of the domestic market -- almost 210 million people, with 76
million in urban areas -- makes this a very attractive market in terms of the potential
for domestic sales. According to the World Bank, Indonesia had a 1997 per capita
GDP (PPP method) of $3390, which is greater than China ($3070) and much greater
than India ($1660). In this respect, the country is wealthier than many people
initially suspect (roughly comparable to many countries in South America and
Eastern Europe), and Indonesia could comprise an attractive consumer market.
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PO L IT ICAL S TAB I L I TY
JUDICIAL, LEGAL, AND CIVIL SERVICE REFORM
Short-Term Outlook: A complete overhaul of the judicial, legal, and civil servicesystems will be impossible; however, the government can take immediate steps,such as raising government salaries and replacing the old guard, to help reducecorruption and increase competence in the short-term.
Long-Term Outlook: Fundamental reform is certainly possible; however, it may take decades, given that over thirty years of Suharto-era corruption must be undone.
Key Indicators: Successful prosecution of bankruptcy cases; publication of court decisions; utilization of disciplinary mechanisms for the legal profession; higher legaleducation standards, higher entry requirements, and transparent promotion
procedures; higher performance-tied compensation, establishment of judge rotationsystem, and annual asset disclosure requirements.
Implications: Investors will encounter significant corruption and arbitrary legal andregulatory proceedings.
For three decades, Indonesia’s authoritarian government promoted economic growth
without developing the necessary accompanying institutions. Then when the
Southeast Asian economic crisis occurred in conjunction with Indonesia’s political
transition, Indonesia’s weak institutions failed to respond quickly and justly to the
crisis. According to The World Bank,
“[w]eak governance has, if not caused, at least exacerbated the
economic crisis from which Indonesia is only just emerging. It spawnscorruption, which exacts a toll on all dimensions of the economy. Onsome counts, corruption in Indonesia costs the country as much as 2percentage points in annual growth since the mid-sixties. It tends tobenefit the rich and tax the poor. It adds to the cost of doing business.It eats into the moral fiber of society.”9
By building strong institutions, the country will be better able to absorb future
external shocks to the economy. In fact, The World Bank contends that investing in
institutions, rather than physical capital, might actually yield higher social and
economic returns.10 While many areas are in need of institutional development, we
believe the two critical ones are the judiciary and the civil service, detailed further
below.
REFORMING THE JUDICIAL SYSTEM
First and foremost, the reformation of the judiciary is critical to bank and enterprise
restructuring. An inept and corrupt judiciary can act as a key bottleneck to quick
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economic recovery. For instance, IBRA has recently lost several bankruptcy cases
against recalcitrant debtors (including the high-profile Bank Bali scandal), despite
mounting pressure from the IMF to restructure the country’s $65 billion private debt
in return for massive foreign aid. “As long as the courts do not show fair treatment, I
don’t really see a lot of hope,” declared Agustus Sani Nugroho, IBRA general counseland senior vice president.11 Preliminary research by Indonesian Corruption Watch
(ICW) claims that only five of the 41 supreme justices in the Supreme Court – the
country’s highest court – cannot be bought.12 According to an article written in The
Jakarta Post, several young lawyers admitted that bribery was a part of their daily
legal work.13 Some lawyers, however, support the longstanding practice: “[judges]
only take money from one side and once they receive the money they will never let
you down, no matter how impossible the case may seem…It’s first come first
served.”14
Several important reasons explain the deep-seated corruption that pervades the
country’s judicial system. First, judges are severely underpaid. Even after a 100%
salary hike, judges take home only Rp 3 million ($400) per month, while a supreme
justice receives only Rp 10 million. Second, judges are overworked. The backlog of
cases compels lawyers to oil the wheels of the judicial system. Finally, the judiciary
lacks a formal external watchdog. The Supreme Court, although corrupt itself, is the
only monitoring body for all the judges in the country.15 Without any accountability,
corruption in the courts will continue.
Fortunately, the Indonesian legal profession has already invested considerable
thought into analyzing the weaknesses of the legal and judicial system.
Recommendations for comprehensive reform include better remuneration of judges,
higher entry standards for legal practice, enforcing disciplinary measures, publishing
more detailed court decisions, and higher quality of legal education. The
government has taken some of the aforementioned recommendations. For example,
a special task force in the Attorney-General’s office has been created to investigate
and prosecute corrupt judges. Furthermore, the government recently announced
plans to reassign up to two-thirds of judges in the capital – including all the chiefs
and deputies of the five district courts – to other courts outside Java.16 While such an
initiative could reduce corruption in the short-run, fundamental structural changes
are necessary in the long-term.
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In recognition of this long-term need, on February 16, 2000, Wahid established the
National Law Commission to examine the state of legal development and make
specific recommendations. The Commission will analyze the justice system, the civil
service system, the legal profession, provincial legislation, economic laws, and
human rights. Unfortunately, the Commission does not have the mandate to actuallyimplement its recommendations. This is up to the legislature.
CREATING AN EFFECTIVE CIVIL SERVICE
Indonesia’s civil service is also prone to corruption. According to the 1999
Transparency International Corruption Perceptions Index, Indonesia is tied for 96 out
of 99 countries.17 The reasons appear to be similar to the judiciary – low salaries,
poor performance management, and lack of accountability. The salaries of civil
service clerks, for instance, are about half of their private sector counterparts while
directors-general are about one-tenth to one-fifteenth. As a result of this salary gap,
the following phenomena have emerged. First, development budgets and projects
are used to pay civil service employees – through honoraria, management and
consultant fees, board membership fees, and other function-related pay. Second,
kickbacks from contractors are distributed through an elaborate patronage system.
Third, since actual income has little to do with performance, the quality of civil
service has suffered. Simply raising the salaries of civil servants, however, will not
solve the problem (and will also bankrupt the government). Such plans must be
accompanied with proper performance incentives and corruption penalties. In
addition, the number of civil servants must be reduced while the quality must be
raised.18
Indonesia has taken several steps to reform the civil service. Efforts include a new
civil service law and an anti-corruption law. Actually implementing such laws,
however, take a considerable amount of time and resources. For example, for the
anti-corruption law to be effective, the State Audit Commission must have the proper
technical training, organizational support, and incentive structure to track the assets
and income of all civil servants. Moreover, the commission must be linked effectively
with the police and the Attorney-General’s office so that abuse can be followed by
quick legal action.19 Similar to the judicial system, reformation of the civil service
system is a slow and painful process that requires modification of both structural
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incentives and cultural attitudes. Thus, foreign investors should expect fundamental
reform to take place over generations to come.
ESTABLISHING THE RULE OF LAW
During the Suharto era, no single financially significant company obtained a contract
without some quid pro quo. Foreign corporations received favorable investment
terms year after year, operating their mines and oil fields and pulp mills and
plantations with minimal concern for the surrounding communities and the
environment. Most foreign governments, business leaders, and advisers have now
warned that if Indonesia fails to uphold its existing contracts, the country will lose
credibility with international investors.
Even under foreign legal systems where the rule of law reigns supreme, many of
these contracts might be deemed invalid and unenforceable. For example, a party
who wins a contract through unlawful means (i.e., bribery and gift-giving) may not
receive any contractual protection under the law. Many existing investment
agreements are tainted by evidence of collusion and conflict of interest. As foreign
companies seek to maintain their suspect contracts, President Wahid is attempting to
insure that Indonesia upholds the rule of law, while salvaging some of the country’s
national resources that were sold off to the biggest international gift-givers. Wahid’s
approach of requesting additional consideration in exchange for honoring corruption-
induced contracts may be the most workable short-term compromise.20
Indonesia’s decision to not enforce unfair contracts does not necessarily indicate that
future, fair agreements will be broken. However, we are still concerned about the
country’s legal and judicial capacity to enforce fair contracts. As the above analysis
indicates, reformation of the judiciary and civil service, along with the application of
the rule of law, is a long-term process that cannot be completed within the next 3-5
years. Indeed, over three decades of Suharto-era corruption must be undone.
According to Mardjono Reksodiputro21, the law was used primarily as a tool to
implement Suharto’s policies. The military viewed “law” as whatever theircommander said it was. In other words, law was a means to an end rather than an
end in itself. Thus, the entire legal infrastructure, as well as cultural and societal
values, must be altered.
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DEMOCRATIC INSTITUTIONS & THE POLITICAL SYSTEM
Short Term Outlook : Assuming President Wahid remains solidly at the helm, the political transition will continue smoothly.
Longer Term Outlook : The major consideration is the health of Wahid and hisability to complete his term (through 2004). If his health wanes, a succession battleis likely, as his Vice President is considered incapable of running the country. If hedoes complete his term and elections are held as scheduled, his legacy will be thestability he brought and the democracy he helped nurture.
Key Indicators: MPR vote in summer 2000; health of President Wahid.
Implications: A difficult political transition could lead to social unrest, as well aschanges in current government policies.
ELECTIONS
In 1999, Indonesians for the first time changed their government through an open,
transparent democratic process. The June 7, 1999 parliamentary election, contested
by 48 political parties (who fielded candidates in every district), was widely accepted
as open, fair and free. The chart in Appendix 6 shows the results.
The MPR (the upper legislature) is constitutionally the highest authority of the State
and meets every five years to elect the president and vice president and to set the
broad guidelines for state policy. In October 1999, the MPR elected Abdurrahman
Wahid as President and Megawati Soekarnoputri as Vice President.
As in the Suharto era, the military has significant sociopolitical as well as security
roles. Members of the military are allotted unelected seats in the DPR (the lower
legislature) and in provincial and district parliaments, in partial compensation for not
being permitted to vote. Active duty and retired officers occupy important positions
at all levels of government. The military thus far has resisted strong pressure from
student and reform groups for an immediate end to this arrangement, but
incremental change is likely over the next several years.22
INDONESIA’S GOVERNMENT
President Wahid heads Indonesia's largest Muslim organization, the NU, which has 30
million members. Wahid’s position as a moral leader was transformed when he and
his supporters formed the National Awakening Party (PKB) following the Suharto’s
fall. While NU is a conservative religious organization, Wahid has consistently
maintained that faith is a personal matter. In the unrest after Suharto, some
politicians called for Islam to have an institutionalized role in the state. While some
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Islamic leaders have been critical of Wahid’s stance, he has gained the respect of
many non-Muslims throughout Indonesia, including the Christians and ethnic
Chinese. Perhaps more significantly, Wahid has forged links with the influential
military elite.23
Wahid previously had close ties with Megawati. Before the election, she considered
him one of her key allies, a man who could deliver a huge Muslim following but would
be content to follow secular policies. During the campaign, Wahid, Megawati and
Amien Rais, Wahid's rival Muslim leader, brought their parties together in the name
of safeguarding the democracy process. However, the joint front did not last, and
Wahid later argued that a female president would offend conservative Muslims.
Relationships soured further as Wahid came to regard Megawati as arrogant and
unable to work with other politicians. (Megawati gained the vice-presidency only
after widespread protests by her supporters over her defeat for the presidency by
Wahid.)
The new government cabinet has been hailed in the international media as a “break
from the past,” but its composition reveals the opposite: the Armed Forces (TNI) and
the Golkar Party—the two pillars of Suharto's regime—have a powerful presence and
continue to hold all the key security ministries. The cabinet resulted from Wahid’s
deals with Golkar, the army and a Rais’s coalition of Islamic parties in order to win
the presidency. Wahid repaid his debts by allowing his allies to deliver cabinet
positions to their supporters.24
By many accounts, Wahid has exceeded all expectations. A skilled political
operative, he has excelled in his balancing act during this tumultuous time of political
consolidation (which is still only in its early stages). Many believe that he is the only
one who can bring about a smooth transition. However, his health is his most
significant handicap -- and the greatest political risk for Indonesia. (A brain
hemorrhage in 1998 led to his near total blindness). If Wahid’s health wanes (an
unfortunate but realistic assumption), there is no clear successor. In the aftermath of the 1999 elections, Megawati is now widely perceived as incapable of leadership.
Her initial goodwill, which came through during the election as a result of her family
name and the general discontent with the Suharto era, is on the decline. In fact, the
MPR will likely change the rules when it meets in summer 2000 in order to keep
Megawati from readily assuming the presidency. While the MPR currently votes for
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the President every five years, they will likely change this “vote of confidence” to
occur annually.
Amien Rais is also mentioned as an alternative for the presidency. He wields
substantial power through his cabinet appointees, his religious following and his deal-
making savvy. However, although it is likely that he will play the role of king-maker
again, his is too right-wing to garner the support of moderates, who comprise the
majority of the electorate. A seldom-mentioned player is the chairman of Golkar,
Akbar Tandjung. Wahid originally selected him as his vice-president but chose
Megawati to appease her very vocal supporters.
ROLE OF THE MILITARY
For the last four decades, the military legitimized the authoritarian regime of
president Suharto and implemented public policy. In fact, the military has been in
charge of duties that usually belong to the civil society in democratic countries. Until
recently, the military seemed to be a threat to the new democracy. However, Wahid
has been successful in reducing the power of the military. For example, he
appointed a civilian to run the Ministry of Defense, and he forced General Wiranto,
who had been Suharto’s military commander, to resign. Despite rumors of an
impending coup in early 2000 (during the height of the Wahid/Wiranto conflict), most
observers now believe that a coup is very unlikely. Wahid enjoys the support of most
of the military, as well as support from the general population and the international
community.
Investors should also recognize the military’s significant involvement in business,
which results from concessions it received during the Suharto regime as a source of
further income. This involvement will decline when the country succeeds in creating
more transparent legislation and open contracts.
DECENTRALIZATION
Short term: Despite its plans, the government has achieved little with thedecentralization process. Indonesia’s lack of institutions and skilled people outside
Jakarta makes decentralization difficult.
Long term: Decentralization is key to maintain governance under such a diversecountry. Thus, we could reasonably expect a higher level of autonomy of the
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provinces in the following years, but complete decentralization is a process that willtake over 5 years.
Key Indicators: Creation and strengthening of local institutions.
Implications: Decentralization is essential to address regional grievances; delay could exacerbate social and political tensions.
The Indonesian government has historically dictated public policy from Jakarta, even
policies that affect distant provinces. Currently, the central government is
responsible for over 80% of national spending. Because of their limited role in
governance, the provinces lack strong institutions and hold significant resentment
toward center. Regardless of the efforts and good intentions of Wahid, it is unlikely
that the planned decentralization will occur soon. A lack of institutions and skilled
people outside Jakarta complicates the process, and it is questionable whether the
central government would give more taxing and spending autonomy to the
provinces, especially to the richer ones, since this would limit the current policy of
redistribution.
Legislation has already been implemented that seeks to return over 40% of spending
to lower levels of government, but these new laws are still incomplete. For
decentralization to succeed, there must be strong institutions and skilled managers
at the regional and local level. The central government will likely have to relocate
numerous officials from Jakarta to the provinces. The central government must also
develop guidelines to hold local authorities accountable for the administration andexercise of their resources. There is also confusion about the division of
responsibilities between the central government and local governments.
Another important factor is the separatist movements, some involving isolated
violence, in several regions of Indonesia. These movements range from the recently
successful independence of East Timor to separatist movements in Aceh , Irian Jaya,
and Kalimantan, to frequent rioting in Jakarta, and to religious intolerance in Lombok.
The separatist sentiment arises from the fact that in the aftermath of the Suharto
regime, many groups in Indonesia want greater control of their lives and a greater
share of the revenues that they generate. This is a major issue for Wahid to resolve,
because the secession of a separatist group could mean a major loss of revenue
(e.g., natural resources) for the country and would set a precedent that would
strengthen other separatist movements. This is a great risk for Indonesia, because
while the population is concentrated on the island of Java, the remote provinces
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generate much of the national income through natural resource extraction. For this
reason, if separatist movements succeed, it could lead to the disintegration of the
country and the impoverishment of much of the population. However, we believe
this scenario is very unlikely. The central government recognizes the critical nature
of this issue and is introducing decentralization policies to address the grievances.
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A P P E N D I C E S
APPENDIX 1 -- MAP OF INDONESIA
Source: The World Factbook 1999. The Central Intelligence Agency.
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APPENDIX 2 -- OVERVIEW OF ASSESSMENT
Factor Overview
Factors contributing to Economic Growth
MacroeconomicStability
Much progress, but risks associatedwith government budget. Growthlimited by investor mistrust.
Bank & CorporateRestructuring
A long, difficult process with largeramifications for Indonesia’s futureand for investors.
Competitive Advantage Limited compared to neighbors.
Factors contributing to Political Stability
Judicial & Legal Reform A long, difficult process with large
ramifications for Indonesia’s futureand for investors.
Democratic Institutions& the Political System
Much progress, but limitedprecedent makes the future difficultto predict.
Decentralization A long, difficult process, withdifficult-to-predict ramifications.
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APPENDIX 3 -- MACROECONOMIC VARIABLES
Sources: BPS, Bank of Indonesia25
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APPENDIX 4 -- IMF-MOTIVATED REFORMS
In April, the government of Indonesia announced that it had complied with 90% of
the 42 reforms required by the IMF. (The IMF suspended disbursement in early 2000
due to lack of progress in Indonesia.) The following list shows the high-level areas for
reform, as described in Indonesia’s letter of intent with the IMF.26 We present this list
because it provides potential investors with insight into the current situation and the
degree of change that Indonesia faces in the near term.
a) fiscal and trade policy reforms
b) fiscal decentralization
c) banking system reforms
d) corporate restructuring, legal reform and governance
e) reform and privatization of state-owned enterprises
f) reform of the energy sector
g) competition and investment policy
h) agriculture policy and forestry
i) environment
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APPENDIX 5 -- STRUCTURE OF TRADE
Foreign Trade -- Exports
Food and
agricultural raw
materials
18%
Fuels, ores, and
metals
33%
Manufactures
49%
Foreign Trade -- Imports
Food and
agricultural raw
materials
14%
Fuels, ores, and
metals
13%
Manufactures
73%
Manufactured Exports as a % of Total Merchandise Exports
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
J a p a n
K o r e a ,
R e p .
H o n g K o n g ,
C h i n a
B a n g l a d e s h
C h i n a
S i n g a p o r e
M a l a y s i a
I n d i a
T h a i l a n d
P h i l i p p i n e s
I n d o n e s i a
data source: World Bank World Development Indicators, 1999 (using 1997 country data)
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APPENDIX 6 -- 1999 ELECTION RESULTS
33%
22%
13%
11%
7%
14%
Indonesian Democratic
Party of Struggle (PDI-P)-
MegawatiGolkar- Akbar Tandjung
National Awakening Party
(PKB)-Wahid
Unity and Development
Party (PPP)
National Mandate Party
(PAN) - Amien Rais
Others
As evident in the chart, Wahid’s party won only 13% of parliament seats, and thus his
accession to the Presidency was unexpected.
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APPENDIX 7 -- RISK MANAGEMENT IN INDONESIA
In our discussions with a major international bank in Indonesia, the bank provided the
following risk management areas that any foreign investor must consider.
a) selection of a local partner -- A local partner is essential to navigate the complex
local environment. Some foreign investors have selected partners based on
cursory, superficial investigation, only to discover that they have been taken
advantage of.
b) acquisition of land -- Land titles are complex, and it is difficult to acquire a clear
title.
c) application of law -- Foreign investors should not rely on the application of law to
resolve disputes.
d) changing markets -- Changing government policies (including subsidies) can
drastically change the competitive environment, thus changing the viability of a
project.
e) export/import -- There is significant corruption in Indonesia’s harbors.
f) foreign exchange risk -- Indonesia has a rudimentary and expensive derivatives
market, which complicates attempts to hedge FX risk.
g) insurance -- Import and political risk insurance is generally unavailable. Other
domestic insurance policies is not reliable.
h) financial reporting -- Financial statement standards are regularly flaunted, which
complicates acquisitions, alliances, etc.
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APPENDIX 8 -- PROJECT LOGISTICS
As part of our field research in Indonesia, we met with the following organizations
and individuals, all located in Jakarta. This information is provided to document the
sources of our information and to assist teams that conduct future analysis of
Indonesia. Of course, the conclusions in this paper are our own and should not be
attributed to any other organization or individual.
Name/Organization Contact Information NotesABN-AMRO Bank, N.V. Mr. Erik Moen
Vice President, COO Jl. Lr. H. Juanda 23-24P.O. Box 2950
Jakarta 10029, Indonesia+62 (21) [email protected]
Mr. Clemente EscanoDirector - Treasury
Jakarta Stock ExchangeBuilding
Tower II, 11th FloorSudirman Central BusinessDistrict
Jl. Jend. Sudirman Kav. 52-55 Jakarta 12089, Indonesia+62 (21) 515-6838+62 (21) 515-4470 (fax)[email protected]
ro.com
ABN-AMRO provided anexcellent perspective onsurviving the crisis and doingbusiness in Indonesia.
American Chamber of Commerce
Mr. Francis X SheaDirector, Corporate FinancePrasetio Strategic ConsultingArthur AndersenWisma 46 Kota BNI Levels25-28
Jalan Jenderal Sudirman Kav1
Jakarta 10220, Indonesia+62 (21) 575-7906+62 (21) 574-4521 (fax)[email protected]
rsen.com
Mr. Phillip Shaw(see separate entry)
We enjoyed a lively breakfastdiscussion with sixinternational businessmen.
BAPPENAS(National DevelopmentPlanning Agency)
Dr. Ir. Sujana RoyatBureau Chief for HumanSettlements and UrbanDevelopment
BAPPENAS provides a goodperspective on developmentinitiatives andregional/central relations.
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Jl. taman Suropati 2 Jakarta 10310, Indonesia+62 (21) 334-819+62 (21) 310-1921 (fax)[email protected]
Chase Bank Jakarta, Indonesia Chase provided insight intothe banking and business
environment.ECONIT Dr. Arif Arryman
Director
Jl. Prof. Dr. SoepomoSH. No 47, 4th Floor
Jakarta 12810, Indonesia+62 (21) 830-4850+62 (21) 835-4743
ECONIT is an economicsthink tank. Dr. Arryman isalso active in Indonesianpolitics.
Embassy of Mexico inIndonesia
Mr. Ismael Sergio Ley-Lopez,Ambassador
Embassy of Mexico
Menara Mulia, Suite 2306 J. Gatot Subroto Kav. 9-11 Jakarta 12930, Indonesia+62 (21) 520-3980+62 (21) 520-3978 (fax)[email protected]
The Ambassador provided aninsightful perspective onIndonesia.
Embassy of Pakistan inIndonesia
Jakarta, Indonesia The Ambassador provided aninsightful perspective onIndonesia.
Embassy of the United Statesof America
Ms. Pamela J. SlutzCounselor for Political Affairs+62 (21) 344-2211 x2280+62 (21) 386-2259
Ms. Judith R. FerginCounselor for EconomicAffairs+62 (21) 344-2211+62 (21) [email protected]
Jalan Medan Merdeka Selatan5
Jakarta 10110, Indonesia
The Counselors have deepknowledge of the situation inIndonesia.
International Monetary Fund Mr. John Dodsworth
Senior ResidentRepresentative
IMF Resident MissionBank Indonesia
Jalan Kebon Sirih 82-84 Jakarta 10002, Indonesia+62 (21) 231-1884
Mr. Dodsworth, who is
central to IMF activities inIndonesia, provided a clearassessment of the situation.
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arranged through:Gertrud WindspergerIMF Public Affairs Division+1 (202) 623-4983
Jakarta Stock Exchange Mr. Mas AchmadPresident Director
PT Bursa Efek Jakarta Jakarta Stock ExchangeBuilding
Jl. Jend. Sudirman Kav. 52-53 Jakarta 12190, Indonesia+62 (21) 515-0234+62 (21) 515-0550 (fax)
Mr. Achmad provided a goodoverview of the state of equity markets.
Prof. Mardjono ReksodiputroProfessor of Law at theUniversity of Indonesia andSecretary of the National LawCommission
The University of Indonesia Jakarta, Indonesia
Prof. Mardjono is an excellentresource in the area of thelegal system.
Ministry of Investment and
State-Owned Enterprises
Dr. Asril Noer
Expert to the Minister onInstitutional Relations
Jl.Dr.Wahidin No. 2Jakarta 10710, Indonesia+62 (21) 386-4448+62 (21) 348-31774
Dr. Noer provided insight into
the privatization process andinvestment objectives.
Mr. Soedarpo SastrosatomoExecutive ChairmanSamudera Shipping Line, Ltd.
Samudera Indonesia Bldg.8/FLetjen S. Parman Kav. 35
Jakarta 11480, Indonesia+62 (21) 548-0088+62 (21) 534-7171 (fax)
Mr. Soedarpo is one of themost successful businessmenin Indonesia, and he wasinvolved in the formation of the country.
Mr. Philip J. ShawPundi Stratejasa Indonesia
13th Floor, WismaMetropolitan II
Jl. Jend. Sudirman Kav. 31 Jakarta 12920, Indonesia+62 (21) 570-3750+62 (21) 571-1556 (fax)[email protected]
Mr. Shaw operates aconsulting firm that assistsinternational companies andis very knowledgeable aboutIndonesia.
Sucofindo Mr. Zafar D. IdhamDirector of Operations
Jl. Raya Pasar Minggu Kav. 34 Jakarta 12780, Indonesia
P.O. Bo 2377, Jakarta 10001+62 (21) 798-3666 x1803+62 (21) 798-6980 (fax)[email protected]
Sucofindo is an inspectionand certification companythat is very involved inimports/exports. Mr. Idhamprovided a good overview of
commerce.
Mdm. Asti SuhartoPresidentPT. Maritosa Coalindo
Jln. Kenali Asam I B Jakarta 13240, Indonesia+62 (21) 478-61032+62 (21) 478-64669 (fax)
Mdm. Suharto is a successfulbusinesswoman whooperates an export/importcompany and is veryknowledgeable about
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Indonesian affairs.
Tirtama Comexindo Ms. Tatyana SekarprijastinaBusiness Development
PT Tirtamas ComexindoBidakara Building, 7th Floor
Jl. Jend. Gatot Subroto
Kav.71-73 Jakarta 12870, Indonesia+62 (21) [email protected]
Comexindo is aninternational tradingcompany (specializing inoffsets) that was affectedhurt by the crisis.
United National IndustrialDevelopment Organization(UNIDA)
Mr. Syed Asif HasnainRepresentative
UN Building Jl. M.H. Thamrin 14P.O. Box 2338
Jakarta 10001, Indonesia+62 (21) 314-1308 x601+62 (21) 390-7126 (fax)
UNIDA is focused onIndonesia’s post-crisisdevelopment.
United Nations SupportFacility for IndonesianRecovery
Dr. Satish MishraChief Economist
UN House, 4th Floor Jl. M.H. Thamrin 14P.O. Box 2338
Jakarta 10240, Indonesia+62 (21) 314-1308 x110+62 (21) 392-1152 (fax)[email protected]
UNSFIR is focused onIndonesia’s post-crisisrecovery.
The Wall Street Journal Mr. Jay SolomonIndonesia Correspondent
14th Floor, Deutsche BankBldg.
J. Imam Bonjol 80 Jakarta 10310, Indonesia+62 (21) 3983-1340+62 (21) 3983-1342 (fax)
Mr. Solomon has been inIndonesia for five years and
has closely watched themany dramatic events since1998. (Mr. Solomon may beassigned to a new country inthe near future.)
The World Bank Mr. Mark BairdIndonesia Country Director
Lippo Life Building, Suite 301 Jl. H. R. Rasuna Said, Kav. B-
10Kuningan, Jakarta 12940,Indonesia+62 (21) 252-0316+62 (21) 252-2438 (fax)
arranged through:Lieke Sastrosatomo, programassistant
Mr. Baird provided anextensive assessment of Indonesia’s recovery.
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Additional logistics information:
• In addition to the organizations listed above, you may wish to attempt to make
contacts with large foreign corporations (e.g., Comexindo, mining companies,
Reebock) and with members of the legislature.
• We stayed at the Hotel Menara Peninsula, a comfortable business-class hotel that
offered very good rates. The hotel is a short taxi ride from the business district,
although there are other hotels that are even closer. You can contact the General
Manager, Kevin O’Hagan, and mention we sent you. +62 (21) 535-0888, +62 (21)
535-0938 (fax), [email protected].
• If you want to see more of Indonesia, consider a trip to Mt. Bromo (fly to
Sarabaya). To see Hindu culture, consider Bali, where you may wish to stay at the
Hotel Bali Padma (Mayke Boestami, Public Relations Manager, +62 (361) 752140,
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E N D N O T E S
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1 Several of our interviewees commented that Indonesia’s lush, tropical environment mitigates poverty (starvation is rarewhen fruit grows abundantly).2 According to World Bank data, Indonesia’s exports fell 10% in 1998 and remained constant in 1999.3 “Indonesia Quarterly Update.” The World Bank, 3/20/00.4 “Indonesia: Seizing the Opportunity -- Economic Brief for the Consultative Group on Indonesia.” The World Bank,1/26/00.5 “Indonesia Country Profile.” The Economist Intelligence Unit, 1999-20006 This scenario is not exaggerated; we interviewed executives of an import/export agency (owned by the son-in-law of Suharto), that had no assets and debt of more than $200M.7 World Bank Development Indicators, 1999.8 “Newmont Reaches Settlement With Indonesia's N. Sulawesi.” Asia Pulse newswire, 4/20/00.9 The World Bank, 1/26/00, p. 13.10 “Indonesia: From Crisis to Opportunity.” The World Bank. 7/21/99, p. 3.1.11 Chew, Amy. “IBRA Sees Slow Indonesia Debt Progress.” Reuters, 4/10/00.12 Unidjaja, Fabiola Desy. “Payoffs Prominent in Court System.” The Jakarta Post , 1/22/00, p.2.13 In fact, one lawyer claimed that at the Jakarta provincial court, judges do not even look at your case if you cannot comeup with at least Rp 75 million ($10,000). Another attorney recounted the time he represented a business tycoon in a trillionrupiah bank scam: “I remember carrying the suitcase containing all the money. I also handed it over to the judge himself.”
14 Unidjaja, Fabiola Desy, p. 2.15 Unidjaja, Fabiola Desy, p. 2.16 “Jakarta Judges Moved Around in Major Government Shift.” The Jakarta Post.com, 4/20/00.17 The higher the ranking, the higher the perceived level of bribery by the 770+ senior executives of multinationalcompanies surveyed.18 The World Bank, 1/26/00, pp. 14-15.19 The World Bank, 1/26/00, p. 16.20 In the recent tax dispute between gold mining company PT Newmont Minahasa Raya, a subsidiary of American miningcompany Newmont Mining corporation, and the local government of North Sulawesi, the parties agreed to an out-of-courtsettlement, whereby the government would drop its lawsuit and honor the contract in exchange for $500,000 in overduetaxes and a $1.5 million contribution to the local people (plus an additional contribution of $1 million per year for threeyears in community development programs). “Newmont Reaches Out-of-Court Settlement.” The Jakarta Post.com,4/20/00.21 Professor of Law at the University of Indonesia and Secretary of the National Law Commission.22 United States State Department.23 Asiaweek.24 United States State Department.25 The World Bank, 1/26/00.26 Government of Indonesia and Bank of Indonesia, “Memorandum of Economic and Financial Policies,” 1/20/00.