An Investor’s Guide to Indonesia: Navigating Corruption

Indonesia’s long-standing practice of bribery has lingered over the decades. the item will be a serious problem; one which truly hampers business along with investments.

Indonesia will be a hot market for any foreign investor. According to global management along with consulting firm McKinsey along with Co, the nation’s economy will be set to surpass those of the UK along with countries in Europe by 2030. By that will time, there will be 135 million Indonesians inside consuming middle-class along with US$1.8 trillion worth of market opportunities in consumer services, agriculture along with fisheries, natural resources, along with education.

although before investors race to put their money into the archipelago, there’s a serious road bump to look out for: corruption inside Indonesian government. For those of you who are brand new to that will country, while Indonesia will be a market with huge potential, the archipelago features a long-standing tradition of bribery along with graft. the item’s a real problem, along with the negative effects can be readily observed inside way local businesses operate, as well as what will be considered commonplace in Indonesia’s investment world. Corruption will be also hurting foreign investment in Indonesia, according to a 2012 report by Standard along with Poor’s.

According to a Corruption Perception Index created last year by global anti-corruption organization Transparency International, Indonesia sits at the low rank of 107th out of 175 nations. The report indicates how corrupt a nation will be by pulling data coming from surveys given to businesses. Indonesia Corruption Watch (ICW) estimates that will the nation lost US$238.6 million in 2011 alone due to government corruption. ICW found embezzlement, misappropriations, along with mark-ups among the primary methods of corruption practices in Indonesia.

Corruption in public sectors

When dealing with the Indonesian government, companies are sometimes obliged to partake in a bit of ‘dirty work’ (petty bribes, facilitation payments, etc.) just to get things done. Entrepreneurs along with investors should also be wary of the wrongdoings happening in Indonesia’s judicial sector.

The Norway-based U4 Anti-Corruption Research Centre claims bribery for business permits will be widespread in Indonesia. Whether they want to or not, local companies are routinely forced to participate by paying extra just to obtain the appropriate permits along with licenses. Should companies take the official route, they may end up waiting for an indefinite period of time, or worse, their applications could simply be rejected.

Indonesia’s Corruption Eradication Commission (KPK) speculates that will as much as 30 percent of the current government tender contracts could potentially be corrupted.

Corruption commonly happens during the tender process, when firms bid on projects. To win, companies often need to mark-up the contract value along with set aside profit margins just to pay the officials. Because of that will, honest companies with better qualifications may not always win projects in Indonesia if their less-qualified counterparts are willing to cross the line.

Even the justice department features a reputation. The Corruption Perception Index finds that will Indonesians perceive the judicial sector among the most corrupt institutions inside country. “the item depends on how much money you have,” said prominent Indonesian lawyer Adnan Buyung to The brand new York Times, arguing that will the investigation, prosecution, along with judgment of cases in Indonesia follow rules dictated more by the free market of the middlemen than by the actual law.

The Indonesian police regularly embezzle money along with receive “incentives” to conduct more thorough investigations. The Times recently cited retired official Aryanto Sutadi, who estimated that will 25 percent of police officers have broken the law at one point or another to earn extra income.

Foreign investors should remain diligent

Particularly for foreign investors, matters related to corruption should be taken seriously. Even if conglomerates are able to make short cuts in Indonesia, the effects can be far-reaching. For example, Singapore along with Malaysia have what will be called an “extraterritorial effect” for their local anti-corruption laws. What that will means will be that will confirmed acts of corruption committed abroad may still be treated as if the offense took place domestically. So, while Singaporean along with Malaysian entities may find the item easy to cut corners in Indonesia to advance their business, participating in bribery or facilitation payments may ultimately cost them their livelihoods along with reputations back home.

The United States’ Foreign Practices Corrupt Act (FCPA) goes one step further as the item prohibits not only US companies, although also companies affiliated with the US coming from bribing government officials anywhere. In December 2014, the US Justice Department punished three executives coming from the French energy company Alstom SA, ordering them to pay a total of US$772 million in criminal penalties for bribing government officials in several nations. Two of the occurrences happened in Indonesia. Prior to that will, US regulators fined German Insurance Allianz SE US$12.3 million for bribing Indonesian government officials.

The prospect of receiving heavy fines along with reputation damage has played an important role in determining whether foreign companies want to try their luck in Indonesia. Should foreign companies plan to expand via acquisitions in Indonesia, then the item’s probably wise to raise efforts with due diligence. The last thing a foreign company wants will be to be found guilty by association, without knowledge, after the fact.

How can we fight that will?

KPK Building by Charles Wiriawan

Fortunately, Indonesia seems to slowly be heading inside right direction when the item comes to combating corruption. More than two decades ago, the government established the KPK. Throughout the years, the organization has convicted several high-profile politicians. Last month, the Indonesia Investment Coordinating Board chairman (BKPM) Franky Sibarani told Tempo that will he intends to work more closely with the KPK to combat corruption inside investment sector.

Under the brand new leadership of Pesident Joko Widodo, the government aims to be more transparent. Government bodies are starting to utilise one-stop online solutions to process things like business permits along with tender offers. With the system put in place, there are at that will point fewer touch points for bidding companies, along with therefore, fewer opportunities for officials to get their palms greased with so-called facilitation payments.

Investors interested in Indonesia would likely do well to go over the one-stop integrated service created by the BKPM.

Officially launched last month, the service aims to eliminate costly red tape for entrepreneurs along with investors. Applicants can at that will point process 134 different permits coming from 22 ministries along with institutions. In an effort to ensure transparency, the BKPM also lets applicants monitor the progress of their permits online.