INDONESIA NEWSLETTER – ISSUE 5 – OCTOBER 2016

Does corruption deter investors in Indonesia and should it?


John Bray, Director

In Control Risks’ 2015-2016 International Business Attitudes to Corruption survey, we asked respondents whether they had decided not to do business in a particular country because of the risk of corruption. The answers seemed clear. Out of the 800-odd companies surveyed, just over 30% said they had stayed away from high-risk countries. The figure for US-based companies was close to the global average: some 29% said corruption risks had deterred them from doing business in particular countries.

At first sight, the figures from the ASEAN Business Outlook Survey 2016 - 2017 tell a different story. The survey was conducted by AmCham Singapore and the US Chamber of Commerce with analytical support from Control Risks, and it received responses from 519 AmCham member companies in all ten ASEAN countries. Among other questions, it asked respondents in which countries they hoped to expand. Indonesia was near the top of the list, with 38% of companies planning to expand operations there, compared with only 31% last year. Within ASEAN, Indonesia is surpassed only by Vietnam.

Amcham chart 2

The response to this question contrasts with a second one, which asks respondents whether they are satisfied with “lack of corruption” in specific countries. This time, Indonesia falls at the bottom of the chart: only 5% of respondents are satisfied. At 6%, Vietnam’s score is only slightly better. In Myanmar, no respondents at all are satisfied.

Yet these same companies apparently are eager to invest in Indonesia and other high-risk countries. So, does that mean that high corruption levels don’t matter? 

It’s not whether you invest, but where, when and how

In Control Risks’ experience, the answers are nuanced. In our view, the findings from our survey are an accurate reflection of the “view from head office”. If you are taking a sweeping global view, it may seem easier to strike certain countries off your target list because they are simply too much trouble. When this question comes up in surveys and interviews, respondents are more likely to mention certain countries in Africa or the former Soviet Union, but Indonesia suffers too. The country’s reputation for high levels of corruption may mean some more cautious headquarters executives simply won’t consider it.

At the regional level, perspectives are rather different. Indonesia is simply too big to ignore. The question is not so much whether to invest, but how to make the right choices, how to justify them to head office, and how best to protect your investment once you have made it.

Control Risks has recently been conducting a series of interviews with regional executives for a forthcoming white paper on Anti-Corruption in Indonesia to be launched in early 2017. Here is an early view of some of the key learning points.

Differences between and within sectors

The differences between commercial sectors scarcely come as a surprise, but the point still needs to be emphasised. Industries such as oil, gas and mining leave a much greater environmental footprint and – for good reasons – are heavily regulated. Once projects come into production, they can be highly profitable. For that reason, they are attractive to external investors as well as powerful predatory interests within the country who may resort to various forms of pressure to claim a share in the business, or even to take it over. There are significant corruption risks at every stage from seeking exploration permits to sustaining production.

In other sectors, corruption risks take different forms. In property development, demands for payments to expedite permits are a common hazard. In logistics, companies require more than the usual effort to withstand demands for payments from customs, and they need to manage clients’ expectations about the time this takes.

There are also key differences within sectors. One executive told us it was hard for an engineering company from a country with tough extraterritorial anti-corruption laws to compete for a major infrastructure project. However, in his view, it might be more feasible to work on specific sub-contracted assignments within same project, especially if companies from countries with looser anti-corruption legislation were unable to meet the technical requirements.

The law as a weapon and a defence

One international executive based in Hong Kong told us – perhaps surprisingly – that he preferred Indonesia to China. However, he had no faith in the integrity of the Indonesian court system. This meant his company often negotiated settlements in legal disputes where it deserved to win, and might actually have won in other jurisdictions. Learning to live with unfair settlements was a price for doing business in Indonesia, but still cheaper than a fruitless court case.

We hear similar comments from executives based in Indonesia. Official regulations are notoriously complex, opaque and at times contradictory. Compliance is therefore arduous, even “mind-numbing” (as we heard several times). An Indonesian company might pay a bribe as a short cut, but international companies cannot afford this approach because they need to comply with their own laws and because paying one set of bribes leads to further demands.

Rigorous compliance with official regulations is therefore the better option, but it is costly in time, energy and mental concentration as well as legal fees. It is nonetheless an essential investment and needs to be factored into potential costs before major business decisions rather than afterwards.

Identifying and disentangling official relationships

A large part of Control Risks’ work in Indonesia takes place after major decisions, for example an international company’s acquisition of a local entity. The new owner has a fair idea of what they’ve acquired, but may not understand its inner workings. Our task typically includes tracing networks of contacts within officialdom, and working out whether they are supported by illicit payments. Ending such payments is far from straightforward. From the official’s perspective, the company has made an agreement, even if this is not backed by the force of law, and they may seek some form of retaliation if payments suddenly stop.

Is “corruption-proofing” possible?

Experiences such as these raise the question whether it is possible to “corruption-proof” your Indonesian business, or whether it is better to simply stay away from the country. Of course, there are no simple cut-and-paste answers that apply to all companies in all circumstances. Rather, executives need a combination of different approaches, applied with informed skill.

Control Risks is committed to Indonesia, and we will share more of the lessons of experience in our forthcoming report. We can’t guarantee investors will face no demands, but well-designed prevention programmes will reduce the risks and make it easier to withstand the inevitable challenges.