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Friday, July 15, 2016

A Strong Appointment

Tito Karnavian
The prospect for deep reforms in Indonesia has always depended on how independent the outsider President Jokowi could be from the country’s sclerotic political party system.  His supporters –who detect a masterly Javanese subtlety– have been waiting for a consolidation of his power after which they expect him to deliver on his campaign promises to eliminate graft and patronage.  They may have been rewarded this week with the nomination of General Tito Karnavian as National Police Chief.  Known for his accomplishments as head of Indonesia’s counter-terrorism agency, Karniawan has been an outspoken proponent of internal reforms and accountability.

“The President’s considerations in choosing Tito Karnavian is to increase the police force’s professionalism to safeguard the public, improve law enforcement, especially regarding extraordinary crimes such as terrorism, drugs and corruption as well as to increase synergy with other law enforcement agencies.” (Jokowi’s spokeperson)

Capturing the assignment was not easy as it has been well known that the former President Megawati, chairwoman of PDIP (the political party that first supported Jokowi back when he first ran for local office as a mayor) supported her former adjutant, Budi Gunawan, the current Vice Chief of Police. Furthermore, Kurniawan was not even on the list of candidates submitted by the National Police Commission headed by Coordinating Minister (Politics, Security, Law) Luhut Pandjaitan, a close confidant of the President.    Given the many cases against US businesses where the police have either looked the other way, or been accused of shakedowns, the appointment bodes well for a strengthened rule of law.

Karniawan may remind one of US General David Petraeus, also a battlefield veteran with a PhD.  After graduating at the top of his academy class in 1987, Karnavian earned masters degrees in UK and a PhD from Singapore’s Rajaratnam School.  Only 51, he made a name for himself early in his career when he apprehended a fugitive Tommy Suharto (son of the former President) accused of murder in 2001.  In 2004 he joined (and eventually commanded) the newly created “Densus 88”, a special counter terrorism force that arrested or eliminated hundreds of terrorists such as Noordin Top (thought to be the bomb maker for 2009 Ritz Carlton and JW Marriott attacks). More recently he exposed high-level corruption at the Trade Ministry involving the clearing of goods.

In October 2015, Karnavian gave a major address at an officers school and was paraphrased as saying that police are guilty of “hedonism, consumerism, the enjoyment of glamour and the showing-off of houses and vehicles.” He denounced the prevalence of “unauthorized levies and brokers” in police procedures, and he said there is a need to “impose accountability – because at present the police do not have it.” He said that the main targets for “cleansing and disciplinary operations” should be regional commanders, Criminal Research personnel, traffic police, human resource administrators and logistics managers.”

If, as analysts speculate, Karnavian can bring a new approach to his position, there should be a drop in practices such as one that often affects foreign companies where the police create spurious criminal charges (as was case in the Chevron bioremediation case) either directly or at the request of a third party and offer to drop them for money.   Having passed over more senior officers, he may run into opposition.  But, he wants to make major changes to recruitment and training, and because of his age, he may have the time needed to do it.

Perhaps because of his strong anti-terrorism credentials there has been little opposition in Parliament.  Civil society groups such as the Legal Aid Institute have been more vocal in pointing out alleged abuses in Papua and Jakarta when he was a local commander.  Regardless, he should get approved. 

The significance of the appointment lies in the President’s defiance of his own party (PDI-P) and perhaps his close aide and backer Luhut Pandjaitan, who once told me “the President has his own mind sometimes”.  Together with Golkar’s return to the ruling coalition (reported last month) it signals that Jokowi will be governing more from the instinct for reform that has characterized his leadership since his days as Solo’s mayor.   With that as a starting point, prospects for greater legal certainty can only go up.

Friday, June 3, 2016

Golkar Returns

For those familiar with Indonesian politics Golkar is the party synonymous with Indonesia’s economic development. More than a just a political party, Golkar was an amalgamation of various “functional groups” (military, government bureaucrats, farmer’s organizations, etc.) that implemented the New Order government’s economic agenda. Golkar was engineered to be a partner of the government and held a virtual 2/3’s majority in Parliament for 35 years. In the reform era that followed President Suharto’s momentous 1998 resignation Golkar has not held the same sway within the government. Its share of seats in Parliament have fallen below 20%, although it remains the second largest party. Most of its members, but not necessarily its leadership, still want to be partners with the government; its in the party’s DNA. So when chairman Aburizal Bakrie unilaterally backed Prabowo Subianto’s losing coalition in 2014 and declared the party to be in the opposition part of Golkar rebelled. Since then infighting has rendered Golkar ineffective and currently few Ministerial posts are held by Golkar members. But through a process of internal reconciliation Golkar has been revived and now wants back into the government. If Golkar’s (and Bakrie’s) intentions are purely benign--meaning it will support President Jokowi’s reform plan--this could be a boon for Indonesia. However, that may not be the case.

On May 16 Golkar held an extraordinary Congress that brought together the rival camps and elected Setya Novanto Chairman. Novanto was recently forced to resign as Speaker of Parliament over secret recordings that implicate him in an alleged shakedown of Freeport Indonesia. (Prosecutors are still investigating the case) His successor Ade Komarrudin ran a close second. Golkar also resurrected its influential Guidance Board (abandoned after 1998) and elected Bakrie its chairman. Agung Laksono, a proponent of new leadership and reform who was Bakrie’s chief rival within Golkar, is not challenging this move. Other key Golkar posts went to Bakrie supporters who were clearly the big winners. The Indonesian press reported that Novanto was backed by Luhut Pandjaitan, a Golkar member who was an early backer of Jokowi and is currently Coordinating Minister for Politics and Security. On the other hand Vice President Jusuf Kalla, also a Golkar member, backed Komaruddin.
A week after the Congress Novanto announced that Golkar had rescinded its 2014 declaration of support for Prabowo’s opposition coalition. Novanto said: “Golkar will work with the government. We will support the programs of the government.” Bakrie said, “Our expertise is in handling authority – not in mounting resistance to authority.” On May 24th 6 Golkar leaders including Novanto and Bakrie met President Jokowi. Although they professed not to be seeking any ministerial posts the timing was not lost on most observers who have been hearing rumors of a Cabinet reshuffle for several weeks.

It may be too early to speculate on what all of this means but several possible outcomes seem reasonable. Golkar, having observed that President Jokowi has distanced himself from his patron Megawati, (head of the PDI-P, still the most popular party) may be positioning itself to take him in or at least nominate him for reelection in 2019. (One mid level Golkar official actually said as much.) At a minimum Golkar would expect to receive one or more ministerial posts. It may also have bargained for some protection from one or more of the investigations currently under way of several of its high profile members (including Bakrie and Novanto).

On paper President Jokowi now has over 60% of the seats of Parliament in his coalition which should help his legislative agenda such as the long-awaited tax amnesty bill. He has artfully watched his rivals bicker among themselves, saying little, meanwhile pursuing his agenda. There seems to be a steely strength behind his actions over the first 18 months of his administration. Golkar may be patting itself on the back for what it may think is its improved position but the President may see a wolf in sheep’s clothing.  It remains to be seen how much of Jokowi’s reform program Golkar will embrace.

Tuesday, May 17, 2016

Nurhadi and the Rule of the Law

Just as the Masela Block decision (main topic of last month’s commentary that described a sudden reversal of a decision to build an LNG facility on rather than offshore) spoke volumes to investors about stark divisions within the government over energy policy, the recent revelation by the Corruption Eradication Commission (KPK) of graft within the Supreme Court apparatus will reverberate just as loudly as knowledge spreads outside Indonesia. On April 21 the KPK raided the home of the Supreme Court’s secretary Nurhadi and confiscated $130,000 in several bags. The raid was linked to an ongoing investigation of the Supreme Court bailiff as well as the arrest of a lower court secretary, Edy Nasution,  accused of taking a bribe in a case involving a major company. The cash trail led directly from Nasution to Nurhadi. Indonesia’s leading news magazine Tempo reported that according to a former Supreme Court judge Nurhadi ”has the power to intervene with the work of court officials up to the level of judges of the Supreme Court. Nurhadi can push through requests for appeals or case reviews that do not actually meet actual requirements.” In what has often been the pattern Nurhadi, a mid level official, was found to own multiple cars and houses way beyond his means. 

Senior Indonesian officials have been quiet so far perhaps because they are waiting for formal charges to be filed. The existence of a court mafia is widely known and local attorneys defending foreign companies and individuals privately confess that they are at a distinct advantage if their adversary brings spurious appeals when they lose. We have seen teachers incarcerated in cases without evidence (JIS) , employees jailed as a result of charges that are civil (Chevron), local debtors avoid paying their foreign creditors by filing capricious counter suits among other tactics.   In all of these cases appeals should never been placed on the court’s docket and now we have even more evidence of why: the legal system -- up to and including the highest courts-- can be bought. The Nurhadi case ends the suspicion.

On a recent visit to Indonesia an attorney who often represents foreign companies told me that he is seeing a marked increase in cases in which the police are threatening to bring companies to court if money is not paid.  Furthermore complaints to the police are not rejected for lack of evidence.   Its all about “funds”.  How widespread this extortion is not really known, but it is a troubling development parallel to the corrupting influence of money in the court system. 

A strong economy, stable government, and a basic attitude towards reform can sweep plenty of dirt under the rug.   But slowing growth (see page 2) and a weakened currency make Indonesia’s dysfunctional legal system stand out more starkly as a barrier to the many open economic policies the current government advocates, especially surrounding foreign investment.  Since September of 2015 12 economic restructuring packages have been released, but not one has involved legal reform.  The Jokowi government --given the platform on which it was elected in 2014-- should take a serious stand on legal and judicial reform and would do well to undertand its intrinsic importance to the nation’s economic future.   Without it the $billions in offshore funds being lured by the new tax amnesty policy will stay there, needed as collateral for loans that lenders demand can only take place in countries with an adequate rule of law.   Policy arrows shot at the 7% growth target, dependent more on foreign investment than exports or consumption, will fall short. 

It may be that the current administration is waiting for its second term to initiate judicial reforms, but the Nurhadi revelations change the equation. Something needs to be done now and the KPK should not be the only institution rooting out the graft. A major overhaul of the system of judicial and prosecutor appointments, as well as stronger oversight of the work of court employees would be a good start.  

Wednesday, February 10, 2016


As President Obama prepares to receive most of Southeast Asia's heads of state at the US-ASEAN Summit February 15-16 in Rancho Mirage I am thinking of a recently fallen friend of AICC, Duane Gingerich, who passed away last Friday. President Obama had it right several years ago when he coined the "pivot to Asia" policy, but Duane had already made his own "pivot "over 40 years ago. Born in a rural region of southeast Iowa known for its one room schoolhouses and annual youth basketball tournament, Gingerich made his way to a similarly rural region of Indonesia (also featuring one room schools) in the late 1960's, through a Mennonite mission. The hardscrabble lives of the people of East Nusa Tenggara left a deep impression on him.   He once remarked to me: "I had to figure out a useful way to return".

Upon completing his service mission Duane chose law school as his return ticket to the people and nation who captured his heart, eventually helping to build Baker & McKenzie's affiliate office, Hadiputranto & Hadinoto, into one of Indonesia's top law firms.
Duane and Reti outside their "Semar House"
I got to know Duane and his wife Reti towards the end of his 30-year career in Indonesia.   In 2010 they flew from Jakarta to Yogyakarta to meet me at the airport and welcome me into their second home in Klaten district. Called "Rumah Semar" (Semar's House) the house sat a few feet from the rice paddies Duane loved and was filled with instruments and art. After explaining his love of wayang kulit (shadow theater) and the wise but vulgar clown servant Semar, we toured several community projects Duane and Reti had personally supported. The following day he and Reti departed for Jakarta and I was the sole occupant of a house with a cook and a driver. By day I would ride in his jeep to visit AICC members in the region and return home to a satisfying meal. I visited friends in nearby Solo who took me to meet its dynamic mayor, Joko Widodo, now President. One evening I woke to the thunderous sound of Mount Merapi's eruption. With six-inch daily ash rains there was no way to fly to Jakarta where I was scheduled to attend a state dinner in honor of President Obama's first visit. I called Duane and he simply said "tidak apa apa" (no worries). Soon I was traveling with his driver on a 14-hour overland journey to Semarang on Java's north coast and west to Jakarta. Because of Duane I made the dinner.

Although Duane spent his working life overseeing the preparation of countless contracts, incorporations, closing documents, and other legal issues, he never lost his sense of adventure that had first brought him from an American farm to Indonesia or his pride in his birthplace. During my 2014 visit he was reviewing catalogs to decide which John Deere tractor he was going to buy for his Goshen, Indiana home. He wasn't going to necessarily use it in a field, it was going to be enough for him to ride on it.   My right arm, AICC's Program Coordinator Mini Meraxa, went to school in Jakarta with Reti. She and Duane advised and celebrated Mini and her husband when their reverse dream to live in the US came true. Reti, the big city girl and Duane, the small town country boy were an ideal couple. On trips to the US, it was Reti that headed to NY; Indiana (and the John Deere) was for Duane.

Since announcing the "pivot to Asia" President Obama, partially raised in Indonesia, has rarely had time to focus the nation's attention on the importance of southeast Asia to its future. ISIS and terrorism overwhelms the narrative, including his last State of the Union speech. As Curtis Chin, a former ambassador to the ADB commented  in a recent Jakarta Globe op-ed: "Americans could well have benefited from Obama's taking a moment to underscore how strengthened trade and security relations with the dynamic economies of Southeast Asia will help the United States meet economic and security challenges: a pivot to Southeast Asia." Let's hope that this month President Obama, White House staff and press corps maximize the importance of the region to America's future and if they do, somewhere Duane Gingerich will know that his pivot helped pave the way. He was one of our best native sons.

Monday, November 16, 2015

President Jokowi in DC

President Jokowi's visit to the US October 26 and 27, although shortened by the forest fire issue, included a longer than expected bilateral with President Obama, progress on security relations, a substantive unexpected announcement by President Jokowi on TPP ("Indonesia intends to join"), successful sessions with potential and current investors, and roll backs of unnecessary rules for foreign workers as well as possible changes to the negative investment list.  Although the ongoing issues of criminalization and incarceration of employees for civil infractions as well as nettlesome energy and mining contract extensions may have been discussed, no follow on announcements were made.  The comments of ministers who joined the visit were full of reform rhetoric and combined with the TPP statement one might conclude that Indonesia is moving towards a RBE (rules-based economy).  The President did discuss foreign affairs and the economy at Brookings but turned to his ministers repeatedly to answer nettlesome questions.   This young President has the strengt
h to delegate but he could send no stronger signal than resolving the case of the Chevron employees that remain incarcerated after courts have decided in their favor as well as making the necessary regulatory changes so international energy and mining companies can safely extend their contracts in a timely fashion facilitating $20-30 billion of potential investments.  Such moves would resonate well beyond the extractive sector.  But kudos must be given to the overall strong signals the visit generated.  I had met Jokowi when he was mayor of Surakarta but he did remember me and our visit to his furniture factory.

Tuesday, October 6, 2015

New Deregulation Package

Indonesia has released the second of three deregulation/stimulus packages designed to boost a flagging economy and strengthen the exchange rate. The first (released September 10) was primarily an exercise in reducing red tape and regulatory confusion in the trade arena and did not garner a lot of attention and praise, perhaps because its hard to immediately see benefits when you are looking in the regulatory weeds. Darmin Nasution, the Coordinating Economic Affairs Minister admitted,  "We issued too many deregulations in the first package and it made us seem to lose focus. Our explanation turned into numbers and people did not get the substance". 
However, the package announced Wednesday is more focused and could perk up the ears of investors who --as a whole-- have been moving assets out of Indonesia's capital markets. "We are making (investing in Indonesia) as attractive as possible," said Chief Economics Minister Darmin Nasution, announcing the latest measures along with several other ministers. "We must fix, simplify, make it cheaper."  
Here is what you should know about "Installment 2":
  • Permit processing times slashed- New measures announced Tuesday included slashing the time taken to process investment permits from at least 8 days to just 3 hours, with processing for permits in mining and geothermal projects in forested areas to be cut from up to 4 years to about 15 days.  The 3-hour time frame, however, is for investments over $6.8 million located in designated industrial parks employing over 1,000 people.  Although when announced the facility was to be available immediately, officials have backtracked and say it will be launched in mid-October. The number of permits needed for mining exploration and for establishing a business in an industrial economic zone have been cut. 
  • Tax Reductions- Exporters who deposit foreign exchange revenue in Indonesia or convert it to rupiah will have withholding taxes from the current rate of 20% to 0% depending on maturity. The interest earnings of a one-month dollar-denominated deposit account would now incur a 10 percent income tax; six-month deposits would incur 2.5 percent and for deposit accounts over six months there would be no income tax. The government will remove value-added taxes for ships, planes and trains made in Indonesia.  The VAT is also removed for imported aircraft and spare parts. 
  • Certificates of Deposit- Indonesia's central bank, Bank Indonesia, will reissue three month certificates of deposit and two week repo agreements.    "We want to drive [liquidity] from short-term instruments towards longer-term instruments because we're afraid excessive [liquidity] in short-term will create speculation. So we reopen these instruments," said Mirza Adityaswara, BI's senior deputy governor.
  • Intervention- Bank Indonesia signaled it will intervene in forward markets for rupiah where it is currently valued above 16,000 to the dollar. The rate as of September 30 was 14,717.
  • Import bans on cloves and tires were eliminated. The new trade minister, Thomas Lembong, said "The regulation on tire imports was wrongly targeted as it was aimed at protecting the local wheel industry, while our local tire industry is already world-class as Indonesia is a net exporter.

We will need to see the implementing regulations before a final judgement can be rendered on these policies.  But they are a welcome sign of the Jokowi's government intention to make reforms and other changes. It will be interesting to see what will be covered in the next package.  There are rumors that Indonesia may bring down corporate tax rates from the current 25% to a level more in line with its ASEAN neighbors or lower.  Also, the government may alter the Negative Investment List to allow for more foreign equity.   However, other, more wide-reaching  reforms to open the economy, change restrictive labor laws, or back away from the mandated value-added (local content requirements) nature of many laws and policies are not yet being talked about.   In the end, these deregulation packages may end up being characterized as more minor than major, and Indonesia needs to be performing in the major key.  But combined with an earnest approach to building infrastructure-- and getting the allocated budget into the system--the packages should push growth back towards 5% or above.

Wednesday, August 12, 2015

The Meaning of Banggai

August 7, 2015

President Jokowi traveled to the Banggai Regency in central Sulawesi this week to inaugurate the $5.8 billion "Pertamina Mega Integrated Project", which is planned to match the upstream production of natural gas with downstream users. The visit follows other forays of the President around the country to jump start other infrastructure projects including: parts of the Trans-Java - a 1,000 kilometer proposed toll road across Java from Merak in Banten, West Java, to Banyuwangi in East Java; the Trans-Sumatran Highway, a 2,508 km north-south road in Sumatra, from Banda Aceh to Bandar Lampung; new power plants that are part the 35,000 gigawatts expected within the next five years; and a 433-km Holtekamp Bridge in Papua. 

At Banggai, the President cautioned: "It must be integrated not only on paper but also in its real implementation in the field. This must be truly integrated, incorporating upstream and downstream industrial sectors and connecting gas producers and users. This must be implemented in the petrochemical and LNG business sectors and power plants," said Jokowi.

The huge project symbolizes the dreams of Indonesia's policymakers: for every raw material, there must be integrated downstream uses in the country. One hears the term "integrated" often in discussions and I suppose its natural. We like to think that everything is connected to everything else. When I lived in Indonesia in the 1970's I was always surprised by the natural way many of my Indonesian friends integrated the micro and macro aspects of life. An accident on a road could be instantly connected to a cosmic pattern that had been detected. Integration is harmony, steady-state, stable, values that resonate strongly in Indonesia rather than the dynamic, inherent conflicts of markets.

The meaning of Banggai is not just harmonius upstream and downstream integration, its also about self sufficiency and independence. The gas can be turned into LNG for power as well as ammonia for fertilizer and other uses, lowering the need to import. But in an increasingly interdependent world is this type of integration planning sufficient ? Could it not turn into an ideological imperative, locking Indonesia into policies that isolate rather than integrate it with the region and beyond ?


I think we are at a critical juncture in Jokowi's Presidency. If infrastructure of the kind that lowers logistics costs and helps supply chain integration cannot be accelerated we will only see more nationalist and protectionist policies, further isolating Indonesia's economy, especially given the weaknesses in the rupiah. We rarely hear the voices of Indonesian economists who know their way around international economics, even though some remain in the government. This week two Indonesian economists based in Australia--Arianto A. Patunru and Sjamsu Rahardja-- released an important report via the Lowey Institute, "Trade Protectionism in Indonesia". They observed that in past times bad economic circumstances led to good economic policies but today we are seeing "bad times leading to bad policies". Whether their cautionary voices and those of us outside Indonesia who are her closest friends, alarmed by the protectionist trend, will be heard remains to be seen. Indonesia's needs more "Banggais" and more industrial integration but not at the expense of regional and global intergration. Indonesia's future is not just supply chain connections within its borders but outside them as well.  The former will not happen without the latter.

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President of the American Indonesian Chamber of Commerce, a private not for profit membership organization based in NY.

These views do not necessarily represent those of the American Indonesian Chamber of Commerce or its members.

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