Anti-corruption must top Indonesia's agenda
By Shihoko Goto
UPI Senior Business Correspondent

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Washington, DC, Oct. 15 (UPI) -- As president-elect Susilo Bambang Yudhoyono prepares to lead Indonesia after next week, he will be facing a slew of challenges that any leader of an emerging market would face, from tackling poverty to encouraging economic growth. But the biggest hurdle he will need to confront may well be cracking down on corruption and keeping up foreign investors' interest in the country.

Certainly, if U.S. investors in the bankrupt Asia Pulp and Paper -- the largest bankruptcy in Southeast Asia -- continue to drum up support for their cause of recouping their losses, capital flows to Indonesia may well continue to fall unless the new president brings about sweeping reform and crack down on corruption swiftly. At stake is the payment from bond investments made in Asia Pulp and Paper as the company stepped up efforts to boost foreign investment. But since it filed for bankruptcy in 2001 amid $13.5 billion of debt, the company stopped paying interest and principal from that year to overseas investors.

Oaktree Capital Management of California and Gramercy Advisors of Connecticut alone have invested more than $250 million in Asia Pulp and Paper when the company raised over $400 million on the New York Stock Exchange in 1999. Two years later, the company went bankrupt, but it continues to operate despite its financial woes to this day. Nevertheless, U.S. investors point out that they have not yet been able to bring the company's executives to the table to discuss the issues and try to bring the case to court, let alone be paid at least part of what they are owed. Instead, in some extreme cases, they have been forced to file cases in some of the remotest islands of Indonesia to seize some of the company's assets to compensate for their losses.

"We're hopeful about the new government," said Melissa Obegi, senior vice president and associate general counsel of Oaktree. She said that corruption and the lack of the rule of law in Indonesia remained prevalent, and that while the scope of the losses incurred by Asia Paper and Pulp were extremely high, the underlying story of deliberately cheating foreign investors was not uncommon.

"This isn't good for Indonesia, either," Obegi added. Oaktree is now stepping up efforts to rally the U.S. government's support for the investors who lost money, namely from the State, Commerce, and Treasury Departments, which it hopes will force the new Indonesian government to take the issue seriously. Meanwhile, their case is likely to get more support from U.S. authorities, given that the U.S. Export-Import Bank has also joined the group of creditors filing lawsuits against the company.

Yet under outgoing premier Megawati Sukarnoputri, the investors' case was hardly likely to get a fair hearing, as Asia Pulp and Paper is owned by the powerful Widjaja family that has close ties to both the Suhartos and the Sukarnos. Hopes are high both within and outside Indonesia that Yudhoyono will crack down on crony capitalism and corruption that has plagued the country.

Of course, it could be argued that investors should have been well aware that there were downside risks, especially in a company that was so politically connected, even if it was one of the leading corporations in the country. In fact, some investors make a point of avoiding Indonesian companies that are politically connected or part of large family-owned businesses. But in Indonesia's case, that would mean most of their companies would not be considered as an investment target.

That, however, appears to be already the case, as overseas investors have already taken matters into their own hands by shying away from the country in recent years, with foreign direct investment falling to a nine-year low of $9.7 billion in 2002. Of course, the decline in investment interest from overseas is not simply due to growing concerns about shaky bankruptcy laws that put creditors at a disadvantage.

Another major concern regarding Indonesia is the fact that it is the world's most populous Muslim country, and there have been a number of attacks across the country including hotel bombings in Jakarta and Bali specifically targeting foreign visitors by Islamic terrorists. As such, the State Department continues to warn U.S. citizens to avoid non-essential travel to the country, which has been a major blow to Indonesia's ability to attract investments.

Still, worries about the rule of law, or lack thereof, in Indonesia isn't helping the country's business prospects either, argued John Phipps, senior director of the U.S.-ASEAN Business Council, a Washington-based trade organization that promotes private U.S. investments to South East Asia.

As such, the incoming Indonesian government "needs to make clear that it will not tolerate corruption...and will root it out from the civil service, and enforce the rule of law," Phipps said, but added that such fundamental changes to the judicial system and overall business culture was easier said than done.

Nevertheless, Indonesia remains highly dependent on foreign capital, and the country needs to put improving corporate governance and publicizing that fact high on its to-do list.

"Indonesia needs foreign investment to succeed...and tap into the wealth (of international markets)," the business council's Phipps said.

But for all the downside risks over Indonesia, the country remains an attractive destination for many businesses, especially as it is the biggest natural gas producer in Southeast Asia. In fact, the US-ASEAN Business Council will be hosting its annual business mission to the country in December, and representatives from 30 to 40 blue-chip U.S. companies including manufacturers, energy investors, and financial institutions are expected to take part, Phipps said.

"The timing will be right to engage with the new government," he said.