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Thursday, February 09, 2006

Research Brief: Indonesia Politics, Good or Bad News?

Have you heard anything good lately? Recently, most of the news has been
bad, so bad that readers somewhat tend to ignore the good news. Firstly, let
us see what the bad news actually is.

Last week, government officials in East Java prohibited fishermen to sail as violent weather will cause high tides and heavy rains until the end of February. In the eastern part of the archipelago, villagers in Irian Jaya went to higher ground as seawater engulfed their homes, afraid that a tsunami would follow.

In Jakarta, Telkom’s governing board sent a letter to the government asking permission to increase rates, while according to the media; PLN, state-owned power company is also reported to request for a similar hike in electricity tariffs.

On the economic front, January inflation was ahead of expectation, with the higher price of rice said to be the cause. For the public, more cash is needed not only to buy rice, but also to purchase sugar.

So what is the good news? The Rupiah strengthens against the US dollar, as
foreign portfolios rush into the Indonesian capital market. SBY’s nomination
for the Noble prize (for peace) can also be considered as good news.

On the other hand, some news is quite difficult to comprehend, blurring the
line between good and bad news. Syafruddin Temenggung, former Chairman
of the Indonesian Bank Restructuring Agency (IBRA), was recently named a
corruption suspect by the Jakarta High Court, accused of selling IBRA assets
well below book value, inflicting billions of Rupiah in damages towards
government funds.

Pontjo Sutowo, son of late Ibnu Sutowo (long-time President Director of state-owned oil company, Pertamina, during the early Suharto era), together with Ali Mazi (Governor of South East Sulawesi), were also named suspects by the Attorney General Office in the case of irregular land use permits regarding the Hilton Hotel.

It was also heard that the Finance Director of PLN, Parno Isworo, is under police investigation as a witness in the South Sumatra Borang price markup case. Abdul Latief, a prominent businessman, is also a suspect, in relation to the non-performing loan (from Bank Mandiri) extended to one of his companies, Lativi ,a television broadcaster.

For several years, government after government voiced their efforts to go after
corrupters, yet throughout the years, the results are seldom heard. To be fair,
the current government managed to successfully bring a few people to jail,
in the case of Bank BNI L/C irregularities for example, nonetheless, the success
rate remains low.

The case of several police officers owning bank accounts worth billions of Rupiah, as reported by the media, is still somewhat fresh in our minds. In the end, only one or two officers, with relatively low ranks, were named as suspects in possession of illegal funds amounting to several hundred million rupiah.

The low success rate may be the result of several reasons. The lowest on the list is due to “collusion” between the suspects, police officials, the attorney general and the court office. However, with the existence of the Corruption investigation Agencies (KPK and Tipikor), these officials become
more reluctant to collude, afraid of being caught, unless the payoff is high.

Therefore, we expect this kind of collusion may only occur in cases that involve
large amounts of money.

On the other hand, the office of the attorney general may lack the necessary
skills to handle cases that are rather “technical”, either financially or
transaction wise. For example, the sale of PT Rajawali III, state-owned sugar
manufacturer, that involved Syafruddin Temenggung, may be hard to prove
because as Chairman of IBRA, he has the right to sell any assets below book value as long as the procedures for selling them (transparency, bidding process, etc) are met.

Without the technical know how, it will be hard for the attorney general office
to improve the success rate, especially on cases like Rajawali III, Hotel Hilton
and others. We believe there are shortcuts to increase the success rate. First,
the office can recruit corporate lawyers in its team.

Although sounding like a “brilliant” idea, few problems remain regarding such approach, which is: who will bear their cost? Secondly, the office must be more aggressive to push the law on “whistle blower” or “witness protection” program.

With such law, a whistle blower could reveal all technical aspects regarding the suspect’s wrong doings as well as provide significant evidence. However, the problem (again) rests on the ability of the attorney general’s office to finance such a program, paying the bills and all living costs of the whistle blower.

The government must quickly find solutions to finance these shortcuts if it
expects to improve the success rate. If not dealt with soon, the public will grow
increasingly skeptical. After all, we already have too many bad news, now is the
time to hear more good news.

NC Securities
08 February 2006

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