Risky Business – a book review. [Coal Asia magazine Vol. 49]

Risky Business – a book review.

Ari Sharp has recently (September 2014) published a book called “Risky Business” which draws upon his experiences from the copy desk of the Jakarta Globe. This book briefly introduces the recent Indonesian history of investment and provides an outline of the Government apparatus, as seen from the investor’s perspective. The book then gives a number of excellent summaries and observations of recent business events that are original defining cases that contribute to the present assessment of the heightened Country Risk for doing business in Indonesia for foreigners and Indonesians.

“Riot at the gates” outlines the success of G-Resources gold exploration and construction project in North Sumatra, with the last minute community issue over a waste water pipe. The company had complied with all regulations, and conducted significant community programs. However it was one village that felt left out and distrustful of the local government that expanded the industries community engagement risk profile.

“Time to pack your bags” is the story of the head of Exxon Mobile being personally squeezed by the Government to pressure Exxon on the Governments aspirational annual production targets.

“Legal Tangles” is the Churchill story of overlapping coal concessions that tests the commitment between joint venture parties, the power plays of competitive Indonesian big business, the mixed up roll of local government, and the Indonesian legal system. Here the risk to the investor is clear, but it also emphasizes the risk to the government of having a free enterprise business sector to contribute to national development.

“Zealous Prosecution” is a review of the Chevron bioremediation event where the Attorney General’s Office and the Anti-Corruption Court change the concepts of civil law into a criminal law situation and thereby altered our ongoing perception of legal risk.

“The battle for Mahakam” is another oil industry story, this time for Total. The negotiations for contract extension became a political test case for the ongoing maturing of Indonesian technical capability and rising nationalism verses budget realism. This was complicated by internal politics that saw the restructuring of the Government’s management of the oil & gas sector. This event reflects upon the risk factors that rely upon long term certainty for major construction projects.

“A port in a storm” looks at plans to redevelop the Tanjung Priok port and the comparable poor performance of the Indonesian ports. Private plans and even shared private & public plans to reinvigorate the port become frustrated by a dysfunctional government.

“Facing jail for doing business” is the Indosat telecommunications saga that saw accepted business practices become the subject of a determined Attorney General’s Office to develop a new interpretation of the business law, and apply it retrospectively. This event also provides a glimpse into the differences between various government institutions.

“Hunger Pangs” lifts the lid on the countries food security outlook, and in particular on the beef industry. It is a typical case of good intentions with poorly defined anspirational legislation, but the lack of serious study resulted in hurting the people, and providing opportunities for corruption etc. The medaling with quotas etc has added a new level of risk awareness to this industry. The government has learnt about the fundamentals of supply and demand to develop a broader concept of food self sufficiency.

“Bankers Bluff” is about Singapore’s DBS bank good plan to buy Bank Danamon. However international political ambitions of Indonesia to use the deal to lever greater access of Indonesian banks into the Singapore banking market failed, and the deal fell through. An example of foreign policies affect on Country Risk.

“Not ready for the world” is the debacle of the Bumi Resources listing on the London stock exchange in a tie up with Rothschild. This exposed poor Indonesian corporate performance to the world stage and reduced the potential of other Indonesian ventures to raise funds on such markets.

“Caging the Golden Goose” reviews a number of implementing regulations that redefines the application of the 2009 mining law into a political tool to replace a nominal level business playing field into one of aspirational waters. The messy manner of delivering the new rules provides a recent change to Country Risk.

Ari Sharp draws a number of conclusions, including looking into the ethos of Indonesia’s leading business groups, the motivations behind government implementation and policy. Ari goes on to make a number of recommendations clearly aimed at the incoming Indonesian Government.

Overview.

This is a timely book, and easy to read. By its nature the book does not go into great depth about all the various side events and issues that are associated with these examples of what is now part of Indonesia’s history, but sticks to the books theme of business risk from the corporate governance and investors perspective. Apparently the book does not yet have a distributer in Indonesia. It contains a number of quotes and a smattering of technical details that would seem to be a useful study guide for university students and the proliferation of guest speakers on endless TV talk shows. The recommendations of this book would seem to coincide with much of Jokowi’s philosophy to bring about a change / improvement in the way of thinking for the Indonesian Government and its institutions that will have meaningful benefit for the larger population.

The large number of cases in this book related to mining reflects a significant recent shift in the Governments greater public emphases on mining over agriculture, a sign in itself of the development from a rural economy towards an industrial economy. For many years the mining industry has been the “quiet achiever” helping drive Indonesia out of the post colonial era into an emerging regional power house. But while Indonesia is looking to take the next stage of development, it has continued to drag along its historical outlook of aspirational regulations. This book clearly shows that the Government and business need to consider a deeper awareness of the implementation of regulations, and implies the legal profession will be busy!

The past is the key to the present.

Each generation has to work within the investment parameters of the day, and industry leaders need to show the way to shape the politics of the day, including the development of the primary industries to deliver meaningful prosperity for the well being of the country. A slightly older outlook on the mining industry risk is reflected in the book Mining Indonesia – Fifty Years Development 1945 – 1995 published by IMA in Jakarta in 1996 andincludes the paper – Mineral Development and Investment Policy in Indonesia by Dr Kuntoro Mangkusubroto as Director General of Mines, Ministry of Mines and Energy. This paper reflects on the philosophy of the guiding principles of Article 33/2 of the 1945 Constitution and its implementation through the successful Contract of Work system (for minerals and coal). “The challenge being faced in maintaining our position as one of the preferred countries for foreign investors in mineral development has led to the need to develop a more attractive investment climate” “Factors such as political stability, geology, investment climate, type of mineral potential, track record of successful companies, human resources, proximity to established markets and others were encouraging while deterrent factors such as infra-structure, bureaucracy etc are considered to be the factors which need to be seriously addressed.” And the outlook on the State Owned Enterprises is interesting for the times “It is obvious that with the change in Government policy towards the state owned enterprises, the Government will merely act as a share holder, which eventually may become a minority position. The “former” state companies will then become ordinary private companies in undertaking their own business.” Indonesia’s governance has always been in debate over the direction of development of the resource sector, between the free enterprise verses the state owned & commune systems. Following the outstanding success of these past policies, recent policies as outlined in Ari Sharp’s book now seem to be moving Indonesia in a different direction, wherein some economic activity can still grow, but with heightened risk.

One theme touched on in Ari Sharp’s book is the choice between a State Owned Enterprise approach compared to a Free Enterprise approach towards the development of natural resources for the benefit of the country. This is not a new topic, wherein some dated, though interesting papers were delivered at the Joint Conference of 1978 on the International Resource Management by the AusIMM and American IMM. Mineral Investment – Resource Management and Mineral policy by Alexander M. Wilson concluding remarks included “All Governments…must realize that it is futile to seek investment capital if they do not create conditions offering some assurance of an acceptable economic return. How acceptable an economic return may be, is directly related to the perceived dimensions of risk”. The Roll of Government in International Dealings in Mineral and Energy Resources by Sir Charles Court concludes “The ultimate roll of Government is to back the freedom of the market place to produce the benefits that people want in rising numbers around the world”. The Future of Democratic Capitalism by John C. Duncan argues the “relation between a free market economy and political freedom.”

Although this last paper linking free market economy to political freedom was delivered by an American during the cold war, its application to today’s Indonesia is particularly interesting. The effective ban on nickel and bauxite mining has deprived many people in the remote mining districts of the opportunity to work, and the owners of such projects for the opportunity to develop infrastructure and community development. The current economic studies referred to in Ari’s book on this issue suggest there may not be a net commercial gain to Indonesia. There certainly is a corresponding lack of business and political freedom for the regions to chart their own future, which has been diminished by the central Government. Ari’s other examples where the Attorney Generals’ Office and the KPK have been brought in to override current good business practices for the interests of the state apparatus to implement a political shift to the left also reflects on this relationship between a free market economy and political freedom. The same political forces have gone on to take away direct elections of the regional heads from the people, and place it in the hands of the local governments that in turn are responsive the their party leaders who are typically based in Jakarta!

Ari Sharp’s book repeats many of the fundamental themes on risk and government policy in their current setting. This suggests that globalization for the mineral industry has been around for a long time and has brought us to this position of well being. Ari makes a number of recommendations to the next generation of industry and political leaders for the continued growth of Indonesia. They make interesting reading.

While it may not always be correct to mix business with pleasure when dating, but mixing business with politics is an old married couple’s game.