From the Winter 2011/2012 Faith issue
By Nicholas Newman
JAKARTA—Muhammad Nazaruddin, a bright 32-year-old, was an up and coming national politician destined for high office, perhaps even president. He was one of the new political tigers that won office as the result of Indonesian President Susilo Bambang Yudhoyono’s election victory in 2004. By 2010, Nazaruddin was already treasurer of the ruling Democratic Party and a member of the House of Representatives Budget Committee, which oversees government projects.
Nazaruddin’s downfall came last May when local newspapers reported he received bribes totalling 25 billion rupiahs ($2.8 million) for a construction contract to build athletes’ housing at the Jakarta 2011 Southeast Asian Games. In late September, two members of the project consortium were convicted of involvement in the bribery scandal and were sentenced to only two and two-and-a-half years in prison and a fine of Rp 200 million ($22,300). “If that’s all they get, there won’t be any deterrent effect,” says Indonesia Corruption Watch chairman Danang Widoyoko.
Shortly after these charges first surfaced, the Corruption Eradication Commission (KPK) formally accused Nazaruddin of accepting bribes involving the project. Subsequent charges included two cases that totaled Rp 2.3 trillion ($256.5 million) in bribes. In August, Nazaruddin’s lawyer revealed a letter from his client suggesting he’d keep mum about crimes committed by the Democrats if Yudhoyono would guarantee his family’s safety, leading to the obvious, if unproven, conclusion that the party’s leaders are culpable in as-of-yet-undisclosed offenses. Then in September 2010, the chief of the Constitutional Court alleged Nazaruddin had offered an unsolicited payment of $120,000 to the court’s secretary-general. Nazaruddin resigned hastily, launching a series of stinging attacks accusing high-ranking government figures, including the Sports Minister Andi Mallarangeng and the secretary of the Democratic Party’s ethics committee, Amir Syamsuddin, of crooked deals. After implicating powerful former associates, he fled to neighboring Singapore for what he claimed was a medical appointment. However, he never bothered to return—at least not for three months. That is when Indonesian authorities discovered him, living under an assumed name in Cartagena, a plush Caribbean beach resort in Colombia. The Indonesian government sent a specially chartered executive plane at a cost of Rp 4 billion ($468,000) to collect him. That too provoked a few raised eyebrows, until the KPK pointed out that a previous whistle-blower who returned on a commercial flight had been poisoned.
“Corruption in Indonesia is just like Coca-Cola,” says Widoyoko. And indeed the problem has permeated far beyond the billion rupiah bribes that prop up the already rich and powerful. It has become a deeply embedded feature of Indonesian society and everyday life. Corruption is sapping the growth and undermining the foundations of the world’s third largest democracy.
In the time of Indonesia’s long-time leader, Suharto, life was a lot simpler for the foreign investor. Suharto ran a one-stop shop. You paid your money to one person, and everything was arranged. Today, in the wake of regional power-sharing, you not only have to bribe officials at the federal level, but also at regional and local levels. This complicates matters. Today, a foreign investor often needs a professional team based in Jakarta and in the appropriate provinces to figure out all the people who need to be paid off.
Corruption has trickled down to every aspect of life. It’s routine for authorities to pull over drivers—whether or not a motoring offence has actually occurred—and ask for Rp 50,000 ($5.64) to avoid being taken to court. Agung, a Jakarta property developer, explains, “You are told you have been speeding, or there is something wrong with your car. You are then asked for ‘some money for a friend.’ This is a code phrase that the officer is demanding a bribe for some sort of alleged motoring offense.”
Truck drivers and transportation firms make regular payments to police, officials at weigh stations, even local thugs at checkpoints to allow their overloaded trucks to pass. Few of these tolls ever make their way into government coffers, so it’s no surprise to find major roads routinely dotted with large potholes. Hauling cargo from Jakarta to Surabaya requires payment of at least Rp 450,000 ($50) in illegal levies to officials at 14 different weigh stations along this 400-mile route, according to Indonesia’s Food and Beverage Industries Association. Truck drivers claim they must overload their trucks to cover the illegal levies. These overweight vehicles further churn up the already decaying roads. In the Indramayu region alone, there are more than 50 miles of failed roads in need of repair, and no plans to repair them. The Iskandar Agus Bandji Cirebon chapter of the Organization of Land Transportation Owners says truck owners must change their tires every two to three months instead of the normal six months because of the poor state of the roads.1
Indonesians resent the vicious cycle of corruption that’s become so deeply embedded in their lives. It is a constant topic of conversation, a media fixture, and the focus of countless conferences. “Indonesians have a love-hate relationship with corruption,” says Agung. Many hate paying the bribes on a daily basis to get things done, he says, “but given that public officials take home barely $200 a month in salaries, it’s hardly surprising they look for ways to supplement their incomes.”
In the past, politicians have talked about halting corruption, but in the end, it has always been just that—talk. Despite years of anti-corruption rhetoric, the scale of the problem is only growing. The most recent Corruption Perception Index prepared by Transparency International ranks Indonesia as more corrupt than Egypt, Brazil, India, and China. A survey released in October found 91 percent of Indonesians believe corruption is widespread, up from 86 percent five years ago. Many Indonesian executives agree with Agung that “corruption is becoming more bureaucratic at all levels of society.” Ironically, Indonesia’s efforts to improve democracy and accountability after Suharto by building strong regional governments have only made matters worse.
In 1999, Time magazine estimated that Suharto amassed a fortune of $15 billion between 1967 and 1998 in cash, shares, property, jewelery, and art. Many businesses included one of Suharto’s children on their board to protect investments from rivals and threats from low-level civil servants. Few want to return to the days of Suharto’s New Order regime when the military massacred hundreds of thousands in the 1960s, then brutally repressed regional uprisings in Aceh and East Timor from the 1970s to the 1990s. Yet, the Suharto system centralized the collection of bribes and established mechanisms to halt deviations from the agreed upon pattern of corruption. People who bought “permits” received guarantees that they were getting the whole package and would not face any more requests for bribes. Corruption under Suharto was compatible with high growth and inflicted minimal damage on economic development.2 While Suharto was president, Indonesia’s economy boomed, with over three decades of 7 percent per annum growth. The president’s wife, Tien Suharto, was widely known as Madam Ten Percent for the level of payoffs expected for approval of major contracts or development projects. At the time, Indonesia and India were about equally corrupt, according to Ari Kuncoro, but Indonesia’s economic performance was healthier. Only three groups—Suharto’s extended family, top members of the military elite, and leaders of Indonesia’s Chinese conglomerates—dominated corruption.
Bribery has changed after Suharto. Corruption is no longer monopolized by a select few after a decentralization program began in 2001. Instead of a strong centralized state, the country’s government fragmented into a host of power centers. Chaotic bribery has become common where centralized corruption once dominated. The Indonesian Chamber of Commerce (Kadin) has complained that decentralization produces additional regulations in the form of taxes, levies, and permits, which drive up corruption at the local government level. As officials throughout the government hierarchy cull profit in this way, the practice has become known as “overgrazing the commons.” Everyone from ministers to assemblymen to local police officers demand payoffs.2
During this summer’s Ramadan, local officials took little time off from collecting their take. For a new passport or driver’s license, the quickest way to avoid endless queues at local government offices is to pay an intermediary. It normally costs Rp 175,000 ($20) to obtain a new driver’s license, but the application and processing is time consuming. Instead, the standard bribe for obtaining an instant driving license is Rp 500,000. For migrant workers seeking a new passport, the process routinely takes eight days, but slipping a bribe of Rp 600,000 to an intermediary means a passport can be obtained instantly.
Sundah, who lives in Denpasar, Bali decided he was going to try to snag a driver’s license by going through official procedures without paying a bribe. His story was reported by Karishma Vaswani for the BBC:
"I took the written test three times, and each time they failed me," he said.
"I was a couple of points short each time—but when I asked to see the test papers, the officials refused. The others in my exam room told me that if I just paid an extra $20, I would get my license."
Mr. Sundah finally managed to get his license because of his persistence—the police realised he was not going to pay them a dime.
"Finally I asked to see the exam paper—and I spotted the question: 'What would you do if you hit someone in an accident?'," he chuckled.
"I got the question wrong—because the correct answer, according to the official exam paper was to run away!"
Effectively, this all but institutionalized system is an express fee for expedited processing—standard practice in most western nations. In Indonesia, however, instead of the government as the beneficiary, these payments go into the pockets of individuals. People have increasingly become both resigned to such fee structures and lured into efforts to see how they, too, might profit.
It’s not just passing a small bribe to a public official that’s routine. Corruption has spread to the private sector. Today, Indonesia is home to more than 60,000 millionaires and 20 billionaires (in dollar terms)—figures that have doubled in the past two years, according the Indonesia’s Ministry of Finance. The financial sector is bubbling with scandals, from a bribery case involving a former governor of the Bank Indonesia that has implicated dozens of politicians, to Citibank, where an employee is charged with skimming millions from her customers.3 Such cases highlight fears about endemic corruption within Indonesia’s financial sector.
As The Economistreported in October:
Churchill Mining, a London-listed firm, announced in May 2008 that it had found 150 million tons of coal in Indonesian Borneo. This was an underestimate. The firm now believes there are 2.8 billion tonnes, making it the seventh-largest undeveloped reserve in the world. Alas for Churchill, other people quickly grew interested. The Nusantara Group, a conglomerate backed by Prabowo Subianto, a politician [and Suharto’s son-in-law], had previously controlled mining in that area. Six companies affiliated with Nusantara held licenses for six blocks in the East Kutai district of East Kalimantan province, but did not explore for coal. Those six licenses expired between March 2006 and March 2007, after which the district government began offering the area to other firms. Churchill entered the picture by acquiring a 75% stake in four new licences for the same area, which had been awarded to the Ridlatama Group, an Indonesian company.
In July 2008, two months after Churchill revealed its discovery, the district chief of East Kutai suddenly extended the six expired licenses that had been held by Nusantara’s affiliates, ignoring the fact that Churchill’s local partner had already been awarded licenses for the same tracts. Churchill claims that it has since been the target of a campaign to drive it out of Borneo. In May 2010, a new district chief of East Kutai revoked the Churchill-Ridlatama licenses, leaving Nusantara-affiliated companies in sole control of the 2.8 billion-tonne reserve.
Local courts rejected Churchill’s complaints, though it has recently appealed to Indonesia’s Supreme Court. And in the process, Churchill Mining has launched a global public relations campaign alerting the financial world that Indonesia is not a trustworthy place to invest.
For private companies, corruption resembles taxation.2Both take money from their business, but the need to avoid detection and punishment makes corruption less efficient than taxation. A bribe is a contract that cannot be enforced in court, increasing the chances the bribe-giver will renege or the bribe-taker will suddenly demand a higher payment. Still, there are some practices many foreign observers (and even Indonesian commentators) would call “corruption” even though it’s totally legal in Indonesia.
In Indonesia, like elsewhere, golf clubs exist not only as a place to play golf, they are equally a place to conduct business—organize deals, network, and bribe officials. It is a good place for an important official to win prestige jobs for his expensively educated children. It is also a good place to receive bribes. A top civil servant is invited to play a round of golf and discuss business. The official has conveniently forgotten his bag of golf clubs. His business friends lend him a set; they play a round of golf, with the prize being the golf clubs. The government official wins, and he decides to sell them at the golf professional shop, since he has a set of clubs at home. The price he’s paid by the shop owner is always the sum agreed as the bribe for the deal the official has made with the executives that morning. This is not illegal, nor is it unlawful when a company like PT Freeport Indonesia admits it has given some $14 million to police and Indonesian military officers as a protection fee to secure their mining areas. Many private organizations, however, criticize these payments as bribery and corruption.
Because the legal system is largely dysfunctional, a vast number of transactions must be concluded in the gray market. The sluggish state telecom’s failure to approve the latest electronic gadgets in a timely manner encourages illicit sales. In November 2010, police arrested two students in a sting operation for re-selling iPads they had purchased legally in Singapore. They were accused by police of breaking the 1999 Consumer Protection Act for selling iPads without manuals in Indonesia and being in breach of the 1999 Telecom Act for selling iPads which had not yet been officially classified as a telecom device. Many found such enthusiasm to enforce the law by the police strange, given that for years many authorized retailers of gadgets had not been prosecuted for breaching the very same regulations. In October, a Jakarta court cleared the accused.
Indonesia’s small- to medium-sized enterprises are more profoundly affected by a corrupt environment than larger companies due to their limited capacity and market power. Such companies must devote a greater percentage of their income to facilitation payments. Corruption regularly occurs when licenses have to be obtained, so businesses often operate without them since a firm may need up to 30 separate documents to be officially legitimate. At least half of all bus drivers in Jakarta don’t have drivers’ licenses, says Sulastri, a local businesswoman. Not having one means drivers have probably not taken an official driving course let alone passed. That’s hardly a surprise, given the dangerous driving that goes on in Jakarta. For anyone caught without a license, it simply means bribing a police officer. It would take at least 40 stops at roadblocks to repay the full, under-the-table cost of obtaining an official license, plus the accompanying bribes to speed up the process.
Despite some improvements for business in recent years, Indonesia’s complex regulatory and legal environment leads many foreign and domestic companies to avoid the justice system entirely. It is not surprising that investors are often advised by corporate lawyers to resolve disputes through international arbitration, because the domestic judicial system operates unpredictably and opaquely. The local business community regards the tax and customs system as especially corrupt with many onerous regulations. Ironically, many of these burdensome regulations have been introduced in an effort to curb corruption.
IMPACTING THE ECONOMY
Despite scattered efforts to put a collar around the problem, a World Bank Report found that some 35 percent of multinational enterprises avoided investments in Indonesia largely because of the high costs related to corruption. The problem has become so pervasive that it threatens Indonesia’s prospects of becoming a BRIIC (Brazil, Russia, India, Indonesia, and China) state. Moreover, countries have introduced anti-bribery statutes, which will make it increasingly difficult for foreign investors to participate in Indonesia’s corrupt practices. A study from the consultants KPMG found that a third of British and a quarter of American companies would simply avoid corruption-prone countries to avoid the risk of being prosecuted at home. At least for the moment, of course, this does not prevent Asian competitors without anti-corruption regulations from participating in such payments to win business in Indonesia.
Some Indonesians say the prevalence of corruption has much to do with its history and traditions. Since ancient times Indonesia has suffered waves of invasions, a succession of clan chiefs, regional aristocracies, and at times colonial administrations. It is not surprising that, since independence, the country has been governed by successive generations of dynastic elites.
Civil servants often treat members of the public as serfs, while regarding themselves as part of the Priyayi (Indonesian nobility). Agung says when he is paying a bribe, he feels he is showing respect to a mafia godfather. Officials expect their peasants to bring tokens of respect. For many brought up in such a society, the offering of a bribe is not seen as corruption but as part of the way of life. In fact, many local businessmen who have travelled widely in the West suggest there’s little fundamental difference between bribing a politician to award government contracts in Jakarta and bribing a Washington congressman to change a law, except in the United States it’s called lobbying.
PART OF POLITICS
It’s widely believed that corruption has spiralled out of control in Indonesia because of the high costs of governing a nation of over 238 million people scattered across some 17,000 islands. Political party fundraisers seek inventive legal and extra-legal methods in a regime with no established culture of donations by party members and supporters.
The Rp 8.7 billion ($1 million) paid in subsidies to all nine recognized parties in Indonesia’s Parliament is hardly sufficient to run a professional political machine. Indeed the vast majority of party members pay no membership fees, while the small state subsidies to parties were cut by almost 90 percent in 2005. Parties and politicians constantly try to raise funds from companies and state agencies, selling advising services to speed the passage of legislation or development schemes through Parliament. Similar procedures have often been the root cause of political scandals in both Washington and Westminster.
Last June, Indonesian Corruption Watch demanded the nine political parties in the federal parliament reveal their financial details in accordance with the Political Parties Law 2011, which mandates that parties have their budgets, balance sheets, and cash flow statements audited annually. Failure to do so could disqualify parties from further government support. Only three political parties responded. Despite promises over many weeks to meet the Corruption Watch request, as of August the six remaining parties had still failed to comply.
Corruption could be posing a threat to Indonesia’s long-term stability as one of the world’s largest democratic states, suggests Franz Magnis-Suseno, a Jakarta-based political philosopher. Though four presidents have been freely elected in Indonesia since the end of Suharto’s 31 years of one-man rule in 1998, an increasing number of Indonesians question the value of democracy, given the continuous run of scandals reported by the country’s largely free press. Clearly though, self-regulation by the rich does not work. And the Indonesian government is too weak to make regulation work either.
REASON FOR HOPE
Still, this runaway corruption has not slowed Indonesia’s impressive 6 percent annual GDP growth since 2007, and there are other reasons for hope as well. For the first time since Indonesia won its independence from the Dutch in 1949, and despite some considerable resistance from the political elite, the legal system appears to have opened a fight against graft. Suddenly, a surprising number of people are being caught and jailed. Finance ministry official Gayus Halomoan Tambunan, a relatively junior official who “fixed” tax issues by helping both domestic and foreign companies illegally evade or reduce their tax liabilities, amassed a small fortune of Rp 74 billion ($8.5 million). Tambunan was sentenced to seven years in prison in August, later extended to 10 years. He proclaimed himself a minnow, compared to much larger fish in the finance ministry, prompting the Indonesian media and regulators to open their probes into the “tax mafia” operating within the ministry.
Founded in 2003, the KPK, Indonesia’s anti-corruption commission, has acquired significant powers for investigation and prosecution, and operates independently of the country’s often-erratic and corrupt police force. On a visit to Jakarta last August, FBI official Gary Johnson said in Tempo magazine that the KPK was having a real impact, describing it as “exceptional, dedicated, and highly motivated,” adding, “they are doing their best. For a relatively young institution, they have achieved a great deal.” The KPK has convicted 150 high-ranking officials, including 68 members of parliament, more than 10 government ministers, four diplomats, and a number of high-ranking chief executive officers and judges, according to its own figures. It has also received more than 55,000 complaints of bribery. Its 100 percent conviction rate, though, looks a little too good in any legal system and suggests there needs to be a closer look at how cases are selected in the first place.
Indonesia’s new drive to fight corruption has been led by pressure from international investors to open up the country, and from a new generation of Indonesian executives and politicians eager to bring the economy into the global free market. The status quo gets in their way of profiting fully from the country’s economic growth and mineral wealth. Haryono Umar, KPK’s vice chairman, explained to the PBSNewsHour that in many remote parts of Indonesia, a lot of government employees “don’t have a clear idea about how to use government money in an accountable manner, so we need to educate them and let them know what practices are against the law.”
But in Indonesia, corruption even plagues the watchdogs. Parallel to the KPK, whose reach is still somewhat limited, a growing number of non-governmental organizations have made anti-corruption monitoring their primary mission. The problem is, alongside the leading anti-corruption watchdogs, clones—set up by unscrupulous officials to capture aid money—undermine the work of the bona fide groups.
Indonesia needs desperately to employ a mix of hard and soft measures to combat corruption. These include closing down black markets entirely and increasing pay levels for civil servants and law enforcement officials. Though similar policies have been tried before in Indonesia without success. Above all, the state must become a much more powerful and effective organization.
While organizations like the KPK have embarked on a determined fight against corruption, it is still all but impossible to build a house or power station without having to pay multiple bribes to win the necessary approvals and permissions. Given the complex and disparate bureaucracies and the seemingly opaque legal environment, foreign investors often arrive and realize they are rabbits in an Indonesian jungle full of tigers. Unfortunately, they often simply take their business elsewhere.
Nicholas Newman is a U.K.-based writer who specializes in Indonesia and the energy industry as owner and publisher of Oxford Prospect, an energy business magazine.
1. Rukmana. Nana. “Coastal Road Damaged: Java, Indonesia,” Planet Mole: Indonesia in Focus.
2. Kuncoro, Ari. “Corruption and business uncertainty in Indonesia.” ASEAN Economic Bulletin. April, 2006.
3. Ibrahim, Fauziah (Host). (2011, July 27). 101 East[Television Broadcast]. Qatar: Al Jazeera.
[Photo: Jeff Werner]