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Decentralisation and regulatory inconsistencies amongst top risks for business in fast-growing Indonesia – new Maplecroft report

05/08/2010

According to a new country report, released by Maplecroft, the decentralised government system in Indonesia is exacerbating key risks for the oil and gas sector; including transparency, corruption and land ownership.

Indonesia's fast growing economy is currently attracting large amounts of foreign investment from the energy sector and the IMF has forecast the economy to grow by 6% over 2010. However, there are a large number of risks within the business environment that must be navigated by companies if they are to capitalise on opportunities.

Decentralisation, which took place in 2001, has resulted in the application of different investment practices across the country. Local governments enjoy considerable autonomy to issue their own business regulations and the variance between regions has added to the lack of transparency in Indonesia. The Organisation for Economic Co-operation and Development (OECD) has stated that: "Most jurisdictions have introduced several levies, often without the accord of the central government, as a means of raising revenue."

Government auditing practices have significant room for improvement, Maplecroft's report says. This point is underlined by the Revenue Watch Institute. The non-profit policy institute, which promotes responsible management of oil gas and mineral resources, states that "information concerning regional oil, gas and mining revenue receipts at the local level remains unclear." Many civil society lobbyists say that corruption at multiple levels of any given contract and inaccuracies in revenue reporting and projections makes tracking the expenditure of these revenues impossible.

GDP growth by region

This structure contributes to the high level of corruption Indonesia, which has been compounded by a corruption court bill which was signed into law in September 2009. The bill effectively decentralises anti-corruption efforts, placing them under the jurisdiction of district courts. Maplecroft's Business Integrity and Corruption Index ranks Indonesia as extreme risk, with a score of 1.18 out of 10. Malaysia by comparison ranks as a high risk country with a score of 4.47.

The Indonesian government has tried to reassure foreign investors and the international community that it intends to improve transparency in the extractive industry. President Susilo Bambang Yudhoyono maintains that it his cabinet is committed to the Extractive Industries Transparency Initiative (EITI), which aims to set a global standard for oil, gas and mining. However, Indonesia is not yet a member of the initiative.

Land and property ownership remains another source of concern for foreign investors. Indonesia's decentralisation process has reportedly resulted in a large number of land claims by local residents against companies often operating on government-granted concessions located in their communities. Incomplete or inaccurate record-keeping is compounded by a corrupt and ineffective enforcement system.

"Companies are advised to ensure that they invest in areas where land disputes do not exist or where they have been settled," said Anthony Skinner, a Principal Analyst at Maplecroft. "Otherwise they risk court cases by plaintiffs and general reputation damage. They may also be seen to be complicit in human rights violations committed by security forces on or around their land."

The Country Report - Indonesia provides in-depth analysis, innovative sub-national maps, stakeholder viewpoints and key recent events. Comprehensive risk analysis is broken down into individual chapters focusing on: governance framework, the regulatory and business environment, political violence, human rights and society, and an economic overview.

Country reports are available for all countries and sectors. For more information and pricing contact info@maplecroft.com