One of the major hurdles faced by Indonesian companies is simply obtaining licences and permits. Due to multiple overlaps of jurisdictions between the national, provincial, and regional governments, companies have to spend significant time and resources submitting applications, and waiting for those applications to get processed. As a result, bribing government authorities in the hope of cutting through the bureaucratic process is a common corporate practice – as successive scandals have illustrated.

Most recently, major property developer Lippo Group ran into trouble when the Corruption Eradication Commission (“KPK”) found evidence of bribery in its flagship Meikarta project. The Meikarta project, developed by the Group’s property development arm PT Lippo Cikarang Tbk (IDX: LPCK), is an IDR 278 trillion (approx. USD $19 billion) investment. If completed, the project will include 250,000 units of prime residential properties along with 1,500,000 square meters of prime commercial space. Ultimately, Meikarta will consist of 200 skyscrapers, hosting offices, apartments, shopping malls, health care facilities, and educational institutions. It is envisioned as a modern alternative to Jakarta, roughly 35 kilometres away.

On October 16, 2018, this megaproject development ran into trouble when the KPK arrested nine suspects, including Lippo Group executive Billy Sindoro, on charges relating to bribery. Mr. Sindoro has  been accused of offering the local regent RP 13 billion (~US$850,000) in order to obtain permits.

While Meikarta remains ongoing, the investigation prompted Lippo to cede majority ownership of the project. In its delayed 2018 Q2 financial statements, Lippo Karawaci disclosed its share ownership over PT Mahkota Sentosa Utama (“MSU”), the project developer, had dropped from 54.37% in March, to 49.72% in June. This was done through a series of transactions, including the sale of 14,000 shares to an individual investor named Mas Agoes Ismail Ning, who has been also identified as a former director of a subsidiary of PT First Media Tbk (IDX:KLBV), an IT company affiliated with the Lippo Group. As a result, it seems the project has been deconsolidated on the company’s financial statements .

It’s not the first notable case of a company getting caught for corruption. Back in April 2016, Ariesman Widjaja, then-president director of fellow property developer PT Agung Podomoro Land Tbk (IDX:APLN), was detained due to an allegation that he was involved in bribing a local politician, Muhammad Sanusi. It was later revealed that Mr. Sanusi had engaged in deliberations on changes to North Jakarta zoning laws related to a seafront reclamation, which was in proximity to APLN’s project sites. The company announced Mr. Widjaja’s resignation on May 2016 but did not explain the reasons for it; nor was the rationale set out in the company’s disclosure to the Stock Exchange or in its 2016 Annual Report. In fact, the bribery case was never mentioned in any of the company’s subsequent official publications.

These cases illustrate both the problem facing corporate Indonesia, and the approach that many companies take in response. A culture of bribery is deeply rooted within the Indonesian public sector, serving as a major deterrent for foreign investors. Yet many companies look at bribery as a necessary “cost of doing business” – whatever the potential penalties of breaking the law, they are seen as worth it to ensure that projects stay on track. After all, without government approvals, both Lippo and Podomoro’s development projects would have been cancelled, and the companies could have faced potential litigation from customers. And when potential problems are realised, companies aim to use governance loopholes to avoid accountability.

While bribery scandals can cause reputational damage, companies attempt to mitigate legal damage by exploiting complex corporate structures, such as setting up special purpose entities, to leave the body corporate itself largely unharmed. As seen in Lippo’s quick deconsolidation of Meikarta and Mr. Widjaja’s imprisonment, companies in hot water will quickly sever ties with problematic projects or the individual executives involved.

Decky is an analyst covering the Indonesian market.