Corruption 101: An Insider's Guide to Graft in Indonesia

Credit: Depositphotos
Why you need to know

Jeffery Hutton offers a rare peek inside the sooty world of coal mining and the greased palms that make it happen.

powerd by Cyberon

There’s no reason for you to know this, but, in case you’re wondering, a sports backpack – the standard knockoff Nike variety available in any night market – can carry about 200 million rupiah (US$16,000) in 100,000-rupiah notes.

But Samuel knows this. Two years ago, the US$6 million mine in South Kalimantan in Indonesian Borneo that Samuel – not his real name – manages as CEO finally started churning out coal for clients running power stations in Vietnam, Bangladesh, Philippines and India. As his first barge was loading that January he got a call from a middleman he later learned was representing the local police.

“[The middle man] said: ‘Look we have our guys down there. We know you’re loading. Please have your cash ready.'”

Not that Samuel is complaining about the graft. His own country, which along with his real name he declined to reveal for this piece, scores little better on anti-corruption NGO Transparency International’s Corruption Perception Index than Indonesia – which languishes in 90th on the global list.

But Samuel hopes that his experience will provide food for thought for other would-be-investors.

“They should know what they are getting into,” he says.

Investors hope to cash in on Indonesia’s high-quality resources, cheap labor and proximity to big markets, but are blindsided by a barrage of demands for payouts.

Credit: REUTERS/Beawiharta
Mining in Indonesia is plagued with hidden costs.

“Investors come here with a rosy looking spreadsheet showing lots of profit but they [end up] shutting shop.”

I’ve known Samuel for a few years now. He’s one of my sources when I want an inside view of Indonesian bureaucracy. Over a series of weekend meetings in the Setiabudi area, where he lives in Jakarta, he opens up about the “hidden costs” investors rarely learn about until they are fully committed, or have been around the block a few times.

For instance, police asking for bribes when you’re about to load up your first shipment of coal.

“The hidden costs are things you discover along the way,” he tells me between sips of Americano and tugs on his vape pen.

In fact, the rights to the mine, which now produces roughly 40,000 tons per month of thermal coal, the sort used in power stations, accounted for US$1.5 million of the initial investment. Infrastructure ­­– roads and a jetty – cost about US$1.5 million. Then there are the bureaucratic missteps: production delays owing to mistakes in permit applications, for example. That set the company back about another US$1 million. The remaining third of the US$6 million was spent greasing palms, according to Samuel.

Some of this graft took the form of one-off payments. To attend a company presentation intended to supplement an application for a permit to clear forest land to make way for a mine, local officials would expect 5 million to 10 million rupiah honorarium for each of the attendees. This may dissuade local heavies from asking for additional time-consuming data like new core samples.

But other hidden costs are recurring. These, Samuel has itemized on a spreadsheet as an expense per ton of coal. He won’t give me the data but he loads it up on an iPad and walks me through its 42 items.

“Everything is official,” he says.

We come across Adi, also not his real name, whom Samuel identifies as local mafia. He has a youth group who will occasionally start protests in front of the mine. The protests attract media attention. To keep Adi happy costs roughly 2,000 rupiah per ton or about US$5,600 a month.

Then there is Adi’s uncle who also claims jurisdiction and links to organized crime to back it up. But the uncle appears shrewder than the nephew. He tells the mine where to build a mosque or a school in a village of no more than 9,000 people and then claims the credit to earn local kudos and favors. This expense, 3,500 rupiah per ton, the company logs as Corporate Social Responsibility (CSR).

Several village heads funnel money in this way, effectively doubling the CSR budget, Samuel says.

Each month, local landowners kick up a fuss to the tune of about 17,600 rupiah per ton. This may be as a result of a minor landslide onto their property. They will not only want it cleared but also compensation. Another will claim the mine is generating too much dust and demand compensation and insist the operator hires his water truck to dampen the offending patch.

Some of these payments are now routine. The police and military will settle for monthly or bi-monthly installments. They insist these are made in cash every couple of months. An intermediary will meet Samuel or a colleague at the miner’s bank and photograph the withdrawal receipt for roughly 80 million rupiah. The cash is later packed into a bag or a backpack. This is how Samuel estimates just how much cash a backpack can accommodate. The parcel is then plunked into the trunk of a car outside of a nightclub karaoke bar where the police official and several of his closest friends ring up a bill, which the mine is also obliged to pay.

Sometimes the armed services will accept a lesser amount if the mine encounters operational issues. Even so, the payments do not mean the police will take Samuel’s side when the chips are down.

“It’s like an insurance policy that never kicks in,” Samuel says.

“If things go bad they (the police) will never stand by you. Your truck may have broken down on the highway. They will tell you to pay someone. If you don’t they will launch an investigation and shut your mine.”

At first glance Samuel’s experience belies a trend toward improved transparency in Indonesia. The administration of President Joko Widodo has streamlined business permitting, reducing (in some cases) to a few hours rather than years the time it takes to set up businesses here.

Photo Credit:Reuters/達志影像
Indonesian President Joko Widodo is struggling to push an anti-corruption agenda.

Widodo personally hit the road to drum up investor enthusiasm for the country’s infrastructure spending glut, having funded about half of a projected US$327 billion program of major transport initiatives.

According to the World Bank’s most recent installment of its annual Ease of Doing Business survey, Indonesia ranks 72nd – up 19 places from the previous year. Things are improving.

Even so, corruption remains a huge drain on the country, channeling resources and services to the moneyed and connected.

Research by Professor Rimawan Pradiptyo at the Gadjah Mada Unversity in Yogyakarta shows that between 2001 and 2015 Indonesian courts including the specialized antigraft watchdog the Corruption Eradication Commission, known as the KPK, have ordered the repayment of more than US$14 billion in “stolen” public funds.

Credit: REUTERS/Crack Palinggi
The office of Indonesia's anti-graft agency, the Corruption Eradication Commission (KPK), in Jakarta, Indonesia.

Pradiptyo reckons more than 10 times that amount of public money was stolen during the same period.

“Corruption remains a big problem for us,” Pradiptyo says.

“If we want to become an advanced rich nation we must erase corruption first.”

Thwarting that goal of a more transparent country are Indonesia’s 536 city, regency and provincial governments. A year after the ouster of the dictator Suharto in 1998, big chunks of constitutional powers, including business and mine permitting authority were devolved from Jakarta to the regions in part as a check on authoritarianism from the center.

But away from Jakarta, rent seeking activities metastasized far and wide. When the KPK swooped on the former governor of Bengkulu Province on the island of Sumatra in June 2017, it confiscated a cardboard box stuffed with 1 billion rupiah in what was believed to be kickbacks from a contractor.

“This is a problem that was set in motion in 1999 with decentralization and has plagued successive administrations ever since,” says Glen Gardiner, founding director of Jakarta based risk consultancy, Concord Consulting.

“Ultimately the biggest loser is Indonesia.”

So why does Samuel persist? Because he makes money. Labor costs are low and the quality of the coal in Indonesia tends to be good. Geographically, the country is close to clients in Asian markets that are increasingly hungry for electricity. But even better, Samuel reckons that once he understands the hidden costs he can leverage them to justify low-ball bids for similar assets.

For example, Samuel's company is in talks with another mine site owner. The current owner says the expected costs of his site, which core samples suggest will produce about 35,000 tons of coal a month, runs to about US$50 per ton. But Samuel’s spreadsheet shows that’s optimistic. Factor in the hidden costs and that number balloons to US$62. Moreover, Samuel's data allows him to determine that the site's asking price is closer to US$4 million than the US$20 million the owner is asking. The reality check is courtesy of his tabulation of fixed costs and a pushback on the rapid jump in asset valuations in the area – ironically linked to the success of his existing mine, which has demonstrated that the deposits can support a viable business.

Getting the right people on board fast is another way to manage risk. After the engineers and rainmaker every mine needs is what’s known as a Humas: someone to manage government and community relations. This is the person who knows whose wedding you will need to help pay for, and the right people to bribe to secure permits.

“Before the barge even comes to the jetty you need maybe five different types of permits. You are looking at costs of US$20,000 per day minimum for that barge whether you load the coal or not. You need to be on top this. Your Humas would take care of this. He does the local relations. You need one guy to talk to everyone. Otherwise you have everyone doing their own thing.”

Credit: Antara Foto. Antara Foto/Nova Wahyudi/ via REUTERS
Coal barge operating costs can run as high as US$20,000 per day.

Through it all, Samuel says that the mine makes money if the price of thermal coal remains above US$35 a ton. At the start of 2018, it’s running at north of US$80 a ton. Does he regret coming to Indonesia? On this Samuel adopts an other-worldly fervor, describing Indonesia as the New York City of mining. If he can make it here, he can make it anywhere.

“I’ve learned so much it was worth the US$1.5 million I paid the owner,” he says.

“This mine is destined to be the most difficult thing I’ve ever done.”

With additional reporting by Imam Shofwan

Editor: David Green

Looking for More?
More『Voices』Articles More『Business』Articles More『Jeffrey Hutton』Articles