The Rice Of Politics In Indonesian Business
On paper, Indonesia is the perfect private equity playground. Indonesia’s fast growing economy, young population, expanding middle class and underserved domestic consumer segments are key pluses for private equity firms. President Jokowi Widodo’s big push to open the country to foreign investors by easing up restrictions on foreign ownership and scaling back regulations have also further boosted investor confidence. In 2016, PE transaction value tripled to US$1.47bn, largely due to the country’s first ‘unicorn,’ ride-sharing company Go-jek, which raised US$550m in a funding round led by global PE leader KKR and Warburg Pincus.
Despite this, an unpredictable legal system continues to be the biggest buzzkill to Indonesia’s investor readiness. Frequent regulatory changes and unclear law making processes persist as key risk factors when investing in Indonesia.
Recently, TPS which is backed by global private equity firm, KKR, was affected by Indonesia’s unpredictable and politicized law enforcement. KKR has a 27% stake in the rice producer.
In July 2017, members of the Food Task Force (Satgas Pangan), formed earlier in the year to combat monopoly and cartel practices within the commodities sector, raided TPS subsidiary, PT Indo Beras Unggul’s (IBU) warehouse in Bekasi, Jakarta. During the raid, the task force, which included officials from the Ministry of Agriculture, the Business Competition Supervisory Commission (KPPU) and the police, arrested dozens of IBU employees and confiscated 1,161 tons of rice.
The main allegation facing IBU is fraud. The task force say that the company had been buying lower grade, subsidised grain from farmers, repackaging and selling it as premium-grade rice at a higher price. It also alleged that the company falsely labelled the nutritional composition of its rice products. The raid was personally attended by high ranking officials including Indonesia’s Police Chief Tito Kurniawan, Minister of Agriculture Amran Sulaiman and the Chief of the Business Supervisory Competition Commission (KPPU), Syarkawi Rauf. The officials said in a press conference that IBU’s actions had caused IDR 15 trillion (US$1.1bn) in state losses.
TPS Food quickly refuted all the allegations saying that it does not use subsidized grain or what is known as ‘Rastra’ grain, reserved for low income residents which are not allowed to be sold in the open market. They also emphasised that their labelling follows industry standards. It did not seem that the task force had a credible case against the company. In fact, one of the laws that the task force accused IBU of violating regarding rice prices, had not even been passed. The scandal also brought up questions on what constitutes as subsidised grain, which government officials themselves have not been able to give a clear answer to. The task force say that the company had bought what is known as IP64 grains from farmers who received subsidized seed and fertilisers from the government and sold it as premium grade rice. However, most rice produced by private companies in Indonesia, are likely to be from IP64 grains as almost all farmers in Indonesia receive some sort of input subsidy. Observers point out that if this was the case, the task force should go after all rice producers in Indonesia, questioning why IBU in particular was targeted.
Despite the unclear circumstances surrounding the raid and allegations against the company, police arrested IBU president director Trisnawan Widodo soon after the raid, for violations of business competition rules and consumer protection laws as well as money laundering. The money laundering charges were peculiarly added based on the consideration that IBU had been perpetrating the violations for several years. According to the Jakarta Globe, if convicted, Trisnawan could face up to five years in prison. The hasty arrest of Trisnawan and the general handling of the case by the government has confuddled many observers in Indonesia.
The fallout following the raid was swift. TPS shares plummeted by 40% immediately after the raid, hitting an 18-month low of IDR 905 (US$0.068). Share price have recovered slightly to IDR 1,040 at the time of reporting.
It is not yet clear, a month following the raid what were the true motivations behind targeting TPS and Trisnawan. Many, like independent commentary website Yosefardi have speculated that the raid was politically motivated. TPS commissioner is one Anton Apriyantono, former Minister of Agriculture during the Susilo Bambang Yudhoyono era and a senior politician in the Partai Keadilan Sejahtera (PKS) party. The PKS party, are known Jokowi opposers and have in recent months intensified attacks against the president’s administration. Yosefardi also pointed out that the rice industry in Indonesia is packed with political exposure, with influential politicians having direct and indirect interests in TPS competitors.
TPS rice scandal is a potent example that highlights the risk of investing in Indonesia. The closely intertwined line between business and politics remain a tricky domain for investors to navigate. How can PE firms and foreign companies cope with this?
Companies like Grab have tried to mitigate regulatory and political risks by hiring ‘government insiders’ into their board. In 2017, Grab hired ex-police chief Badrodin Haiti as its President Commissioner, presumably as a way to mitigate the regulatory uncertainties for ride-sharing apps in Indonesia. (It didnt work out that well for them as Badrodin quit some two weeks after) Other players like CVC Capital Partners, who are very active in PE-deals in Indonesia rely on their long-standing partnerships with big conglomerates like Lippo Group, who many would say are too big to bring down. In 2013, CVC cashed out US$1.3bn in an IPO of Lippo’s department store, PT Matahari Department Stores Tbk.
For a start, a deep due diligence of company targets and their main principles is needed. Political Exposure checks must go beyond merely finding out if any of your Indonesian partners hold public office or are associated with Politically-exposed-persons (PEPs). In Indonesia specifically, a thorough understanding of the political and regulatory climate is warranted. Constant monitoring is also needed to ensure that you stay adrift of regulatory changes and political power shifts. In order to mitigate uncertainties, we must look beyond the four walls of the company.
Written by Datarama Analyst Suhaidah.
