What a difference half a decade makes. Five years ago, Indonesia was in the news for all the wrong reasons - cronyism, terrorism and economic challenges. Things have certainly turned around. Now the world's biggest exporter of coal, (also the biggest exporter for palm oil), a strong currency, low interest rates, a resource boom like nowhere else in the world, Indonesia is on a roll. “To be a successful lawyer in Jakarta at the moment, all you need to do is keep your balance on the surfboard because the wave we are riding is tremendous - there is this huge wave of work that has started to build up,” Oenteong, Suria & Partners Senior Foreign Legal Consultant Greg Terry said. “As soon as the GFC was digested two years ago, the legal services market started to grow and it has kept growing.” The pie is large and growing faster than those who want a slice can dig in. After five years of continuous growth, optimism have given way to almost fever-pitched euphoria, fuelling Indonesia's economy with a plethora of deals in power generation, natural resource and infrastructure.
Car sales, an indicator of domestic demand in Indonesia, were up 57% in 2010 – hitting a record 764,088 units last year – demonstrating strengthening consumer demand from the country’s 240 million-strong population. Indonesia, Southeast Asia’s largestnational economy has expanded 6.5 percent in the first quarter of 2011 over the same quarter last year – off the back of 6.1% full year growth in 2010 and 4.5% growth in 2009. The slight dip in 2009 (see table 1) only briefly interrupted a narrative of bullish inbound interest. Total investment swelled by 54% last year to 208.5 trillion rupiah, with foreign direct investment more than doubling (52%) to 148 trillion rupiah. “The economy is hitting on all cylinders – and that translates into a high level of activity in our Indonesia practice in the Singapore office and elsewhere in the firm,” Latham & Watkins partner Mark Nelson said.
Land of opportunity: The coal rush
This year, Indonesia’s Chamber of Commerce and Industry (KADIN) has predicted that the national economy could grow 7%, higher than government’s predictions of 6-6.5%. Many respondents contacted by ALB have seen pipelines gearing up – with lawyers of both domestic and international firms operating at maximum capacity.
According to Terry, Oentoeng Suria & Partners - Blake Dawson's Indonesian affiliated firm - is flat chat. Earlier this month, it more than doubled its headcount, acquiring a firm of the same size to cope with the swell of work. “We have guys working quite literally round the clock on a regular basis whereas four years ago, weekends were sacrosanct; nowadays this office is flat out on weekends. The amount of work has grown enormously,” he said. The primary focal point of that growth lies in resources and commodities. Commonly attributed to the relatively new mining law that came into effect in 2009, legal practices across Indonesia are now reaping the benefits of active regulatory management. The Indonesian government had subsequently issued two additional regulations effective 1 Feb 2010 that have gone some way to assisting in the implementation and clarification of Law No.4/2009: namely the government regulation on mining areas and its regulation on the conduct of coal and mineral mining business activities. “Cross-border investment into mining tenements that started with the new mining law has since exploded - but it [cross border investment] has been across the board,” Terry said.
Susandarini, the managing partner of the new Norton Rose alliance firm Susandarini & Partners believes that the new legislative regime for mining has had the greatest success in such key areas as allowing direct foreign ownership of exploration and mining rights. “The mining industry is awaiting further legal clarity in other areas such as the scope of requirement for in country processing of minerals and the new requirement that concessions be ‘auctioned’,” she said. A recent review of 8,000 concessions by the government identified carious issues with 50% of the concessions that includes overlap and compliance.Robert Reid, Foreign Counsel at Soemadipradja & Taher believes that the implementation of the 2009 mining law has had a significant impact on mining services, altering the landscape in a substantial way. “Companies have been given a period of three years to adjust - up to 2012. In the meantime, as their licenses expire, many have had to restructure to adjust, so the past six months have seen us give a fair amount of legal advice on such restructurings,” Reid said.
Major deals such as the Bakrie – Bumi – Vallar deal that witnessed such breakthroughs as the first ever listing of an Indonesian coal miner on the London Stock Exchange also took place in late November 2010. Hadiputranto, Hadinoto & Partners, Soemadipradja & Taher, lman Fenwick Wilan and Freshfields advised on the landmark cash and share swap tri-merger involving the three public-listed companies. The deal created one of the biggest global players in coal. “The need for oil & gas, coal and mineral resources to feed the huge growth in demand in the region’s powerhouses such as China and India has led to a significant increase in investment in these sectors from regional players. The Indonesian coal sector has been a particularly fruitful market for these large power consuming nations, with Indian investment in Indian investment in Indonesian coalcontinuing to increase,” Hadiputranto Hadinoto & Partners managing partner Wimbanu Widyatmoko said.
Widyatmoko believes that India’s geographic proximity makes perfect sense for it to look to Indonesia to satiate its need for coal to power its domestic economy. “India has been a significant investor in the Indonesian mining sector in recent years, with investment interest also in ancillary activities such as power generation,” he said. “Indonesia has a natural geographic fit for India, with much shorter shipping distances than other large coal exporters such as Australia, and also the lower coal qualities available in Indonesia can be matched with the power plants being constructed in India.”
Aside from Indian players, other large 'captive' consumers of coal – such as the region's power utilities from Korea, China, Japan and Thailand - have also been investing upstream in coal mines to shore up long term supply and insulate their domestic power supply from the large spikes in coal prices seen in recent years. “Everyone wants to get involved and some clients are far too keen to want immediate action to do enormous projects in a very short space of time,” Soemadipradja & Taher partner Fadjar Kandar said.
Powering the landmark deals
Other significant deals on the market include an innovative US$400m senior loan facility from a syndicate of 12 banks for Saptaindra Sejati (SIS) – a subsidiary of Adaro Energy. The loan secured, closed in April 2011, have a maturity period of seven years – the longest tenor of any major financing to date in the Indonesian market. The Kutai Timur aluminium smelter and power plant project – valued at US$4bn was a deal than demonstrated the strength of India’s commitment to invest in the country. The deal is part of India’s state owned National Aluminium Company’s (NALCO) plans to build an luminium smelter and power plant in Kutai Timur – a site close to coal suppliers. “There has been a marked uplift in Indian investment into Indonesia. This has been particularly evident in the resources sector with Indian investors acquiring stakes in many mining projects, particularly in the coal sector,” Norton Rose partner Ross Ramsay said. According to Ramsay, Indian banks have also appeared to have increased their involvement in Indonesia, often supporting Indian companies in meeting their funding needs for the acquisition and development of Indonesian projects. Other market observers agree. Other market observers agree. “Major Indian players have arrived and are walking around town seeking opportunities in resources and also in financial services,” Terry said.
Similarly, Rahmat Soemadipradja, partner of S&T says work in resources has in a big way stemmed from Asia's regional powerhouses. “We have witnessed a trend of work coming out from the region - India and China are pouring money into Indonesia. Other parts of the region include Singapore and Korea. South Korea in particular is moving into infrastructure and finance - big time. South Korea is committed to invest up to US$20 billion in Indonesia in the next few years,” Soemadipradja said.
The changing face of inbound investors into Indonesia has not gone unnoticed by Latham & Watkins partner Mark Nelson. “The investors coming into Indonesia used to be largely developed country businesses setting up joint ventures and making greenfield investments. Today, investors from China and India and elsewhere in the developing world are securing resources -- whether it’s palm oil or coal or other minerals. Sovereign wealth funds have also entered the Indonesian market and private investment funds as well. These new investors were not active in Indonesia in any meaningful way 10 years ago, so it's a very different group of players today,” Nelson said.
Latham & Watkins partner Joseph Bevash noted trends that indicate shifting dynamics in the funding landscape.”An important trend in Indonesia that all of us have seen is the strength and sophistication of the Indonesian banks, who are playing leading roles in large, multi-source financings,” Bevash said.
Oil and gas
Despite rumours adrift of oil fields drying up in Indonesia, the proof is in the pudding. “The appetite for the oil & gas sector is now moving into coal bed methane (CBM) – other rising trends include geothermal, now seen as a new, exciting prospect in terms of oil & gas projects right now,” Kandar said. Although growth in the past year has not been as stellar as its coal-related cousins, there have been a number of project expansions in a number of areas, according to Kandar. “There are also newcomers in terms of oil & gas production sharing contracts (PSC) – through acquiring either shares in the PSC operators/ contractors or the PSC interests. Recently we've been advising a number of newcomers. Given that they've seen some appetite in the area, they are also seeing potential that they can do CBM in the style of PSCs.”The firm has seen a strong pipeline of work emerge from the region, most notably from Australia, India, Singapore and Malaysia.
“Oil production in Indonesia has been on the decline. Indonesia not that long ago moved from being a net oil exporter, part of the OPEC economies, to being a net oil importer. Oil production is one of the real focuses of the government - in terms of enhancing oil production, Allens Arthur Robinson Jakarta-based partner David Holme said. Holme, who is currently on secondment to Allen's network member firm in Jakarta, Widyawan & Partners, is currently working on a number of landmark oil & gas projects in Indonesia, including the Inpex Masela Floating LNG project. “Another key priority of the Indonesian government is floating LNG and LNG regasification to enhance gas production and domestic gas supply. Development of coal bed methane resources is also being prioritised to secure domestic gas supplies,” he said. The firm is also currently advising PT Ephindo, an Indonesian CBM development company, on the divestment of an interest in two PSCs in Kalimantan, Indonesia. Susandarini & Partners, together with Norton Rose, is currently acting for Statoil – the Nordic region’s largest company – in relation to advice on oil & geothermal matters in Indonesia and its recent acquisition in three upstream oil & gas projects. The firm has also acted for Sinopec in relation to the proposed development of oil terminal facilities in Indonesia. Terex Corporation had also instructed the new firm, established only in late 2010 – on the international and Indonesian aspects of the US$1.2bn sale of its mining equipment division to Bucyrus.
Alliances
The lucrative potential for the Indonesian legal services market has spawned the formation of Norton Rose with Indonesian ally Susandarini late last year. Norton Rose left previous partnership Brigitta Rahoyoe & Partners to launch its new formal association. Earlier in June 2010, magic circle firm Allen & Overy also announced its entry into the Indonesian market via an alliance with local ex-Hadiputranto, Hadinoto & Partners lawyer Daniel Ginting, joined later by his compatriot Harun Reksodiputro to form Ginting & Reksodiputro. “The establishment of Susandarini & Partners which has an association with Norton Rose is a trend. This can also be seen with the emergence of some other firms in Indonesia,” Ramsay said.
This sentiment is echoed by Allens’ Jakarta-based partner David Holme. “Indonesia is quite prolific in terms of the spin-offs from larger firms. Senior or well-known practitioners in law firms spinning off and setting up their own arrangements - I would say is more common in Indonesia than it is in other jurisdictions. It happens to a degree in all jurisdictions but in Indonesia there is a real trend for partners of larger firms spinning off and setting up their own operations,” Holme said.
Current close cooperation agreement alliances include Australian outfit Allen Arthur Robinson’s partnership with Widwayan & Partners; Blake Dawson – which divorced Soebajo, Jatim, Djarot to join up with Oenteong Suria & Partners and had also acquired a 13-strong corporate boutique firm Atik Susanto & partners last month; Freehills with Soemadipradja & Taher and Minter Ellison’s partnership with local commercial firm Makarim & Taira S. “The market has certainly become more competitive – we have found our alliance with Freehills to be of great benefit. We have been great friends for 25 years – not only at a professional level but also on a personal one. Most of the partners here have spent time on 1 year or 18 month secondments to Australia at Freehills. So the culture gets absorbed by process of osmosis when we go back to practise here,” Soemadipradja said.
According to Holme, since the close cooperation agreement was inked between AAR and Widwayan, the growth the firm has seen in Indonesia has been a steep spike averaging 20% every year through to the current financial year. “That might taper off a little bit but I am expecting the growth to continue to a significant degree,” Holme said.
Assegaf believes that it is not always necessary to join forces with an international firm if one is able to maintain or increase service quality on a go-it-alone basis, although he admits that a tie-up may be desirable in the context of regional expansion. The firm has grown strictly organically, from 30 lawyers three years ago to now a headcount of 50 lawyers. “The practice is very busy and we are taking - not aggressive - but appropriate steps to anticipate both existing work and work in the pipeline.
Some local practitioners think the Indonesian legal market is small, by comparison to its Asian neighbours. Cracks are emerging in the shifting tectonics as strong demand for local lawyers to work on an overwhelming flow of deals puts stress on a small talent pool. “One trend you will see is the names and photographs of senior associates disappearing from law firm websites,” Terry said. “Because if they are on the website, the foreign law firms going through the sites will be on the phone five minutes later with our staff. The local firms are certainly under pressure from the Allen & Overys and Linklaters who are in the process of opening their offices here.”
Some believe the propensity of junior partners – or senior associates – to leave for greener pastures is stemmed from a culture of ‘equity hogging’. A source who declines to be named, said many junior partners in Indonesian firms, (typically described as 50-year old lawyers who have not been given equity by the founder of the firm) leave to form their own firms which will give them equity. “They get frustrated earning so much for the founder,” he said.
The influx of foreign firms has a contributing factor to greater mobility, according to some lawyers. “Lateral moves at the senior level seen over the past 12-24 months have largely been driven by new foreign firm entrants into the market, as opposed to senior talent moving from one firm to another existing firm in the market,” Widyatmoko said. “Searching for good talent has always been a challenge but the demand particularly at the senior level has been on the rise. As the domestic market grows, the demand for good counsel has also increased with many local firms gearing up to expand their resources and this would include several international firms that are starting to seriously consider setting up their own presence in the country. It is expected that this will become the trend as not many firms have focused on and dedicated sufficient time and resources to training their associates and lawyers.”
Anecdotal evidence has shown Indonesia to have some of the lowest lawyer per capita figures globally. Billing rates there are still relatively low and below Asian and global standards, according to lawyers from international law firms. Most believe that as the work rate goes up, so will billing rates - leading to a double squeeze as the demand for legal services puts pressure on hiring collides in combination to lawyers looking for higher salaries. “What's happening now is that the pie is expanding faster than the arrival of competitors. We just talked to juniors we try to recruit from other Indonesian firms that don't have strong global ties and so on, and they all tell us they are working enormous hours as well. Everybody's busy. There is a lot of scope for growth, even as it becomes more competitive, just because the pie is going to grow faster,” Terry said.
Corruption
A problem that plagues multiple jurisdictions in Asia, Indonesia’s struggle with corruption and the use of facilitation money to get governmental approvals for projects through is not a unique situation. With the enactment of the UK Bribery Act on 1 July 2011, and the US version, the Foreign Corrupt Practices Act (FCPA) being aggressively enforced, things could get a bit tricky. According to word on the ground things are improving. There are definite changes – the attitudes of civil servants and government officials are different. It doesn’t reduce the expectation for facilitation payment. Visible changes in the way government officials and civil servants are now increasingly apparent, with officials now more cautious to find ways to get around the prohibition and the punishments and the penalties of the anti-corruption laws under the various international anti-corruption laws.
Corruption in Indonesian society has permeated many levels. According to our respondents, the de-centralisation of Indonesia's political system that gives local and regional government more power has exacerbated the potential difficulties in this area. This is particularly true for projects situated in remote areas.
“The Indonesian Government has taken significant and positive steps in tackling corruption,” said Holme. “There's more to be done and the problem is not unique to Indonesia. There is a strong level of awareness in Government that to attract international investment there needs to be confidence in the transparency of the regulatory and court systems. For now though there is a focus on international arbitration when drafting agreements.”
For Holme and many others, the court system still has a long way to go to develop and foster confidence amongst foreign investors. Inconsistent regulatory approaches, conflicting regulatory decisions and overlapping unclear regulations are issues that respondents have said impacts the ease with which foreign investment operates in Indonesia. 'The process of dealing with local governments and implementing your investment continues to be quite complex and they are trying to refine it and bring it into a single stop authority. But nevertheless, there is an inherent complexity in Indonesia. Because of the diversity, because of regional autonomy, and because of the continued inconsistent decision-making process across government departments, it is another challenge,” he said.
Holme echoes this sentiment. “One of the key issues that the government have been looking at is land acquisition - which is one of the big hold-ups in implementing infrastructure projects in Indonesia,” he said. The government is in the process of assuming responsibility for land acquisition and also putting in place the necessary implementing legislation to enable land acquisition to proceed.”
Assegaf Hamzah & Partners founding partner Ahmad Fikri Assegaf says it is undeniable that corruption still exists in Indonesia, but believes the country has made large strides forward and the improvement is evident. “I think the corruption is scary; you've got judicial corruption where people buy decisions - they bribe judges to get favourable decisions. You get corruption also at the local government level with local administrations granting mining and plantation concessions and licenses without going through auction processes. In Parliament, there have been cases where legislators took bribes from local governments so as to get bigger budget allocations,” he said.
Assegaf maintains that this is not prevalent at every level but only at some. “The KPK (Indonesia's anti-corruption watchdog) as so far delivered on its promises. It is independent of the government and to date has had a 100% conviction rate. The KPK is a real threat to those who engage in corruption. Although the problem of corruption still exists, it is slowly receding,” Assegaf said.
Infrastructure: The train to success
A major stumbling block that has grinded the progress of numerous infrastructure projects such as toll roads and railway networks to a halt, is the headache of land acquisition. Indonesia today still does not hold strong compulsory land acquisition powers and uncertainties abound around guaranteed tariff increases over the life of concessions. “While the business case for investment in tollroads is as strong as that in the power sector, we believe the development of toll roads will continue to be sluggish due to these regulatory issues,” Widyatmoko said.
Other respondents have also noted that growth in the infrastructure sector has been slow. “The growth in infrastructure is not as big as everyone anticipated two years. A lot of projects are not being implemented - be it expressway projects or power projects, but it now appears that the government has realized that the private sector cannot be solely relied upon to build the country's infrastructure, and now seems very committed to pushing it forward,” Assegaf Hamzah & Partners managing partner Assegaf said. This renewed push to drive up infrastructure growth has seen the Indonesian government take a strong stance to push state-owned companies to complete their projects; take over projects from the private sector; systematically consolidate projects, and sort out the issue of the compulsory purchase of land from private occupiers. Assegaf believes the government's current sense of renewed vigour to straighten out the country's infrastructure woes can be sourced from the frustration of long project delays. “It's a mix of issues that relate to an acquisition process that is not very straightforward, since Indonesia doesn't have a strong legal framework for requiring people to relinquish their land if it is needed for public infrastructure. It's a combination of that and differing licensing regimes in different areas - local government actions are sometimes not in sync with central government regulations,” Assegaf said.
Holme echoes this sentiment. “One of the key issues that the government have been looking at is land acquisition – which is one of the big hold ups in implementing infrastructure projects in Indonesia,” he said. The government is in the process of assuming responsibility for land acquisition and also putting in place the necessary implementing legislation to enable land acquisition to proceed.”
Latham & Watkins which acted on the first Indonesian IPP - the Paiton 1 power project in 1995 - has capitalized on the tremendous activity in the Indonesian power and infrastructure space, and has expanding its practice from Hong Kong to include offices in Singapore, Tokyo, Shanghai and Beijing. “We have been extremely fortunate to have been involved in a series of groundbreaking transactions in Indonesia and across the region.”
The popularity of the PPP framework has remained for infrastructure projects in Indonesia for now. Recent regulatory developments last year have been impressed upon the PPP framework to revamp its currency.The financing of projects could now become easier with the new system that sees government concessions, tendered out under specific tender regulations, done as an open tender or as investor-sponsored arrangement tenders that goes with the right match. These provide government guarantee arrangements that are beneficial to the financing of PPP infrastructure projects.
The future
Indonesia’s light burns bright for the road ahead. Although this huge wave could lose momentum very quickly as witnessed with the GFC for many economies, the insatiable demand for commodities and resources from other growing economies will keep the wheels churning for a long time to come. The road to redemption is racing up to meet its feet, as the government sets about the task of tackling those gritty problems such as corruption, its judiciary and court system, nonalignment of legislation and regulations between local and federal auspices. The focus and attitude projected by the leaders of the country will surely reap fruit for many years ahead.
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