Corruption in Asia

Government raids and arrest of Lippo executive in bribery probe threaten one of Asia’s biggest developments, known as the ‘Shenzhen of Indonesia’

The planned US$21 billion Meikarta development, covering 22 sq km of the Bekasi-Cikarang district on the outskirts of Jakarta, is the largest undertaking in Lippo’s history and would provide access to Southeast Asia’s first high-speed train

PUBLISHED : Thursday, 18 October, 2018, 9:55am
UPDATED : Thursday, 18 October, 2018, 9:55pm

Indonesia’s anti-corruption agency said on Thursday it had raided 10 locations, including the home of the deputy chairman of the Lippo Group, as part of a bribery investigation linked to the conglomerate’s US$21 billion Meikarta real estate project.

The raids came after the Corruption Eradication Commission, known as KPK, arrested two Lippo Group consultants and an employee accused of trying to pay off city officials to obtain property permits for Meikarta.

Billed as the “Shenzhen of Indonesia”, after the booming Chinese city, Meikarta is Lippo’s largest project to date and is meant to be a centre for the automotive and electronic industries. It will also include five-star hotels, shopping malls and universities.

The raids targeted the home of Lippo Group deputy chairman James Riady, a Lippo Group office and the home and offices of local government official Neneng Hasanah Yasin, who was one of nine suspects arrested by the KPK earlier this week.

Yasin, Riady and other representatives of the Lippo Group did not respond immediately to requests for comment.

The KPK said Lippo employees detained this week said they had been acting on instructions from Lippo director Billy Sindoro to bribe Yasin, who is the regent for West Java’s Bekasi area where the Meikarta project is located. Sindoro has also been arrested, as well as four other public servants. Lawyers for Sindoro and Yasin have not responded to requests for comment.

This is the second time Lippo has become involved with the anti-corruption agency, which identified the director only as “BS”.

Given all these headlines regarding permits issues, we are concerned about the sustainability of the Meikarta project
Trung Nguyen, a senior credit analyst

While the alleged bribe of 13 billion rupiah (US$857,011) is tiny compared with the millions in alleged illegal kickbacks in the national electronic identity card contract programme in 2010 and the bailout of PT Bank Century in 2008, it highlights the difficulties companies face in navigating the approval system for projects in Indonesia.

“Given all these headlines regarding permits issues, we are concerned about the sustainability of the Meikarta project, both from sales as well as funding concern,” wrote Trung Nguyen, a senior credit analyst at Lucror Analytics Pte, in a report.

Nguyen wrote that the credit bias for the group remains “negative” given the deterioration in its financial profile, as well as issues such as permits and the bribery case.

The Meikarta bribery case may cause investors to become cautious as it follows KKR & Co’s struggle to protect its investment in Indonesia’s PT Tiga Pilar Sejahtera Food and Goldman Sachs’ court battle with PT Hanson International. The arrests may bolster President Joko Widodo’s image as being tough on corruption ahead of a presidential election scheduled for early next year.

The planned 278 trillion-rupiah development, covering 22 sq km of the Bekasi-Cikarang district on the outskirts of Jakarta, is the largest undertaking in Lippo’s 68-year history. It would provide access to what would be the first high-speed train in Southeast Asia and gardens modelled on Manhattan’s Central Park. The group has said the project will be jointly funded by partners such as Mitsubishi, Toyota and Sanko Soflan Holdings.

The project, developed by PT Lippo Cikarang’s unit PT Mahkota Sentosa Utama, has already completed residential towers and pre-sold thousands of units.

Lippo Group was founded by Indonesian tycoon Mochtar Riady, and has interests in property, health care, education, retail, television and financial services in Indonesia, Singapore and Hong Kong. PT Matahari Department Store, supermarket operator PT Matahari Putra Prima, PT Siloam International Hospitals and internet and cable TV provider PT First Media are among the listed companies controlled by the group.

Shares of Lippo Cikarang were down 18 per cent this week. Its parent PT Lippo Karawaci lost 3.4 per cent and its dollar bonds traded near record lows. S&P Global Ratings said on Wednesday the bribery case could weaken Lippo Karawaci’s liquidity which, along with cash flow, will be a key credit factor over the next 12 months.

Lippo’s Meikarta township, located along the high-speed train network connecting Jakarta and Bandung, the capital of West Java province, is among the largest projects being built in the region. The project will be close to industrial estates and factories of global carmakers such as Toyota and Honda.

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Other parts of Lippo’s business have been hurt by a slowdown in household spending. Net income of Matahari Department Store fell 5.6 per cent last year, the first decline since at least 2010. Matahari Putra Prima, the supermarket business, reported a 1.2 trillion rupiah net loss.

Lippo may overcome the current crisis as several Indonesian property companies, which ran into trouble in early phase of their projects, have emerged relatively unscathed, according to Jemmy Paul, president director at Jakarta-based PT Sucorinvest Asset Management.

“The only difference this time around is the scale of Meikarta project itself,” Paul said. “I think Lippo should focus on keeping this project alive, salvage whatever sales that they have secured and deliver them. This is not something that they can unwind midway.”