Waiting for the dust to settle in Indonesia

Where there is danger there is opportunity,” says Angeline Suparto, head of the Indonesian practice group at Asian firm Colin Ng & Partners, quoting a famous local proverb.

Suparto is optimistic about the outlook for Indonesia despite the intermittent political crises which have brought setbacks to economic recovery.

It has been a turbulent year for foreign firms in Indonesia, which first arrived to cash in on the pre-crisis boom. The questioning by police of Morgan Lewis & Bockius lawyers last year was followed by White & Case closing its Jakarta office in February. Then Herbert Smith decided to form a non-exclusive association with Indonesian firm Kramadibrata & Partners (see box).

The Bank Bali scandal (see box) and the killings in East Timor have led to the World Bank and International Monetary Fund suspending loans to the Indonesian government. And investors remain cautious as they await the outcome of the November presidential elections, which may lead to the removal of President Habibie from office.

After last year's economic crisis, international firms that had been cashing in on the boom have now turned their focus to banking sector restructuring, privatisation and corporate debt restructuring.

At the heart of this, Norton Rose is playing a key role as international counsel to the government-backed Indonesian Bank Restructuring Agency (Ibra).

Norton Rose works in a strategic alliance with Indonesian firm Lubis Ganie Surowidjojo. Back up is provided by Norton Rose's 20-lawyer Singapore office.

In July, Ibra entered a strategic alliance with Standard Chartered Bank, advised by Linklaters, to recapitalise Bank Bali.

Bill Jamieson, who led the Norton Rose team advising on the recapitalisation agreements, says: “Ibra is a very significant force in the Indonesian economy.

“It is effectively a holding company for assets which have been nationalised as a result of the collapse of the banking sector.”

There are mixed feelings among observers about how political events are affecting the speed of recovery.

Jamieson says some deals have been stalled by the recent political events. “I think it's fair to say there has been a deterioration in the political climate, which is not good for business,” he says.

But, he argues, things are still moving. “We have had indications of transactions in the pipeline. But in the current climate people are starting to be cautious.

“Take Ibra as an example. It has set itself a target and has got to raise 17 trillion rupiah worth of assets in the next year. And I don't think it's that far advanced on the target. Given the political confusion it is going to be delayed.”

“I don't anticipate any further problems for foreign firms. Indonesia is still in a state of crisis, but we are optimistic about the future once the presidential elections are out of the way,” he says.

Not all lawyers detect a climate of caution however. Singapore-based Linklaters partner Swain Roberts, who was lead partner advising Standard Charter Bank on the Bank Bali deal, says the economy has slowed following the scandal and events in East Timor. But this has not led to deals being cancelled.

“One deal was postponed, but I'm not sure if you can say it's because of political problems,” Roberts says.

“We haven't seen a repeat of the January 1998 collapses. It is surprising how well things have held up. It's now a matter of seeing how that progresses.”

Linklaters covers the vast majority of its Indonesian work from Singapore, with its Hong Kong office involved in some of the restructuring work.

Roberts says a surge of work came in at the end of the second quarter of this year, and he is optimistic that things will get back on track, provided the presidential elections go without a hitch.

“The events over the last two to three weeks have slowed down progress significantly. It may well continue to be reasonably slow until the presidential election has been completed.

“Most of the project finance work relates to fairly large infrastructure and is primarily government-led, needing significant levels of investment.

“Because of the overhang of the economic crisis, the work tends to be restructuring of existing project finances. In that area we are certainly seeing a lot of work. But it has slowed in the last couple of weeks,” says Roberts.

Lawyers on the ground in Indonesia claim to be busy. Sri Indrastuti Hadiputranto is managing partner of Hadiputranto Hadinoto & Partners, the Indonesian correspondent firm of Baker & McKenzie. She says there is corporate restructuring and mergers and acquisitions work around, but construction and infrastructure projects have been put on hold. “The type of work has shifted, but we are still very busy.”

She identifies a paradigm shift toward greater transparency within Indonesian institutions following the Bank Bali audit.

“The whole thing is good but sad,” she says. “Sad because of the exposure of corruption. Good because it is the first time people are beginning to be open about what happened. It was very brave of the chairman of Ibra to speak openly.

“People are still very careful. There is increasing confidence but investors are careful not only about the economic but also the political situation.”

Freshfields partner Ian Harvey-Samuel confirms his firm has recently focused less on the Indonesian market. But he says there is plenty of ongoing Indonesian work, especially on Indonesia's largest restructuring in which he led a team of lawyers from Freshfields' London, Brussels, Hong Kong, Tokyo and New York offices, acting for PT Astra International Tbk. He continues to act for 17 Astra Group members involved in debt restructuring negotiations with creditors.

“The market is very mixed right now. Some companies are further behind than others. A few months ago there was a very active project market and a lot of capital raising,” says Harvey-Samuel.

He says investors are still eyeing Jakarta. “Indonesia is still attracting interest. I think they [investors] will be looking at specific businesses which are professionally run.

“It's not a dead duck. It has actually got cleaner and calmer. And when you go there you wouldn't notice there is an economic recession.”

Clifford Chance partner and former Singapore managing partner Elizabeth Knox, like Roberts, identifies a slow but steady recovery that has not affected deals.

The firm is doing a lot of restructuring and mergers and acquisitions work but points out that Indonesian restructuring is still painfully slow even in comparison with other Asian countries, which are seen as slow-paced.

“Given that an awful lot of the work was stop and start, [recent events] have not made a huge amount of difference. As far as I know no work has actually been terminated. I don't think it's likely.”

Colin Ng is an Asian firm allied with UK-based Sinclair Roche & Temperley. Its Jakarta office is structured as a consultancy, PT CNP Perdana, to conform with industry regulations, and works closely with local firms.

Suparto believes that the economy is turning the corner and clients are preparing the groundwork for new Indonesian ventures. She is working on a number of significant due diligences for Hong Kong and Singapore-based clients.

She says businesses have been looking at industry, manufacturing and agricultural sectors. “Investors who were here basically shelved plans,” she says.

“However, now a lot of them realise the economy has bottomed out and they are doing a lot of preparatory or ground work and have started to make enquiries and begin formulating business plans for next year. If the situation improves and stabilises, they want to be prepared to go in next year to take the opportunities early on.

“Because the problem is not simply economic but also heavily influenced by politics, a lot depends now on the results of the presidential elections and what happens in East Timor,” she says. “It all depends on whether we have a very smooth and non-violent presidential election process and if the results are satisfactory.

“The president would have to be able to unite a country which is very diverse in nature and be able to create unity in the face of diversity.”

Suparto emphasises that there is a renewal of interest in the market, explaining it offers both opportunities for new investment and expansion for existing investors.

“Indonesia has a lot of potential. If we can get over the elections and results smoothly the economy will rebound very fast. After the June elections the stockmarket expanded very rapidly,” she says.

Indonesia, at present, is a country in transition, politically and economically. As one observer puts it: “There is now less tolerance for the Indonesian way of doing things.

“In the past there has been a very blase attitude. Companies are very institutionalised and because salaries are woefully inadequate there is a lot of petty corruption. It becomes a vicious circle.”

UN forces may be massing on the horizon waiting to provide some political stability in parts of the country, but lawyers are upbeat about what lies on the business horizon. As Jamieson says: “The wave of work has not arrived but it is still in view off shore.”

Indonesia in Turmoil

APRIL 1998

White & Case, Baker & McKenzie, Coudert Brothers, Morgan Lewis & Bockius and Deacons Graham & James reported to Indonesian regulatory authorities by lawyers claiming the firms were failing to comply with bar rules. Morgan Lewis partners questioned by police after Indonesian litigator Hotman Paris speaks out against foreign lawyers. Paris then leaves his firm Makarim & Taira S to set up on his own.

FEBRUARY 1999

White & Case decides to pull out of Jakarta. Herbert Smith cuts its association with Prof Dr Mariam Darus Badrulzaram & Partners to join a non-exclusive arrangement with Kramadibrata & Partners.

APRIL 199Norton Rose advises Ibra on its $55bn bank recapitalisation programme. Ibra also signs agreements with Standard Chartered Bank, advised by Linklaters, for the recapitalisation of Bank Bali.

JULY 1999

Freshfields completes the largest single corporate debt restructuring since the beginning of the Asian economic crisis. The planning, drafting, negotiation and execution took a year to complete. The deal involved restructuring over $1bn of US debt and rupiah 1trillion.

AUGUST 1999

People of East Timor vote for independence despite intimidation from militia groups allegedly backed by Indonesian military.

SEPTEMBER 1999

IMF and World Bank loans called into question as corruption in Bank Bali, now controlled by Ibra and Standard Chartered Bank, is revealed by a PricewaterhouseCoopers audit.