Construction is at a virtual standstill at the $20 billion Meikarta mega-project outside Jakarta. Photo: Company supplied
Construction is at a virtual standstill at the $20 billion Meikarta mega-project outside Jakarta. Photo: Company supplied

Indonesia’s powerful Riady business empire is under Anti-Corruption Commission (KPK) investigation over bribes one of its Lippo Group subsidiaries allegedly paid local officials to kick-start the US$20 billion Meikarta mega-project on the eastern fringes of Jakarta.

Investigators have already searched the palatial lakeside home of vice-chairman James Riady, 61, the son of 89-year-old Lippo founder Mochtar Riady, and 10 other locations in a series of evidence-gathering raids across the Indonesian capital.

Riady’s lawyer, former deputy justice minister Denny Indrayana, said nothing was seized at the tycoon’s 16-room mansion on a man-made island bordering Karawaci’s Lippo Village, a long-established housing and office development on the western side of Jakarta.

The KPK said later Riady would be called as a witness in the case, one of a series of high-profile corruption scandals that have had Indonesian conspiracy theorists speculating about whether they are linked to the current presidential election campaign.

But this is not the first time Lippo has been in hot water and comes at a time when the KPK has vowed to concentrate more resources on the private sector, focusing particularly on the payment of gratuities to civil servants.

‘A vision for the future’

Advertised as “epic in scale and vision as a truly integrated city of the future,” Meikarta’s planned 92 tower blocks cover a choice 500-hectares next to the new Kertajati international airport, the Trans-Jakarta Tollway and the planned Jakarta-Bandung high-speed railway.

In addition to shopping malls, a hospital and 100ha of parkland, blueprints of the self-contained super-city include 10 five-star hotels, 150 elementary and high schools, three universities and an industrial research center.

Last week’s raids follow the arrest of Lippo operational director Billy Sindoro and three other suspects for paying what the KPK claims were part of a promised Rp13 billion (US$850,000) bribe to Bekasi district chief Neneng Yasin and four other senior local government officials.

Then president-director of Lippo’s television cable company, First Media, Sindoro was jailed for three years in 2009 after being caught in a Jakarta hotel elevator with 500 million rupiah in cash destined for a member of the  Business Monopoly Supervisory Commission (KPPU).

Sindoro’s younger brother, former Lippo Group chairman Eddy Sindoro, is also in KPK custody for allegedly paying a US$50,000 bribe to the registrar of the Central Jakarta District Court, who was handling several court cases in which Lippo was involved.

Eddy fled abroad after being indicted in December 2016, but when Malaysia deported him to Indonesia last August he again eluded authorities and escaped to Singapore, where he eventually surrendered on October 12.

Both US graduates, the brothers are part of the inner circle of James Riady, who became known internationally for his relationship with former US president Bill Clinton; they first met in 1978 in Little Rock, Arkansas, where Lippo had bought a local bank.

Riady Jr was barred from entering the US for eight years after pleading guilty in 2001 to making illegal contributions to the Clinton election campaign in what the US Justice Department prosecutors called a “conspiracy to defraud the  United States.”

The Meikarta bribery case has raised concerns among the thousands of people who have made substantial down-payments on apartments and offices since the developer PT Mahkota Sentosa Utama embarked on an expensive advertising campaign last year.

Shares in four of Lippo’s subsidiaries, including PT Lippo Cikarang and PT Lippo Karawaci, dropped into the red zone last week with market analysts predicting the downward trend would continue until the implications of the case become clearer.

Corporate governance

S&P Global Ratings says while Lippo’s liquidity and cash flow will remain key credit factors over the next 12 months, the bribery allegations against PT Lippo Karawaci Tbk raise questions about the company’s internal corporate governance.

Obtaining building and other permits is a notoriously drawn-out process, often designed to extract pay-offs. A source of intense frustration for President Joko Widodo, it is one reason why Indonesia can’t attract the direct foreign investment needed to correct the country’s trade deficit.

Sources familiar with the Meikarta venture say Lippo appears to have miscalculated by going ahead with the project, no doubt believing it could cut corners by getting the necessary licenses while work was in progress.

With local bureaucrats deliberately dragging their feet, Indonesian homeowners are often encouraged to start the construction of houses before a building permit is issued, then find themselves the target of extortion once the work is complete.

Lowering its sights?

Meikarta risks becoming a millstone around the neck of Lippo Karawaci, the main property arm of a conglomerate with diversified interests in banking, hospitals, schools, malls, department stores and cable television.

Construction is at a virtual standstill and sales have reportedly been slow for a project whose success rests on housing some of the thousands of middle-income earners who work at Japanese car and motorcycle assembly plants on nearby industrial estates.

Former Lippo employees remember a similar experience with the more up-market Lippo Village (LLVV), where the company was forced to lower its sights, particularly after part of the mall was sacked by anti-Suharto rioters in 1998.

S&P, which so far gives Lippo an unchanged B-negative rating, says any fallout from the bribery case could impact on cash flows and put further pressure on what the agency believes is a “thin liquidity buffer.”

It is also worried that it might affect customer confidence, leaving PT Lippo Cikarang to fall short of its target of 10.5 trillion rupiah ($750 million) in marketing sales this year, compared with 7.8 trillion rupiah in the months following its 2017 launch.

Lippo’s asset sales in 2018 are expected to provide some relief, but S&P believes they will only be enough to meet its debt-servicing over the next year and that it will have to raise additional funding to meet future needs.

Last June, Moody’s Investors Service cut Lippo Karawaci’s rating from B1 to B2 on $75 million in senior unsecured notes due in 2020, warning that proceeds from the private placement covered only half of the firm’s debt maturing in 2018-2019.

Previously, Fitch had downgraded Lippo Karawaci’s long-term issuer default rating to B+, based on expectations of significantly reduced access to cash flow from property sales.

With a reputation for ruthlessness, Lippo’s travails earn little sympathy in the wider Indonesian business community. “Nobody really likes Lippo,” says one analyst, who notes that the politically-wired conglomerate is treated warily by most domestic banks.

Although its exposure to the project is minor, state-owned Bank Negara Indonesia (BNI), the country’s fourth biggest lender, has already stopped extending new mortgages for Meikarta until Lippo’s legal situation becomes clearer. Other financial institutions are expected to follow suit.