YOUR GUIDE TO ’S POLITICAL & BUSINESS AFFAIRS | September 14th, 2018

Highlights of the week

Team Jokowi forges ahead, Team Prabowo struggles The battle between Joko “Jokowi” Widodo and are entering new phase. With the election campaign slated to start on Sept.23, incumbent President Jokow has put together his dream team. On the other hand, challenger Prabowo was reported to struggle building his own dream team. Overcoming the outbreak of the collective corruption Corruption oh corruption. The recently exposed collective corruption cases in several regional legislative councils are carrying two urgencies: the need for long-term anti-corruption programs and electoral system restructuring to end the vicious circle of corruption.

OJK involves fintech association to police industry The Financial Services Authority (OJK) has stepped up its enforcement on the rapidly growing financial technology sector (fintech). The issuance of Regulation No. 13/2018 provides a thorough legal umbrella for the industry. With a lot of untapped potentials available, the regulator is teaming with industry’s players, such as the Indonesian Fintech Association (AFTech Indonesia) to avoid taking the wrong step.

A fresh start to fix Garuda’s financial woes State owned airline Garuda Indonesia is attempting for a fresh start after being trapped with corruption and mismanagement issues. The appointment of new president director is slated to rejuvenate the biggest premium class airline in Indonesia. Nevertheless, tough challenges await the new board to bringing the company back on track.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 2

POLITICS

Team Jokowi forges ahead, Team Prabowo struggles With the election campaign slated to start on Sept. 23, incumbent President Joko “Jokowi” Widodo has put together his dream team. Challenger Prabowo Subianto, meanwhile, is struggling to build his team because of competing interests among his supporters. While political bigwigs certainly add credentials to both teams, the real and most telling work in winning votes on April 17, will come from the army of young dedicated volunteers on each campaign trail. Background: Team Jokowi has a leader: Erick Thohir, the man who was credited for Indonesia’s recent success in hosting the Asian Games. A proven and well-connected entrepreneur, Erick will head the team comprising not only top leaders of the nine political parties in his coalition, but also public figures, including heads of regional governments. Prabowo is still sorting out his team and has until Sept. 22 to submit their names to the General Elections Commission (KPU). A military general is tipped to lead Team Prabowo. Insight: The appointment of Erick Thohir has boosted the credibility of Team Jokowi. His name was announced barely a week after the closing of the Asian Games on Sept. 2, a successful feat not only in terms of the performance of Indonesian athletes, but also the organization and logistical arrangements. Credit went to the 48-year-old founder and chairman of the Mahaka Group, a holding company that focuses on media and entertainment businesses.

Erick brings not only proven managerial skills to the team, but also strong knowledge about young people through his business interests, always a crucial segment of voters. He owns the Republika daily newspaper and website, which in the past echoed the voice of conservative Muslims critical of President Jokowi. While he is not known to interfere too much in editorial decisions, it is unlikely that Republika will work against its owner. Erick’s appointment plugs the two gaps in Jokowi’s profile: attracting millennials and neutralizing opposition from conservative Muslims.

Candidate Jokowi had already submitted the name of his official campaign team with the KPU on Aug. 20, before he announced Erick to lead his campaign last week.

Team Jokowi includes all the chairs and secretary-generals of the nine political parties supporting his nomination. It counts on the support of Vice President Jusuf Kalla, former vice president Try Sutrisno and some members of Jokowi’s cabinet. But Finance Minister Sri Mulyati Indrawati, whose name was on the original list, has since announced that she had withdrawn from the team. No explanation was given.

Team Jokowi was working at full steam even before Erick was included. It has since enlisted more public figures and religious leaders. Among the most prominent recruits are provincial governors, with one team spokesman bragging that at least 15 governors would join when the campaign begins.

Among the governors who have publicly declared their support is of West , the province which in 2014 voted overwhelmingly for Prabowo. Former vice governor Deddy Mizwar, still a popular figure, has also thrown his support behind Jokowi. Two governors who ran on Democratic Party tickets, Muhammad Zainal Mahdi of and Lukas Enembe of , said they would defy their party and support Jokowi.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 3

New North Governor , who during this year’s election campaign openly supported Prabowo, says he will remain impartial in 2019. Governor is the only governor likely to openly support Prabowo. He won the governorship in 2017 on Prabowo’s Gerindra Party ticket.

The inability of the Democratic Party to stop desertions of key public figures has irked Prabowo’s camp. It did not help that the party now says local leaders can have “two legs” in the elections, supporting the Democratic Party in the legislative election, but campaigning for Jokowi in the presidential race.

This ambivalence has been a contentious point that is holding Prabowo back in putting together his campaign team. There is also the question of where to place , the son of the former president who harbors ambitions of running in the 2024 presidential election himself. Then there is also the problem of raising money to bankroll the election campaign, with the four parties in his coalition already struggling to finance their own campaigns.

If Jokowi put together his team before searching for its leader, Prabowo has taken the opposite approach. He already has a leader in former Indonesian Army (TNI) commander Djoko Santoso.

As in his 2014 campaign team, it is likely that the team will be filled with military types. Those who have worked with Prabowo say only those with a military background can handle the temperamental candidate.

Prabowo has been trying hard to recruit another former TNI commander in Gatot Nurmantyo, who also harbors presidential ambitions. Gatot has not publicly announced which way he is leaning. Backing the winning team could earn him a cabinet post that he could use as a springboard for a 2024 presidential bid. Backing the wrong horse would kill his political aspirations.

Team Jokowi also has some military types although they are less prominent. Former TNI commander Moeldoko, who was Gatot’s predecessor, is the presidential chief of staff and deputy to Erick Thohir in the campaign team. There is also Lodewijk Freidrich Paulus, who like Prabowo served as chief of the Army’s Special Forces and is now secretary-general of . And there is former Indonesian Navy chief Marsetyo.

The presence of party bigwigs in Team Jokowi, however, is no guarantee that they will dedicate much time to the presidential election campaign. All the political parties will be competing for seats in the House of Representatives and the regional legislative councils. They may be part of the same coalition in the presidential race, but they are rivals in the legislative elections.

Golkar, for one, is under a lot of pressure with predictions that it would be demoted out of the top two parties for the first time in its history. In the 2014 elections, it lost its perch to the Indonesian Democratic Party of Struggle (PDI-P) to come second. All surveys show that Gerindra will come second after the PDI-P in 2019.

The presence of party leaders in Team Jokowi will likely be token as they will focus more on the fortunes of their parties. But they will be quick to claim credit and their share of the spoils if Jokowi wins the election, demanding key posts in government.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 4

Much of the hard work in canvassing votes instead will come from volunteers. These are mostly young people, including college students, who make effective foot soldiers working at the grassroots. Since these voluntary groups are not part of the official campaign teams, their finances are not subject to reporting and auditing requirements stipulated by law.

In the 2014 race, Jokowi had these young volunteers to thank for. His official team sat back as their candidate had such an unbeatable lead. But relentless campaigning by Prabowo dramatically cut Jokowi’s lead and he almost clinched the presidency. Jokowi won the race by a five percent margin.

Going into the 2019 race, Jokowi is not going to make the same mistake. He has already put in place his dream team and much more.

What we’ve heard: It is reported that Erick Thohir’s appointment as the chair of the Jokowi-Ma’ruf campaign team was proposed by several figures, one of whom was Vice President Jusuf Kalla. Erick is deemed the most apposite figure to fill the position not only because of his tremendous networks and logistical skills, but also his capability to outsmart Sandiaga’s maneuvers. As the Jokowi-Ma’ruf camp perceive Sandiaga as Prabowo’s trump card, appointing a figure with the competence to outmaneuver Sandiaga was a must.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 5

Advisory Board Name Status Megawati Soekarnoputri Chair of the Indonesian Democratic Party of Struggle (PDI-P)

Airlangga Hartarto Chair of Golkar Chair of the Nation Awakening Party (PKB) Chair of the National Democratic Party (NasDem)

M. Romahurmuziy Chair of the (PPP)

Osman Sapta Odang Chair of the People’s Conscience Party (Hanura)

Hary Tanoe Soedibyo Chair of the United Indonesian Party (Perindo)

Diaz Hendropriyono Chair of the Indonesian Justice and Unity Party (PKPI)

Grace Natalie Chair of the Indonesian Solidarity Party (PSI)

Campaign Team

Head Erick Thohir Steering Committee Jusuf Kalla, Try Sutrisno, Puan Maharani, Pramono Anung Wibowo, Agung Laksnono, Akbar Tanjung, Dimyati Rais, Siswono Yudho Husodo, Suharso Monoarfa, Sidarto Danusubroto, Marsetyo Deputies Moeldoko, Lodewijk Freidrich Paulus, Abdul Kadir Karding, Jhonny G Plate, , Herry Lontung Siregar, Hajrianto Y Thohari, Eriko Sutarduga Secretary Hasto Kristiyanto Deputy Secretaries Verry Surya Hendrawan, Ahmad Rofiq, Raja Juli Antoni, Dewi Suharto Treasurers Wahyu Sakti Trenggono, Agus Gumiwang Kartasasmita Deputy Treasurers Juliari Batubara, Amir Uskara, Jazilul Fawaid, Syamsudin Andri Arsyad, Riri Lestari Murdiyat, Dudi Purwagandhi Spokespersons Ahmad Basarah, Johan Budi, Abdul Kadir Karding, Tb Ace Hasan Syadzily, Irma Suryani Chaniago, Arif Budimanta, Arya Sinulingga, Lena Haryana Mukti Directorate heads Ario Bimo (Planning), Fikri Satari (Content), Usman Kansong (Political Communication), Yadi Hendriyana (Media and Social Media), Beni Ramdani (Campaign), Adi Kusuma (Young Voters), Noor Achmad (Mobilization of Networks), Usra Hendra Harahap (Logistics and Props), Irwan Pulungan (Legal and Advocacy), Arif Wibowo (Election Witnesses), Maman Imanul Haq (Volunteers) Nusyirwan Soejono, Rizal Malarangeng, Yanuar Prihatin Bagdja, Iman Special Assignments Adaruqutni, Inaz Nasrulloh Zubir, Isyana Bagoes Ok

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 6

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 7

Overcoming the outbreak of the collective corruption

The recent collective corruption cases plaguing several Regional Legislative Councils carry two major implications for the country’s future. In addressing this deep-seated problem, government and party measures must prevent collective corruption from erupting in other regions. Regardless, the inadequacy to devise an effective long-term solution may trap the country in a vicious circle of corruption.

Background: The arrests of dozens of regional councilors by the Corruption Eradication Commission (KPK) in Malang, and for collective graft has shaken the country. The number of detained politicians is so high that most of their regional councils have been left barren following the arrests.

The cases of collective corruption indicate the inadequacy of the country’s legal mechanisms in regulating corruption and legislative candidacy. As illustrated by the dispute between the Elections Supervisory Agency and the General Elections Commission (KPU) on the prohibition of former graft convicts from contesting elections, Indonesia is still in the midst of a legal limbo in addressing such problems. Claims have been made of covert attempts to impede investigations of corruption. The KPK, for instance, has been weakened and subjected to criticism. Meanwhile, decisive action is needed to prevent a domino effect of collective corruption.

Insight: The KPK’s raid on the Malang Legislative Council has left the council bereft as 41 out of the 45 councilors were arrested because of their complicity in a collective corruption case. Similarly, 38 former North Sumatra councilors and all of Jambi’s councilors were arrested as they were found complicit in accepting bribes.

Besides the enormous number of councilors involved, all the above-mentioned cases bear two more similarities. First, collective corruption was deeply embedded in the councils, and well institutionalized as they were masterminded by the regional heads. Non-active Jambi governor Zumi Zola, Malang Mayor Mochamad Anton and former North Sumatra governor Gatot Pujo Nugroho have been named suspects by the KPK for bribing councilors in their respective jurisdictions.

Second, all of the collective corruption cases were related to the passage of the draft regional budget (RAPBD). The councilors accepted bribes from Zumi, Anton and Gatot in exchange for their support for the RAPBD proposed by the regional heads, labeling the money as a “legalization fee”.

The similarities of the cases signify the pervasive jobbery inside governmental bodies and the state’s inaptitude to manage the debacle. In counterbalancing the scandals, political parties quickly dismissed and replaced the tainted politicians. The government also quickly inaugurated their replacements and assigned them to formulate a 2019 RAPBD. Public discourse appears to emphasize government and party attempts to revive the paralyzed regional administrations following the arrests of the councilors.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 8

The quick measures might be caused by the fear of the possible spread of collective corruption to other regions; appointing replacements is perceived as the best way to maintain business as usual. Nevertheless, in haste to maintain the administration, a long-term solution has yet to be formulated.

In containing the scandal and maintaining a sense of normality, the government and parties should address the underlying problems. According to experts, councilors resort to collective corruption primarily because of two reasons, which are expensive political costs and existing legal loopholes. Indonesian Institute of Sciences (LIPI) researcher Firman Noor argued that as councilors were obliged to provide a large amount of start-up capital to fund their campaign, elected councilors often abuse their power to ensure a return on investment. Hence, the detained councilors in Malang, Jambi and North Sumatra may have abused their authority and demanded a legalization fee in return for their campaign expenses.

Moreover, the state’s existing legal discourse is not comprehensive enough in managing corruption among politicians. The law mostly focuses on corrective measures, while preventive measures have yet to be fully implemented. The KPU’s attempt to introduce preventive measures by introducing a prohibition for former graft convicts from contesting elections received a muted response; while some parties do adhere to this regulation, most parties insisted on registering former graft convicts for the upcoming legislative election. Consequently, now there are 38 former graft convicts registered as legislative candidates. Transactional politics, coupled with the absence of stringent regulations, does make a good recipe for the chronic disease.

In enforcing effective preventive and corrective measures, the active role of the KPK, as the largest antigraft body in the country, should be ensured. Nevertheless, in recent years, the commission’s fight against corruption has frequently been met with opposition. Politicians often expressed strident criticisms against the KPK. (PKS) politician and House of Representatives deputy speaker Fahri Hamzah, for instance, once compared the commission’s operations to a witch hunt, claiming that its operations, coupled with the KPK’s ambiguous definition of corruption, makes it more suitable to operate under North Korea’s dictatorship. It is also reported that the attempt to weaken the KPK has been put through the legislative process, illustrated by the proposal to revise Law No. 30/2002 on the KPK’s powers.

Now, the commission’s decision to investigate collective corruption cases in Malang, Jambi and North Sumatra is rumored as no coincidence, but rather related to the upcoming 2019 legislative election. In regard to Jambi, for instance, the KPK is rumored to have targeted its Regional Legislative Council because of Zumi Zola’s ties with the (PAN). It is reported that the money embezzled by Zumi was used to fund a number of PAN’s operations, including the accommodation expenses of PAN’s regional board in Jambi and the rent for PAN’s headquarters in Jambi.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 9

Meanwhile, assessing the strategic importance of the KPK’s investigation in Malang and North Sumatra is not as straightforward. In regard to Malang, it is speculated that the KPK’s decision to investigate collective corruption there was, to a certain extent, influenced by the regional election. As the KPK declared two of the electoral candidates, namely Mochamad Anton and Yaqud Ananda Gudban, suspects, the remaining candidate pair, Sutiaji and his running mate Sofyan Edi Jarwoko, who were backed by the Golkar Party and Democratic Party, went unchallenged in the election.

Indeed, absolute corruption eradication is implausible as even countries with the cleanest government still experience corruption every now and then. Yet, what makes the recent collective corruption cases particularly alarming is how deeply embedded and institutionalized the corruption is, in that it involved a pack of councilors and high-ranking officials. Indonesia has witnessed numerous corruption scandals, but these particular collective corruption cases demonstrate how our inept legal discourse on corruption might send Indonesia to the verge of collapse.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 10 BUSINESS & ECONOMIC POLICY

OJK involves fintech associations to manage fast-growing industry

The Financial Services Authority (OJK) has stepped up its enforcement of OJK Regulation No. 13/2018, enacted on Aug. 15, by cracking down on financial technology (fintech) companies that are not registered with the OJK and a fintech association.

Takeaway: The local fintech industry holds much potential for the economy, especially in targeting unbanked businesses. A well-drafted regulation is necessary to help this industry achieve its full potential, and the OJK as regulator and the Indonesian Fintech Association (AFTech Indonesia) must work hand in hand to regulate the development of the emerging financial services concept.

Background: Indonesia’s fintech industry is developing rapidly at 16.3 percent per annum, stimulated by the growing internet penetration rate in the country.1 From only four fintech companies in 2006, the figure jumped to 165 companies in 2015-2016. Total fintech investment in 2017 reached US$176.75 million, while fintech transactions are projected to reach $22.3 million in 2018.

Nevertheless, this fast-paced development comes with an excessive number of fintech companies unregistered with national fintech associations and which use dubious methods.2 To encourage the development of a healthy fintech industry, the OJK enacted its regulation No. 13/2018, which requires all fintech companies to possess fintech association membership before they are granted an operating permit.

1 Fintechnews.sg, “Fintech Indonesia report 2018 – the state of play for Fintech Indonesia” 26 June 2018 https://tinyurl.com/yd9dmpvq 2 Kontan.co.id, “Sejauh ini, satgas investasi OJK sudah temukan 407 fintech P2P ilegal” 8 September 2018 https://tinyurl.com/yc2o6u3u SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 11

Insight: Despite the rapid growth, the local fintech industry is still dominated by two types of service: payment (38 percent), which falls under the regulatory supervision of Bank Indonesia, and lending (31 percent), which falls under OJK supervision except for crowdfunding.

According to the Institute for Development of Economics and Finance (Indef), fintech lending services contributed Rp 25.97 trillion to gross domestic product (GDP) in the first half of 2018. Aside from aggregate contribution, the Indef study also found that lending services stimulated 3.5 percent growth in the output of conventional insurance services and 6.95 percent growth in the output of pension fund services, and created more than 215,000 jobs in the financial sector.3

There is strong a possibility that the fintech industry could contribute more to the economy, given its current low penetration rate. For instance, the national penetration rate of fintech lending services was only 2 percent in 2016, significantly smaller than China’s 14 percent and India’s 5 percent (see Table).

3 INDEF Monthly Policy Brief, “Peran Fintech Lending dalam Ekonomi Indonesia” Vol. 2 (2), 2018 https://tinyurl.com/yayg5hz8 SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 12

With only 48.9 percent of adult Indonesians holding a bank account in 2017,4 a well-regulated fintech lending industry would improve coverage for unbanked Indonesians, especially micro, small and medium enterprises in the informal sector, which does not provide access to conventional bank loans but connected to the mobile internet network.

Naturally, fintech companies are targeting unbanked Indonesians, as they cannot compete with the lending rates of commercial banks. Commercial banks should therefore not worry about the robust development of the fintech industry. The government should offer incentives to encourage commercial banks to work with fintech in reaching out to unbanked businesses and businessmen with affordable rates. Currently, the primary criticism of fintech services is that their lending rates are too high, with some officials likening fintech rates to those of loan sharks.

4 Digitalnewsasia.com, “Indonesia leads in financial inclusion progress: Global Findex 2017” 24 April 2018 https://tinyurl.com/ydh3rd9p SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 13

Industry Insight: Fintech association to help manage industry The new OJK regulation issued in August requires new fintech companies to be members of a fintech association before they can join the OJK’s regulatory sandbox and obtain an operating permit. Tenggara Backgrounder spoke to Karaniya Dharmasaputra, the secretary-general of the Indonesian Fintech Association (AFTech Indonesia) – the biggest of two national fintech association – for his views on the industry and its future.

Question: What is the current state of the fintech industry in Indonesia?

Answer: The financial technology industry is growing progressively and is completely different from traditional financial services. The government has taken a positive approach to regulate the new financial concept, unlike e-commerce, which is still unregulated.

What are the challenges the industry faces? The major problem is the government perspective. They still stick to a brick-and-mortar approach that favors conventional financial services, high capital transactions and certain economic actors. This has adversely affected the implementation of fintech. Their reluctance about using digital signatures and one-time know-your-customer (KYC) process, for example, contradicts the essence of fintech: simplifying complex financial procedures.

There are three essential challenges the national fintech industry faces: the domination of high net worth and institutional investors in the financial [sector], the disproportionate size of banks in the financial industry and a general mindset that savings should go to banks. Because of these, our regulations tend to target high value transactions.

Another problem comes from the judicial system, which has not fully accepted electronic signatures. According to the Civil Administration Law, the courts only accept signatures in ink – or physical signatures – even though the Electronic Information and Transactions Law recognizes electronic signatures. Hence, every legal decision on a dispute over electronic signatures depends on the discretion of the individual judge.

What has the association been doing to address these challenges? The association basically promotes regulatory adjustments. We encourage the government to address the fundamental difference between fintech and traditional financial services. We are also pushing for a more balanced approach in drafting financial regulations to drive our economy into the digital realm. At the same time, we are trying to educate the public by highlighting the differences between fintech and traditional financial services. Fintech targets consumers in the middle to lower income brackets, a very retail-oriented market in comparison to traditional financial services, which target the upper income bracket.

In the long run, we are trying to change the government’s view and to empower the public through financial literacy in showing that fintech concerns massive volumes of small value transactions.

What is the relationship between banks and fintech? I believe that fintech companies provide a win-win solution for commercial banks. Fintech will benefit the banks through its ties with custodian banks. For example, if you transfer funds to Bareksa [bareksa.com, an investment portal], the money goes to our custodian banks and increases the money they put in circulation. This is healthy for the bank and the economy.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 14

By our nature, we should not be competing with each other but cooperating. P2P [peer-to-peer] lending, in particular, connects the unbanked business segment to the financial system. It helps small business (like small and medium-sized enterprises) to obtain loans without having to comply with a bank’s strict loan requirements, like providing physical collateral that most of them do not have. We are trying to replicate the success stories abroad such as in the UK’s Funding Circle, where fintech links big and small businesses to develop the entire economy. It is also important to note that the association [AFTech] consists of fintech, banks and corporate partners. After all, we must synergize to provide full services.

How does the association view the latest OJK regulation? We view the government’s move to provide a legal umbrella via OJK regulations No. 13/2018 and No. 77/2016 positively. These regulations are generally good for business. They help to build trust between the industry and the government.

The latest regulation is very important, as it grants more authority to the OJK’s association partner [AFTech]. The appointment will link our membership to OJK licensing, meaning that fintech companies must become [AFTech] members to obtain their permit or to join the OJK’s regulatory sandbox.

The regulation also gives the association enforcing power. If necessary, our code of conduct will help filter out [potentially deviant] companies and discipline “misbehaving” members, which risk losing their permits if we revoke their membership.

What are the association’s goals and hopes? We wish to continue to encourage regulatory adjustments until it fully facilitates not just brick- and-mortar financial services but also fintech services. In particular, we want to push for electronic signatures and unified electronic KYC to promote financial inclusion. Indonesia’s internet penetration [rate] will help increase financial penetration, even to the most remote areas, without physically connecting to a bank. We can achieve this when regulations are designed to match the industry’s long-term goals and current challenges.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 15

A fresh start to fix Garuda’s financial woes

The State-Owned Enterprises (SOE) Ministry appointed I Gusti Ngurah “Ari” Askhara Danadiputra as new president director for Garuda Indonesia on Wednesday, replacing Pahala Mansury who had been embroiled in a series of controversies with Garuda’s two powerful labor unions: the Garuda Pilot Association (APG) and the Garuda Workers Union (Sekarga).

Takeaway: The appointment of Ari Askhara as the new president director of Garuda Indonesia marks a fresh start to fix Garuda’s financial woes. The main challenge for the new president director will not only be making Garuda profitable, but also turning its fast growing LCC subsidiary, Citilink Indonesia, into a money-making machine.

Background : Pahala’s conflict with APG and Sekarga began immediately after his appointment as president director in April 2017. As the new president director, Pahala wanted to merge two crucial positions – operation director and maintenance director – into the single position of production director to simplify the chain of command.5

Pahala’s decision was controversial, because it violated Civil Aviation Safety Regulations (CASR). In response to Pahala’s decision, APG and Sekarga threatened the new director with a strike.6 Upon learning of his mistake, Pahala appointed captain Triyanto Moeharsono as operation director and I Wayan Susena as maintenance director.7

Pahala’s ability to lead Garuda Indonesia was put into further question following massive delays in Garuda’s flight schedules during the Mount Agung eruption in in December last year. Garuda’s public relation department blamed the eruption, but Alvin Lie, an ombudsman member, countered it by explaining that the delays were caused by a poorly managed transition from the Crewlink to the Sabre flight scheduling system.8

APG and Sekarga’s threat to hold an Idul Fitri holiday strike last June was the final blow to Pahala’s career in Garuda Indonesia because Coordinating Maritime Affairs Minister Luhut Pandjaitan and SOE Minister Rini Soemarno needed to negotiate directly with APG and Sekarga’s representatives to end their planned strike.9 It is unfortunate that these controversies have stalled the agenda to fix Garuda’s financial woes.

5 Kumparan.com, “Dirut Garuda tetap hapus posisi direktur operasi.” 14 April 2017 https://tinyurl.com/y9242qq6 6 CNNIndonesia.com, “Direktur operasi dihapus, pilot Garuda ancam mogok terbang.” 4 May 2017 https://tinyurl.com/y9wjq597 7 Beritasatu.com, “Garuda lantik direktur operasi dan direktur teknik.” 15 May 2017 https://tinyurl.com/y7pwsjws 8 Liputan6.com, “Ombudsman minta Kemenhub lebih awasi sistem Garuda Indonesia.”12 December 2017 https://tinyurl.com/ydak2bns 9 CNNIndonesia.com, “Luhut pasrahkan masalah mogok pilot Garuda ke Rini Soemarno.” 4 July 2018 https://tinyurl.com/ya465z9n SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 16

Insight: Garuda Indonesia is a fast-growing flag carrier. Between 2007 and 2017, Garuda’s passenger capacity nearly quadrupled from 9.6 million to 36.2 million, dominated by rapid growth in domestic air travel, particularly in the low-cost carrier (LCC) segment, from just 400,000 to 12.2 million passengers.

In response to the growing demand for domestic air travel, Garuda Indonesia expanded its fleets from 62 in 2007 to 202 in 2017. Out of 140 new aircrafts, 40.7 percent is utilized for Garuda’s LCC subsidiaries, Citilink Indonesia. In 2017, Citilink’s fleets accounted for 28.7 percent of Garuda Indonesia’s fleet.

Despite the growth opportunity, Garuda has been struggling to improve its operational performances. For instance, Garuda’s domestic passenger seat load factor (SLF) fell 8.78 percentage points to 72.72 percent in 2007-2017. Contrastingly, Citilink’s SLF had increased from 74.8 percent to 79.78 percent.

Although Citilink has been growing rapidly, it is unable to generate decent profit from its operations. Except for 2015, Citilink recorded losses in the range of US$9.7 million to $53.3 million each year. Consequently, the size of its retained deficit grew remarkably from $25.1 million to $145.6 million.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 17

Garuda Indonesia, the parent company, also struggled in making sustainable profit, even after eliminating $1.38 billion of accumulated loss since mid-1997. In 2017, it had $443.4 million of accumulated loss.

What we’ve heard: Pahala N. Mansury’s dismissal plan had been circulating long before Garuda Indonesia’s scandal resurfaced.

State-owned port operator Pelindo III director I Gusti Ngurah “Ari Askhara” Askhara Danadiputra reportedly boasted about his placement as new Garuda Indonesia director to fellow directors two months ago during a state-owned enterprises (SOEs) directors meeting at Rini Soemarno’s residence.

Ari Askhara is known as a smart lobbyist by fellow SOEs boards. He is said to have established a close relationship with Rini, who chose Ari Askhara to replace Orias Petrus Moedak as Pelindo III president director in April 2017, when the latter was appointed as finance director for state-owned coal producer PT Bukit Asam.

Meanwhile, Pahala has occasionally complained about his rigid communication with Rini to several fellow boards during his tenure. He complained that Rini, for example, rarely responded to his WhatsApp messages. Pahala’s request for board member change was left unanswered by Rini. When she decided to comply, however, the replacement was not whom Pahala had expected.

Rini and Pahala’s relationship reportedly began to deteriorate in June following Pahala’s failure to prevent the conflict between the board of Garuda Indonesia and the pilots in May- June, when the pilots were threatening to stage a strike during the Idul Fitri holiday.

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected] 18

Disclaimer: Tenggara Strategics always aims to use reliable sources in providing our best analysis to our clients, and is not responsible for any errors, inaccuracies and/or viewpoints in the original source material upon which we have based our analysis. The analysis contained in this document is intended exclusively for our clients who have subscribed to this service, and is not for public consumption or dissemination.

Nothing contained herein shall to any extent substitute for the independent investigations and the sound technical and business judgment of the reader. In no event will Tenggara Strategics, including its employees, be liable for any decisions made or actions taken in reference to the information contained in these documents, or for any incidental, consequential, indirect, special or exemplary damages, including damages from loss of profits or opportunities, even if advised of the possibility of such damages.

Tenggara Strategics is a business and investment research and advisory institute established by the Centre for Strategic and International Studies (CSIS), The Jakarta Post and Prasetiya Mulya University. Combining the capabilities of the three organizations, we aim to provide the business community with the most reliable and comprehensive business intelligence related to areas that will help business leaders make strategic decisions.

Board of Commissioners: Jusuf Wanandi, Djisman S. Simandjuntak, Endy M. Bayuni

PT Trisaka Wahana Tenggara Board of Directors: The Jakarta Post Building Riyadi Suparno, Phillips J. Vermonte, Jl. Palmerah Barat 142-143 Deddi Tedjakumara Jakarta 10270 Guarantor: Riyadi Suparno +62 21 5300476/8 ext. 2009 [email protected] Researchers & Writers: www.tenggara.id Astria Zahra Nabila, Adinova Fauri, Benni Yusriza, Dwi Atmanta, Frans Surdiasis, Hendarsyah Tarmizi, Lionel Priyadi, Vincent Lingga, Yesaya Christianto

SUBSCRIBERS COPY, NOT FOR DISTRIBUTION For subscription: [email protected]