October 2019 – Korean Hyundai Engineering and Construction (Hyundai), the company building the Cirebon 2 coal-fired power plant in Indonesia, has been accused of bribery and corruption. The sponsor of the project, PT. Cirebon Energi Prasarana (CERP), a joint venture which includes Japanese Marubeni and JERA (a joint venture between Tokyo Electric Power Co., Inc. and Chubu Electric Power Co., Inc.), has also been implicated in this bribery. Commercial banks, Mizuho Bank, Mitsubishi UFJ Bank (MUFG Bank), Sumitomo Mitsui Banking Corporation (SMBC), and the Japan Bank for International Cooperation (JBIC), a public bank, are among the financiers.
These bribery allegations arose when the former regent of Cirebon, who has been arrested and indicted for another corruption case, also admitted in the court hearing that he received money from Hyundai to calm local land disputes. Furthermore, the Indonesian Corruption Eradication Commission (KPK) announced that the former regent received 6 billion Rupiahs (approx. 423 thousand US Dollars) in return for issuing the Cirebon 2 project license (the investigation for the source of bribery is still in progress).
Culture of Corruption Largely Unchanged
Infrastructure development projects in Indonesia are prone to corruption and Japanese private and public financial institutions finance many of these projects. Recent corruption cases in Indonesia involving Japanese companies include a power plant project and a railway project in 2014. The CEO of PLN, the state-owned power company, was also arrested for corruption in May 2019.
These cases, together with the Cirebon 2 bribery case, tell us the difficulty of completely eliminating the risk of corruption in involving large infrastructure development projects. Acknowledging the risk of corruption just mentioned, financial institutions are expected to conduct stricter pre-loan screenings of corruption-inducing factors, including protests and pollution and take stricter measures, including suspending the loan disbursement as soon as the fact of corruption comes to light.
Banking without Legal Certainty?
This project lacks legal certainty, a necessary precondition for the project to proceed. This project’s environmental permit had been revoked as a result of the legal action taken by the residents. The court ruling was announced on 19 April 2017, a day after the banks signed the loan agreement on 18 April. This means the banks signed the agreement without waiting for the court ruling. It raises a question about the manner in which the financiers conducted due diligence, including legal risk.
Japanese banks allegedly relied upon the Government Regulation(*1) that aimed to accelerate infrastructure development, based on which new environmental permit was issued in July 2017. The financiers, therefore, judged that all the preconditions had been met. However, the legality of this Government Regulation itself is being questioned and the judicial review is currently ongoing. (*2)
Possible Cancellation of the Project
As mentioned above, the project license was allegedly issued illegally. If proven illegal, this project could be cancelled.
Mega Banks Responses
In letters written in September 2019, Market Forces, WALHI, 350.org Japan, FoE Japan, and Banktrack challenged the three Japanese commercial banks on their loan policies in response to this corruption case, however, the banks declined to provide specifics.
In addition to a defect in the process of due diligence, continuing to finance this project, tainted by unacceptable business conduct, will tarnish the reputation of Japanese Mega-banks’ as well as Japan, Inc. more broadly.
*1 the Government Regulation No. 13 (2017) regarding National Spatial Planning
*2 The plaintiffs argue that this regulation is illegal because it contains provisions that contradict with laws which rank higher in the Indonesian regulatory hierarchy (namely, Law No. 26 (2007) regarding Spatial Planning; Law No. 32 (2009) regarding Environmental Conservation and Management). Depending on the result of the judicial review, the project itself could potentially be cancelled.