Guidelines to `living less dangerously` in Indonesia
January-March 2018
By: Peter Verhezen, Ian O Williamson and Natalia Soebagjo

On the other side of the extreme, relying only on reputable business networks as a mitigating factor to reduce risks may seriously backfire. In 2010, Nathaniel Rothschild, the wealthy British financier, invested $3 billion in the Bakrie Group, the prominent family-owned Indonesian business conglomerate, during the global coal boom. The scion of the Rothschild banking dynasty did not foresee the enormous conflicts of interest that would ultimately undermine this joint venture. Rothschild acquired an interest in Indonesia’s Bumi Resources and Berau Coal (one of the largest coal exporters in the world) from Bakrie. The newly created joint venture, named Bumi PLC, was listed on the London Stock Exchange. By having the venture listed, Rothschild assumed that the formal legal system in Britain would provide protection from biased decision-making by its Indonesian majority owners or neutralize weak formal governance mechanisms in Indonesia. But even being listed in London did not bridge the differences in business approach and culture between the two partners. When insurmountable governance differences emerged in the joint venture, Rothschild attempted to remove Bakrie from its board. However, despite Western-style governance structures at the London Stock Exchange, this was unsuccessful, leaving Rothschild with no other choice but to “write off” his investment in 2014.

Institutional voids

Relative to developed countries but similar to other emerging countries, Indonesia is noted for having very weak and unreliable institutions at a macroeconomic level that create institutional voids. For example, the legal system has been characterized as unpredictable and inconsistent, with patchy implementation and enforcement of rules and regulations. One major challenge to doing business in Indonesia is that, following the collapse of the late President Soeharto’s regime in 1998, more than 500 regional governments were given autonomy to create new local bylaws and interpret and enforce other laws.

In many cases, these autonomous regions have created or interpreted laws in an inconsistent manner. For example, duplications or inconsistencies in tax law or regulations on work visas and business license processes create confusion for companies and make it difficult to operate across different regions.

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