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

Another challenge is that laws and regulations can change quickly in Indonesia with little notice. There are several recent examples where laws and regulations impacting business (eg, halal food labeling, exporting natural resources or hiring expatriates) were dramatically changed with little prior notice. When the political environment and legal framework does not provide the necessary certainty to make substantial investments, businesses may attempt to circumvent these ambiguities by looking for legal loopholes or by relying on useful informal business relationships, potentially resulting in corruption.

For example, Freeport Indonesia, the local subsidiary of the US-based global mining giant, experienced a significant challenge in renewing a major mining permit. Freeport believed that the original contract, signed with the previous Indonesian government, provided for a clear option to renew. However, some ministries within the current government adopted a different orientation toward the Indonesian resource sector relative to previous governments. This led to the government developing a different interpretation of the prior contract and creating great commercial uncertainty for Freeport. As a result, top executives within Freeport could no longer rely on the legal contractual framework previously negotiated and had to renegotiate the entire joint venture arrangement. The matter became even more complicated when, during negotiations, the speaker of Indonesia’s House of Representatives (DPR) was alleged to have attempted to extort shares from Freeport Indonesia in exchange for a new contract, indicating the incredible ambiguities and complexities of relationships with Indonesian politicians.

Doing business in a murky environment can be frustrating and quite time-consuming for business executives attempting to navigate legal uncertainties and power plays. While small and medium-sized Indonesian enterprises may not be confronted with the same level of direct political interference as multinational corporations, they may still be burdened by structural inefficiencies of bureaucratic red tape, or even outright extortion. Despite enormous institutional progress during the last decade, doing business in Indonesia remains unpredictable because of weak institutions. When asked to describe the legal and jurisdictional environment faced by Indonesian and international companies, a former vice chairmen of the Indonesian Bank Restructuring Agency stated: “Even if you have the formal law on your side, you still are not sure at all whether the judge’s ruling will be fair and according to the rules. Often it all boils down how much the judge is paid by whom.”

As illustrated in Figure 1, the combination of institutional voids due to weak legal institutions and law enforcement, inconsistent government policy at the country level and potential conflicts of interest at an organizational level due to concentrated ownership makes Indonesia a very unique market within which to conduct business compared to other developed and developing economies. Furthermore, the combination creates an environment that allows for or tolerates forms of corruption. This is clearly illustrated in the low ranking of Indonesia in Transparency International’s annual corruption index.

Please login to leave a comment