Lessons in doing business in Indonesia
Recent events regarding UK insurer Prudential in Indonesia raise questions about how companies seeking to uphold international standards can operate responsibly in nations with shaky rules of law.
Earlier this year, UK insurer Prudential Life was given a stark lesson in doing business in Indonesia.

It started when a consultant whose contract had been terminated sued the company for $40 million. It seemed an unreasonable claim, and the decision by the local courts to award the consultant even $400,000 seemed harsh. The company sought to appeal against the ruling. It was shocked when the courts then enacted an old law and filed the company’s Indonesian operations for bankruptcy.

PT Prudential Life Assurance has assets in the country of around $100 million and asserts its solvency vehemently.

According to Clare Staley, media spokeswoman for Prudential, the court ruling took everybody by surprise. She was restricted in what she could say as the appeal process is underway, but the sense of confusion and shock was apparent. A company statement said: “PT Prudential Life Assurance is very surprised that the court has decided to accept the petition filed against it … PT Prudential Life Assurance is financially very strong. Its Risk Based Capital ratio of 255 per cent (as at December 31, 2003) compares very favourably with the 100 per cent requirement dictated by the Ministry of Finance.”

While the Prudential case is rare, it does have precedent, with the Canadian company Manulife having been dealt with in a similar way in 2002. That decision was overturned in the Supreme Court, and it is likely that the Prudential case will be cleared up and the company will get back to work. Lex, the droll columnist at the Financial Times, summed up the situation: “Had Mr Micawber visited Indonesia, he might have revised his definition of misery.”

Though such cases are rare, they highlight one of the challenges facing responsible companies operating in Indonesia. As the Prudential case proves, seemingly random legal rulings can be a shadow over day-to-day operations and long-term planning.

Bruce Munro is head of the Indonesia operations for the large construction company Thiess, a subsidiary of the Australian construction company Leighton Holdings. He is open about the concerns. “Apparently illogical court decisions such as [the Prudential case] do give us cause for concern … Unfortunately the whole legal system in Indonesia is open to abuse. I understand the Minister for Finance is proposing amendments to the bankruptcy laws to prevent this sort of abuse of judicial power in the future. We watch these kinds of things closely as they can have the effect of negatively impacting foreign commitments to invest.”

The legal culture in Indonesia has been undermined by corruption, which has been rife in public service, particularly during the reign of President Suharto. According to the global corruption watchdog Transparency International, Suharto’s administration holds the dubious record of being the highest “remunerated” in comparison with a range of recent dictators. It estimates that something like $35 billion was pocketed by the administration between 1967 and 1998. Much of that came from artificially high invoices to foreign businesses and from taking kickbacks. The country’s recent history is soaked with cronyism and bribery, and while subsequent administrations have sought to improve the situation, such an embedded culture takes time to change.

For businesses wanting to operate responsibly, the challenges are particularly acute as. The Prudential court decision is not overtly corrupt or illegal. Even those businesses seemingly doing the right thing may find themselves sinking in a muddy legal environment.

These legal issues are essentially at the base of all the major challenges facing responsible businesses. Linked to the legal environment is the limited protection, in comparison with developed economies, for the rights of workers and other stakeholders.

To best understand the undervaluing of human rights in many areas of Indonesia, it is important to know the central role the military plays in the Indonesia political structure. For many decades, Indonesia operated a system known as “dwifungsi” or dual function. This system formally established the military as both a political as well as a defence force and mandated a number of parliamentary seats for the military.

While “dwifungsi” has now been officially superseded, the influence of the military, both directly and indirectly, remains strong. Bruce Crouch, an Indonesia expert at the Australian National University, says the power of the military is entrenched. Extortion is widespread, he said, noting that members of the military are not tried under civilian law in Indonesia, but under military law, which often sees them get off lightly, thus decreasing the risks of acting illegally.

The military influence affects business and human rights, to the extent that commercial operations can become “militarised” – indirectly, in relation to culture, and directly through the use of armed troops to protect assets. For instance, Crouch says: “Military salaries are very low and this has obliged many soldiers to ‘live off the land’. One way of increasing their income is to act as protection services for foreign companies.” Foreign companies have become embroiled in situations where government armed forces and even non-government paramilitaries have been used to protect companies’ plants. Major mining companies such as Rio Tinto and Freeport have been bloodied by such accusations. Newcrest Mining, an Australian gold mining company, is the latest to become entangled, amid claims that it is using military forces to protect its Toguraci open cut mine from local protests.

Suffice to say that the military influence has not engendered a positive or sophisticated thinking to ensure human rights are upheld.

But attitudes are changing, and Indonesians are becoming mobilised around issues as human rights and environmental sustainability, especially following the downfall of the Suharto dictatorship.

For non-Indonesian companies, a company culture that translates across borders is likely to be most effective – that is, the practice known as extra-territoriality of ensuring that a multinational company’s generally high standards in its home base are kept in all its overseas operations.

Oil giant BP’s $3 billion Tangguh Liquid Natural Gas project in the Papua province, potentially one of the world’s largest LNG projects, has been marked by its avowedly pro-human-rights approach. The approach is founded on a close relationship between the company and local stakeholders. The company has instigated a programme called Consultation, Empowerment, Participation, Partnership and Sustainability. This strategy, BP says, “is adopted to minimise negative effects of the project, thereby turning potential challenges into positive opportunities for local communities and other project stakeholders”.

However, it may be argued that the company’s presence in Papua, as a guest of the Indonesian government, may be ethically questionable. The Papua province, or Irian Jaya, was handed over to Indonesia in 1969 by the former Dutch colonial administration under shady circumstances and in the face of popular calls for independence, which remain present today. Such a point only serves to underline the many complex ethical challenges of working in Indonesia.

Underlying these issues is the creeping influence of corruption. Transparency International’s global corruption survey of 133 countries put Indonesia in 122nd place, making it the worst rated in Asia apart from the military dictatorship in Myanmar and the perennially last placed Bangladesh.

Munro says Thiess chooses its business partners on the basis of their similar values, in the hope of cutting out corrupt culture. But, in some industries, corruption presents an almost impossible obstacle.

In the logging industry, one of the country’s major export industries, for example, corruption is endemic, making it almost impossible for responsible businesses to operate and compete without becoming corrupted themselves. Recently, the country’s president, Megawati Sukarnoputri, admitted the government was virtually powerless to stop illegal logging, effectively because it could not control human nature.

Such a dilemma also faces responsible businesses in Indonesia. While it is clearly vital for companies to maintain a solid ethical policy and culture, the spectre of human nature will always be present. In a context where the rule of law is sometimes shaky and where respect for human rights and basic sustainability can be limited, the opportunities for the worst sides of human nature to be manifested abound.

Ultimately, that is perhaps the greatest challenge facing the responsible business in Indonesia.


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