Jim Armitage: Bumi fiasco casts a cloud over the President's tea party at the Palace

Indonesia risks gaining the same reputation as Russian mineral firms on Wall St

London SW1 has felt like one of the thousands of little islands that make up Indonesia these past few days.

It's all because the country's president is in town, meeting and greeting our royals, ambassadors and, of course, business leaders (we know what these jaunts are really all about).

The lavishly named President Susilo Bambang Yudhoyono and his missus were given a jolly good show by our royals. Not to mention the Prime Minister and other top dogs of the establishment. The Queen even put them up in the spare room at Buckingham Palace.

I have to admit, I wasn't aware of the Yudhoyonos' arrival until I found my cycle route to a meeting in Westminster was blocked by a 21-gun salute in Green Park. Rather annoying, frankly.

But we must look to the bigger picture here. That is to say, we really must cozy up to Indonesia because it's one of those resources-rich, explosively fast-growing nations. You know, the ones that Goldman Sachs would have squeezed into their fabled BRIC acronym, had it been able to get the initials to scan right. BRICI just didn't sound cool enough, and rhymes unfortunately with "sticky".

The stats being put out by the Department of Business, Innovations and Skills say it all really. Indonesia's economy is expected to outgrow ours by 2030, it has a middle class as vast as India's and, with 238 million inhabitants, it's the world's third largest democracy, having made a relatively painless transition from dictatorship since the resignation of the military-minded President Suharto in 1998.

As you would expect, Yudhoyono signed a whole bunch of trade deals with British firms, including a BP liquefied natural gas project and big collaborations on defence and education.

It was all going swimmingly in fact, until, just as the President was meeting British businessmen over tea at St James's Palace yesterday afternoon, the news broke that Nat Rothschild was lining up his guns for a counterbid for Bumi's coal assets. Yep, the Bumi fiasco was well and truly back.

Nat's plan, to remove the Bakrie family members and chairman Samin Tan as investors, is indeed a rather dramatic twist to those following the Bumi saga. But, while it may be a fascinating tale for the specialists in the City, why would a bit of bickering among two groups of private investors spoil the cucumber sandwiches in the palace throne room? Well, because it has highlighted a frightening side to doing business in Indonesia.

Bumi was the first major company from the country to achieve a listing in London. It was projected as being a relatively risk-free way of Western investors getting exposure to the fast-growing but somewhat wild business environment there. Rothschild placed his reputation on the line by promising London-quality corporate governance of a business with emerging markets-quality growth rates.

But it has been an unmitigated embarrassment. Not only for Rothschild, who fell out with his Indonesian partners after finding alleged mismanagement in the business on a grand scale, but also for Indonesia itself.

The Bakrie family are one of Indonesia's most powerful and controversial dynasties, and have clearly acted badly towards minority shareholders. Meanwhile, the clear impression Western investors will get from the whole fiasco is that the country is dangerous. It risks gaining the same reputation as Russian minerals companies have been getting among investors on Wall Street, after repeated scandals about misreporting of crucial financial numbers.

However, Yudhoyono and others in his Democratic Party might not be entirely displeased. One of the Bakrie family scions, Aburizid Bakrie, has been selected to lead the Golkar Party's election battle for 2014. Golkar are part of the Democratic coalition but have been regular critics of Yudhoyono, something of a thorn in his side.

So perhaps we shouldn't be too surprised to read that the President's newly-appointed investment honcho, Chatib Basri, went on the record to the Financial Times this week to condemn the Bumi affair. He said it set a "bad precedent" for the country and that it was seen internationally as a fault of the government.

The country must, he said, look at improving the corporate governance standards of its stock market companies. Otherwise, the penalties could be huge.

He is surely right. OK, they may have masses of gas and coal underground. They may have a whopping great population (which can, frankly, cause as many problems as benefits), but if it is not seen as being a safe place to invest, then the kind of rapid inward investment it has enjoyed may not last for too long. Although the shares bounced up yesterday, investors who bought them at their peak of £14 last year have lost 80 per cent of their money.

Understandably that makes fund managers cross, particularly when they had concerns about issues like the Bakries' debts in the first place. The current probe into financial irregularities, they say with hindsight, hands slapped firmly to foreheads, was so inevitable from the outset "why did we ever sign up?"

While there had been no falling-off of investment into the country as yet from the Bumi affair, that could change, Mr Basri warned. "I am worried because there is not much pressure for reform today. I am afraid that when things go wrong it will be too late to reform," he said.

The trouble for Indonesia doesn't just stem from the activities of the Bakries in Bumi. There have been recent crackdowns on foreign companies owning assets like mines and banks which smell to Western free marketeers of protectionism. Certainly a backward step along the road away from dictatorship.

Basri argues this is not the case, and that reforms are still heading in the right direction.

But the President must step carefully if his trip to London this week is to reap the kind of benefits he, and the British government, had hoped for.

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