T

he potential breakup following a tumultuous relationship between major shareholders in London-listed Bumi Plc has highlighted the growing political risks to investment in Indonesia’s mining
sector, particularly for foreigners, analysts say.

UK-based political and economic risk consulting firm Maplecroft said in a report issued over the weekend that attempts to improve corporate governance in Indonesia since the fall of Soeharto had been ineffective.

“Allegations of financial irregularities at Bumi Resources have once again focused attention on the weak corporate governance culture among many family-owned conglomerates in Indonesia.”

Bumi Plc’s board of directors is currently reviewing a proposal from the Bakrie Group for the takeover of all the company’s assets in its Indonesian subsidiaries: PT Bumi Resources and PT Berau Coal Energy.

The proposal, which includes a share-swap offer and an estimated US$1.28 billion in cash, follows the board’s decision to probe “financial and other irregularities” inside the subsidiaries that allegedly involved individuals affiliated with the Bakrie Group.

Maplecroft said heavily concentrated ownership structures coupled with a lack of transparency in management and financial accounting precluded any meaningful strengthening of internal controls in large Indonesian companies.

“Similar to the Bakries’ dominance over Bumi Resources, many large companies in Indonesia are dominated by politically connected powerful families,” it said referring to the Bakrie family patriarch, Aburizal Bakrie, the chairman of the Golkar Party who plans to run for the presidency in 2014.

Indonesian capital market analyst Yanuar Rizky acknowledged that corporate governance was still a major issue for many Indonesian companies. However, in the Bumi Plc case, both disputing parties, the Bakrie Group and Nathaniel Rothschild, were “the bad guys”.

“Bakrie Group has a poor track record with pledging its assets, so does Rothschild with his various hostile takeovers. One thing is clear, that whenever negative information emerges, there are parties who sell shares in Bumi Resources and Berau. I have noticed that there are four to five foreign securities companies influencing Bumi Resources and Berau’s share prices,” Yanuar said.

Torn by disputing shareholders and a decline in commodity prices, Shares in Bumi Plc have plunged 70 percent since the start of the year, while Bumi Resources and Berau saw 69 percent and 49 percent drops respectively.

The combination of nationalistic policies, poor corporate governance, weak infrastructure and lower profit margins posed higher risks to investors in the coal-mining sector in Indonesia, Maplecroft concluded.

Despite Indonesia’s shortcomings, however, the consulting firm said problems at Bumi Resources, Asia’s biggest thermal coal exporter, were unlikely to threaten foreign direct investment in the country in the short to medium term, provided that the economy continued to perform.

Commenting on the dispute between shareholders in Bumi Plc, the chairman of Indonesia’s Investment Coordinating Board (BKPM), Chatib Basri, called for better cooperation at the level of business-to-business partnerships.

“We don’t want cases that can cause uncertainty to investors. So far we haven’t seen it [Bumi Plc’s impact on investment], however, we have to avoid these things in the future. The government cannot take part in business to business matters,” Chatib said.