Pertamina's game: Gambling RI's recovery<\/p>\n
Ali Mustofa, Indonesian Law Enforcement Watch (ILEW),
\nJakarta<\/p>\n
It wouldn't be the first time that Pertamina has played games
\nwith Indonesia's future. The company almost bankrupted Indonesia
\nduring the oil boom of the 1970s. The company, which holds a
\nmonopoly on oil exploration, exploitation and sales -- all in the
\nname of the people of Indonesia -- was famous for its corruption
\nduring the Soeharto years, with billions of dollars in
\ninefficiencies and potential losses identified by Price
\nWaterhouse Coopers in 1999.<\/p>\n
But with Baihaki Hakim at the helm, Pertamina was supposed to
\nbe different, having put the old Soeharto-era ways behind it.
\nSadly, a case involving a canceled geothermal contract indicates
\nthat Pertamina is still prepared to put its own interests ahead
\nof Indonesia's, and to ignore basic business rules of behavior.<\/p>\n
Pertamina is now locked in a court battle with an American-
\nowned company, Karaha Bodas (KBC), which signed a contract with
\nPertamina in 1994 to develop two geothermal power plants in West
\nJava. During the Crisis, the government canceled the contract,
\nbut only after KBC had spent more than US$100 million on the
\nproject.<\/p>\n
The contract between Pertamina and KBC contained a clause
\nsaying that if there was a dispute between the parties, the case
\nwould be taken to arbitration in Switzerland, a neutral location
\nwhere differences could be resolved. This is a standard clause in
\nvirtually all contracts involving Indonesian state-owned
\ncompanies and foreign investors. Most foreign business dealings
\nanywhere in the world use such arbitration clauses. In fact,
\nneutral-ground arbitration is such a cornerstone of international
\ntrade and investment that the United Nations has set rules
\ngoverning it, codified in the Convention on the Recognition and
\nEnforcement of Foreign Arbitral Awards, the New York Convention
\nfor short. Indonesia signed the Convention in 1981, which makes
\nit binding here.<\/p>\n
Although it freely signed the contract with KBC providing for
\narbitration in the case of a dispute, Pertamina is now trying to
\nuse Indonesian courts to evade the very arbitration it had agreed
\nto in the contract.<\/p>\n
In recent weeks, much has been said about the Manulife case
\nand its frightening effect on foreign investors. But the attempt
\nby Pertamina to evade its legal responsibilities and use the
\nIndonesian courts to escape the customary rules of international
\nbusiness will be just as damaging to Indonesia's reputation as a
\nplace to do business.<\/p>\n
What makes the situation even more damaging is that Pertamina
\nis not a privately owned company. It is a state-owned company,
\nand an agent of the Indonesian government. In international eyes,
\nwhen Pertamina acts, it does so with the full backing and
\napproval of the Indonesian state. Ironically, as a result
\nPertamina's performance and policies cannot be publicly
\ncontrolled.<\/p>\n
Last year, at the Energy Dialog in Houston, Texas, President
\nMegawati Soekarnoputri promised investors they would be welcome
\nin her Indonesia, saying the country would honor its financial
\nobligations. \"I realize that for some time now, investors have
\nbeen losing confidence in the economic situation in my country
\ndue to uncertainties. We are going to rectify that by earning
\nyour confidence,\" the President stated. She went on to say:
\n\"Complementing the measures taken in the political and economic
\nfields is our effort to uphold the rule of law. I believe that
\nthis is an important undertaking as it provides one of the
\npillars of our business environment.\" Pertamina's actions in the
\nKBC case directly contradict Megawati's commitments. Who runs the
\ngovernment, Megawati or Pertamina?<\/p>\n
In a statement made in The Economist (July 6, 2001), Kwik Kian
\nGie, the minister responsible for the National Development
\nPlanning Agency, said if he were a foreign investor, he wouldn't
\ninvest in Indonesia. \"The law enforcement is not there, but not
\nonly that, the whole thing is so confusing.\" Kwik's words have
\nproved prophetic. Even before the Pertamina and Manulife cases,
\nforeign investment for the first four months of the year dropped
\nan astounding 59 percent from the same period last year. And last
\nyear was the worst year in a decade for foreign investment. With
\nthe country's private and public sectors crippled by debt built
\nup through the crisis, Indonesia needs foreign investment to
\ncreate jobs and restore economic growth. Pertamina's actions are
\nstealing Indonesian jobs.<\/p>\n
What makes Pertamina's case seem even more self-centered is
\nthat it had agreed to the arbitration and argued its case in
\nfront of the arbitrators, without ever suggesting that the
\narbitration was being improperly conducted. When the arbitrators
\nruled in favor of KBC and awarded the American company $261
\nmillion covering development expenses and lost profits, Pertamina
\nbrought an appeal not in Indonesian court, but in Swiss court.
\nThe Swiss Federal Court rejected Pertamina's appeal.<\/p>\n
Now, isn't it peculiar that a year after its appeal in Swiss
\ncourts that Pertamina shows up in Indonesian courts arguing that
\nthe proper place for the appeal to be heard is in Indonesia? The
\nreason for Pertamina's belated change of heart is simple. KBC is
\nnow attempting to get the money Pertamina owes it. As an
\nAmerican-owned company, it has gone to a Texas court, where
\nPertamina has an office, to enforce the arbitration award.<\/p>\n
There are a lot of legal arguments about the UN-sanctioned
\narbitration process, about the fact that Swiss law governs
\narbitrations in Switzerland, about the fact that Pertamina is
\nbound to accept the award, but what is critical to understand is
\nthat Pertamina is playing a dangerous game with Indonesia's
\nreputation for no other reason than to paint itself in a
\nfavorable light with Indonesians.<\/p>\n
The whole thing amounts to a PR stunt by a company that has
\nrun its own reputation into the ground and wants to drag
\nIndonesia down with it.<\/p>\n
What does Pertamina stand to gain by trying to annul the award
\nin Indonesian court? Nothing. Will it save itself $261 million
\neven if the case in annulled? No. Under the Convention, an
\nannulment of an award, as Pertamina is attempting, cannot be used
\nto stop courts in other countries from enforcing the award. The
\nwhole point of the Convention is to provide for worldwide
\nrecognition of arbitration awards, not see them undermined when
\none party decides to change the rules after losing the game.<\/p>\n
Whatever happens in Indonesian courts, U.S. courts, and courts
\nin Singapore, Hong Kong and other jurisdictions will continue to
\nenforce the award, and make Pertamina pay its due to KBC.
\nPertamina will end up paying $261 million plus interest to KBC.
\nAll it will do if it continues its court case in Jakarta and
\nmotion appeals worldwide in is make foreign investors even more
\nwary of doing business here, not to mention their lawyer fees
\nestimated at least $1 million a month.<\/p>\n
Pertamina seems to lack the concern and wisdom that what they
\nare doing may actually have an extremely negative effect on
\nIndonesia's already damaged image and economic recovery. As a law
\nobiding Indonesian citizen, this is unacceptable.<\/p>",
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