Honoring contracts

Honoring contracts

President Abdurrahman Wahid's reaffirmation on Monday of the
Indonesian government's full commitment to honor contracts with
international companies seems designed to assuage the fears of
investors pending the decentralization of political and fiscal
authority to the provinces and districts early next year.

Many resource-based ventures, notably mining and plantation
operations outside Java, have become frequent victims of
harassment at the local level. Local administrations and
villagers, for more than 32 years completely excluded from the
decision making process regarding the exploitation of local
natural wealth, are now forcefully asserting their rights.

Former president Soeharto's exit in May, 1998 has unleashed a
collection of activists -- non-governmental organizations, local
leaders or village heads -- some touting genuine causes, several
with self-seeking interests -- that were kept silent during his
32-year authoritarian rule.

All the contracts concluded under the corruption-infested
Soeharto regime now seem to be in danger as the legitimate
government of President Abdurrahman has yet to build a
stabilizing central force and the police and Military are still
too discredited to act as respected and credible law enforcers.

The resulting breakdown of law and order in several provinces
and the persistent recession have made resource-based ventures
located mostly in remote areas highly vulnerable to arbitrary
claims and harassment. Local people, mistrusting law enforcement
agencies, often resort to violent behavior in asserting their
views, resentments or rights. Hence the harassment suffered by
the Kelian Equatorial Mining company in East Kalimantan, Freeport
in Irian Jaya, Indorayon in North Sumatra and Caltex in Riau.

But the resentment against some companies is quite legitimate
given that many contracts or concessions in the past were
acquired through corruption or collusion. Many businesses in the
provinces had simply ignored local administrations and
communities because the only requirement to operate and become
prosperous was to keep the central government in Jakarta happy.
Local people sometimes received almost nothing for their land
that was appropriated by investors; the real payment having been
given to officials or political leaders in Jakarta.

It is, however, encouraging to note that the government will
not arbitrarily terminate or close those businesses that were
granted contracts or concessions through corruption or under
questionable practices. The decision by the government to
renegotiate those contracts will not violate any national or
international laws, nor will investor confidence be damaged.

All major industrialized countries now have enacted laws
against corrupt business practices. Companies that got their
contracts or concessions through bribes and questionable
procedures should accept renegotiation. They cannot continue to
operate with double standards, behaving one way in their home
countries and another in Indonesia.

Most important, though, is that the assessment or audit
process to determine whether a contract was concluded through
corruption or awarded as a result of legitimate business
practices should be transparent and fair.

There is, however, another strong message conveyed by the
recent wave of local resentment against businesses. Compliance
with the law, though mandatory to maintain legitimacy, is no
longer enough to guarantee long-term viable operations.
Companies, notably those operating in undeveloped remote areas
where the government has yet to provide even basic services,
should also be strongly committed to exercising social
responsibility.

Social responsibility rises above the mandatory floor for
corporate standards. It also incorporates standards of behavior
that may be expected but are not required under Indonesian laws.
It is a concept that focuses on operational behavior and its
impact on the neighboring community, while embracing standards of
good business practices.

Without this social responsibility, operating prosperously in
the midst of an impoverished community fosters resentment and
envy that may eventually explode into resistance. People will not
tolerate forever what they perceive to be an unjust distribution
of wealth. But social responsibility should not be mistakenly
equated with philanthropy, an activity extraneous to a company's
operations and one that often creates a sense of artificial
prosperity.

Donating to a worthy cause, though appreciated, is less
effective than continuous efforts to empower the local community.
Social responsibility is best realized by gradually transferring
business, technical and social competence to local people by
utilizing, as much as possible, local labor, contractors,
suppliers, and consultants, even when subcontracting those
services elsewhere, seems easier and much less expensive.

Experience has shown that companies that have met their social
obligations are less vulnerable to pressure from local people or
administrations. A company's best defense is its reputation in
the community.