Indonesia must respect business contracts, says IFC

A'an Suryana, The Jakarta Post, Jakarta

Despite recent signs of improving economic fundamentals, foreign investors are still reluctant to invest in Indonesia due to legal uncertainties and breaches of business contracts by the Indonesian side.

Against that background, the International Finance Corporation (IFC) urged Indonesia on Thursday to respect business contracts in a bid to lure back the foreign investment badly needed to help spur economic recovery.

James D. Filgo, an executive at Consolidate Service International Incorporation, revealed that bad perceptions of the Indonesian legal environment continued to cloud the minds of foreign investors.

"The legal environment here is annoying. Legal decisions are frequently decided out of court through backroom deals," Filgo, told participants here in a seminar titled: The Enforceability of Business Contracts.

Other speakers in the seminar were Amitava Baneerje, IFC regional representative for Indonesia and Malaysia, Richardo Simandjuntak, a lawyer with Gani Djemat & Partner Law Firm and Hikmawanto Djuwana, a lecturer in law at the University of Indonesia.

This bad perception, which has recently been aggravated by the rampant breach of business contracts by the Indonesian parties, has been a cause for concern for the government as well as foreign investors.

According to Richardo, business contracts had been breached in several cases including contracts involving Paiton Energy, Karaha Bodas and Kaltim Prima Coal.

In the Paiton case, state electricity company PT PLN and PT Paiton Energy Company had agreed in a contract to settle any potential disputes through an arbitration council.

However, when a dispute occurred in the contract period, the Central Jakarta District Court granted a provisional decision in 1999 that prohibited Paiton from taking the unresolved conflict to the international arbitration council in Stockholm, Sweden.

The decision was a clear breach of the contract as the arbitration council was the only forum for dispute resolution agreed to by the parties in the contract.

Richardo said the rampant breach of contracts had deterred foreign investors from pouring their investments into Indonesia.

Amitava Baneerje confirmed his view, saying that the level of foreign investment in Indonesia remain far from expected.

From an inflow of US$11.5 billion in 1996, private capital has been flowing out of Indonesia at about $10 billion a year in the last four years.

Private investment has dropped from 81 percent of fixed investment in 1996 to around 50 percent of fixed investment in 2000.

"The continuing capital flights and the fall in private investment reflect the lack of confidence in the country's business environment," said Baneerje.

Unless investors have confidence in the judicial system, there can be little hope of attracting foreign direct investment, Baneerje added.

According to Baneerje, three tantamount challenges that the law apparatus should deal with in the Indonesian court system are: corruption, lack of independence and untrained personnel.

"Besides that, the bottom line is that the business contracts must be respected by the judges so that the verdict will not scare away foreign investors," added Hikmawanto Djuwana.