Indonesia must respect business contracts, says IFC

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.