Indonesia must stick to its laws to win back foreign investors

Indonesia must stick to its laws to win back foreign investors

Tjaco Van Den Hout, The Straits Times, Asia News Network, Singapore

Following the terrorist attack at the JW Marriott Hotel in
Jakarta and its tragic human toll, it may be useful to analyze
the various factors holding back Indonesia's development.

According to many familiar with business and investment in the
region, combating corruption and abuse of legal process in
Indonesia is as vital to its future as fighting terrorism.

Indonesia offers economic advantages that have spurred its
massive growth over the last 20 years. These include a
comparatively well-developed infrastructure, incredibly rich
natural resources, a well-trained workforce, and an internal
market of about 220 million people. These advantages will
continue to create wealth and attract foreign capital if the
country is able to improve the reliability of its dispute
resolution processes.

Andrew Steer, World Bank country director for Indonesia, says:
"If Indonesia could make genuine progress on the investment
climate, governance and legal reform -- as it has on
macroeconomic policy -- it could again become one of the
brightest performers in East Asia. The international community
hopes that this will happen and stands ready to do whatever it
can to help."

Earlier this year, the World Bank released an Anti-Corruption
Guide focusing on Indonesia. It recommended increasing
transparency and oversight by civil society as effective
deterrents against corruption.

Official Indonesian policy encourages private-sector growth
and foreign investment; Jakarta has signed investment-protection
treaties with more than 50 countries. In 1998 and 1999, the
government issued several new regulations to ease the entry of
foreign companies and capital into Indonesia.

There have also been serious efforts, including a new
arbitration law in 1999, to establish a suitable legal
infrastructure for international arbitration. Under this law, the
enforcement in Indonesian courts of foreign or domestic
arbitration awards, including those in which the government is a
party, should be fairly routine.

But in practice, an arbitration award rendered outside
Indonesia may be very difficult to enforce in Indonesian courts,
especially if the losing party is Indonesian. This one-sided
approach is particularly glaring with regard to disputes
involving the Indonesian government's vast holdings in the energy
and natural resources industries.

Investors will no doubt remember the Pertamina case where, in
the midst of the Asian financial crisis in the late 1990s,
Indonesian state-owned electric utility, oil and gas companies
reneged on contracts for construction and operation of power
plants and long-term electricity sales with foreign power
companies, then refused to pay nearly US$600 million (S$1.05
billion) in arbitration awards.

The arbitration proceedings were crippled from the start by
interference from the Indonesian government and courts. At one
stage of the arbitration proceedings, the Indonesian parties,
including the government, sued in a Jakarta court to annul the
arbitration award and to halt separate pending arbitration
proceedings by the foreign companies against the government.

The Jakarta court obliged by granting an injunction, ordering
the suspension of the arbitration, according to some
commentators, in contravention of Indonesia's arbitration law,
and threatened fines of $1 million a day if the arbitration
continued in defiance of its order.

When the arbitral tribunal attempted to reconvene at the Peace
Palace in The Hague, the Indonesian-appointed arbitrator was
pressured to withdraw from the proceedings. He obliged and was
met at Schiphol Airport by several Indonesian officials who
"escorted" him back to Jakarta.

The tribunal proceeded nevertheless and ordered the Indonesian
government to pay the full amount of the earlier award. However,
the foreign companies were never paid and, instead, had to resort
to filing an insurance claim for expropriation with the Overseas
Private Investment Corporation in the U.S.

In a related dispute, the independent power producer Karaha
Bodas, which had contracted with the same Indonesian state-owned
enterprises to develop a power plant, was awarded US$261 million
by a Swiss arbitral tribunal after an Indonesian presidential
decree suspended its contracts. The Indonesian parties refused to
pay any portion of the award and obtained an injunction from the
Central Jakarta District Court to prevent the foreign companies
from taking further steps to recoup their losses.

The foreign companies are attempting to collect the
arbitration award through courts in the U.S., Hong Kong and
Singapore, by going after the Indonesian assets in those
countries.

Last December, Indonesia further damaged its reputation for
justice when it arrested two senior executives of the Indian
software company Polaris.

The chairman and senior vice-president of Polaris were on a
visit to Indonesia for talks with the Jakarta-based Bank Artha
Graha after the bank terminated a software contract it had with
Polaris.

The contract called for disputes between the parties to be
resolved by arbitration in Singapore. But instead of resorting to
arbitration, the bank demanded $10 million from Polaris. After
the two Polaris officials baulked at the bank's demand, police
arrested them on fraud charges. The men were released after a
week in custody. A Times of India report on the incident quoted a
source calling it "an extortionist game".

If Indonesia wishes to recapture its earlier reputation as one
of the brightest performers of East Asia, it must take steps to
liberalize its regulatory environment, restrain government
interference in legal proceedings and introduce other conditions
favorable to international arbitration.

Resorting to arbitration rather than the courts for the
resolution of disputes is a matter of contract. Assuring maximum
respect for arbitration agreements, especially those in which the
Indonesian government is itself a party, would be a fundamental
step in restoring confidence among foreign investors. Together
with the government's stepped-up efforts in fighting terrorism,
it would go a long way towards reversing today's trend of
tumbling foreign investments.

The writer is secretary-general of the Permanent Court of
Arbitration in The Hague, the Netherlands.