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.