Pertamina's game: Gambling RI's recovery

Pertamina's game: Gambling RI's recovery

Ali Mustofa, Indonesian Law Enforcement Watch (ILEW),
Jakarta

It wouldn't be the first time that Pertamina has played games
with Indonesia's future. The company almost bankrupted Indonesia
during the oil boom of the 1970s. The company, which holds a
monopoly on oil exploration, exploitation and sales -- all in the
name of the people of Indonesia -- was famous for its corruption
during the Soeharto years, with billions of dollars in
inefficiencies and potential losses identified by Price
Waterhouse Coopers in 1999.

But with Baihaki Hakim at the helm, Pertamina was supposed to
be different, having put the old Soeharto-era ways behind it.
Sadly, a case involving a canceled geothermal contract indicates
that Pertamina is still prepared to put its own interests ahead
of Indonesia's, and to ignore basic business rules of behavior.

Pertamina is now locked in a court battle with an American-
owned company, Karaha Bodas (KBC), which signed a contract with
Pertamina in 1994 to develop two geothermal power plants in West
Java. During the Crisis, the government canceled the contract,
but only after KBC had spent more than US$100 million on the
project.

The contract between Pertamina and KBC contained a clause
saying that if there was a dispute between the parties, the case
would be taken to arbitration in Switzerland, a neutral location
where differences could be resolved. This is a standard clause in
virtually all contracts involving Indonesian state-owned
companies and foreign investors. Most foreign business dealings
anywhere in the world use such arbitration clauses. In fact,
neutral-ground arbitration is such a cornerstone of international
trade and investment that the United Nations has set rules
governing it, codified in the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, the New York Convention
for short. Indonesia signed the Convention in 1981, which makes
it binding here.

Although it freely signed the contract with KBC providing for
arbitration in the case of a dispute, Pertamina is now trying to
use Indonesian courts to evade the very arbitration it had agreed
to in the contract.

In recent weeks, much has been said about the Manulife case
and its frightening effect on foreign investors. But the attempt
by Pertamina to evade its legal responsibilities and use the
Indonesian courts to escape the customary rules of international
business will be just as damaging to Indonesia's reputation as a
place to do business.

What makes the situation even more damaging is that Pertamina
is not a privately owned company. It is a state-owned company,
and an agent of the Indonesian government. In international eyes,
when Pertamina acts, it does so with the full backing and
approval of the Indonesian state. Ironically, as a result
Pertamina's performance and policies cannot be publicly
controlled.

Last year, at the Energy Dialog in Houston, Texas, President
Megawati Soekarnoputri promised investors they would be welcome
in her Indonesia, saying the country would honor its financial
obligations. "I realize that for some time now, investors have
been losing confidence in the economic situation in my country
due to uncertainties. We are going to rectify that by earning
your confidence," the President stated. She went on to say:
"Complementing the measures taken in the political and economic
fields is our effort to uphold the rule of law. I believe that
this is an important undertaking as it provides one of the
pillars of our business environment." Pertamina's actions in the
KBC case directly contradict Megawati's commitments. Who runs the
government, Megawati or Pertamina?

In a statement made in The Economist (July 6, 2001), Kwik Kian
Gie, the minister responsible for the National Development
Planning Agency, said if he were a foreign investor, he wouldn't
invest in Indonesia. "The law enforcement is not there, but not
only that, the whole thing is so confusing." Kwik's words have
proved prophetic. Even before the Pertamina and Manulife cases,
foreign investment for the first four months of the year dropped
an astounding 59 percent from the same period last year. And last
year was the worst year in a decade for foreign investment. With
the country's private and public sectors crippled by debt built
up through the crisis, Indonesia needs foreign investment to
create jobs and restore economic growth. Pertamina's actions are
stealing Indonesian jobs.

What makes Pertamina's case seem even more self-centered is
that it had agreed to the arbitration and argued its case in
front of the arbitrators, without ever suggesting that the
arbitration was being improperly conducted. When the arbitrators
ruled in favor of KBC and awarded the American company $261
million covering development expenses and lost profits, Pertamina
brought an appeal not in Indonesian court, but in Swiss court.
The Swiss Federal Court rejected Pertamina's appeal.

Now, isn't it peculiar that a year after its appeal in Swiss
courts that Pertamina shows up in Indonesian courts arguing that
the proper place for the appeal to be heard is in Indonesia? The
reason for Pertamina's belated change of heart is simple. KBC is
now attempting to get the money Pertamina owes it. As an
American-owned company, it has gone to a Texas court, where
Pertamina has an office, to enforce the arbitration award.

There are a lot of legal arguments about the UN-sanctioned
arbitration process, about the fact that Swiss law governs
arbitrations in Switzerland, about the fact that Pertamina is
bound to accept the award, but what is critical to understand is
that Pertamina is playing a dangerous game with Indonesia's
reputation for no other reason than to paint itself in a
favorable light with Indonesians.

The whole thing amounts to a PR stunt by a company that has
run its own reputation into the ground and wants to drag
Indonesia down with it.

What does Pertamina stand to gain by trying to annul the award
in Indonesian court? Nothing. Will it save itself $261 million
even if the case in annulled? No. Under the Convention, an
annulment of an award, as Pertamina is attempting, cannot be used
to stop courts in other countries from enforcing the award. The
whole point of the Convention is to provide for worldwide
recognition of arbitration awards, not see them undermined when
one party decides to change the rules after losing the game.

Whatever happens in Indonesian courts, U.S. courts, and courts
in Singapore, Hong Kong and other jurisdictions will continue to
enforce the award, and make Pertamina pay its due to KBC.
Pertamina will end up paying $261 million plus interest to KBC.
All it will do if it continues its court case in Jakarta and
motion appeals worldwide in is make foreign investors even more
wary of doing business here, not to mention their lawyer fees
estimated at least $1 million a month.

Pertamina seems to lack the concern and wisdom that what they
are doing may actually have an extremely negative effect on
Indonesia's already damaged image and economic recovery. As a law
obiding Indonesian citizen, this is unacceptable.