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.