Police, judiciary, mere weapons of harassment

Police, judiciary, mere weapons of harassment

Todd Callahan and Reinhard Hoenighaus, Contributors, Jakarta

The recent bankruptcy ruling against financially sound PT
Asuransi Jiwa Manulife Indonesia (Manulife) by the Central
Jakarta Commercial Court has left Indonesia's already severely
tested business community shaking their heads in disbelief.

Expressing concern that negative investment flows would
accelerate as a result of the decision, one long-time Indonesia
watcher characterized the case as another black eye for the
country.

Yet it is only the latest, if most striking example in a
series of alarmingly flawed judicial decisions that are
prejudicial to the interests of foreign investors and ultimately
damaging to the government's efforts to revive the economy.

In the Manulife case, the controversial June 13 ruling is the
latest shot fired in a battle that stretches back to late 2000.

The legal shenanigans started when the Canadian insurer bought
a 40 percent stake in its Indonesian unit from its now defunct
local partner, Dharmala Sakti Sejahtera, through a government
auction.

Incredibly, the sale was almost immediately contested by Roman
Gold Assets, a shell company widely believed to be acting on
behalf of Dharmala's Gondokusumo family.

Since then, many observers assert that the police and
judiciary have simply been employed as weapons of harassment.

Declaring Manulife bankrupt for failing to pay its old partner
a dividend in 1999 when none had been authorized by shareholders
is simply out of line.

The result: Manulife Indonesia, its employees and their
dependents, and nearly 400,000 ordinary Indonesian policyholders
and their families have been put at risk.

While there is optimism the Supreme Court will reverse the
decision, the damage to Indonesia's credibility is already done.

In another example of how the courts are misused in Indonesia,
a US$650 million lawsuit is currently being waged against British
Petroleum (BP) in the South Jakarta District Court.

The plaintiff, PT Mestaco Swarnadwipa, decided to file the
lawsuit after BP terminated its business relationship with the
company.

BP maintains that it severed relations with Mestaco because
the firm supplied a fire retardant, Halon 1301, that was non-
compliant with purchase order specifications and potentially
dangerous.

According to Mestaco, its business reputation was damaged and
it lost substantial amounts of business with other companies.

In recompense, the company is seeking US$150 million in
material losses and another US$500 million in immaterial damages.

But in the prosecution of its case in the South Jakarta
District Court, Mestaco has failed to produce any convincing
evidence of lost contracts or income. How the case will end is
not clear. However, what is apparent is that investors are not
likely to make any more commitments in Indonesia if they feel
battered by its legal system.

In yet another case, a court in Padang, West Sumatra this
month rejected the request of state-owned PT Semen Gresik to
force the management of its fully-owned subsidiary, PT Semen
Padang, to hold an extraordinary shareholders meeting.

Since a management reshuffle comprises the main agenda of the
meeting, the court's ruling was curiously in line with the
interests of Semen Padang's current management, who are
vehemently opposed to any changes in directors and commissioners.

According to one source, the Padang court rejected calls for a
shareholders meeting on the grounds that explanations were not
provided for why the management reshuffle was necessary.

Is not a shareholders meeting the appropriate venue for these
discussions to take place?

The fact is that Semen Padang and members of the West Sumatran
political elite have vigorously opposed the holding of an
extraordinary shareholders meeting.

This sort of behavior is dangerous because it sets a precedent
for managers at other state-owned companies to hijack the legal
process to defend special interests and deny genuine shareholders
their right to guide corporate decision making.

If this practice spreads, it would create an intolerable
situation for business in Indonesia.

So far the public debate has tended to charge easily-blamed,
mostly foreign scapegoats with causing the country's economic
problems, as demonstrated by the controversies surrounding the
role of foreign companies in the national economy and the ongoing
debate about extending the government's relationship with the
International Monetary Fund (IMF).

What has been lacking, however, is serious investigation into
how much investment and productive economic activity is lost to
Indonesia because of its corrupt and dysfunctional judiciary.

The record on legal reform is long on need and short on
results. The problem is how to move the process forward.

No one realistically expects Indonesia to reform its legal and
judicial sector overnight. That job will likely take generations.

However, the government can and should do more to create some
degree of respect for its legal institutions.

Forget about re-writing the bankruptcy law and other
legislation; cases like Manulife would have occurred anyway.

To lay a foundation for meaningful judicial reform, the
authorities need to start scrutinizing questionable rulings and
punishing errant judges. There must be consequences for bad
behavior. Until this happens, courtroom opportunism and
embarrassing cases like Manulife, BP and Semen Gresik will
continue to hamper investment and economic recovery in Indonesia.

Callahan is a technical advisor at PT Jasa Cita, a research
and business information form associated with CastleAsia.

Reinhard Hoenighaus is completing graduate studies in
international affairs and previously worked for Indonesia's
Kompas daily newspaper.