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.