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Indonesia has made great strides in its journey toward democracy and the rule of law. If we were to use a scorecard for transitions from authoritarianism to popularism and from oppression to openness in the last half of the 20th century, Indonesia deserves the highest marks for a reasonably peaceful transition.

I have read and heard remarks like the one above regularly since the election last June. I agree with them completely, but I have to raise the question: What have they done recently?

I do not mean to be facetious; there are excellent and heartening statements of reformist policy coming from the top of the new administration. However, the implementation of that policy by the bureaucracy and mid-levels of the administration have hardly kept up with the new governmental paradigm.

In fact, it is now becoming apparent that the new age of foreign investor freedom that seemed to be promised in the late 1990s is further away than many expected. While the top level of government acknowledges the economic realities of debt restructuring, bank recapitalization, and IBRA asset sell-off, the regulatory bodies of the government seem to be throwing up barriers to the progress of these important endeavors.

Just days before I wrote this column, President Wahid withdrew the PLN-Paiton Energy lawsuit from the jurisdiction of the Indonesian court system. Criticism of that move was immediate and widespread. Much of the criticism focused on the fact that PLN had won several important motions in the trial, and it looked like it was 'going to win!' 'Why quit now?' several MPR members asked.

That series of 'wins' for PLN ignited nationalist feelings among even the broad-minded and politically astute, and also among others who perhaps did not realize the effect those decisions had on the validity of contracts in general and arbitration clauses specifically.

It is always difficult to discuss the judicial system of a foreign country without sounding ethnocentric or critical. However, international observers have pointed out that the Indonesian court system is not compliant with western or international standards at this time.

The Indonesian court system has been said to be patrimonial in nature. Whether or not that is true, it seems to be the perceived condition by international investors. Patrimonial judicial authority is where the judicial office and its attendant powers are appropriated by the office-holder. In such a situation, judicial authority is exercised on the basis of specific and personal relationships between the individuals involved, not necessarily on the basis of law or fact.

This is one of the reasons that the Indonesian court system has been avoided over the years by most foreign investors. Indonesia is hardly alone in the world facing this accusation. International companies have known about, accepted, and adjusted to this perception in order to operate in Indonesia and other like countries

One of the accepted methods used to avoid the Indonesian court system is to include a Choice of Law clause or International Arbitration clause in the contracts between the various parties. In theory, this gives the international investor a certainty that international norms of contract law will be followed.

The violation of this aspect of contract law is what made the PLN-Paiton Energy legal dispute so frightening to the international investor community. One of the many Jakarta district courts, without apparent authority, assumed jurisdiction of the case through a contract provision never intended for that purpose, and more importantly, effectively prohibited Paiton Energy from seeking its contractually guaranteed right to international arbitration in case of dispute.

These decisions, lauded by many Indonesian elected officials, shook the international investor community in Indonesia to its knees. The respect for guaranteed arbitration rights along with the general sanctity of contracts are keystones to the international business presence in Indonesia. Remove the keystones and the structure collapses.

The PLN-Paiton Energy case is hardly the only one that has raised issues in international business. Cal-Energy, Wal-Mart, and certainly the Bank Bali-Standard Chartered Bank dispute have all eroded the small, emerging confidence of international investment in Indonesia.

However, even the bureaucracy has made some attempt to change. The implementation of the special domestic bankruptcy court is just one example. Nevertheless, the failure of the majority of lenders to obtain satisfactory judgments in that court, has lead to the perception that it is ineffective in resolving sophisticated disputes. We seldom hear much about that court any more. Independence and further training of the justices may improve the situation.

Unfortunately, a major reform of the courts of first instance is still a long way away. The best method of maintaining a productive business in Indonesia remains the tried and true method of relationship building and maintenance. Alternatives fail to suffice.

In my opinion, most of the problems in the execution of contracts here deal with Indonesian nationalism.

Rampant nationalism had long been controlled under the old New Order government. Former President Suharto made incredibly great strides in international acceptance over the old order of President Sukarno. The international presence that Indonesia developed over the last 30 years was above any domestic calls for nationalism. This is one area where Indonesia has changed greatly since the fall of the New Order. Indonesia, as the fourth largest nation and third largest democracy, now cares about and may claim a preeminent place in South-East Asian and global politics-perhaps without the infrastructure and experience required to justify those claims.

The Indonesian government's disputes with the IPPs, with Standard Chartered Bank, and with the numerous companies still operating here, involve the growing reluctance for Indonesia to be seen in a subordinate position to a foreign firm. In this case, I use the word “foreign” in all of its ethnocentric meanings: alien, bazaar, outlandish, exotic, strange, unfamiliar, and un-respected.

Many Indonesians have a problem understanding why contracts with such 'foreign' companies should be enforceable at all in light of changing circumstances. Obviously, the thought goes, the foreign company is in a better position to absorb the risk of loss than the Indonesian company. 'They're rich, after all, and we are not.' This ties into two of the pillars of Indonesian society-Social Justice and Humanitarianism. In Indonesia, in case of unforeseen circumstance, like a traffic accident, there is no fault assumed. The party best able to compensate the other is liable. This applies in many Indonesian businessmen's minds to contracts. The foreign company must be in a better position to deal with the changing circumstances, and even if they are not: 'What, realistically, can the foreign company do about it?'

This sentiment on the part of a small but significant minority of Indonesian businessmen has caused the feeling on the part of many new foreign investors that if you have a dispute with an Indonesian party, the legal agreements you have made are not enforceable and, if you decide to sue in an Indonesian court, you probably will not succeed in getting a judgment in your favor.

There is also a possible national inferiority complex emerging that causes great resentment to perceived international interference in national affairs. Note the conciliatory statements made that international pressure had nothing to do with the Indonesian government's decision to suspend legal action in the PLN-Paiton Energy case. A position clearly contrary to the facts.

International business now operating or wishing to operate in Indonesia, will be faced with an amazing number of opportunities. But with those opportunities comes the hard realities of operating in Indonesia. It takes understanding and perseverance to do business in Indonesia. But for those companies that take the time to understand the situation, to position the right personnel here, the profit potential is enormous.


This article was generously contributed by George B. Whitfield, III when he was a Technical Advisor with Executive Orientation Services.
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