Shoeb Kagda, Jakarta – Whichever way one looks at the issue, Indonesia's new leadership is in no-man's land when trying to deal with the massive energy and gas contracts endorsed by the former Suharto government.
Most of the contracts are riddled with corruption and collusion and the state almost always comes out the loser. If the government and the newly elected Parliament decide to nullify these contracts, it will send a shock wave through the international investor community which would almost definitely ricochet to hinder the country's efforts to pull itself out of its economic slump.
But if, on the other hand, the government honours these contracts, it will continue to bleed as most of these have been structured to ensure that the "privileged" partners in the joint venture projects enjoy unnatural profits. More importantly, the government would also face the rising groundswell of a nationalistic backlash as it would be accused of pandering to foreigners who want to lay their hands on the country's most prized assets.
The only step forward, therefore, is to renegotiate these contracts to ensure that they are more fairly structured and the Indonesian government and its citizens receive what is rightfully due them. But as the case between independent power producer Paiton Energy and national power company PT PLN has illustrated, even this path is fraught with minefields.
The fact that President Abdurrahman Wahid has had to personally step in to try and resolve the problem indicates just what is at stake and just how powerful these investors are. Paiton Energy is owned by American giants General Electric and Edison Mission, Mitsui of Japan and local Indonesian firm PT Batu Hitam Perkasa, which is controlled by businessman Hashim Djojohadikusumo, who had close ties with the former first family.
After months of legal wrangling between PLN and Paiton to change the terms of the purchase agreements, particularly the price of electricity sold to the state power company, PLN sued Paiton in a Jakarta court for engaging in corrupt practices. As international pressure began to build, Mr Abdurrahman instructed PLN to drop the suit and return to the negotiating table.
At its crudest level, the international pressure being applied is pure bullying, as the Paiton Energy owners engage all the diplomatic and political muscle they can muster to pressure the Indonesian government into continuing to honour the contract and settle the dispute out of court. Paiton Energy has even been rumoured to have called in two former US secretaries of state – Henry Kissinger and Warren Christopher – to intervene on their behalf.
No doubt Paiton will argue that it is within its rights to protect its investment – which amounts to about US$2.4 billion – and the interest of its shareholders. The power purchase agreement, it will add, is a commercial document that is legally binding and can only be revoked by a special court in Washington DC under the Indonesian foreign investment law. The issue, however, is not just about adhering to a legal contract, but about doing business with a corrupt government with full knowledge of the kind of contract entered into.
The international community has supported the current government's stand on rooting out corruption and collusion in business and government, but when those same standards are applied to foreign investors, cries of breach of contract ring out. The truth is that if such contracts were signed in the home countries of these foreign investors, be it the United States, Japan or Europe, those at the top might well end up behind bars for engaging in criminal activity.
Double standards are, thus, being applied by those who shout the loudest about getting rid of corruption in Indonesia. After having enjoyed unnatural profits for so long, they are reluctant to give up such windfalls and are resorting to threats and other means to preserve their golden goose. Only after the threat of legal action have Paiton and the other independent power producers agreed to renegotiate the terms of their contracts.
It cannot be denied that Indonesia is heavily dependent on foreign investors to revive its moribund economy and thus needs to treat them fairly and honourably. The government must also abide by commercial contracts signed by the previous regime.
In its efforts to clean up corruption, the same standards must be applied to both local and foreign businessmen. A clear, transparent playing field must be created for all business contracts involving the government and state-owned enterprises and must apply to even the most economically powerful players.