Bill Guerin, Jakarta – As Indonesian President Susilo Bambang Yudhyono and several of his ministers were wooing investors in Singapore last week, the Indonesian affiliate of French oil giant Total SA, the world's second-biggest gas producer, was making a third appearance in court to stave off a demand by two Indonesian contractors for seizure of its assets.
Foreign investors have major concerns about the lack of legal certainty, the difficulties of negotiating and enforcing contracts, arbitration and judgments, and unequal treatment of domestic and foreign companies. Total's Indonesian operations through Total E&P Indonesie cover seven oil and gas fields and more than 500 production wells in remote areas of East Kalimantan, including Handil, Bekapai, Peciko, Tambora and Tunu, that supply PT Badak NGL – one of the world's biggest LNG (liquefied natural gas) plants.
The dispute is over a US$19 million contract signed in 2001 between Total and a contractor, PT Sarana Kaltim Jaya, for work on the construction of platforms and a gas processing plant at the Tunu field. During the construction phase, technical difficulties in the field necessitated changes to the original budget of $19 million and both Total and Sanggar agreed on several revisions to the contract price.
Total had paid the contractors a total of $25 million by 2003 but the contractor continued to press for more, claiming that further price adjustments were necessary. Total refused to pay any more. Both sides then agreed to call in the Oil and Gas Upstream Regulatory Agency (BP Migas) to mediate. Total agreed to a proposed audit of the project by the Development Finance Comptroller (BPKP), though it made clear it had no contractual connection with the second contractor, PT Istana Karang Laut, as that company had been subcontracted by Sanggar, not Total.
The audit concluded that Total should pay some $7.131 million to the contractors, and last month the two filed a bankruptcy petition against Total, claiming it had refused to pay up. Indonesia's Bankruptcy Law, amended in 1998 after pressure from the International Monetary Fund (IMF), established a separate commercial court system. The IMF insisted on protection of creditor rights as a condition for its $4.8 billion bailout package at the time of the Asian crisis.
Last September, parliament passed a new law in a bid to close loopholes that have been used against foreign investors. Bankruptcy cases against the profitable local operations of British insurer Prudential and Canadian rival Manulife in 2002 resulted in both firms being temporarily shut down after financial disputes that gave rise to bankruptcy proceedings despite both companies' solid financial performance.
In 2002, the commercial court declared bankrupt a local subsidiary of Canadian insurance firm Manulife Financial even though the Indonesian Ministry of Finance declared the subsidiary solvent. The Supreme Court later overturned the ruling. In a similar case two years later, a commercial court in Jakarta declared Prudential's local unit bankrupt after a former consultant to the company accused the insurer of not paying his dues. A court-appointed receiver ordered the London-based insurer to suspend its local operations.
The new law specifies that only the finance minister can file a bankruptcy petition against insurance companies in commercial courts. The attorney general and the central bank are the only bodies permitted to file petitions against banks. Though the amendments to the Bankruptcy Act now prevent creditors from filing bankruptcy suits against solvent banks and insurance companies, any creditor can file a bankruptcy petition in commercial courts over a dispute with other commercial enterprises.
The plaintiffs are asking the court to confiscate the project and two Total office buildings in Jakarta and Balikpapan, East Kalimantan. They have demanded that the court issue an asset-preservation order on assets that belong to the state and are under BP Migas' supervision, including Total's onshore gas process in Senipah, its offshore facility in Tambora, payments from LNG buyers from Japan, South Korea and Taiwan, and the condensate payment from Senipah.
More than three centuries of Dutch colonial rule have left a legacy of the Roman-Dutch version of civil law, where, unlike the reliance on legal precedent and tradition of "common law" prevalent in England, Australia, New Zealand, Hong Kong, Singapore and India as well as the United States, Indonesian judges depend on statutes.
An earlier Asian Development Bank report noted that the judges are free to apply the law as they see fit, which accounts for the lack of consistency in decision. Judges need commercial training and better pay and higher social stature, the report suggests. Corruption is also a major factor.
Todung Mulya Lubis, one of Jakarta's most famous corporate lawyers and who represents Total, also happens to be the chairman of Transparency International Indonesia (TII), the local arm of the Germany-based anti-corruption watchdog. A TII report released last Wednesday ranked Jakarta as the most corrupt Indonesian city, while the courts and judiciary were ranked the most corrupt public institutions.
TII announced the results of its inaugural Indonesian Corruption Perceptions Index (IPKI), which surveyed 1,305 directors, managers and owners of businesses (1,117 with local firms and 118 with multinational firms) in 21 cities. Lubis said in a press statement that the survey, conducted to find out whether there is a correlation between domestic and foreign perceptions of corruption in Indonesia, shows that "corruption in this country continues to be seen as endemic, systemic and widespread".
Chris B Newton, president of the Indonesian Petroleum Association (IPA), was quoted as saying the bankruptcy case against Total was not helping the investment climate at all, and he feared that it would scare away badly needed foreign investment. Legal and judicial-sector reforms remain critical to any sustained improvement in the investment climate, but whether the Total case will hurt sentiment is doubtful, given investors' already-poor perceptions about Southeast Asia's largest economy.
While the case certainly highlights the unpredictability of Indonesia's legal system, elsewhere it would be seen as little more than a commercial dispute. Lawyer O C Kaligis, who represents the plaintiffs, argues that the case should not be seen as a threat to foreign investors as all companies operating in Indonesia must abide by the law. "This is a simple case – they owe some money that they have to pay. It is impossible for Total to stay here for so many years without benefiting from their projects," Kaligis said.
Lubis could even face charges of influencing court proceedings. Kaligis, representing the contractors, reported him to the police for holding a press conference during an earlier hearing of the bankruptcy petition and issuing a press statement while the court proceedings were still under way. During the press conference, Lubis said that should the commercial court accept the petition, it would scare off foreign investors. "Such a statement will influence the judges' opinion, while all we are asking is for the oil company to pay the money it owes our clients," Kaligis complained. "Why should he say stuff like 'the case will scare off investors'? This is a simple case between creditors and a debtor, not about influencing the investment climate."
On the same day the TII report was published in Jakarta, President Yudhyono pledged in Singapore to clear away red tape, corruption and other obstacles that have long deterred foreign investment. Tax, labor and investment laws will be amended to make the business climate more attractive, he said. "We believe that increasing transparency and reducing red tape [are] the necessary first step to address corruption."
The two countries inked a new investment guarantee agreement that gives most-favored-nation treatment to investments between the two countries. Any investment disputes that cannot be resolved will be referred to the International Center for Settlement of Investment Disputes.
Singapore at least has confidence that the Indonesian president will make progress on problems he has acknowledged himself could not be solved "overnight". Prime Minister Lee Hsien Loong said investment agreement would be "a very useful signal to investors that Indonesia welcomes investments and is moving to enhance the conditions for investments in Indonesia, and it will be noted by people from many countries".
[Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has worked in Indonesia for 19 years as a journalist. He has been published by the BBC on East Timor and specializes in business/economic and political analysis in Indonesia.]