INDONESIA: IN TRANSFORMATION After Presidential Election

(photo courtesy of hulsen.net)

A. New Slogans for Foreign Investment
The Indonesian government through the Investment Coordinating Board, locally known with the acronym “BKPM”, attempted to encourage foreign capital to invest in the country by the promotion of the year 2003 as the start of the “Investment Year” after experiencing a steady decline since 1998 (see table below) followed, thereafter, by the re-confirmation of the One-Stop Service under the coordination of BKPM by Presidential Decision No. 29/2004. This is a withdrawal of the authority on a total of at least 14 (fourteen) licenses which were once given by the Minister of Internal affairs Decree No. 130-26/2002 to the regional authorities as an implementation of the Autonomy Law No. 22/1999.

B. The Country’s Past Turmoil
Apart from the May-riot which had disrupted the country in 1998 and caused the tumble of the then reigning regime, there have been periodic episodes of several bombings which brought forward uncertainty in security. Thus, there were many factors that undermined the confidence of investors in investing in Indonesia and made the economy collapse into national crisis due to the simultaneous closures of 16 banks at the IMF’s ill-advice, the unavailability of credit even to exporters, labor lay-off, dependency on private consumption which accounts for 70% of the country’s economy etc., during these past 6 (six) years.

When under the IMF’s program, Indonesia was pressed hard to sell or divest her profitable state enterprises in order to help the country to compete with foreign players, once the oil and gas sectors are liberalized and fully open to free competition. Now that the surviving banks have somewhat recovered, budget deficit has fallen, monetary has stabilized, the country exited from IMF loan program in December 2003.

C. Indonesia at a Junction
2005 marks a crucial turning point for Indonesia which is expected to start significant political changes for Indonesia due to the forthcoming Presidential election and appointment later this year and also, simultaneously the start of significant liberalization in custom, trade, oil and gas sectors. Indonesia has no choice but to boost the confidence of potential investors. A new President will be sworn in by October 2004 and the Indonesian business community perceived it as a guarantee of a greater political stability and the return of economic growth or at the least, to strike an improvement in at least the next 5 (five) years. It is expected that all these would help rebuild the investors’ trust that had been lost following the tumble of the previous regimes.

D. The Global Liberalization’s impact
Indeed various laws and regulations have been enacted with a view to bringing security, justice, accountability, as well as business encouragement as part of the commitment of the present government in pursuing a transformation. In spite of all those, the implementation would yet depend on the political will of the forthcoming government. Logically speaking, however, having experienced prolonged economy crisis, whichever government is in office, there is no other option for them but to improve the country in all respects, especially in this era of globalization that has created global free trade zones (“FTZ”) under an ambitious liberalization by the World Trade Organization where Indonesia must, upon her ratification of Law No. 7/1994, compete with the whole world and reform or harmonize her investment in accordance with the arrangements under the Trade Related Investment Measures (TRIMs). Currently, Indonesia as a country is not able to compete even with other countries of Southeast Asian region. Even though there is a likelihood of an impasse in the liberalization due to the absence of such common position, yet Indonesia as a member of ASEAN must be prepared to step into the phases when those have been mutually agreed upon in an overall agreement which is scheduled for completion by this year. Other phases would include facilities of investment flows, mechanism for dispute settlement and the system in the registration of Intellectual Property Right (“IPR”). In regard the latter, normally the system of licensing is involved in foreign investment. Under the present local condition, it is very likely that Indonesia will, once again, become a nation which will be adversely affected by the unavoidable global trade liberalization. As a matter of fact, as a developing country, Indonesia being in the condition that still needs to impose tariff as a protection for as long as it can endure, now is obliged to make drastic tariff cuts.

E. The Investment after Crisis
In the report lastly issued by the Investment Board, the most attractive business sectors to foreign investors was trading and services, followed thereafter, with machinery and electronic industries and hospitality businesses such as hotels and restaurants. As for domestic investors, the most attractive sectors are chemical, pharmaceutical and electronic industries followed by food and textile processing. Under Indonesia’s IPR Law, Indonesia provides legal protection to both trademark as well as service mark. In order to enhance the protection system in IPR, Indonesia has ratified World Trade Organization (“WTO”) including its 3 (three) major Ehibits (GATTS, GATS and TRIPs on IPR) in 1995 and all WIPO’s criteria including PCT and the regulations under the PCT, Trademark Law Treaty and WIPO Copyright Treaty (1996-2002).

F. The Indonesian Future
Having moved away from all kind of crisis, Indonesia is now gearing towards a new agenda for, inter-alia, numerous mega projects in her state budget including 10 (ten) tenders of new blocks of oil and gas which are expected to help cope the pressure of unemployment problem and to increase economic growth up to 5% from the current 4%. (Compared to Vietnam’s expectation of 7.5% growth in 2004, 8% in 2005 and The Philippine’s 5% in 2004 and 6 % in 2005 for the next 10 years) Indonesia has since long emerged as a potentially oil and gas exporting country along with other natural resources such as coal, nickel, steel and other mining reserves. As oil is now the focus of world attention, Indonesia should be attractive as it is very much in the front rank.

As mentioned above, 10 (ten) new blocks have been on tender. Nonetheless, being in a weak economic condition, Indonesia has been pushed by developed countries and even the World Bank to open up all kind of restrictions including various restrictions in the oil and gas sectors which represent the core business of the country. Among all those are monopoly, subsidy and other protections in these business sectors by the year of 2005. Especially the needs of the United States to expand in the global trade and the needs to have cheaper prices in energy, gas or LNG, in order to maintain sustainable economy have forced them to have more access to global supply through major expansion in that Indonesia as a target area is also underway.

Evidently, foreign investors in this sector are not discouraged by the economic or security crisis in Indonesia as they have been queuing to enter into this business sector once the liberalization is to take effect in the year of 2005 which would become a giant leap to Indonesian oil sectors that shall cease the monopoly being enjoyed by her state enterprise “Pertamina” for more than 35 years. As result of its fight against a US based company, Pertamina is currently facing serious international legal actions that have resulted a monetary compensation and penalty by a Swiss arbitration award upon Pertamina and a seizure on its assets in the USA by a US court and a Hong Kong court’s decision to freeze Pertamina’s assets in Hong Kong. As result, Pertamina would have cash-flow problems. This immediate problems would be escalated by future problems of Pertamina in response to the globalization and liberalization of oil and gas which reduce the core competence which Pertamina used to be a cash-cow for having the privilege of monopoly in the past.

Indonesia has issued Natural Oil and Gas Law No. 22/2001 which makes significant changes in the operation, the ratio of production sharing and the taxation in this sector.

Nevertheless, Indonesian potentials yet depend on many factors; among others is the law and regulation. Due in large part to the wave of global liberalization, rapid changes in the legal treatment and new legislations have been enacted including the wide spectrums in the application of decentralization in Indonesia by the former centralized government have posed a complex legal understanding that reach the legal foreground of both the national and international law even wider. With the issuance of the Autonomy Law No. 22/1999 regional government officers are authorized to determine their own autonomy region on the affairs of their own region, with the exception of defense, foreign affairs, monetary and fiscal.

Other branches of law have inevitably become bound by and related to and, therefore, entangled one to the others which lead to various dimensions including contractual issues, legal relations between the industry and the transition economies, dispute solutions, local enforcement of any awards, taxation and environmental issues in the context of globalization and global dispute settlement. Not only Indonesian but in virtually all other countries in the world, the regulatory frameworks have dramatically changed or been adjusted with the new treaties, conventions and protocols now in place.

Given the above, Indonesia being now in the weak bargaining power in negotiations, makes it even more convenient for investors to come in and take advantage of it.
Although the Indonesian government should take cautious steps and make a reasonable plan, both for long term and short-term, but to date the Indonesian government has not taken a strong approach to protect the country’s interest. Having said that, Indonesia is now at the brink of issuing a new investment law. We are yet to see how this new law shall regulate foreign investment and shall combat all kind of protections. One thing is for sure that unlike as in the past where foreign investor were required to divest up to 49%, under the new Investment Law, foreign investors are no longer required to divest.

G. IPR Licensing in Foreign Investment
Talking about Foreign Investment in this new world of globalised economy, one could not avoid raising the issue on how IPR is treated, protected and valued by and between the investors where one would enjoy the other’s intellectual property right that has been gained through or after long-term invention. Indonesian laws do recognize such right. However, at present the legal protection of each IPR is still scattered in each related law specially protecting the respective type of IPR in the form of licensing arrangement where each law imposes the obligation to register the license agreement of each particular type of IPR with the Indonesian IPR office. Unfortunately, until now, no registering body has been formed. The Indonesian government is still in the process of preparing a bill that is intended to uniform the registration requirements of all kind of IPRs. It is expected that once such bill is ratified, the same registering body and the same or similar requirements would apply to all kind of IPR. Until then, the investor IPR holders shall rely on the contractual licensing agreements made internally between them and file the same with the IPR as a mere notification with an expectation that once a registering body is in place, the filings will be recognized and taken over accordingly. As for licensing contracts in the framework of fereign investment, the licensing investor and the licensee investor after entering a license agreement, would file it with the Capital Investment Board along with or as an integral part of their Joint Venture Agreement. This way, the IPR owner could expect the Investment Board to serve as a mediator should any dispute including the IPR dispute arise. Under such circumstances, the Investment Board shall use its leverage to impose and enforce any sanction that would cause the joint venture company to adhere with it.

H. Freedom of Contract in Licensing Contract and the Government’s Interference in Foreign Investment

In developing countries such as Indonesia, the government face never-ending dilemma especially in anticipation of the globalization effect where on the one hand the country is bound to apply the principle of equal treatment but on the other hand, the people would require local protection. There have been discussions among legal scholars regarding the need to apply the principle of equality (aequitas praestationis) within the corridor of the criteria of legal fairness (justum pretium) which is interpreted to mean that in spite of freedom of contract, every contract must observe the criteria of fairness. In regard to IPR licensing, the legal requirement is expected to tie up the IPR right with the obligation of implementing the transfer of technology attached to such IPR right. Under the auspice of one national treatment adopted in the globalization concept, it remains unclear whether the local government would limit both the freedom of contract under the conduct of the Indonesian Civil Code and the equal treatment adopted in the spirit of globalization, with the criteria of legal fairness which was introduced and took place after the World War II particularly in Latin American countries, by making the registration requirement instrumental to the local government terms and condition for purpose of national protection. If so, we are yet to see if under the globalization outset, it is legally possible.