POST-CRISIS DILEMMAS FOR FOREIGN INVESTORS AND REGULATORS

A. Regulating Foreign Investment
In response to steadily declining foreign investment since 1998 (see table), the Indonesian government, through its Capital Investment Coordinating Board (known as BKPM from its Indonesian name, Badan Koordinasi Penanaman Modal) attempted to attract foreign capital to the country in 2003, promoting it as the “ Year of Investment” . Although foreign investment continued to decline in 2003 and 2004, though not as sharply as in the previous year, BKPM was reconfirmed as the sole agency governing domestic and foreign investment activities, stipulated by Presidential Decision No. 29/2004. This represents a withdrawal of the authority on a total of at least 14 licenses governing investment previously granted by the Minister of Internal Affairs, under Decree No. 130-26/2002, to regional authorities as an implementation of the Autonomy Law No. 22/1999.

B. Indonesia at a Junction
Indonesia faces a crucial turning point in 2005. Significant political changes are expected after the Presidential election at the end of 2004. Simultaneously, a significant liberalization of the customs, trade, oil and gas sectors is expected. 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 will perceive it as a guarantee of greater political stability and a return of economic growth, or at the least, the creation of an environment that would to economic improvements over the next five years. This would help rebuild investors’ trust that has been lost.

C. Impact of Global Liberalization
Indonesia must, upon 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). Indonesia is a member of the Association of South East Asian Nations (ASEAN) and must comply with the phases of liberalization when they are likely agreed upon by the end of this year. Included in such phases are facilities for investment flows, mechanisms for dispute settlement and system for the registration of intellectual property rights (IPR). However, economic liberalization is likely to remain stalemated, due to the absence of a common position. Indeed, Indonesia is not able to compete even with other countries in the Southeast Asian region and such is its economic condition that its tariff protection regime will remain in place for as long as possible. Under present conditions, it is very likely that Indonesia will once again become a nation adversely affected by the unavoidable global trade liberalization.

D. Investment after the Crisis
In a report issued by BKPM, the most attractive business sectors to foreign investors were trading and services, followed by machinery, and electronics and hospitality businesses such as hotels and restaurants. As for domestic investors, the most attractive sectors are the chemical, pharmaceutical and electronic industries followed by food and textile processing. Under Indonesia’s IPR Laws, the country provides legal protection to both trademarks and service marks. In order to enhance the protection system for IPR, Indonesia ratified WTO



agreements including its three major annexes (GATTS, GATS and Trips on IPR) in 1995 and all World Intellectual Property Organization (WIPO) criteria, including PCT and the regulations under the PCT, the Trademark Law Treaty and the WIPO Copyright Treaty (1996-2002).

E. The Indonesian Future
Indonesia is hoping to leave the crisis of the past behind and gear towards a new agenda for, among other initiatives, numerous mega projects in the state budget. Among these are 10 tenders for new blocks of oil and gas exploration, which are expected to help relieve the pressure of unemployment problem and increase economic growth up to 5% from the current 4%. This compares to Vietnam’s expectation of 7.5% growth in 2004 and 8% in 2005 and The Philippine’s 5% in 2004 and 6 % in 2005. Indonesia has long emerged as a potential exporter of oil and gas along with other natural resources such as coal, nickel, steel and other mineral resources. As oil is now the focus of world attention, Indonesia should be attractive given that it is very much in the front rank of producers.

Indonesia has been pushed by developed countries and the World Bank to relax all kinds of restrictions, including various limitations in the oil and gas sectors, which represent country’s core business. Among these are lifting monopolies, subsidies and other protections in these business sectors by 2005. The United States in particular has identified Indonesia as a source of cheaper energy, particularly liquefied natural gas (LNG), in order to maintain its own stable economy.

Evidently, foreign investors in this sector are not discouraged by the economic and security crisis in Indonesia, queuing to enter the business sector once liberalization takes effect in 2005. This represents a giant leap for the Indonesian oil sector, in which the state oil company Pertamina will cease to be a monopoly


after 35 years. Compounding the development, Pertamina is facing serious international legal action as result of a dispute with a US-based company. Already, an award was made against Pertamina for monetary compesation and a penalty made by a Swiss arbitration court and a seizure on its assets in the US by a local court. Meanwhile, a Hong Kong court decided to freeze Pertamina’s assets in the territory. As a result, the company is suffering cash flow problems.

These immediate problems for Pertamina are likely to escalate in the future through globalization and liberalization of the oil and gas sector, reducing the company’s core competence of cash flow under the power of monopoly. Indonesia has issued Natural Oil and Gas Law No. 22/2001, which makes significant changes in the operation, ratio of production sharing and the taxation in this sector.

Indonesian potential still depends on many factors, among which are its law and regulations. Due in large part to the wave of global liberalization, rapid legislative changes have been enacted, including wider spectrums for application than under the former centralized government. This has posed a complex legal questions relating to both national and international law. With the issuance of the Autonomy Law No. 22/1999, regional government officials are authorized to determine the affairs of their own region, with the exception of defense, foreign affairs and monetary and fiscal issues. Other branches of law have inevitably become entangled with one another. The includes contractual issues, legal relations between industry and transition economies, dispute resolution and local enforcement of awards, taxation and environmental issues.

Not only in Indonesia but also in virtually all other countries, the regulatory frameworks have dramatically changed or been adjusted by new treaties, conventions and protocols. Given the above, Indonesia has weak bargaining power in negotiations, making it even more convenient for investors to come in


and take advantage of the country. Although the Indonesian government should take cautious steps and outline a reasonable plan, both for long and short term, it so far has done little. Having said that, Indonesia is now on the brink of issuing a new investment law. It remains to be seen how this new law will regulate foreign investment, or how it can combat various protections. Under the new Investment Law foreign investors will no longer be required to divest up to 49% of their stake.

F. IPR Licensing in Foreign Investment
Talking about Foreign Investment in the globalised economy, one could not avoid raising the issue on how IPR is treated, protected and valued. This is particularly so by and between investors where one enjoys the other’s intellectual property right that has been gained through or after long-term invention. Indonesian laws do not currently recognize such a right. At present the legal protection of each IPR is still scattered among various related laws, especially those protecting the respective types of IPR. This is in the form of licensing arrangements where each law imposes the obligation to register the license agreement of each particular type of IPR with the Indonesian IPR office. Unfortunately, no registration body has yet been formed. The Indonesian government is still in the process of preparing a bill that is intended to make uniform the registration requirements of all kind of IPR. It is expected that once such a bill is ratified, the same registration body and the same or similar requirements would apply to all kinds of IPR.

Until then, investor IPR holders must 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 foreign investment, after entering a license agreement the licensing investor and the licenses investor file it with BKPM along with or as an


integral part of their joint venture agreement. This way the IPR owner can expect BKPM to serve as mediator if any dispute arises. Under such circumstances, the board would use its leverage to impose and enforce any sanction that would cause the joint venture company to adhere to it.

G. Licensing-Contract Freedom and Government Interference

In developing countries such as Indonesia, the government faces a never-ending dilemma, especially in anticipation of globalization, where on the one hand the country is bound to apply the principle of equal treatment but on the other, the people expect 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 criterion of legal fairness (justum pretium), which is interpreted to mean that in spite of freedom of contract, every contract must observe the criterion 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 an 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 after World War II, particularly in Latin American countries, the registration requirement is instrumental to the local government in terms and condition for the purpose of national protection. As this is the case, we are yet to see the legal impact of globalization on such premises.