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12, 2000 VOL. 26 NO. 18 | SEARCH ASIAWEEK
Indonesia Courts Trouble
legal mire stalls investment and recovery
By JOSE MANUEL TESORO Jakarta
In the lawsuit brought by the Minahasa district against gold mining concern
Newmont Minahasa Raya, the requested damages were big and so were the
stakes. The district of Indonesia's North Sulawesi province had demanded
$8.2 million from the company - about 25% of the 1999 profit of its parent,
U.S.-based Newmont Mining Co., the world's second-largest gold producer.
The alleged offense: failure to pay $2.8 million in taxes on topsoil and
rock that Newmont had removed to mine ore in Minahasa.
When a district court ordered the mine shut on April 8 after refusing
to hear witnesses for Newmont, it seemed the mining company might join
the ranks of those devoured by Indonesia's turbulent post-Suharto transition.
Jakarta's commercial courts were already criticized for shielding defaulting
debtors - and their assets - from foreign creditors' bankruptcy petitions.
Would emboldened local courts and governments now start holding foreign
investors' assets hostage? In 1998, the mining industry alone pumped an
estimated $1.2 billion directly into the economy, at least $708 million
of that in the form of revenues for the government.
But last month Indonesia's Supreme Court asked the local court to review
the closure order. Six days later, the Minahasa regency withdrew its suit
in return for a promise that Newmont would pay $500,000 for materials
the company authorities used to fix community roads. "At the end of the
day, the system did work," says Richard Ness, Newmont's boss in Indonesia.
The miner may just have been lucky. The decision comes at a time when
Indonesia's entire legal system is under intense scrutiny. The retirement
this month of the chief justice has sparked a debate over who should replace
him: someone from within the judiciary, or a rank outsider? Like most
government institutions over the past three decades, the courts have become
a haven for corruption. At least two cases have been filed with the new
anti-corruption National Ombudsman Commission alleging graft and collusion
among Supreme Court justices - including the chief justice. Reformers
argue that without change, shady courts could endanger everything from
foreign investment to economic reform and recovery.
Consider recent decisions concerning Bank Bali. The private bank, taken
over by the Indonesian Bank Restructuring Agency (IBRA) in July 1999,
became the center of a scandal that helped bring down the government of
B.J. Habibie. In exchange for smoothing the recovery of loans worth $113
million, Bank Bali's previous owner, Rudy Ramli, paid a $68.3 million
commission to Joko Chandra and another man linked to the former ruling
party, Golkar. Last December a court dismissed a criminal case launched
by the government against Ramli and other bank directors. A March pre-trial
hearing dropped the indictment of Chandra, while still another court ruled
that his company could keep its share of the bank payout. Finally, that
same month, the Jakarta State Administrative Court decided that IBRA's
takeover was illegal and ordered the bank returned to Ramli.
While no one has openly accused the judges in the various Bank Bali cases
of doing anything wrong, the string of unexpected decisions has done little
to dispel the impression that too many court judgments are one-sided -
perhaps tilted towards the side with the most money.
"Indonesia is in the middle of a massive confusion of the legal system,"
says lawyer Frans Hendra Winarta, a member of President Abdurrahman Wahid's
National Law Commission. The problem lies not only in the degeneration
of the court system but in a mass of sometimes conflicting local regulations,
parliamentary decrees, ministerial decisions and presidential orders.
In Newmont's case, for example, its contract of work with the Indonesian
government - which has force of law - exempts it from tax on waste materials.
But the local parliament passed a law in 1998 allowing itself to assess
levies. Meanwhile, progress in prosecuting those responsible for Bank
Bali is stymied: By law, banking secrecy can be lifted only by an order
from the central bank governor. And Bank Indonesia Governor Syahril Sabirin
is among those implicated in the scandal.
To such tangled problems, there are no easy or quick solutions. Some have
suggested firing most existing judges or even allowing foreign ones. The
risk, acknowledges Winarta, is that justices who know they will be fired
are "going to grab left and right, to have enough money for seven generations."
This month the National Law Commission has finished an action plan to
begin the process of law and court reform - but its fruit may not be visible
for years. Those who support legal reform argue that it is not intended
just to comfort foreign investors and economic reformers, but to preserve
and advance Indonesians' common interest: the right to justice.
While the struggle to change the courts continues, investors face a dilemma:
trust that the system will work, or join the bidding? Says James Castle,
a Jakarta-based investment consultant: "When we get the government's attention,
we get a fast result. But you can't take every case to the president.
The important thing is to set up some kind of resolution mechanism." The
government, too, is in a bind: allow the courts to work even if it means
losing crucial cases, or intervene, thereby undermining the rule of law
it hopes to foster? To savvy investors, Indonesia's crumbling legal system
has always been a risk. But in this environment of change, it has become
a source of unnerving uncertainty.
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November 30, 2000