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MAY 12, 2000 VOL. 26 NO. 18 | SEARCH ASIAWEEK

Indonesia Courts Trouble
A legal mire stalls investment and recovery

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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