Saturday, January 23, 2010

Pertamina VS Karaha Bodas: Judge the Law-Enforcement Perceptions in Indonesia?

Published on Bisnis Indonesia on 7 and 8 July 2004.

By: Sulistiono Kertawacana
Legal Practitioner in Jakarta

After going through the exhausting dispute, finally PERTAMINA intended to pay claims Karaha Bodas Co.. LLG (KBC) in the amount of U.S. $ 250 million to meet the decision of International Arbitration (U.S. $ 291 million-pen) because of suspension of the geothermal power plant (PLTP) Karaha project.

However, two days later (May 13, 2004), two from PERTAMINA (Priyanto as the former head of the Division of Geothermal and Syafei Sulaeman as the former chief sub Geothermal) and Robert Mc Kitchen (U.S. citizens) as Vice President KBC suspected under corruption case of Karaha PLTP project.

Karaha Geothermal Power Plant Project is a project to develop a geothermal power plant 400 Mega Watt (MW). There are two contracts signed on November 28, 1994. Namely, (i) Joint Operation Contract between PERTAMINA and KBC (associated with geothermal field development) and (ii) Energy Sales Contract between between PERTAMINA, KBC, and PLN that will act as buyer of electricity generated.

However, since the economic crisis and the recommendations from the International Monetary Fund (IMF), on 20 September 1997 the President through Presidential Decree No.39/1997 on Suspension / Re-Assessment of Government Project, State Owned Enterprises, and Private Businesses Associated with the Government /State.

Presidential was suspending the Karaha PLTP project until economic situation recovers. Furthermore, on 1 November 1997 through Presidential Decree No.47/1997, the Project should be continued. However, based on Presidential Decree No. 5 / 1998 on January 10, 1998 the Project was back on suspended.

Eventually the government, on March 22, 2002 through Presidential Decree No.15/2002, intends to continue the project. Furthermore, supported also by the Decree of the Minister of Energy and Mineral Resources of No.216K/31/MEM/2002 Geothermal Power Plant Project Status Determination of Suspended Karaha Being Forwarded.

From this series of stories, suspension PLTP the Karaha project was not purely PERTAMINA’s intention, but it is to carry out government policy.

In fact, government policy recommendations were backed by the International Monetary Fund (IMF), which is indicated by the Letter of Intent Government of Indonesia to the IMF to overcome the economic crisis. Of course, the crisis itself (and is internationally recognized) is not the will of the government. That is, suspension of the project is the impact of economic crisis follow-up beyond the control of the government; let alone PERTAMINA.

Termination of a contract by one party (not the agreement of the parties), in view of law, can be caused by defaults (default or non-fulfillment) or force majeur (emergency situation).

Starting point that distinguishes the two is the will to cancel the contract. If the intention to end the contract is one of the free will of parties, so he defaults. Meanwhile, if the failure of one party to fulfill the contract due to performance in circumstances beyond the control of one party, so in a state of forced and unpredictable events, called a force majeure.

Categorizing conditions in force majeur are (among others) government policies / regulations, natural disasters (floods, earthquakes, mountain erupted), war, riots, and armed rebellion.

If the contract cancellation is caused by the defaults, then the injured parties deserve compensation. Not so, however, if caused by force majeure. Because, on force majeur, the event is outside of the will of the parties and are not predictable.

Thus, the suspension of the project by PERTAMINA Geothermal Power Plant Karaha is force majeure. However, KBC does not care about the reason for that is the basis of suspension of project. Proved, in April 1998 sued KBC PERTAMINA through International Arbitration in Switzerland.

A Pathetic Dispute

Of the total claim for damages KBC to PERTAMINA for U.S. $ 560 million (U.S. $ 100 job losses that have been implemented for 8 exploration wells and 20 small wells by KBC million plus the value of benefits to be received), arbitration "only" claim KBC grant worth U.S. $ 261 million.

Indeed, there are some things that dubious "honesty" KBC in the disputed project. First, according to the Indonesian Geothermal Association (API) there are indications KBC to mark up for financing the project (of course in cooperation with the Indonesian side). Because, according to the API as well invests on average U.S. $ 3 million, so the maximum cost of about U.S. $ 40 million (KBC claim his expenditure of U.S. $ 100 million).

Second, based on insurance claims that have been received by KBC and the actual reserves of evidence, only 60 MW (Kompas 6/6/03). Consequently, KBC's ability to build projects for 400 MW Geothermal Power Plant as stated in the contract is still in doubt.

Third, KBC has received an insurance claim from Lloyd's - London on hold the project is U.S. $ 75 million. This means that if the insured value of the total project, the project is U.S. $ 75 million (much smaller than KBC lawsuit amounted to U.S. $ 100 for damages expenditure value KBC).

Fourth, there is a difference in the value of projects already carried out (expenditure) are reported to the Directorate General of Taxation (U.S. $ 83 million) with the proposed arbitration (approximately U.S. $ 100 million).

But, International Arbitration in 2000 had granted the lawsuit KBC with PERTAMINA to pay punitive damages of U.S. $ 261 million (. U.S. $ 111.1 million for expenses and losses of U.S. $ 150 million for loss profits (lost of profit) plus interest of four percent per year since 1 January 2001).

PERTAMINA has proposed a variety of legal efforts to cancel the implementation of the International Arbitration decision in foreign courts where the assets of PERTAMINA.

Based on Article 5 paragraph (2) b of the Convention on the Recognition and Enforcement of Foreign Arbitral Award dated June 10, 1958 ( "1958 New York Convention") - Indonesia has ratified a presidential decree stipulated that the petition No.34/1981- enforcement of arbitration International can be rejected as contrary to public order (public policy / public order).

Reasons for refusing a weapon contrary to public order are very flexible. Even sometimes seems so subjective. Especially for the countries that were defeated. In general, the public order is defined as the order, prosperity and security, justice, or not contrary to law.

By considering the suspension of the project based on state policies as stipulated in the Decree, then on August 27, 2002 the Central Jakarta District Court has awarded to grant the request of PERTAMINA that refused the execution of international-arbitration award.

The reason, contrary to public order, as allowed by Article 66 of Law No.30/1999 on Arbitration and Alternative Dispute Resolution.

The fate of Assets

The issue is, how the fate of PERTAMINA's assets frozen by the courts in foreign countries? KBC has sued for the conduct of arbitration decision in the courts of New York, Texas, Hong Kong, and Canada to be able to freeze the assets of PERTAMINA in the country.

New York court had frozen the existing PERTAMINA deposits in the Bank of New York. PERTAMINA fate that will be decided by the Supreme Court (Supreme Court / Supreme Court) in New Oreleans, United States (U.S.) in September 2004 to come.

Therefore, efforts to uncover cases of police corruption in Karaha PLTP project are one of the searches for new evidence (Novum) other than Novum in the form of an insurance claim payment from the Lloyd-London over the suspension of the project.

As we know, the U.S. has a Foreign Corruption Practice Act (FCPA) in 1977 which has been changed several times. U.S. companies operating in Foreign Affairs do FCPA jurisdiction outside the United States to reach that prohibits the practice of corruption (including bribery). Threats are fines up to U.S. $ 2 million for legal entities or U.S. $ 250 thousand for individuals and imprisonment of up to 5 years..

It is said, as quoted by Tempo Magazine, one had thought that corruption was investigated by the police include the status of PT Sumarah in Karaha Bodas. Allegedly, 10% of shares owned PT Karaha Bodas Sumarah is blank stock only alias no deposit on paid capital.

That is, Karaha Bodas was reasonably suspected to violate FCPA. The hope, if only stock proven no paid up, then the U.S. Supreme Court that will decide the case in September 2004, will refuse enforcement of international arbitration on the grounds KBC has been violated Indonesian law in violation of the FCPA substantially.

Therefore, police, prosecutors, and courts in Indonesia to quickly process cases of alleged corruption and KBC are expected to be terminated before the U.S. Supreme Court decision. It is a work effort that cannot be delayed.

Investment Insurance

Indeed, to anticipate the risk of direct foreign investment (especially in developing countries), the World Bank (WB) has initiated the Convention Establishing the Multilateral Investment Guarantee Agency (MIGA). The Convention has received the World Bank in the 1985 annual meeting in Seoul (South Korea). All member countries of the World Bank and Switzerland can be a MIGA member (Article 4).

MIGA will promote investment flows MIGA Convention participating countries (especially developing countries). The way is to provide guarantees against non-commercial risk on capital investment (direct) in a participating country (host country) that came from countries other participants (investors).

Non-commercial risk is the risk of (i) monetary transfer, (ii) the revocation or nationalization of property and similar actions, (iii) breach of contract (breach of contract), and (iv) war or civil war (Article 11 a), but it can also be extended provided that the guarantee is requested by the host country and investors.

Indonesia has ratified the convention signed in Washington DC on June 27, 1986 and put it in the form of Presidential Decree No.31/1986 on the Ratification of MIGA Convention.

Judge Perception?

If we look, the international award granted claims of foreign investors due to the suspension or cancellation of projects in Indonesia is more of an international perception of the poor in the Indonesian legal certainty than the legal substance of the suspension or cancellation of the reasons the project itself.

Because, in fact we have a strong reason and fundamental to review various private power projects that were approved in the Suharto era. Whether those force majeur reasons for the crisis that hit Indonesia and indicated the reasons of corruption, collusion or nepotism ("CCN").

During his rule, Suharto has approved 27 private power contracts are handled by foreign companies in partnership with local companies owned by Suharto's family and cronies. Several of contracts clumsiness began to unfold after his downfall.

It is said that 20 of the 27 private power projects were not feasible. Even sometimes a tricky course (because not necessary). Private electricity prices to buy comparatively expensive PLN ie between U.S. $ 5.6 cents (Rp504) to U.S. $ 8.6 cents (Rp774) per kWh. Though the price of PLN electricity only Rp161 per kWh. In comparison, private electricity prices in Thailand, Laos, and Philippines as well, each for U.S. $ 4.2 cents, U.S. $ 1.29 cents and 5.3 cents (Trust No.34 Year II).

Clearly, the transaction is detrimental Indonesia. Therefore, although no reason was the economic crisis the Indonesian government should have a strong legal basis to review various private power projects are for the sake of Indonesian consumers.

Moreover, the IMF has also recommended the cancellation or suspensions of project reinforced by economic crisis conditions. That is, not the subjective reasons for the government of Indonesia alone; let alone PERTAMINA.

However, what power, bad image of law enforcement in Indonesia are now the 'attractiveness' of the International Arbitration to consider punishing RI. We must unite to provide an adequate explanation. It was this time, and Indonesia in the correct position.

Hopefully PERTAMINA case that we all can realize that sometimes perception is more important than objective conditions. Therefore, the perception is built in a long period.

Saturday, January 16, 2010

Criticize "Dissolution" Scenario of IBRA

Sinar Harapan January 07, 2005

Bahasa Version

Sulistiono Kertawacana
Legal Practitioner in Jakarta

National Bank Restructuring Agency (IBRA) has extended his tenure. These expressions may be provocative. In fact, thus is standing the law. This was contrary to the public impression that spread in the media at the end of February and then a busy discussing the "dissolution" of IBRA.

Public affirmation of many fooled by paragraph 1 of Article 1 of Presidential Decree No.15/2004 regarding Task Termination and Liquidation stating that IBRA declared dissolved as of February 27, 2004. In fact, if we listen to the affirmation of Article 1 paragraph 3 and 4 juncto Article 2 of Presidential Decree No. 15/2004, essentially he extended his duty to 30 April 2004. The task was particularly associated with the completion of four things namely liquidate Frozen-Bank Operations / Business Activities of Frozen-Bank, obligations of shareholders, audit and transactions that have occurred prior to February 27, 2004. That is, the institutional IBRA has not disbanded, but only reduce and eliminate other tasks besides four IBRA it.

Previously, the agency was responsible to do the administration of government guarantees provided to commercial banks as mentioned in the Presidential Decree No26/1998 and control, coach and effort to restructure, including restructuring of banks by Bank Indonesia (BI) declared healthy and necessary legal action in order to restructure bank (Article 2 of Presidential Decree. 27/1998 on Establishment of IBRA).

In connection with banking restructuring program, (formerly) IBRA has duties to recover banks stated and delivered by BI, settle the bank's assets, both physical assets and obligations of the debtor through the Asset Management Unit (Asset Management Unit), and seek a refund of state has been distributed to the bank - bank through the settlement assets in a restructuring (Article 3 paragraph 1 of Government Regulation (PP) No. 17/1998 on IBRA, as amended by Regulation No. 47/2001-PP IBRA).

Clearance Tim
Article 6 of paragraph 1 of Presidential Decree. 15/2004 confirmed with IBRA for the task and / or dissolution of IBRA, all his wealth into state property managed by the Ministry of Finance (Finance). Clearly, this is confuse construction. Because there are doubts about the exact time when IBRA no longer wealth. Apparently, the president does not understand this.

Because, there are 63-days period, or approximately two months between the end of IBRA's task in certain areas as referred to Decree 15/2004 (February 27, 2004) with the agency's time frame stated dispersed (April 30, 2004). This is not the time for a moment that many faced IBRA conundrum. In the end, this will cause a serious legal problem.

Task renewal of IBRA has legal consequences for the validity of legal acts which Clearance Team has been formed by presidential decree No.16/2004 on the establishment of IBRA clearance team led by the Ministry of Finance, especially, related to the authority to represent completion of IBRA in business assets (wealth IBRA). Clearance Team has duties in charge of handling the problem filing, the state property-related cases in the judiciary, legal issues, financial administration, and assistance in the framework of implementation of audit IBRA clearance.

To carry out its duties, Clearance Teams should be assisted by the Working Group (KK), which was formed as the head of Team Finance settlement. One of the tasks of these families are handling the Working Group on Legal Issues (KKPMH) which acts as the power minister (as head of Team clearance) for the proceedings in the courts.

More Precisely Regulated by PP (Government Regulation)

Yet, should the existence of IBRA is extended to 30 April 2004 (by narrowing its function), with consequences for the local authorities for legal action for and in behalf of IBRA associated with wealth of IBRA that is an organ regulated by PP IBRA. This is where the importance of assertiveness of Presidential Decree No.15/2004 to decide when property assets under IBRA be managed by the Ministry of Finance.
Because, as long as the agency still standing, in principle the authority to represent good IBRA outside the court and in the courts (including the dispute in court relating to the wealth IBRA) is an organ regulated in the PP IBRA namely IBRA chairman (Article 5, paragraph 4 PP IBRA) .
Therefore, the validity of KKPMH acting as proxy of the Minister of Finance for the proceedings in the courts in the context of settlement for the benefit of potential wealth of IBRA has no strong basis for the authorities in court. Consequently, his opponent will easily win the legal dispute in court.

Therefore, the legal basis through Clearance Team to act KKPMH deal IBRA property disputes is weak. In fact, position, duties, and authority in the Ministry of Finance as stipulated PP IBRA was transferred to the Minister of State Owned Enterprises (PP No. 63/2001).

If the government authorities intend to cut existing organs of IBRA (in certain cases) because of perceived IBRA's task has been reduced, it is more appropriate if it should be arranged in PP IBRA (not by decree of a lower level than the PP in the hierarchy of legislation).

Clearly, the principle of legal construction of the extension of duty with camouflage IBRA "Liquidation" is better to have a political purpose with a weak legal footing. Prepare to reap KKPMH defeat in court as has been experienced during this IBRA. Good government is willing to learn from previous experiences. Construction law will affect litigations victory.

Wednesday, January 13, 2010

Debt Relief of Indonesia

Sulistiono Kertawacana
Legal Practitioner in Jakarta
Monday, July 25, 2005
Bahasa version
Suara Karya Version

By mid June, British Prime Minister Tony Blair and U.S. President George W. Bush agreed to remove 100 percent of the debt of poor countries on the African continent. How is about Indonesia? Does Indonesia have chance to get debt relief or necessary to apply Indonesia debt?

Reasons for Debt Relief
In the history of foreign debt, debt relief (part or all) occur because of legal or economic reasons. Economic reasons related to the debtor country's economic sustainability. As for legal reasons related to the legitimacy of a regime or misuse of loan funds
The reason the law looked the debt as odious debt (debt unclean) or criminal debt (debt criminal). Leonce Ndikumana and James K Boyce (1998) distinguish the definition of both.

Odious debt is a loan made by the illegitimate regime in a democratic perspective, that is not representative, authoritarian, dictatorial and oppressive used to oppress people.

Criminal debt is part of the loan funds to the countries that have been corrupted by government officials and / or his cronies. Therefore, it is not fair if the people of debtor countries must pay the entire debt.

The goal is that creditors are not just looking at loans disbursed economic risks (ability to return the debt). For, if the odious debt or debt uncategorized criminal debt, there is a risk not getting paid (in total).

According to the International Law Commission (1977), the doctrine of odious debts firstly recognized in 1898 when the U.S. refused to pay debts in the negotiations Cuba Spanish-American War. U.S. claims to both the U.S. and Cuba are not responsible for the debt-Cuba on the grounds, including the debt accumulated during the colonial Cuba and does not provide benefits for Cuba. Soviets did not acknowledge the debt that has accumulated the Tsar in 1921 with a similar reason.

Costa Rica considered that debt accumulated Frederico Tinoco regime to the Royal Bank of Canada was odious debt in 1923. This case ended up in the UK arbitration vs. Costa Rica.

Chief Judge of the United States, Taft set as illegitimate debt (won Costa Rica). The reason, the Bank has to know the debt is past president of F. Tinoco to private interests while in exile in foreign countries (Annual Digest of Public International Law Cases, 1923).

Reason for debt relief to economic reasons was when Germany first made after World War II. Obligations of Germany to creditors were DM 1.5 billion per year. This amount is burdensome. It was feared that the economy would be a mess (if it remains unpaid) which resulted in the emergence of chaos that triggered a model leader Hitler with his Nazi.

German negotiator, Josef Abs, managed to convince the creditors that Germany pay its debts in a healthy ratio of its foreign trade balance. The talks held in London on February 27, 1952 it agreed to remove the foreign debt of nominal Germany 51.5% (Ivan A Hadar, 2004).
Second, when the global debt problem, in 1982 Mexico declared itself "insolvent" and unable to pay off the obligation to pay debt principal and interest received private debt. This step is then replicated many other Latin American countries. The international community had together helped .

Model of World Bank

Historically, the World Bank has several models in order to reduce the debt the debtor countries. Those are Brady Plan, Toronto Term, Naples Term, and High Indebted Poor Countries Initiatives (HIPC). All of them requiring debtor countries Structural Adjustment Program run by the IMF.

Brady Plan initiated by the U.S. Finance Minister Nicholas Brady when trying to cope with external debt (ED) crisis Mexico. Terms countries get debt relief if 3 of 4 conditions met. They are (i) ED ratio of Gross National Product (GNP) of more than 50%, (ii) ED ratio of exports of more than 275%, (iii) the ratio of debt to exports increased more than 30%, and / or (iv) the ratio increased interest rates on exports more than 25%.

Toronto terms given to the debtor countries with GNP per capita criteria is less than US $ 610 (in 1990) or who experience debt problems and have continually balance of payments prospects are poor.

Naples terms given to the debtor countries with GNP per capita criteria is less than U.S. $ 500, or (ii) the ratio of net present value of the exports ED more than 350%. If the first criteria is not met, the debt reduction was probably less given.

HIPC initiative provided for the debtor country in a condition to the Naples terms provided by the International Development Association. Debtor is still sustainable if the ratio of net present values of its exports ULN 200-250% and the ratio of external debt service to export in the range 20-25%.

Indeed, the proposed debt relief for poor countries not only has long sounded. Jubile petition in 2000 signed by about 120 countries and supported, among others, Kofi Annan, Tony Blair, Nelson Mandela, and Gerhard Schroeder campaigned for debt cancellation of poor countries. According to him, every pound sterling of creditor countries sends as aid, requiring debtor countries to pay 9 Pounds Sterling

Indonesia Case

Its report in 1997, which entitled Summary of RSI Staff Views Regarding the Problem of ‘leakage’ Bank Project budgets, the World Bank, estimates that a minimum of 20% -30% of Indonesia's development budget funds being diverted. Of course, it is no exception World Bank projects.

World Bank internal report "Dice memorandum" detailed the leaks, which was below 15% in the Department of Health and the Ministry of Mines and Energy, 15% -25% in 8 departments (such as agriculture, education, public works, and religion), more than 25% in four departments (including forestry and domestic).Article 3 paragraph 5 (b) the Articles of Association (Articles of Agreement) World Bank (IBRD) World Bank would manage to make rules to ensure that loan funds will be used only for purposes agreed upon, by giving appropriate attention to economic considerations and efficiency , unaffected by political considerations and other non-economic.

Therefore, the World Bank must do the appropriate actions to prevent the leakage of funds lent to Indonesia. Moreover, Indonesia has the Corruption Perceptions Index ranks the top as the most corrupt country in the world.

But so far the World Bank (especially during the Suharto regime) as a blind eye to leak 20-30% loan to Indonesia as has been acknowledged in various World Bank reports that specified the Memorandum Dice. New World Bank revealed the corruption prevention loan fund since 1997 as noted in the report Helping Countries Combat Corruption: The Role of the World Bank.

However, based on General Accounting Office report (Institute of the U.S. Congress requested the investigation of corruption at the World Bank) in April 2000 entitled Management Controls Stronger, but Challenges in Fighting Corruption Remain concluded the World Bank and the debtor countries do not always act in accordance with auditing procedures for the project and oversight of financial management and loan disbursement process.

Leakage World Bank debt is debt that criminals might be legal reasons petition debt relief for Indonesia. Under Article 10 paragraph 3-letter number 10 C General Conditions Applicable to Loan and Guarantee Agreement of the World Bank declared open the possibility for the Court and the UN role in the dispute between the World Bank with the client (debtor countries-pen).

Currently Indonesia is also the state budget is still in tatters and the debt trap by ignoring the education sector and health services (currently the State Budget Law and Law on the National education system is being tested material on the Constitutional Court). And two things were very important for the sustainability of human development of Indonesia. Therefore, in addition to internal efforts to external efforts are also needed.

Unfortunately, until now there has been no legal action by the debtor countries themselves as well as representatives of NGOs through a lawsuit (legal standing). It is time we use the legal instruments in the approach to debt elimination. Is Indonesia will be a pioneering and precedent debt pattern? Let us try!