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| World Marketplace |
Pacific Doldrums
Hadi Soesastro
08/01/06
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Inconsistent Policies
High on the list of reforms demanded by foreign investors are changes to the legal system. There is a dire need for a fair judicial process and legal certainty for contracts. Investors also want to see the justice system take a more active role in combating corruption.
Moreover, the government must also resolve a number of outstanding high-profile disputes with international investors, which have made others leery of committing capital to the country. It is aware of this problem, and made a breakthrough in March when the state-owned oil company, Pertamina, finally resolved a four-year dispute with ExxonMobil over who should oversee development of the Cepu oil region between east and central Java. The parties agreed that ExxonMobil will lead the operations, but Pertamina will participate as a junior partner. This satisfied nationalists’ desires to ensure that the exploitation of these resources was not entirely left to foreigners. Pertamina’s role in the development might be nominal, but it hopes to learn from its partner in order to develop its own oil-producing capacity.
Another well-publicized dispute has given pause to foreign investors considering opportunities in the archipelago. During the Asian financial crisis, Indonesia decided to privatize its cement industry, and sold Mexican powerhouse Cemex a minority stake in Semen Gresik, the country’s largest cement producer. In 2001, under then-President BJ Habibie, the government reneged on its pledge to offer Cemex additional equity, which would have given it a majority stake, after protests in neighborhoods with Semen Gresik plants. In 2003, Cemex filed suit in an international arbitration court.
TOP VIEW
The world’s third-most-populous democracy, Indonesia apparently possesses the
workers and resources to become one of Asia’s leading economic engines. But
although there are some glimmers of light, the country remains burdened by
ineffectual leaders who are unable or unwilling to institute investment, labor
and legal reforms demanded by many foreign investors. |
But in May, Cemex decided to simply sell its stake. A private Indonesian company, Radjawali, negotiated a deal with Cemex, but will proceed only if the government surrenders its option to buy back the Mexican company’s shares. Fortunately for Radjawali and Cemex, the government does not appear to have the resources to do so.
Investors shuddered at a similar situation in late 2005, when the government hinted that it wanted to buy back the shares in telecommunications giant Indosat, which had been sold by the previous administration to Singapore Technology Media (ST Telemedia). The government argued that the strategic importance of the telecommunications industry required it to be under the control of the state. ST Telemedia refused to sell its stake.
Clearly, the government must adhere to the privatization policies and agreements set by earlier administrations. Indonesia should emulate the United States by making it clear to investors from the outset that certain sectors or companies cannot be acquired by foreign interests. In the U.S., free traders and protectionists have long argued over such deals. They squabbled when China National Offshore Oil Corp. bid to acquire Unocal. But the situation in the United States seems much clearer: Debate usually takes place before a sale is approved, whereas on countless occasions, Indonesia has changed its policy after a deal has been set in motion or closed.
Another problem for foreign investors is the Indonesians’ nationalistic opposition to foreigners owning the country’s natural resources. Multinationals such as ExxonMobil, Newmont Mining and Freeport McMoRan have run up against Indonesian hostility toward the exploitation of natural resources by foreigners, particularly when these multinationals appear to endanger the environment or local communities.
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