What is the legal framework for foreign investment into Indonesia?

1.4. Methodology

This research employs the normative legal research by using statute approach, conceptual approach, analyze approach and case approach. II. What is the legal framework for foreign investment into Indonesia? 2.1.International Standard Indonesian law seeks to protect the sanctity of foreign capital diluting geographic risk by restricting compulsory acquisition to that being of market based compensation. Indonesia is developing a no- tion of being an attractive region in which to invest climbing global rankings of a place in which to invest. 7 . Law No. 25 of 2007 regulates foreign investment into Indonesia. The investment laws require that the investment mechanism is by incorporation, one established with foreign capital is called a PMA company. The PMA company is identified in incorporation and liability laws, Law No 40 of 2007 and in investment law. The new Indonesian investment law Law No. 25 of 2007 actually exists as a compliance to inter- national obligation of Indonesia as being a member of WTO-TRIMs Agreement. In general the main principles of WTO such as non discrimination with the MFN and NT principles as well as transparency principles have already cover under the Indonesian investment Law. However, the de- velopment of Indonesian investment law established with long story from more domestic legal basis until complies to international obligation. In the late 1980s, there was a significant increase in foreign direct investment throughout the world. However, some of the countries including Indonesia in general receiving foreign investment imposed numerous restrictions on that investment designed to protect and foster domestic indus- 7 Above 3, 3. tries, and to prevent the out flow of foreign exchange reserves. Those measures restrictions includ- ing local content requirements which require that locally produced goods be purchased or used, manufacturing requirements which require the domestic manufacturing of certain components, trade balancing requirements, domestic sales requirements, technology transfer requirements, ex- port performance requirements which require the export of a specified percentage of production volume, local equity restrictions, foreign exchange restrictions, remittance restrictions, licensing requirements, and employment restrictions, in fact it considered as violation of GATT Articles III and XI, and are therefore prohibited. An addition, finally Indonesia as well as other countries be- comes a member of WTO in 1994 where the nature of WTO Agreement adopted from GATT. As a result, therefore Indonesia should comply to International obligation in attracting foreign invest- ment especially as part of TRIMs Agreement then further known as liberalization era. Until the completion of the Uruguay Round negotiations, which produced a well-rounded Agreement on Trade-Related Investment Measures hereinafter the TRIMs Agreement, the few international agreements providing disciplines for measures restricting foreign investment provided only limited guidance in terms of content and country coverage. Fortunately, TRIMs Agreement explicitly pro- vide the law for the member to comply with the National Treatment Principles as part of non dis- crimination system as underpin can carry out better atmosphere for future investment sector. Another regime also provides international basis for better improvement of investment activities including the principles of good corporate governance is the OECD. The OECD Code on Liberali- zation of Capital Movements, for example, requires members to liberalize restrictions on direct in- vestment in a range of areas. The OECD Code, however, is limited by the numerous reservations made by each of the members. In addition, there are other international treaties, bilateral and multi- lateral, under which signatories extend most favoured nation treatment to direct investment. Only a few such treaties, however, provide national treatment for direct investment. The Asia Pacific Eco- nomic Cooperation Investment Principles adopted in November 1994 are general rules for invest- ment but they are non-binding. As a member of WTO-TRIMs Agreement, Indonesia has ratified the WTO-TRIMs Agreement in 1994 and its compliance to international obligation set up under investment law since 2007. There are some international standards such as: The National Treatment Principles, Transparency, Legal Certainty, as well as Accountability clearly exist under Article 3, Article 4, and Article 6 of the Law No. 25 of 2007. Foreign direct investment must be approved by the Indonesian Government, generally, through the Badan Koordinasi Penanaman Modal BKPM a board that coordinates and monitors foreign direct investment, the notable exceptions being the in banking and finance and upstream oil and gas. The PMA must adhere to the various licensing regimes, depending on the nature of the business and the fiscal construction its operations. The common form of indirect foreign investment is through the Indonesian bourse and controlled by the Otoritas Jasa Keuangan OJK. The effect of publicly listed entities and the foreign control issue is under discussion in Indonesia with Regulation 52013 under a state of review. Objectively, the BKPM holds a monitoring role as to the notion of such investment structures. By understanding the new Indonesian investment law, currently it can be considered that Indonesia has not only complied to TRIMs but also it has respected and complied to good corporate gover- nance principles as developed by Organization for Economic Co-Operation And Development OECD. As ruled on the basis of OECD Principles of Corporate Governance 2004, it can be un- derstood that corporation including investment capital corporation shell subject to principles of good corporate governance namely: Ensuring the Basis for an Effective Corporate Framework, The Right of Shareholders and Key Ownership Function, the Equitable Treatment of Shareholders, the Role of Stakeholders in Corporate Governance, Disclosure and Transparency, as well as the Re- sponsibilities of the Board. 8 With regard to banking sector, the primary objective of corporate go- vernance should be safeguarding stakeholders ‟ interest in conformity with public interest on a sus- tainable basis. Among stakeholders, particularly with respect to retail banks, shareholders ‟ interest would be secondary to depositor ‟ interest. 9 . In General the GCG is …the framework of rules, relationship, system and process within and by witch authority is exercised and control in corporation. 10 In addition, foreign investors without doubt will invest their capital in the countries that ruling and implementing GCG principles consis- tently. 11 By assessing the important role of GCG in order to attract foreign investment it can be considered that although Indonesia is not a member of OECD Convention, Indonesia has respect- ing and adopting the good corporate governance code imposed by OECD under investment Law Law No. 25 of 2007, Indonesian Limited Liability Company Act Law No. 40 of 2007 includ- ing corporate conduct for the Board of Director and other related laws more importantly at the fi- nancial matter and banking sector . 2.2 Bilateral investment treaties BITs Bilateral Investment Treaties are a function of International law with the objective to pursue har- monisation of laws to an international standard, designed to provide key foreign investment deci- sion makers with legal certainty in the construction of enterprise. A persuasive ambition is for supply side ambition is to assure internationalisation of dispute resolution. On the demand side of capital, usually in developing economies, the BITs are a tool to encourage and compete for in- 8 OECD 2004, OECD Principles for Corporate Governance, OECD Publication Services, Paris, p. 17-24. 9 Basel Committee, 2015, Guidelines Corporate Governance Principles for Banks, BIS Publication Bank for Interna- tional Settlement, p.3. 10 Tony Ciro, 2013, Corporation Law in Principles, Thomson Reuters Professional Australia Limited, p. 115. 11 Joni Emirzon, 2007 The Principles of Good Corporate Governance A New Paradigm in Indonesian Business Prac- tices Prinsip-Prinsip Good Corporate Governance Paradigma Baru Dalam Praktk Bisnis Indonesia, Genta Press, Yo- gyakarta Indonesia, p.43. vestment 12 and establish the ground rules for trade relations whilst internal reform is taking place. The original construction of Bilateral investment treaties is Article 21a of the Vienna Conven- tion on the Law of Treaties VCLT thatdefines them as an expressed international treatybetween States, governed by international law 13 . A key focus of the bilateral agreement is often concerns dispute resolution. In Indonesian dimension, the legal basis of BIT is stipulated under Article 6 2 of the Law No. 25 of 2007. Contracts may elect non-Indonesian law. Such a choice will ordinarily be honoured by Indonesian courts by function of Article 1338 1 of he Indonesian Civil Code. Nevertheless, the court can ap- ply Indonesian law. Indonesia is not a party to any international convention that allows enforcement of foreign court judgements, they are thus not enforceable in Indonesia. Indonesia, progressively, encourages arbi- tration in dispute resolution. Law No.30 of 1999 Arbitration and Alternative Dispute Resolution provides for the principal, designed to reduce judicial burden and to provide finality in dispute.The benefit of this approach is that it reduces the intervention of courts, reduces the judicial burden and to assure arbitral award finality. Indonesian arbitration Law does not follow the United Nations Commission on International Trade Law UNCITRAL Model Law. It is possible to exclude Indonesian jurisdiction join preference for foreign arbitration. However, Indonesian Arbitration Law only recognises a foreign arbitral award once an Indonesian court has recognised the award through the issue of „exequatur‟. Thus whilst 12 Mathius Busse, Jens Koniger and Peter Nunnenkamp, “FDI Promotion through bilateral investment trea- ties: more than a bit?” 2010 146 1 Review of World Economics 147, 148. 13 Tarcissio Gazzini, “Bilateral Investment Treaties” , International Investment Law. The Sources of Rights and Obligations Brill, 2012 99, 100-106. significant regulatory environment exists to support a foreign judgement in arbitration, enforcement faces a number of difficulties the most significant of which is the difficulty in Indonesian court pre- dictability. The parties to the agreement define the scope and diversity of the clauses 14 . Internationalisation of law brings along with it notions of bureaucratic advocacy as processes of dispute resolution given its nature. Whilst the intent and function maybe that a ruling, which has taken place in a third nation in an international tribunal, Indonesian law construction is such that the ability of enforcement is ultimately a function of diplomacy due to the failure to ratify ac- knowledgment of international arbitration ruling. An analysis of that case Indonesia‟s preference to maintain legal sovereignty is not a mere nepotis- tic function, they herald back to matters of domestic perception of equity and an internal debate as to nationalism against provincial authority. Nation building structures will at time give way to such politics. 2.3 The cultural belief imperative In preparation of this article the writers had the pleasure meet with Made Mangku Pastika, governor the governor of Bali 15 . During this discussion the governor made a profound statement as to local cultural relationship with economic development. He made two profound statements. 14 Todd Allee and Clint peinhardt “Evaluating Three Explanations for the Design of Bilateral Investment Treaties ” 2014 661 World Politics 47. 15 10 am, 8 December 2015; Government House. The first was that the local governing structure is different to other Indonesian jurisdictions and ref- lective of the nuances of value systems of Bali and its over 1,000+ cultural villages. A Balinese governor must be Balinese. The second statement related directly to economic development. The governor made the affirmative statement that any economic development will only progress in the context of the guiding local val- ue system of Tri Hita Karani and Rwa Bhineda. Tri Hita Karani guides that all have a responsibility to God, to good of woman and to the environment. It is a tripartite system of equal weight and must be harmonised in action. Raw Bhineda in the understanding that opposites are a manifestation of themselves, everything has an equal and proportionate opposite. The governor made a statement proposed as fact, economic development that fails any of these cultural notions will not advance. Indonesia is vast country, the worlds largest archipelago, it is made up of 17,000 islands occupying a total area of 1,904,569 square kilometres. Indonesia has the world 4th largest population. The country is vast and its community construction is complex. The investment decision maker should understand the following about the corporation law in Indo- nesia: a Court proceedings can be lengthy; b It is not uncommon to find the statute in conflict; c The judiciary has a high degree of discretion; and d Law is not centralised nor is its depository of information. 2.4 Bilateral agreements in context. The matter of Churchill Mining Plc v. Republic of Indonesia ICSID Case No. Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB1214 and ARB1214 and 1240 provides some insight into this notion. In context, Indonesia ‟s Law No.4 of 2009 on Minerals and Coal Mining governs the law of mining. The licence based system came into effect in late 2009. These laws hold provision provisions stat- ing that old mining law will be managed under transitional provisions thus honouring previous go- verning law, contracts for works systems. The foreign investment consortia of East Kalimantan coal mine at the heart of this matter was legally constructed in 2007. In rejecting the Indonesian government‟s challenge to the jurisdiction of the International Centre for Settlement of Investment Disputes ICSID, the media reported the following comments, “Coordinating Economic Minister Hatta Rajasa regretted the ICSID tribunal decision, and Industry Minister MS Hidayat called on lo- cal administrations to be more cautious 16 ,” further, “The Indonesian Resources Studies IRESS said on Thursday that the government ‟s decision to give local administrations the power to issue mining permits to both local and foreign investors as part of the decentralization policy several years had brought more harm than good to the country. 17 ” Churchill Mining Plc v. Republic of Indonesia ICSID Case No. Planet Mining Pty Ltd v. Repub- lic of Indonesia, ICSID Case No. ARB1214 and ARB1214 and 1240 is an example of the deli- cate nuisances in the gravitas in the value assigned to risk and its role in ordinary business. In this matter the international consortia stated grievance in the construction of property, or lack thereof given success in mining operations, opposed to the ideological and legal notion of the ownership of 16 Raras Cahyafitri and Ina Parlina, “RI risks loss in Churchill legal battle ,” The Jakarta Post online February 27 2014, http:www.thejakartapost.comnews20140227ri-risks-loss-churchill-legal- battle.htmlsthash.qIZc4XGx.dpuf. 17 Raras Cahyafitri, „Indonesia should learn from case: Analysts‟, Jakarta Post online 28 February 2014 http:www.thejakartapost.comnews20140228indonesia-should-learn-churchill-case-analysts.html. land and a licensed right to use it, rightly a function of risk from the position of the Indonesian. In this matter the consortia of Churchill and Planet were stripped of effective ownership of a coal de- posit, proven by them to be globally significant in favour of Nusantra Group, a well-connected company controlled by presidential candidate Prabowo Subianto, after a gratuity of US40 million had been paid. Nusantra Group made the case that the license to mine over the land had never been legal relinquished. After the Indonesian domestic challenge exhausted the Churchill and Planet con- sortia took the case to the ICSID claiming on US2 Billion in damages 18 . Thus the perception from your conviction is a matter of objective analysis. The consortia are aggrieved based on a position of domestic nepotism and unfair legal administration upon asset seizure. The Indonesian perspective seems to be that the matter has been dealt with objectively through the Indonesian legal system and now the foreign consortia is seeking damages heinous to their perception of value 19 . According to the commend reported by Mr Amir Syamsudin Law Human Rights in 2014, it can be assess- ing that in the adjudication case above, Indonesian government has a chance to succeed in the next trials regarding the merit of the case. The government has strong evidence that it has not violated the bilateral investment treaties, national law or international law. Letter on it can be understood that the optimism of Indonesian government is supported by facts that investment claims made by Churchill and Planet Mining Pty Ltd [Churchill ‟s subsidiary] do not comply with and even violate the Indonesian laws, 20 ” It would be imprudent for thedecision maker of foreign direct investment into Indonesia to consider that Intentional convention will provide a sole basis in law as to the surety of the governing struc- 18 Churchill Mining Plc v. Republic of Indonesia ICSID Case No. Planet Mining Pty Ltd v. Republic of Indonesia, ICSID Case No. ARB1214 and ARB1214 and 1240. 19 ibid. 20 Raras Cahyafitri and Ina Parlina, “RI risks loss in Churchill legal battle ,” The Jakarta Post online February 27 2014, http:www.thejakartapost.comnews20140227ri-risks-loss-churchill-legal- battle.htmlsthash.qIZc4XGx.dpuf; Raras Cahyafitri, „Indonesia should learn from case: Analysts‟, Jakarta Post online 28 February 2014 http:www.thejakartapost.comnews20140228indonesia-should-learn- churchill-case-analysts.html. ture of capital invested. Indonesian law is paramount. In recognition of this an understanding of Indonesian good governance as assessed by an analysis of directors duties to the investor or credi- tor should form part of the basis for prudent investment decision making. Our discussion will ref- erence against the Australian construction as a basis of comparison. III. What are the duties of director in carry out good governance for investment capital?