Resources and law reform are driving the Indonesian legal market and attracting investment from around Asia and the rest of the world
There is no denying that Indonesia faces some tough challenges in the years ahead. From the ever present threat of terrorism and ethnic unrest to rising inflation and a drop in demand for its exports caused by global financial crisis, the archipelago faces sterner tests than many of its south-east Asian neighbours. But even so, these should not obscure an important emerging reality: Indonesia is fast becoming the political and economic success story of South East Asia, so much so that economists and market analysts have seen fit to draw macroeconomic comparisons between it and the roaring BRIC economies of India and China.
But in many ways, Indonesia has more to look forward to than these two countries. Over the next two years its workforce is predicted to grow faster. Its economy, too, will expand at a rate quicker than any other in the region, and the recent landslide re-election of President Susilo Bambang Yudhoyono will offer a clarity of vision (not to mention a vital boost to infrastructure and project spending) that has been sorely missing over the past three years. The result is an economy and a country in a much better position than most to tackle the difficulties presented by the global financial crisis head on and capitalise on its opportunities. Indonesia’s brigade of nearly 8,000 fiercely parochial lawyers share this optimism. As Melli Darsa, the founding partner at the Indonesian law firm that bears her name says: “Every area in Indonesia is an area of growth for lawyers.”
Natural resources
It should come as no surprise that the sectors driving the Indonesian economy remain energy & resources; after all the country is among the world’s top three exporters of coal, natural gas, crude palm oil and natural rubber, and home to the world’s largest gold mine and second-largest copper mine. And even despite a global downturn that has dented demand for its exports, the outlook is good. With economic expansion of 3% to 4%, it is likely to be the only major Asian country outside India and China to register positive growth this year.
“The financial crisis has hit Indonesia, but not as badly as it has in other countries in the region,” says Darsa. “Things have remained strong, energy & resources continue to be active, clients are still looking to execute strategic M&A, and banks have not retreated completely – they are still active, perhaps more so than in other jurisdictions in Asia.” While this may be the case, there is no denying that dealflow is down from the stratospheric levels experienced in 2006 and 2007.
But it is the prospects of recovery that are most exciting for the nation’s lawyers, according to Justin Patrick, a foreign legal counsel with Mochtar Karuwin & Komar (MKK). “Natural resources continue to be robust across the board, although things have been affected by the financial crisis,” he says. “But over the next 12 months the market will enter a couple of new phases which will raise activity. These include electrification programs, clarification of mining laws and the government’s commitment to new infrastructure spending; these will all boost activity.”
Patrick goes on to note that there is also a very different mix of clients seeking instructions on entering Indonesia. “We have seen different types of parties coming into the sector or looking to participate,” he says. “Indian and Chinese clients continue to be active in terms of looking to Indonesia for resources, while other international clients are actively seeking out strategic investments in either natural resources or the service industries associated with natural resources.”
With a different mix of clients comes changes in the roles the nation’s lawyers are playing. According to Tjahjadi Bunjamin, a partner with Hiswara Bunjamin & Tandjung (HBT) lawyers are playing a more active hand in getting parties together to do deals. “We are being called on to do different things at the moment,” Bunjamin says. “Because the global financial crisis has widened margins and increased the price of targets, we have to be more innovative when it comes to structuring deals and linking sponsors and financiers with our clients. I would say we are now more deal managers than we ever have been in the past.” The changed role being played by lawyers is also a function of the uncertainties that exist in certain areas of the law. “The anti-monopoly laws and the mining laws are two areas that are still marked by a high degree of uncertainty,” says Patrick. “In both cases, the legal overlay has always been present but it’s in the practical application of these that clients are still unsure. We are playing a role in advising them here, as well as seeking clarifications from the government. The amount of advisory work we are handling is increasing.”
Mining prosperity
The mining laws Patrick speaks of not only create uncertainty but have also divided foreign investors. Until recently, Indonesia had not seen a major mining contract since 2000, a spell only broken by the iron sands project in Yogyakarta by Australian company Indo Mines Limited. The new mining bill aims to break this trend and increase inbound deals by strengthening the government’s control over contracts. But there has been much debate as to whether the reforms will either lure or repel foreign investors. The bill will dispose of an old Contract of Work (CoW) – a government-granted contract that gave the deal parties control over the agreements – and replace it with a licence system, which instead gives the government control. “As far as foreign investors are concerned, [the disposal of CoWs] has them divided into two camps,” says Luke Devine, foreign legal consultant at Hadiputranto, Hadinoto & Partners. He cites major mining houses and junior explorers as the two divided groups.
“The major mining houses have demanded that the old CoW system must be retained, as … it gives the investors the certainty they need in order to spend the billions required to develop these large-scale mining projects.” The new system hands control of agreements to the government, Devine says, not the deal parties, to make deal amendments. “The mining houses have stated that they would be reluctant to invest in mining projects without legal and regulatory certainty that the CoW system provided them. The investment from these foreign majors may decline in respect of new projects,” he says.
On the other hand, junior and mid-tier explorers will be more welcoming of the new licence system, as it gives ownership rights not allowed under the old law. “Allowing direct foreign share ownership in these projects … will make it easier for foreigners and foreign capital markets to invest in mining projects with the required ownership certainty,” says Devine. “The new mining law will be welcomed for the added certainty in this respect.”
Another potential problem for investors is the ongoing debate as to whether the holders of existing CoWs will have to give them up under the new law, which could impact on the number of future investments. “The termination of existing contracts … may have significant adverse consequences for investor confidence in Indonesia’s regulatory system,” says Devine. “There are concerns that this will have broader ramifications for foreign investment in Indonesia, and not only in the mining sector, as it gives a clear signal to investors as to the attitude of the Indonesian Parliament to honouring the terms of existing contracts. These contracts were approved by the Indonesian Parliament at the time of their initial signing. If the effect of the new mining law is to cut their term short, it will again put the spotlight on Indonesia’s regulatory uncertainty.”
However, the changes would also mean more work for lawyers, as they would now have to traverse through central, provincial and regional government regulations, Devine adds. “Although the legal work involved in the often complex contractual structuring around the current form of domestic concessions will cease, additional legal work will come from having to work through the myriad of … regulations that will apply to these mining projects, rather than [as is currently the case for the foreign investment mining projects] simply reviewing the terms of the signed CoW.”
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