Colin Ong, Managing Partner, Dr Colin Ong Legal Services, and President, Arbitration Association Brunei Darussalam, on legal developments

As the largest ASEAN country and one of the most tolerant nations in the region, Indonesia has been blessed with both an abundance of natural resources and a large population of diverse people of different religions living together in peace. Over the last five years, the national economy has developed at a faster rate than in many other ASEAN countries and there has been significant foreign investor interest in the country.

On February 21, 2012 the Government Regulation No. 24 of 2012 an amendment to Government Regulation No. 23 of 2010 on the Implementation of Mineral and Coal Mining Business Activities was enacted in Indonesia. Regulation No. 24 requires majority or wholly foreign-owned companies that hold mining licences in Indonesia to divest the majority share of the company to an Indonesian participant within 10 years of production. Additionally, it is now mandatory for an Indonesian participant to own 20% of the company within six years of production. This ownership requirement increases according to a scale and it reaches a level of 51% after the 10th year of production.

The deputy energy and mineral resources minister, Rudi Rubiandini, explained that one reason for the new regulation is to prevent Indonesia’s mining sector from being “economically colonised forever”. While this presents an opportunity to domestic participants, it will force foreign investors to divest their equity.

The issue concerning the transferability of mining business licences is a controversial one. Law No. 4 of 2009 on Mineral and Coal Mining (2009 Mining Law) prohibits the transfer of such licences. The Ministry of Energy and Mineral Resources has issued circulars that stated otherwise, however. While the Constitutional Court decided in June 2012 that several provisions of the 2009 Mining Law were unconstitutional, it did not have a chance to deal with Regulation No. 24 or whether the new regulations forcing mandatory divestment of shares by foreign companies were constitutional. Churchill Mining, a UK-listed coal company, has brought the dispute over its mining licence to international arbitration before the International Centre for Settlement of Investment Disputes (ICSID), which is one of the five members of the World Bank Group.

One recurring complaint that has been made by foreign investors is the fact that it has been very difficult for them to enforce arbitration awards in Indonesia. This has sometimes put the nation’s investment climate at a disadvantage. It would be useful to find ways to solve this small but important issue.

Currently, Law No. 30 of 1999 deals with arbitration in Indonesia. The law applies to all arbitrations conducted in Indonesia, both domestic and international, in addition to the recognition of domestic and international arbitration awards. While it initially served Indonesia well, criticisms have been made regarding the interference of Indonesian courts in the proper enforcement of both local and foreign arbitration awards, possibly resulting in the breach of treaty obligations under the New York Arbitration Convention of 1958, which Indonesia ratified by means of Presidential Decree No. 34 of 1981. Continued concerns over the courts’ disregard of arbitration agreements and international awards may keep foreign investors away.

One possible solution is to replace the existing law with the UN Commission on International Trade Law Model Law on International Commercial Arbitration (MAL). The MAL was designed to create a common and convenient procedural base for all trading nations to adopt so that investors would be able to concentrate on the fairness of a harmonised legal system that acted similarly. It would also be likely to limit the number of investment arbitration disputes initiated against the Republic of Indonesia through the ICSID process.

The Rules of Arbitration in the 2010 Protocol to the ASEAN Charter on Dispute Settlement Mechanisms has designated Jakarta to be the default place of arbitration for disputes. As the MAL has been adopted by almost all other ASEAN countries, its adoption by Indonesia would allow the country to increase its dominance as a potential location for investment in the region.