Original language | English |
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Pages (from-to) | 701-723 |
Number of pages | 23 |
Journal | Journal of World Investment and Trade |
Volume | 12 |
Issue number | 5 |
DOIs | |
Publication status | Published - 2019 |
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In: Journal of World Investment and Trade, Vol. 12, No. 5, 2019, p. 701-723.
Research output: Contribution to journal › Review article › peer-review
TY - JOUR
T1 - Political Strategies of TNCS for corporate interest in Indonesian public interest litigation
T2 - Lessons for developing countries hosting FDIS
AU - Islam, M. Rafiqul
AU - Prihandono, Iman
N1 - Funding Information: 1660-7112 2211-9000 Brill Netherland 10.1163/221190011X00049 Political Strategies of TNCS for Corporate Interest in Indonesian Public Interest Litigation: Lessons for Developing Countries Hosting FDIS Rafiqul ISLAM M 1 PRIHANDONO Iman 2 1 PhD and LLM (Monash University, Australia); MA (Economics), LLB (first class), BA (honours) (Rajshahi University, Bangladesh); currently Professor of Law, Macquarie Law School, Macquarie University, Sydney, Australia; the author can be contacted at: [email protected]. 2 LLB (Airlangga Universitas), MH (Universitas Indonesia), LLM (Sydney University); Lecturer at the Faculty of Law, Universitas Airlangga, Indonesia; currently PhD candidate at Macquarie Law School, Macquarie University, Sydney, Australia; the author can be contacted at: [email protected]. 2011 12 2011 5 701 723 Copyright 2011 by Koninklijke Brill NV, Leiden, The Netherlands 2011 Koninklijke Brill NV, Leiden, The Netherlands version header and INTRODUCTION The pursuit of corporate profit maximisation from their foreign direct investment (FDI) in host countries often leads transnational corporations (TNCS) to go beyond their commercial to non-commercial strategies. Among these strategies, resort to political influence appears to be prominent in Indonesia, a developing country and an important destination of TNCs with their FDIS. TNCs conduct their business operation in Indonesia mostly by establishing a subsidiary company under a joint venture or operation agreement with domestic enterprises on specific business projects, or simply by opening branch offices. The involvement of local stakeholders inevitably requires TNCS and their subsidiaries to deal with local court settlements in disputes arising out of their multiple fornls of business operations, especially when court clarification on TNCS' rights and obligations is needed, or when TNCS have no other option except to respond to legal actions brought against them under the local laws. Under the Indonesian law of civil procedures, TNCS as legal entities doing business in Indonesia can sue and be sued in civil courts. But most foreign investors find civil court proceedings cumbersome. Their main concern is the alleged discrimination against them in Indonesian court. TNCS are likely to have confidence in an independent and credible judiciary in host countries to guarantee commercial certainty by protecting their property rights. In the absence of such a judiciary, TNCS tend to use various non-commercial strategies to influence the end result of their disputes in favor of corporate interests. The fact that Indonesia still lacks a credible and effective judiciary encourages TNCS to apply political strategies to influence government policies to protect their interest against possible unfavorable judgments in Indonesian courts. To this end, the three distinct political strategies that are usually used include: (1) exit threat, (2) home government pressure, and (3) local political partnership. This article examines the extent to which TNCS in Indonesia resort to political strategies to indirectly influence judicial decisions in cases where corporate and public interests are in conflict. The examination of pertinent cases suggests that TNCS actively apply political strategies to influence government policies impacting on the judicial decisions of these cases. It identifies factors and conditions that serve as conduits between the government policies and TNCS' interests and how they work together to influence judicial decisions. The judicial power sharing with Parliament and circumscribed by the government, judicial unaccountabihty, and vested interests of ruling elites afford opportunities for TNCS to use political leverages on the government policy making process that sways judicial decisions often in favour of corporate interest regardless of their marginalising effects on the public interest. The Indonesian parameters are likely to have parallels in other developing countries. For the benefit of these countries, this article draws from the Indonesian experience some lessons worthy of wider adoption. In recognition of FDis as an economic survival and development imperative in these countries, as is the case in Indonesia, it purports to strike a balance between competing corporate and public interests. It suggests legislative and judicial reforms for an FDI- friendly environment to restore TNCS' confidence in the legal system and judicial process in protecting all legitimate, whilst preventing any unethical and illegal, corporate activities, which will in turn safeguard the public interest in host countries. SIGNIFICANCE OF FDIS FOR INDONESIA Positive correlations between FDis and economic growth in host countries, however debatable, vary from economy to economy depending upon their individual circumstances at any given time. Indonesia is perhaps one of those host countries that have experienced this truth in the cycles of their economic development. In the context of Indonesia, the correlation between Fi)is and economic growth can be best explained by looking at its economic conditions following the Asian financial crisis in 1997. Its economic recovery was evidently slow compared with other Asian countries, like Thailand and South Korea, which were able to attract new FDIS soon after the crisis.2 Without new FDI inflows, the Indonesian economy was worsening by a continuous capital withdrawal during 1998-2003. Only when foreign investors' confidence resuscitated and FDI inflows generating export of manufactured goods regained momentum in 2004 its economy started to recover and continued to experience a steady growth. Thus, it is evident that the lower investment activities amidst the Asian currency crisis significantly stultified the economic growth of Indonesia.' Empirical studies on FDI impacts on Indonesia found that FDis have been a major catalyst in bringing benefits essential for its economic growth. FDIS significantly contributed to boost Indonesian exports. Such a study on 13 Indonesian manufacturing industries from 1990 to 2000 indicated that the export offoreign-controlled factories was significantly higher than that of local plants.4 This finding was consistent with the World Bank showing the share of Indonesian total export trade in manufactured goods increased from 3% in 1980 to 57% in 2000 when foreign investors started to expand their business.5 Foreign-owned plants in the manufacturing sector created job opportunities 5% faster, and labor productivity higher, than that of solely locally owned enterprises, and positively facilitated technology spillover from the former to the latter.6 Such technology transfer from FDIS to local suppliers resulted in welfare gains through greater outputs and lower prices of products, benefiting suppliers, final goods makers, and consumers.7 The above empirical observations underscore the paramount significance of FDIS for economic development in Indonesia. Given these benefits, Indonesia has strong incentive to provide a positive and patronising environment to attract Fms and aggressively been liberalising its investment policies and introducing legislative reforms to portray itself as a safe destination of FDIS since 1998. The financial sector has witnessed the improvement of surveillance mechanism, removal of barriers, and implementation of transparent licensing procedures. Legal reforms on corporate governance and requirements for more responsible business conducts have been introduced. Competition Law, enacted in 1999, now provides and ensures a competitive business environment. More importantly, a new Investment Law passed in 2007 has clarified the Indonesian policy framework for investment.8 However, these reforms are not necessarily enough to sustain and increase the current Fm inflows because of its perennial problem of lacklustre legal protection, unreliable and politicised enforcement, and widespread corruption.9 Despite the challenges referred to, the prospect of FDIS inflows to Indonesia seems to be promising. An UNCTAD survey placed Indonesia in rank 9 out of 15 most attractive destinations for FDIS.111 Despite the ongoing global financial crisis since 2009, Indonesia has been able to maintain its FDIS growth." These achievements may be a strong indication that more FDIS will enter into Indonesia in the years ahead. The government realises that more FDI inflows are critical to raise its projected economic growth rate to 7%.12 To sustain these accelerating Fm inflows for the targeted growth rate, the government has no other palatable option but to strengthen the fDl-friendly business environment. It is amidst this posture that TNCs exert political influence on the government to adopt specific policy-spaces for FDIS to protect corporate interest, which tilts more often than not against the public interest in situations where these two competing interests come into conflict. POLITICAL STRATEGIES OF TNCS The responsibility and ability of host countries to control FDl-led resources exploitation in the public interest and in support of domestic industries' competitive edge has made their governments 'the major sources of uncertainty' for many TNCS.13 In a bid to overcome their commercial uncertainty, TNCS have been actively adopting various strategies, albeit including political, to influence the public policy making process. There are three theories that may explain why TNCS engage in political strategies. First, the interest group theory endorses that public policies are the results of a compromise between the competing interests of different interest groups, including customers, corporations, and politicians or public officials; and that regulatory policies which affect FDIS usually are made by a power battle between these interest groups. Second, the public choice theory maintains public policies as a product of market-like exchange between government officials and private actors. TNCS provide governments with resources such as votes and campaign funds and in return governments provide private actors with favorable public policies. And third, the resource dependency theory suggests that TNCS depend on host governments as the sole resource of favorable regulations.14 Consistently with the public choice theory, TNCS generally employ three different types of political strategies: information, financial incentive, and constituency building, which correlate to the goods exchanged in the political markets, namely information, money, and votes. In their information strategy, TNCS influence public policy makers by providing specific information on the cost and benefits of various issues-oriented outcomes. In their financial incentive strategy, TNCS directly supply financial support to either political decision-maker or political party. And in the constituency building strategy, TNCS obtain favorable political decision by mobilising their individuals, namely employees, customers, and suppliers to express preference for a particular policy maker or political party. 15 When doing business overseas, Tt�res have strong incentives to apply at least one of these political strategics to safeguard their substantial investment and business interest in host countries. 16 TNCS surniise that their bargaining power with host governments is likely to be eroded partially over time in response to other stakeholders' intervention. Therefore, influencing the government policy pertaining to FDis is crucial for TNCS to assure that policy makers take corporate interest into account in formulating public policies.17 The political strategies that TNCS and their subsidiaries apply to influence government policies on FDIS in Indonesia in the main include: exit threat, home government pressure, and local political partnership, which are utilised in three different ways. First, when the government introduces new regulation that adds more obligations for foreign investors to serve the public interest, TNCS react and respond by threatening to relocate their operation to a less demanding country. The fact that host governments are in competition for FDi enables TNCs to use this position to pressure the Indonesian government not to create conditions inimical to corporate interest. The exit threat strategy is aimed at informing the government that its policy is not welcomed. This strategy often acts effectively mainly because the relocation of Fm would not just harm the economy, but the signaling domino-effect of FDI relocation may prevent or discourage further FDI inflows to Indonesia. The home government pressure strategy is used when the stake at risk is significantly high and relocation to another country is commercially unreasonable or practically impossible. TNCS seek support from their home government to resolve their problem primarily because of the fact that their home countries (mostly developed) can exercise their strong bargaining power and political clout in dealing with Indonesia, a developing country. TNcs expect that the pressure of their home government will persuade the host government of Indonesia to amend, delay, or change any policies unfavorable to corporate interest. Whilst the above two strategies are reactive in nature, the political partnership strategy is proactive in approach. TNCS establish their political alliance by allocating shares to public officials, political party leaders, or their family members and affiliated firms, usually as minority shareholders. TNCS also enter into joint operation agreements with domestic companies which have strong affiliation with public officials, political party leaders, or their family members. These strategies culminate into the financial incentive strategy, which transfers financial benefits to policy makers usually indirectly in the form of equity benefit and company's profits. The political strategies of TNcs have not only been applied to influence the government policy-making process but also permeated into the judicial settlement process in Indonesia particularly in cases where TNCS' interest is at risks due evidently to its conflict with the public interest. TNCS take the full advantage of the Indonesian judiciary marked by its judicial power sharing with Parliament, domination by the executive government, judicial incompetence, and corruption; and cascade their interference through the government to the judicial process. TNCS influence the Indonesian government and policy makers to take and implement those policy-spaces and options that would impact on thc judicial decision making in a manner that protects corporate interest irrespective of their marginalising effect on the public interest. THE CURRENT STATUS OF THE INDONESIAN JUDIC IARY The pursuit of an independent and credible judiciary remains ongoing in Indonesia. Historically, the judiciary was subservient to and under the absolute control of the executive during the era of Soekarno (1945-1965) and Soeharto (1965-1998).18 The process of judicial reformation to establish an independent and accountable judicial system commenced in 1999. The first notable effort towards a credible and effective judiciary was the enactment of Law No. 35 of 1999 on Fundamental Provisions concerning Judicial Power and Law No. 43 of 1999 on Fundamental Provisions concerning the Civil Service. These new Laws separated the judicial authority of courts from the executive control and lower court judges from their 'civil servant' status. 19 Despite these attempts, the judiciary remained far from being credible and independent, lacking accountability and transparency" The Indonesia Commercial Court, established in 1998, exercised jurisdiction to adjudicate bankruptcy cases, enabling foreign investors to avoid corruption practices in regular courts. This court, functioning under the new Laws, failed to stop bribery practices,'-1 as there was strong indication of corruption in the rulings of this court.22 The new Laws were followed by a major step in judicial reform through the enactment of the third amendment to the Constitution in 2001, which provided constitutional ground for the independent exercise of judicial power and the enforcement of law and justice.23 It also introduced a new mechanism, the Judicial Commission, for the appointment of the Supreme Court judges.24 This Commission was mandated to prepare a shortlist of candidates to be appointed as judges of the Supreme Court and present the list to Parliament for further scrutiny and appointments to be confirmed by the President.25 This progress towards judicial reform was consolidated by the enactment of four judicial laws in 2004,26 and subsequently improved further through the enactment of five judicial laws in 2009.27 These new legislations introduced a number of judicial reforms, rendering the Supreme Courts in charge of all four judicial bodies - called the 'one roof' judicial system with new mechanism for accountability and transparency.28 Despite the above successive judicial reforms, the Indonesian judiciary is far from being independent, credible, and effective. The independence granted in the new amendments and Laws remains 'half full and half empty' because most judicial authorities of the Supreme Court and the Judicial Commission are left to be regulated by statutes.29 This means that judicial power is not exclusively vested in the judiciary but shared, to a significant extent, with Parliament. This dilution of the separation of judicial power depreciates the ability of the apex judiciary to pursue stable institutional structure, staffing, career development, financial management, and arrest corruption practices in courts. A survey on the integrity level of the public sector in 2008 found that three district courts under the administration of the Supreme Court were among five public service units that had the lowest integrity scores.311 The Supreme Court itself realises that the main challenges in improving the independency and credibility of the Indonesian judiciary are corruption practices, low quality and inconsistency of judgments, judicial incompetence, significant delays in the litigation process, and the lack of transparency.3' The Indonesian judiciary may well take a long period to improve its status and efficiency, but addressingjudicial incompetence and corruptions as a matter of priority is in order to solicit public confidence.32 It is the persistence of the lack of independent and credible judiciary that erodes TNCS' confidence in judicial settlements and affords opportunities to use political leverages instead to influence judicial decisions to protect corporate interest. POLITICAL STRATEGIES OF TNCS IN PUBLIC INTEREST MITIGATION The relevant cases examined below to highlight the political influence of TNCS directly on the government and indirectly on the judicial decision making process to advance corporate interest represent the two distinct periods of judicial reforms: 1999-2004 and 2005-2009. WALHI v. FREEPORT (2000) Wahana Lingkungan Hidup Indonesia (Walhi) v. PT Freeport Indonesia Company (PTFI)33 is an example of how local political partnership and home government pressure strategies are used by a TNC to safeguard its corporate interest in public interest litigation. The plaintiff Walhi filed this case following the landslide accident which caused the death of four people on 14 May 2000. The accident occurred in the Wanagon Lake in Irian Jaya where the defendant PTFI dumped mining wastes and rocks since the beginning of its operation in 1971. Walhi alleged that P'rFI violated Law No. 23 of 1997 on Environment by providing incorrect and misleading information about its environmental management in mining operations. Walhi claimed that the landslide was caused by the poor environmental management ofPTFl. Therefore, Walhi requested the court to hold PTFI responsible for the violation of the Indonesian environmental law and order to make public apologies in national and international mass media for 10 days in the wordings set by the plaintiff.34 The District Court of South Jakarta found that PTFI violated Article 6(2) of the 1997 Environment Law by providing the public with incorrect information that there was no evidence of the landslide causing harm to human health and that there was no long-term impact on the environment.35 The decision dealt with merely a peripheral issue and avoided the determination of the real cause of the accident. The court focused on the obligation of PTFI to provide correct information on the environmental condition of the Wanagon Lake only after, not before, the accident. In fact, the main claim of the plaintiff was that the defendant disseminated incorrect information about the overburdened dumping of rock wastes in the Lake which in effect caused the accident. The court did not deal with this central issue. Nor was there an explanation in the judgment why the court decided to disregard this issue. The determination of this issue had wider implications. It would have forced the court to decide whether or not PTFI could continue to deposit its toxic and rock wastes into the Lake. Seemingly, the court was reluctant to decide the legality of the dumping of mining wastes by PTFI in the Lake. It ordered PTFI to make maximum possible efforts to minimise the risk if future, landslide and maintain the proper water quality level in the Lake that flows to the surrounding rivers. This order is clearly indicative of the admission by the court that the way PTFI has been depositing its rock wastes was inappropriate, and the water quality of the Lake below standard. By ordering P'rFI to improve its environmental management in the Lake, the court essentially recognised that the environmental management of PTFI in the Lake was poor before the accident. This recognition and its related order were evidently inconsistent with the judgment which only found the violation of Environmental Law by P'rF� subsequent, but not prior, to the accident. Apparently there were two events that might have influenced the outcome of the case. First, there was an indication that political power of the local partner played a significant role in this case. At the time of the case, Freeport-McMoRan Copper & Gold Inc, a US based mining giant and the parent company of PTFI, held 81.28% shares, and both the Indonesian government and PT Indocopper Investama Corporation (Indocopper) each held 9.36% shares. Part of Indocopper shares in PTFI was owned by PT Nusamba Mineral Industry (50.48%),36 a company affiliated to Bob Hasan, a close crony of Soeharto, stalwart of the ruling Golkar party, and once the Minister of Trade and Industry. When this case was filed in November 2000, Purnomo Yusgiantoro, another Golkar party loyalist, was the Minister of Energy and Mineral Resources (EutR). Following the Wanagon Lake disaster, there was no reaction from the Ministry of Emr condemning PTFI for its failure to prevent the landslide from occurring. On the contrary, in December 2000, Minister Yusgiantoro issued a decree allowing P'rFl to continue the dumping of mining wastes into the Wanagon Lake, which was still under judicial consideration. This ministerial decree sent a strong signal to the court that, from the government point of view, there was nothing wrong with the deposit of toxic rock wastes into the Wanagon Lake. Pressures from the home government might have indirectly contributed to the result of the case. Strong comments by the US Ambassadors prevented the Indonesian Ministry of Environment from taking necessary action within its power against the offending TNC. Several months before the accident, P'rFt published a report of environmental audit carried out by an independent international consultant to promote itself as an environmentally responsible company. This report in part contained the information that was incorrect and misleading. In September 2000, two months before Walhi filed the case, the State Minister of Environment Sonny Keraf strongly criticised Ptfi's environment audit report and found that at least ten points needed further verification.37 As a reaction to ministerial criticism, then US Ambassador to Indonesia Robert Gelbard publicly accused Minister Keraf, alleging that the Minister was criticising only American companies and doing virtually nothing to deal with the real and important environmental problems affecting Indonesia.31 The Ambassador further expressed his disappointment when Keraf was re-elected as the State Minister of Environment.3y Notwithstanding Article 41 of the 1961 Vienna Convention on Diplomatic Relations requiring a foreign diplomat not to interfere in the internal affairs of the host state, the Ambassador overtly interfered in the host state's domestic governance of 1''rFt with impunity presumably due to the economic clout that the US enjoys over Indonesia. Following these pressures from US Ambassador, neither Keraf nor the Ministry of Environment took any action against PTFI or got involved in this case, despite their authority to do so.40 With the prior knowledge of environmental damages in the Wanagon Lake caused by P'rF�, had the Minister and/or Ministry been actively participating in this case by providing expert witness and evidences, the possibility of a different outcome could not have been gainsaid. MINAHASA V. NEWMONT (2000) In Pemerintah Daerah Minahasa v. PT Newmont Minahasa Raya (1''rNMR), the regional government of Minahasa filed a lawsuit against PTNMR in the Tondano District Court claiming that the defendant owed the plaintiff US$2.8 million for unpaid taxes.41 This tax was for the extraction of stone, gravel, and sands by the defendant between 1996 and 1998 in accordance with the Regional Regulation No. 7 of 1998 on the Taxation of Mining Activities on Materials. PTNMR denied the obligation, arguing that its mining operation was regulated by the 1986 Contract of Work, which excluded PTNMR from paying any taxes for the stone, gravel, and sands extracted as part of its mining activities.42 P'rNUtR also argued that the extraction of the stone, gravel, and sands was not for any commercial purposes but wastes in the gold mining process. Moreover, the regional regulation under which the tax was levied enacted in 1998, which was not applicable retrospectively to PTNMR.4J However, before examining the main issue of the dispute, the plaintiff requested the court to issue a provisional decision. The court granted the request and issued a provisional order on PTNMR to shut down its extraction activities pending the final decision of the disputes. 44 Few days before the scheduled date for the execution of the provisional decision, a delegation of PTNMR executives met with the Secretary-General of the Supreme Court. This was followed by another meeting with a number of Members of Parliament and a parliamentarian spoke to the press that this provisional decision would bring negative impact on the Indonesian investment climate-.45 Similar comments were also made by other government officials, business association leaders, and the Ambassador of Singapore to Indonesia.46 Indeed, following this provisional order, 16 foreign investors filed applications for the termination of their projects in Indonesia." All these exit threats eventually culminated into the issuance of a letter by the Supreme Court Chief Justice ordering the Tondano District Court to delay the execution of its provisional decision. Although the Supreme Court denied any government and PTNMR pressure in issuing this letter, the Chief Justice admitted that the letter was issued after a careful examination of the documents related to the case provided by the Ministry of Mines and Energy.48 This intervention of the ChiefJustice was praised by many as an effective way to restore foreign investors' confidence that had been damaged by this lawsuit Eventually, the case was settled through an out-of-court settlement with the regional government ofMinahasa, which eventually dropped the cause.50 The events that occurred at aftermath of the provisional decision and prior to its execution clearly explain how an 'exit threat' strategy by TNCs can influence the judicial decision making in Indonesia. Although PTNMR. itself did not threaten directly to relocate its operation from Indonesia, it succeeded in its campaign, albeit together with other TrrCS, in convincing the Indonesian government that this precedent would create a negative image concerning the protection of Fdis and harm the Indonesian investment climate, leading to their high outflows and low inflows. 51 FDIS are obviously crucial for the economic growth in Indonesia and PTNMR successfully exploited this vulnerable position of the government. Ro/1�. NEWMONT AND NESS (2006) In Republic of Indonesia v. PT Newniont Minahasa Raya (P'rrrn�k) and Richard B. Ness (Director), the Indonesian government brought a criminal action against PTNMR and its Director for polluting the Buyat Bay. After an investigation by the Indonesian Police, the Prosecutor officially charged PTNMR and its Director with multiple criminal acts of pollution under the Law No. 23 of 1997 on Environment.52 In its indictment, the Prosecutor accused PTNMR for illegally dumping toxic waste and placing the exhaust tailing above the minimum depth, which caused environmental damages and health problems to Buyat Bay villagers.53 Following the arrest of several PTNMR executives by the Police, the US Embassy in Jakarta immediately reacted by releasing a press statement, which criticised the detention as inappropriate and warned that this incident could further harm the investment climate in Indonesia.54 Soon after this press statement, the US Ambassador held a meeting with the Indonesian President and Chief of the Police to express his concern about the arrest of US nationals and urged that the detention be suspended immediately.55 The successor Ambassador went one step further. In an official press conference, he contended (a) that the lack of legal certainty was a major problem for Indonesia in attracting foreign business; (b) that the prosecution of PTNMR executives was setting a bad example for attracting foreign investment; and (c) that the Indonesian government should assure that one would not be brought to a criminal court without evidence, as happened in this case.56 Interestingly, the Ambassador was confidently being judgemental on the lack of evidence in the case at a time when the investigation-led evidence was under examination by the court. After examining both side arguments and evidence, the court found on 24 April 2007 that PTNMR and its Director were not proven guilty of committing the crimes in the indictments.57 The prosecution failed to provide convincing evidence to prove that the defendants committed the accused crimes. Admittedly, the trial was marked by inconsistencies in the key evidence, poor presentation of witnesses, and unprofessionalism in handling the case by the Prosecutor.51 It is also equally true that the judges frequently intervened during the questioning of the defendant witnesses by the Prosecutor, who raised no objection when the defence lawyers insidiously impaired the credibility of the prosecution expert witness by asking questions leading to a certain conclusion.59 Although the Prosecutor declared that the judgment would be appealed, no attempt was made to appeal at the higher court. These facts tend to suggest that both the Police and the prosecution did not seriously pursue this case, which seemed to be meant to fail right at the start. The enthusiasm and confidence that the prosecution displayed at the time of initiating the case and framing the charges dissipated markedly soon after the repeated adverse public comments on the Indonesian FDI protection regime by high profile officials from the home country of the defendants and their meetings with the Indonesian President and Police Chief. Given the fact that these comments and meetings took place in the context of the case, the passivity of the prosecution may be more than sheer coincidental and incompetence. One cannot help but inclines to infer that the sudden loss of momentum in pursuing the case by the prosecution was attributable to the overt home government pressure and covert exit threat cascaded through the Indonesian highest authority played a role in shaping the judicial outcome. H�4LH7 v. Lapindo (2007) In Wahana Lingkungan Hidup Indonesia (Walhi) v. PT Lapindo Brantas Inc (PTLBI) et al,60 the plaintiff filed a lawsuit against 12 defendants61 to the District Court of South Jakarta in February 2007. Walhi filed this lawsuit following the mudflow disaster at the drilling operation area of the Brantas Production Sharing Contract (Psc), a joint operation project for natural gas exploration. The mudflow forced the displacement of thousands of local residents losing their lands, houses, and jobs. When the mud started to erupt on 29 May 2006, Brantas Psc was jointly operated by three corporations: PTLBI (50%), PT Medco E&P Brantas (32%), and Santos Brantas Pty Ltd (18%). P'rLB� was a company affiliated to Aburizal Bakrie, a senior member of the ruling Golkar party and Coordinating Minister for People's Welfare in the President Susilo Bambang Yudhoyono (SBY) cabinet. The plaintiff based its claim on the strict liability principle under Article 35 of the Law No. 23 of 1997 on Environment Management, which provides that business entities are strictly liable for the damage to the environment, regardless of whether or not the element of fault exists In its judgment, the court stated that the central issue of this case was to determine who would be held responsible for the mudflow accident. The judges relied heavily on the expert testimonies as to whether the accident was caused by the failure of PTLBI to install special casing for drilling equipment or by natural phenomenon such as the earthquake that happened few days before in areas about 300 kilometres away from the drilling area. After examining all testimonies, they came to the decision that the mudflow disaster was caused by natural phenomena and as such the corporate defendants could not be held responsible.63 This is a case that exemplifies the use of local political partnership strategy by TNC to protect their business interest and avoid liability. The influence of Aburizal Bakrie, a prominent politician, then incumbent minister, and a major partner in PTLBI, is difficult to rule out altogether. Despite the public statement of the State Minister of Environment that the mudflow could be 'categorised as environmental pollution', the government took no legal action against the responsible companies.64 This is in stark contrast to the government's immediate legal action against mining activities polluting the Buyat Bay on the strict liability principle in State Ministry of Environment v. PT Newmont Minahasa Raya.65 Although the case was dismissed for want of jurisdiction.,66 the Ministry appealed to the High Court. It was this government persistence to pursue this case that forced PTNMR to offer an out-of-court compensation settlements Given the devastating impact of the xnudflow disaster on the entire community, a serious legal action including appeal on the basis of the strict liability principle against all corporations involved was in order to protect the overriding public interest at stake. But no such initiative and persistence expected of the government was present. The involvement of elite political personality and his business interest in the case appeared to have contributed to the gerrymandering posture of the government. The government inaction to sue all companies involved in the drilling operation eventually provoked NGOS to take legal actions against these companies.68 Surely the government was not immune from responsibility. It was the government that approved the drilling operation for these corporations but failed to take immediate measures to mitigate the impacts and hold the responsible corporations liable. However, being sued on the same side with the government was an advantage for the foreign corporate defendants. Both the government and corporate defendants pursued similar strategy to exonerate their legal responsibility by shifting the real cause of the disaster to the nature. Rudi Rubiandini, a petroleum expert from the Institut Teknologi Bandung and expert witness for the plaintiff, testified that this accident took place due to the operational failure to install a special casing to the drilling equipment when drilling below 927 feet deep.69 This testimony was refuted by two expert witnesses for the defendants, testifying that drilling activities without installing the casing in up to 600 feet deep was common and had no correlation with the mudflow, which was caused by the movement of earth as a result of the earthquake erupting fluids from the depth of 4,500 meters to the surface.70 The government also openly claimed natural phenomena as the cause of the disaster. The court placed more weight on the expert testimonies of the defendants than that of the plaW tiffwhcn there appears to be no set standard on how judges should examine contradicting scientific evidences and any given scientific evidence deserves more weight than others. If the mud eruption was caused by the earthquake, why did it happen only in the Brantas Psc drilling project, not in other drilling projects operating in adjacent areas even closer (than Brantas Psc drilling) to the same earthquake? Despite such pertinent yet unanswered questions, the judges concurred with the defendants' position on the cause of the mudflow. The government was aware that huge funds would be required to re-build the infrastructure to stop the mud eruption, which was unpredictable and the damage could grow higher over time with consequential mounting liabilities for the defendants including those in the government. Indeed, the mud has been erupting for more than five years now and continuously covering larger area. Being one of the defendants along with corporations, the government did not issue an administrative order within its power requiring all corporations in Brantas Psc to jointly share the liability and cover the damages.71 Given the pervasive culture of self- serving influence by ruling politicians and judicial mindset of somewhat toeing to the government line in Indonesia, it is easier to affirm than to deny that those influential politicians who had vested commercial interest in the outcome of the case leveraged the government's unequivocal stand on the liability for the damages, which sent a clear message to the court. DAVm ML Toewc v. INSïTIVT PHRTANIAN Bocok FJ" AL (2008) The plaintiff in the popularly known 'formula milk' case sued the Bogor Institute of Agriculture (IPB) for violating Article 1365 of Indonesian Civil Law by publishing the conclusion of a research report that found contaminating bacteria in 22 brands of infant formula milk but did not publish their brand names. The plaintiff alleged that the National Agency of Drug and Food Control (NADFC) and the Ministry of Health (MoH) also violated the law by failing to take appropriate measures within their power to publish the brand names of contaminated milk in the interest of consuming public. The District Court of Central Jakarta decided that all defendants have violated the law and ordered the defendants to publish the brand names of the contaminated milk.72 This decision survived on appeal at the High Court of Jakarta and the Supreme Court of Indonesia Under the Indonesian procedural law on civil litigation, the decision of the Supreme Court is final and binding for all parties in disputes,�4 which the defendants defied. IPB refused to publish the brand names of contaminated milk on the ground that releasing these private research findings for public use was against the ethical code of conduct universally recognised in the scientific world." Both NADFC and MoH did not comply with the Supreme Court decision either on the pretext that they were not involved in the research and did not possess any information about the research finding.76 Pursuant to the plaintiff request, on 26 April 2011 the District Court of Central Jakarta issued a reprimand letter ordering IPB, NADFC, and MoH to comply with the Supreme Court decision and publish the brand names of contaminated milk within eight days from the issuing date of that letter, which went unheeded.77 The plaintiff therefore requested the District Court of Central Jakarta to make a forced execution order. In response, IPB submitted its application for a special examination,78 and the government sought an injunction on the forced execution,79 from the Supreme Court. The government's refusal to comply with the binding decision of the Supreme Court set a bad precedent for the rule of law, judicial effectiveness, and legal certainty in Indonesia - demonstrably a backward step undermining the quest for strengthening the judiciary that has been ongoing since 1999. The government had no legal barrier whatsoever in publishing the brand names of the contaminated milk. For assuring public health and the safety of food and drugs for public consumption is one of the main legal duties of MoH. In order to perform this obligation, MoH had the full authority to ask IPB to share its research finding. Alternately, since this research was funded by the Directorate General of Higher Education under the Ministry of Education, MoH could have simply coordinated with the related department to gain access to that research report. MoH might have been fearful of any potential legal action by the manufacturers of alleged contaminated infant formula milk. But any such legal action would have failed because a party to a dispute could not be sued for taking measures to comply with a court decision. There were at least six TNCs manufacturers conducting marketing activities for selling their infant formula milk products in Indonesian markets through their subsidiaries.80 Although the brand names of contaminated infant formula milk were unknown, it was very unlikely that their products were not among the 22 bacteria- infested brands. The publication of the brand names would have significantly harmed their commercial reputation nationally and globally, leading to a significant decline in profits and facing numerous legal actions for compensation by customers. Thus the risks at stake were substantially high for Tt.�CS, which would use every possible means to avoid these risks. So why did MoH disregard the Supreme Court decision? One possible answer may be that it was influenced to protect the interest of TNC manufacturers. If it is true, the kind of strategy TNCS used in this case was unknown. The TNC manufacturers of infant formula milk expressed no reaction; nor was there any indication of home government pressure or exit threat strategy. None of these TNCS had any known affiliation with political leaders or government policy makers. However, there was once a statement by the Executive Director of Baby Food Manufacturer Association (BFMA) of which all involved TNCS were members. In that statement, BFMA fully supported the decision of IYS, NADFC, and MoH not to publish the brand names of contaminated milk. It further guaranteed that all infant milks manufactured by BFMA members were safe for consumption.81 Interestingly, the Executive Director of BFMA, who made the statement, previously was the Director of Standardisation of Food Products of NADFC and responsible for the safety of food products when this case commenced in 2008. Admittedly, it is not known yet whether TNCS concerned have surely influenced the government policy and if so what type of influence. TNCS might have tried to influence the government by using the information strategy individually or collectively through their business association in a bid to share the cost and benefit of such action Indeed, there were strong incentives for TNCS to use collective rather than individual action in this case. Apart from declining sale and consumer backlash, by acting collectively TNCS might have convinced the government that this case would not only harm TNCs, but also local firnis manufacturing milk products and the huge number of employees, farmers, and suppliers, who depend on milk industries. Regardless of these speculations though, the decision of the apex judiciary remains in limbo and unheeded despite the potential for grave consequences on the public health of infants. So far, none of the parties IPB, NADFC, or MoH has offered any public explanation as to the safety of infant formula milk or refuted scientifically the original test result of contamination. These inactions particularly of MoH have been condoned on the face of its legal responsibility to assure consuming public of the safety of food and drugs and the public right to know. LESSONS TO BE LEARNT FOR DEVELOPING COUNTRIES One of the fundamental responsibilities of a good government is to protect the public interest and welfare of its citizens. FDls-induced development as a catalyst for national economic well-being and felicity has become a major policy consideration in developing and developed countries alike. The prime suppliers of FDIS are TNCS, which strategically pursue profit maximisation and risk minimisation, preferably risk-free conditions, in any markets they operate. In such a business operating psyche where self- serving corporate interest is the decisive factor, the socio-economic welfare and public interest of communities are often lost in the margin of high profits. Moreover, the short supply of FDIS compared with their ever growing demands has created a competitive environment, in which governments compete against each other to attract more and more Fms, affording Trrcs a unique bargaining opportunity to limit the policing of their corporate activities by host governments. In this pursuit, TNCS resort to various extra- commercial strategies, which can generate circumscribing effects on the independent competence of host governments to govern their national welfare and public interest in many instances. Indeed, many developing countries in this race to the bottom for FDIS have lost or are on the verge of losing their sovereign authority to look after the legitimate interests and rights of their nationals. As a result, the resolution of this dilemma, more often than not, tips the balance in favour of corporate interest and to the grave detriment of public interest. The Indonesian examples epitomise the pressing problem and stark choice facing many developing countries in managing a balance between the two competing interests. Therefore as a logical follow-up, certain balancing legislative and judicial measures are deduced from the Indonesian experience to serve as lessons worthy of imitation by other developing countries hosting and attracting Fms. These measures to forestall extra-legal consideration in judicial decision making may be intuitively taken for granted in developed countries but remain a real challenge in many developing countries. The effective implementation of these measures is likely to functionally circumscribe Tt�CS' scope of maneuvering their commercial clout and political strategies to protect corporate interest at the expense of public interest in host countries. National FDI promotion agencies, strategists, negotiators, policy makers, and regulators are likely to benefit from these lessons, enabling them to develop appropriate strategies in advance to provide adequate protection to all genuine corporate activities and legitimate interest, whilst preventing their abuses and excesses by holding them accountable and liable for flawed and furtive corporate practices. They must look for sustainable, not just more, FDIS that contribute to their economic growth, environmental protection, and social development. Judicial independence: The Indonesian experience reveals that the transition to the independence of the judiciary through legal reforms is not adequate enough to yield instant result. The introduction of an independent judiciary in law was not matched by the creation of independent judicial minds. The legacy of judicial dependency continued unabated in Walhi v. Freeport where the court was evidently reluctant to examine the cause of the landslide accident to avert conflict with the government, which renewed the perrnit for PTFI to continue the dumping of rock wastes in the Wanagon Lake to the grave detriment of public interest. In Minahasa v. Newmont, the District Court's decision on the temporary closure of P'rrrMR mining operation was untenable to the government, which could not intervene because the new Law No. 35 of 1999 placing the lower court judges under the controlling authority of the Supreme Court. It was very unlikely that, in the absence of documents provided by the Ministry of Mines and Energy, the Supreme Court would have ordered the District Court to delay the execution of its decision. Obviously the judicial reform of 1999 had not been internalised in executive and judicial bodies to unchain their entrenched link established for years. It was this conduit though which TNCS infiltrated to use their political strategies to influence the litigation process for commercial ends. An independent and effective judiciary appears to be a pre-requisite for striking a lawful balance between the competing claims and interests. The judiciary in many developing countries has a long history of dependency on, and subservient to, the executive government. Such dependency not only frustrates the process of impartial judicial decision making but is also susceptible to the injection of extra-legal elements for judicial consideration to subvert justice. Hence, introducing judicial independence may only be the necessary first step, which must be translated into reality in order to lawfully balance both corporate and public interests when they comc at the crossroads. Appropriate measures and safeguards fostering motivation to independent judicial minds in exercising judicial functions would go a long way in attaining the desired balance. Judicial accountability: The requirement of judicial accountability remained absent in Indonesia even after its second judicial reform in 2004. Both Rom. Ncwmont and Ness, and Walhi v. Lapindo failed to offer rational explanation for transparent decision making. In Roi v. Newtnont and Ness, there was no explanation as to why the prosecution initiated and laid the criminal charges against PTNMR so vigorously only to pursue them poorly after reaching an out-of-court settlement in 2006. Following this deal, the court ruling in 2007 exonerated PTNMR from the liability for polluting the Buyat Bay - a dire public interest matter that the court shrugged off without any public explanation and scrutiny whatsoever. The tendency to act beyond judicial accountability was more apparent in Walhi v. Lapindo when the court accepted the government and corporate defendants' claim that the accident was caused by natural phenomena without explaining why the mudflow erupted only in the defendants' drilling area to the exclusion of other drilling operations much closer than the defendants' drilling area to the same earthquakes. Any reform towards independent judiciary must create judicial accountability to the public. It is true that judges are appointed, not elected by the people. But the enormous scope of its power and functions places the judiciary in a vulnerable position to turn into judicial dictatorship in terms of abusing judicial power and discretion not subsumable in law.13 The degree of public confidence in the judiciary is contingent largely upon the public perception of the integrity and transparency of its decision making process. The public accountability of the judiciary is not inimical to its independence but mutually complementary. Judicial independence endures if judicial accountability strengthens. Developing countries, including Indonesia, desirous of effective legal regulation of Trrcs and their FDIS must strive to establish a balanced judiciary, which is independent, transparent, and accountable both constitutionally and legally in exercising its judicial powers and functions, which would narrow down the scope of TNC infiltration. Home country interference: Since the beginning of the Asian financial crisis in 1998, Indonesia experienced negative Fm inflows when other East Asia countries recorded positive inflow." The World Bank report on Indonesia 2000 forecast its longer recovery period and highest FDI outflows than the other two worst-afliicted Asian countries, Thailand and South Korea.85 Only in 2005 the level of FDi inflows started to rise noticeably.86 These economic performance indicators paved the way for home government pressure and exit threat strategies, which proved to be very effective in influencing the government decision not to pursue the criminal liability charges against PTNMR. The government was too sensitive and apprehensive of any potential negative impacts on its investment climate. In its bid to sustain the increasing level of inflows and decreasing level of outflows offDlS, the government arguably had no choice but to take the decision notwithstanding its marginalising effect on a crucial public interest issue. Sluggish economic perforniance brings nervousness in FDI management by host countries. It is fraught with the possibility of inviting effective home country diplomatic and political pressure to insulate corporate businesses and earnings from any new regulatory scrutiny in host countries. Corporate earnings are an important revenue source of home countries, which have direct vested interest in vigorously protecting their foreign income sources. This precisely happened in Indonesia which encountered multiple home country pressures brought to bear overtly through public criticisms of its FDI protection regime by home country diplomats, who also covertly conveyed their exit threats to the government. Resisting capital exporting home country pressure can be an exceedingly challenging and uphill daunting task for many developing countries. But managing and minimising such pressure that condones unethical and underhanded corporate practices is a duty of host countries and imperative to protect the public interest. Foreign diplomats' public reactions to the Indonesian FDi regime was an unwarranted violation of Article 41 of the Vienna Convention on Diplomatic Relations 1961 (both Indonesia and the US are parties), which Indonesia apparently failed to invoke. The mitigating effect of legitimate institutionalised diplomatic defence to counter home government pressure may not be gainsaid. Treating corporate responsibilities under international investment law may be another option. Moreover FDI originating sources are gradually being diversified, making transition from traditional capital exporting North American and European countries to a global distribution including China and ASEAN members. Exploring opportunities to attract FDIS from new players may ameliorate the underdog bargaining position of developing countries in many instances. Self-serving political patronage: The Indonesian experience typifies the self-serving political cover-up of deceptive corporate practices with impunity in many developing countries. The 2004 general election failed to establish a strong government in Indonesia. No political party obtained an outright majority to take decisions in Parliament. The Democratic Party of the elected President SBY secured only 7.45% votes.87 This distribution of representations forced SBY to form a coalition government with the political supports of ministers from rival parties, which resulted in government policies being more of a political bargaining between the coalition members.88 This explains why the SBY government was reluctant to take strong action against the unconscionable corporate practice of Brantas Psc. Any such action would have displeased influential Golkar party politicians serving in the coalition government, who had direct financial affiliation with the TNC involved. It was this involvement of economic interest of ruling politicians that rendered the local political partnership strategy to work effectively in protecting Santos Ltd from being held liable for the mudflow disaster. The problem of political partnership has been declining since the re-election of SBY and his political party with the governing majority on their own right and the final stage of legal reform on the judiciary in 2009. The establishment of a strong government and the final judicial reform impacted positively on political stability and economic growth.90 The government seems to be more confident in dealing with TtVCS with steadily declining conflicts between corporate and public interests. Political opportunism, insolent public interest record, uncontrollable sectarian economic interests, and precarious accountability are deeply entrenched in the political culture of many developing countries, militating against their efforts to regulate Fms for maximum possible economic gains. These unaccountable political power abuses must be brought, albeit gradually and carefully, under accountability disciplines and a national benefit approach. This may be achieved in two different ways working concurrently. First, strict legislative vigilance over the business interests in foreign corporate activities and income sources of all politicians, especially those in power, needs to be introduced through the enactment and enforcement of appropriate law based on the conflict of interest principle. This legislative discipline must mandatorily be monitored by ombudsman, comptroller, auditor-general, or anti-corruption authorities with violations calling into question before the judiciary. And secondly, financial impropriety arising from political partnership with TNCS may be exposed publicly by naming and shaming those beneficiary politicians to generate national public opinion as a deterrent. After all, the people of host countries have permanent sovereign right to, and control over, their natural resources and are entitled to know whether their ministers have pledged priority to their own self-interest and those of TNCS over the national interest. Executive unamiability to judicial authority: The alleged contaminated in£1nt formula milk is yet another case where corporate and public interests were in conflict. Though TNCS were not direct parties in this case, its outcome was certain to impact on their business interest. The refusal by the government to obey the Supreme Court order to publish the brand names of contaminated infant formula milk and its failure to provide legitimate reasons for not doing so is a clear example of executive arrogance and unamiability to judicial authority. This decision of the government tends to ignore the public health implications and the public right to know the potential risk involved in infant formula milk in markets, which in effect safeguards the corporate interest of TNCs manufacturers of that milk. On their part, TNCS appear to have resorted to a strategy different from those previously employed. Instead of participating in this case directly, TNCs have joined force with domestic firnis to establish a business association and appointed a former high ranking government official as the director of this association. And it was this association and its director who made public statements strongly endorsing the government policies and position. Whether these statements are indicative of any prior influence by the association and its director on the government not to publish the brand names of contaminated milk is unknown. But these supportive statements arc sympathetic to corporate interest and antipathetic to the public interest. Should a parallel strategy of collaboration between TNCs and local firms exist in other developing countries, a legislative policy appraisal and response with a view to regulation is warranted and indeed imperative when such collaboration is known or has reason to know would step over its business threshold into impairing the public interest. Explicit constitutional and legislative arrangements for the separation of powers with appropriate checks and balances between government organs may help consolidate judicial authority and minimise instances of executive defiance. CONCLUSION The competitive task of establishing and sustaining a FDI-friendly environment exposed Indonesia, like many developing countries, to various corporate pressures aimed at influencing the government policies to pervade into the judicial decision making process. The examination of public interest litigations in Indonesia implicates TNCS for using political strategies to protect corporate interest in cases where corporate and public interests are in conflict. Attracting and maintaining FDIS is as much an economic survival and development imperative in Indonesia as in most developing countries. But the management of Pot-induced economic development without compromising the public interest has become a daunting challenge for them. This article draws some lessons from the Indonesian case studies for other developing countries in parallel situations. These lessons are not necessarily panacea, but contributory means, to resolve this conflict by striking a balance between the two competing interests. To this end, effective legislative and judicial measures are accorded priority for obvious reasons of their partial or full absence in Indonesia and many developing countries. This lacking induces their governments to politically interfere with the judiciary with impunity and erodes Tt�CS' confidence in the judicial protection of corporate interest. As an alternative, TNCS find it convenient to exert political influence on host governments to pursue such FDI policies that cascade down the judicial process to safeguard corporate interest at risk from the competing public interest. There appears to be no viable alternative to the establishment of the rule of law administered by an independent judiciary to restore corporate confidence in an impartial judicial decision making process to ensure legitimate business certainty and interest, whilst preventing deceitful corporate practices that often militate against the public interest. Despite significant progress in judicial reforms in Indonesia, establishing an independent and credible judiciary is likely to require longer time and serious commitment from the government and the judiciary. The defiance of the apex court ruling by the government in the infant formula milk case has but added to the ongoing confidence crisis in judicial neutrality and legal certainty. It undermines successive legislative reforms since 1999 for an independent judiciary. The Supreme Court order remains valid but unexecuted. The final outcome of this standoff between the government and the judiciary appears to be a test case to show whether or not the transformation towards an independent and effective judiciary has been crystallising in Indonesia. The bid for an independent judiciary free from executive control remains a hard battle in many developing countries. So does the legacy of lopsided power relationship between them that continues unabated. The judiciary frequently experiences executive invasions for political expediencies. The executives in these countries are still grappling with the ethos and spirit of judicial independence. The motivation to a judicial mind and due process in performing executive activities and functions is a pre-requisite of good government. So long as the vast empires of executive authorities remain uncontrollable by law and not amenable to judicial oversight, the quest for striking an effective balance between competing corporate and public interests in many developing countries will remain elusive.
PY - 2019
Y1 - 2019
UR - http://www.scopus.com/inward/record.url?scp=84954215518&partnerID=8YFLogxK
U2 - 10.1163/221190011X00049
DO - 10.1163/221190011X00049
M3 - Review article
AN - SCOPUS:84954215518
SN - 1660-7112
VL - 12
SP - 701
EP - 723
JO - Journal of World Investment and Trade
JF - Journal of World Investment and Trade
IS - 5
ER -