People's Consultative Assembly chairman Zulkifli Hasan, right. (Antara Photo/Regina Safri)

Legal ‘Jihad’ Against Private Sector Gathers Pace in Indonesia


APRIL 24, 2015

The National Mandate Party, or PAN, elected its new chairman, Zulkifli Hasan, right, on Sunday. He is seen in this photo with Muhammadiyah chairman Din Syamsuddin. (Antara Photo/Regina Safri)

Jakarta. The head of an Indonesian Muslim organization has filed cases to overturn three laws, escalating what he calls ‘a constitutional jihad’ that has already dealt a blow to investors in the oil, gas and water sectors and now threatens to hit more.

Muhammadiyah, a social movement with some 30 million members, has identified 115 laws it believes violate a constitutional tenet that natural resources must be controlled by the state for the benefit of the Indonesian people.

“We will not stop as long as there are any laws that are contradictory to the constitution. This is our constitutional jihad, it’s our social struggle,” the group’s chairman, Din Syamsuddin, told Reuters in an interview.

He said Muhammadiyah had this week filed requests for judicial reviews in the Constitutional Court saying that the 1999 foreign exchange law, the 2007 law on investment and the 2009 law on the electricity sector are invalid.

If the court accepted these claims, the legal basis for convertibility of the rupiah currency would be thrown out, safeguards that foreign investors rely on to be treated on a level playing field would be lost, and the right of private operators to run power plants would be removed.

The group’s ‘jihad’ may seem outlandish and doomed to fail in a country where few question the free market economy, yet their citizen activism has already overturned two laws.

In 2012, Muhammadiyah succeeded in crimping the government’s ability to contract with private companies in the oil and gas sector.

Two months ago it felled a law governing the use of water, which plunged businesses in sectors as varied as textiles to beverage bottling into uncertainty after the rule allowing water permits to be given to the private sector was axed.

The new challenge is likely to be a worry for President Joko Widodo, whose election victory six months ago lifted investor hopes of reforms that would untangle the country’s red tape, tackle corruption and beat back vested interests.

Amid doubts that he was going to be able to fulfill those hopes, Widodo told a World Economic Forum meeting in Jakarta this week that foreign investors were welcome and, should they run into any problems, to give him a call.

“Uncertainty and confusion”

Arif Budimanta, special staff to the finance minister, told Reuters that the government, which needs heavy foreign capital to realize infrastructure ambitions, would prepare a legal team to fight the latest challenges from Muhammadiyah.

But foreign investors are alarmed.

“I would not be betting against a favorable ruling by the court,” said Arian Ardie, an American-Indonesian risk consultant with interests in shrimp and power generation businesses.

“These are fundamental changes in base laws that regulate commerce in Indonesia,” he added. “It gives me definite pause in terms of making future investments here.”

Jakob Sorensen, head of the European Chamber of Commerce in Jakarta, said the government needed to step in and reassure foreign investors. “We’re really lacking clarity. We need a clear policy direction,” he said.

Lawyers say Constitutional Court rulings could empower other courts to decide in favor of citizens seeking to overturn private contracts.

A Jakarta district court made a rare ruling last month that resulted in the annulment of contracts with private companies, including a unit of France’s Suez Environnement, to supply water in the Indonesian capital.

The companies, whose contracts will stand while they appeal against the verdict, were not initially affected by the Constitutional Court’s ruling on the water law because they were providing water for public use.

Political analyst Kevin O’Rourke said the court had ruled erratically on several cases in recent years, showing “a lack of appreciation for economic fundamentals, as well as a penchant for accepting strident interpretations of the constitution”.

He said that if the 1999 foreign exchange law was struck down it would not automatically render the currency non-convertible because of a prior law it replaced, but parliament would have to pass new legislation that took into account the court’s views on foreign exchange freedom and controls.

“In the meantime, uncertainty and confusion about the status of the law, and about the convertibility of the currency, might weigh heavily on investor sentiment, depressing markets,” O’Rourke said in a research note.