Indonesia The Legal 500 recommends

Indonesia
The Legal 500 recommends


Legal 500 commentary:

Indonesia is the poorest country in the Indo-Malaysian archipelago, after Singapore and Malaysia. The largest Muslim country in the world, and with the fourth highest population, it is spread across a chain of thousands of islands dominated by Java, seat of the capital, Jakarta. The language spoken is Bahasa Indonesian, a modified form of Malay. Ethnically it is highly diverse, and the people range from rural hunter-gatherers to a modern urban elite.

The country is rich in natural resources - many of them under-exploited - but also suffers from natural disasters due to its location near the intersection of shifting tectonic plates. In May 2006 thousands of people were killed after a powerful earthquake struck the island of Java, and in July 2006 an earthquake generated a two-metre high tsunami that killed at least hundreds of people at a beach resort.

Ever since Indonesia achieved independence in 1945, the government has faced a constant struggle to keep the nation's islands together. Some regions want full independence from Jakarta, and their hopes were raised when East Timor became a separate country in May 2002.

Former army general Susilo Bambang Yudhoyono won Indonesia's first-ever direct presidential elections in September 2004. The election was hailed as the first peaceful transition of power in Indonesia's history. President Yudhoyono promised to tackle separatist conflicts, fight terrorism - a major concern and detractor to foreign investment since the Bali bombings in 2002 - reform a legal and business environment that is widely acknowledged to be riddled with corruption, and address the urgent need for investment in the country's infrastructure.

Since he came to power, the promised anti-corruption initiatives have been generating positive effects in the country's courts system, though some would say they have been less successful in tackling corruption in the country's massive bureaucracy. However, the level of new infrastructure projects has been disappointing to the national and international business communities, as has the slow pace of economic reform and an apparent failure to create jobs.

Economy

After being badly hit by the Southeast Asian financial crisis of 1997-98 (the financial crisis), Indonesia has for the last few years been exhibiting a slow but steady return to a growth economy. At the time of going to press, GDP was expected to have slowed in the last two quarters of 2006, owing to subdued growth in private consumption, but domestic demand was expected to rebound strongly in 2007.

Indonesia is a very large market, and one that is much more important regionally than those of Singapore and Malaysia. Though the economy is still troubled, the country continues to produce a steady flow of domestic M&A and financing transactions driven by local commodity producers requiring capital for expansion.

There were no major transactions in 2006 to compare with 2005's purchase by Philip Morris International of a stake in Indonesia's third largest tobacco company, the largest ever acquisition in Indonesian history. However, the financial situation of the government continues to improve, and there has been an increase in acquisition finance entering the country from international banks based in Singapore and further afield.

One of the dampening effects on the economy was the government's 2005 decision - hailed as 'brave' by market commentators - to significantly increase the price of fuel domestically, by reducing its level of subsidy. The government has also postponed its much-anticipated conference on infrastructure projects. With the country desperately in need of the development of its conventional infrastructure such as toll roads, it is hoped that projects will begin to materialise soon.

The main area of economic activity in Indonesia is currently natural resources, with mining and LNG projects being the most active in the country. The country is rich in natural resources, particularly oil, gas, coal and gold. However, many of these are under-exploited, with oil fields and coal mines lying abandoned or undeveloped. The global demand for oil, and higher global commodity prices, means that there is considerable interest in the acquisition and redevelopment of these fields and mines, particularly from Chinese and Malaysian companies. Malaysia and Singapore are also very active in Indonesian palm oil plantations.

With North Asia fighting over access to energy, China is notably a current aggressive investor in the Indonesian energy sector, particularly in relation to electricity projects. The 2006 success of the Tangguh LNG project - the largest private sector project in Indonesia since the financial crisis - will, it is hoped, encourage more foreign investors to accept the risks of Indonesian projects.

Billing

Rates have remained relatively steady, and are usually arranged in US dollars. Assistants charge around US$100 to US$150 per hour for commercial advice, and partners from US$200 to US$400. Larger, internationally focused practices may charge more.

Marketing

Compared to nearby jurisdictions, marketing rules are relaxed. There is no central Bar association in Indonesia and no clear prohibition, but professional etiquette prevents aggressive marketing.

In-house lawyers

Most major Indonesian companies (particularly in the banking and energy sectors) employ substantial teams of lawyers. The major corporate law firms are also seeing a steady flow of departures as associate-level lawyers opt out of private practice. It is common for in-house legal departments to handle all the local aspects of a deal themselves, and to instruct foreign legal counsel directly. In the banking sector, routine loans are commonly handled in-house.

Notaries

In Indonesia, the absence of a notary as signatory on a contract can jeopardise the position of a signing party. Notaries receive payment on a scale-fee basis proportionate to transaction size, typically 0.1% of its value.

Legal system

The general Indonesian legal system is based on Roman-Dutch law, subsequently modified by new criminal procedures and election codes. Shari'ah law is also becoming increasingly important in relation to banking and capital markets transactions.

The legal system is both complicated and unusual, and it is often difficult for a foreign lawyer to make sense of it. Both international law firms and international companies are heavily dependent on foreign lawyers working in Indonesia - whether as foreign legal counsel in Indonesian firms or as secondees from international firms - to bridge the culture gap and explain how Indonesian law will affect their deal.

International companies often find it difficult to obtain clarity and certainty from Indonesia's regulatory framework and from the court system, which is overcrowded and devolved into provincial courts in 30 provinces. It is still common for these district courts to generate surprising rulings.

Generally, the Indonesian courts are notorious as the most unreliable in Southeast Asia, with regular instances of lawyers paying off judges, or defendants feeling coerced into making payments. There has also been a considerable amount of litigation that was perceived to be vexatious.

However, the anti-corruption initiatives that are underway are now perceived to be having effects, with an increased reliability in court decisions, particularly those emanating from the Supreme Court, and larger commercial disputes generally handled with much more consistency.

East Timor gained independence from Indonesia in 2002, but Indonesian commercial law still applies, and some Jakarta law firms will handle work on the island.

Lawyers who wish to appear in court must have an advocate licence issued by the Supreme Court. Foreign legal counsel cannot hold rights of audience, even if employed by Indonesian law firms. However, the Association of Indonesian Advocates (AAI) has recently decided to allow foreign lawyers to become honorary members, a decision seen by many as a welcome move towards the international openness of the profession.

Legislative developments

Indonesia now has an anti-corruption commission. The raft of legislative developments anticipated has not yet materialised, but there are several draft laws currently undergoing a consultation process.

Legal market

Most Indonesian lawyers are generalists, and it is common to find leading practitioners handling work across banking, capital markets, M&A and projects. Many Indonesian lawyers effectively work as sole practitioners, supported by associates. In the larger, multi-partner firms, partners still tend to have quite distinct practices, rather than working as part of a department or team. Consequently, the strength of a local firm tends to rest directly with the strength of individual lawyers, and clients are advised to contact the lawyer they wish to instruct personally.

Hadiputranto, Hadinoto & Partners has the best reputation for consistency of service and is, according to international clients, 'the firm you can go to for pretty much everything'.

In 2006, full-service firm Soebagjo, Jatim & Djarot merged with Minang Warman Sofyan & Associates (MWSA Law Offices), a smaller commercial firm noted for its Indian clients and Islamic financing practice.