On 24 March 2015, the Central Jakarta District Court issued a decision which declared that PAM Jaya's long-standing cooperation agreements with its two partners, PT PAM Lyonnaise Jaya (Palyja) and PT Aetra Air Jakarta (Aetra), are null and void. The decision was issued based on a lawsuit brought by 12 individuals against the President of the Republic of Indonesia, the Vice President of the Republic of Indonesia, the Minister of Public Works, the Minister of Finance, the Governor of Jakarta, the Jakarta House of Representatives and PAM Jaya as defendants, and PAM Jaya's two partners, Palyja and Aetra, as the co-defendants.
In arriving at their decision, the panel of judges among other things considered that PAM Jaya should have signed the agreements based on the decision of its own management and not because PAM Jaya was influenced and instructed to do so by the President of Indonesia. In essence, the conclusion of the court was that PAM Jaya (a company owned by the Jakarta Government) signed the agreements (which were restated in 2001) under duress from the then-President Suharto, and accordingly the signing of the cooperation agreements was not valid and was not in compliance with the law
The decision has sent shockwaves through a number of Indonesian infrastructure sectors where the Government has tasked Government institutions to roll out infrastructure developments across the country. Doubts will now arise as to whether arguments of "political duress" can be used to invalidate contracts implemented under these and other President-sponsored programs.
Loss making projects not binding?
The panel of judges further considered that PAM Jaya's cooperation with the two partners (which has been ongoing for almost 18 years) has weakened PAM Jaya's main role and duty as a regional Government water company. The panel of judges believed that the main roles of PAM Jaya must be in line with the prevailing Regional Regulation No.13/1992, which are to improve public welfare, increase regional income and develop the provision and distribution of water in Jakarta. The panel of judges considered that PAM Jaya's cooperation agreements with Palyja and Aetra have caused PAM Jaya to suffer losses, without delving into the reasons as to why these losses have arisen. For example, despite the rising water treatment and production costs, the Jakarta Governor has not permitted any increase in consumer water tariffs since 2007, and this has put considerable financial strain on PAM Jaya.
Concerns now arise about whether the courts could be used to invalidate other forms of Government infrastructure concessions which are "out of the money".
To the panel of judges, PAM Jaya's act in signing the cooperation agreements and the Government's acts of supporting the cooperation and its implementation are unlawful and violate the citizens' rights to water.
Blow to Legal Certainty in Public Private Partnerships
The Central Jakarta District Court's decision is not final and binding yet. It will only become final and binding if, by 7 April 2015, no party declares an appeal against the decision. If one of the parties appeals against the decision, the finality and binding effect of the decision will be stayed as long as the appeal processes continue (there are two further court stages that the parties can go through, at the High Court and the Supreme Court).
While there is still hope that the higher level courts will rectify the situation, the Central Jakarta District Court's decision is a blow to the Government's effort to assure private investors that Indonesia has a solid investment climate underpinning its infrastructure sectors. Infrastructure projects are typically long term investments which need to survive across different leadership regimes in a country. The Central Government is currently in the driver's seat in various infrastructure projects and the contracting party may be Central/Regional Government-owned entities. If an infrastructure contract that was driven by the Central Government can be nullified after 18 years just because of a claim by non contracting parties on the grounds that the contract was entered into because of influence by the then-President, investors in private partnership infrastructure projects may have reason to worry about whether their long term investments would be protected.
First but not the last?
This is the first case where an Indonesian court has, at the instigation of a number of citizens, decided to annul a private agreement between a government instrumentality and a private party. In addition, the panel of judges also decided to order the Government to revoke the support letters related to the projects. The reasoning used by the District Court is sufficiently vague and broad to be applied across a number of other infrastructure sectors.
Strong statement needed
Despite whatever appeal rights exist in relation to the District Court's decision, if the Government truly wishes to encourage private sector investment in the Indonesian infrastructure sector, the Government needs to send a strong and unequivocal message to the market in response to this decision – that the Government will honor long term contracts, and will take all steps necessary to defend the sanctity of these contracts within the Indonesian legal framework. Accordingly, whether the Government files its own appeal to this decision will be watched closely by infrastructure investors.