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How can Australia make sure its economic partnership with Indonesia works – for both countries?

Prime Minister Anthony Albanese and President Joko Widodo deliver a joint press conference on 6 June. Photo by Rangga Pandu Asmara Jingga for Antara.

In early June, the newly elected Labor Prime Minister of Australia, Anthony Albanese, set off on a whirlwind charm-offensive to Indonesia. He was accompanied by senior ministers and officials, and the leaders of some of Australia’s biggest companies, including the Commonwealth Bank, Wesfarmers, and industry super funds.

All the right words were said – Australian Foreign Minister Penny Wong even said them in Indonesian. The Indonesian government turned on the charm too, from a full ceremonial welcome to bamboo bikes.

The visit therefore appeared to bode well for the implementation of the Australia-Indonesia Comprehensive Economic Cooperation Agreement (IA-CEPA), the bilateral free trade agreement that was signed and ratified into law last year. But whether it turns out that way remains to be seen.

It should be impossible to ignore the enormous economic opportunities that Australia’s 270 million-strong northern neighbor offers. Indonesia’s middle class is much bigger than the entire population of Australia, and before the pandemic, the country enjoyed GDP growth of around 5% per year. Likewise, despite extensive promotion of Indonesia as “open for business”, it has never met its foreign investment targets. IA-CEPA could help change this.

But businesspeople looking to invest in Indonesia weigh the opportunities against commercial and legal risks. They ask themselves, is Indonesia a safe place to do business? And how can risk be reduced, or hedged, to make investments worthwhile? Businesspeople ask these questions because businesses have shareholders, owners, institutional investors, and superannuation members to consider, and risk needs to be carefully measured.

Deep concerns about corruption, unfair dispute resolution, and unreliable judicial contract enforcement in Indonesia are major reasons why Australia’s economic relationship with Indonesia has long been underdone. Australia is not in Indonesia’s top 10 trade and investment partners, despite their proximity, and Indonesia is not in Australia’s top ten either.

For IA-CEPA to work, Indonesia needs far more transparent and reliable commercial and contract legal arrangements that will allow Australian businesses to invest in Indonesia with greater confidence. This element of the bilateral relationship is not always visible, but it is important.

So, what can be done to reduce the commercial and legal risk for foreign investors in Indonesia?

First, the new Albanese government should develop programs that can ensure our business community better understands Indonesia’s complex legal system, which is very different from Australia’s. Business executives, fund managers and entrepreneurs need to be supported to develop the expertise to navigate Indonesia’s legal system and accurately assess risk related to it. They also need Indonesia-specific cultural competence and commercial knowledge.

Second, there is a fundamental need for Indonesia’s Supreme Court to address shortcomings in contract law enforcement by the courts it supervises. In particular, it needs to provide the courts at Indonesia’s commercial heart, the Central Jakarta District Court and the South Jakarta District Court, with advanced training to deal with complex business matters.

It should also provide these courts with training on the enforcement of decisions made in international commercial arbitrations. Australian lawyers, legal academics and judges could assist with this.

Third, in line with the bilateral partnership envisaged by IA-CEPA, Australia should work with Indonesian lawmakers to support reform of contract law to reduce risks for investors. For example, by law, all contracts must be in Indonesian language (even international ones, which are often not negotiated in Indonesian). However, courts have been very inconsistent in applying this rule, creating significant legal ambiguity and increasing commercial risk for those doing business in Indonesia.

In resolving these kinds of commercial law reform issues, legislators and judges from both Australia and Indonesia should be provided with cross-cultural training, and information on each other’s legal traditions and systems. This would assist in preparing proposals for reform and help avoid miscalculations and assumptions about the requirements for commercial law reform.

All these activities will require technical assistance from lawyers, legal academics and law reform institutions in both countries. These experts can provide the knowledge, skills, and experience that businesses and governments need. IA-CEPA is a practical opportunity, but it will require hard work, attention to detail, and cross-sectoral cooperation by both countries if it is ever going to live up to its promise.

These kinds of initiatives would help Indonesia attract foreign investors. Specifically, it would give businesses greater confidence in engaging with Indonesian domestic courts and legal institutions. It is easier for businesses to assess risk if they know that they will win or lose a contract dispute on its merits. As matters stand, businesses lack this certainty.

These are not sexy or exciting policy initiatives, but they are needed. A bilateral partnership that creates laws, legal infrastructure, and training to support commercial relationships is the hard work necessary to build long-term ballast in our bilateral relationship.

So, in the wake of a Jokowi and Albanese’s highly successful “reset”, the challenge for the two governments is now to move beyond rhetoric, spend money, and work to implement practical initiatives and policies that can lead to change and make IA-CEPA something more than just aspirational.

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