Indonesia’s rise as a major industrial power is attracting foreign investors and an increasing number of international law firms. South-east Asia’s biggest economy has been expanding steadily over the past decade. Growth was 6.2% in 2012, and although it slowed down in the first quarter of 2013, the archipelago remains an attractive investment destination, thanks to well-developed energy and resources sectors and its burgeoning book of business related to sharia-compliant banking and finance.
The consumer market is also booming, as a middle class of 50 million is on track to treble to 150 million in the next few years. Brands such as Adidas, Starbucks and British American Tobacco have all been vying for a slice of the action. In tandem with this, a cooling Chinese economy is increasing investor interest. And Jones Day capital markets partner Joe Bauerschmidt explains that the return of Indonesia’s credit ratings to investment-grade status has led to a reduction in the cost of capital. The stable political environment is helping too. ‘Over the last two terms, the presidency has been enormously successful. Susilo Bambang Yudhoyono has been a consistent president. And having one political party rule has certainly been a major positive influence on business,’ says Bauerschmidt, who has been doing deals in Indonesia for the past 20 years.
The upshot is a rapidly developing legal services market. International law firms, led by those from the UK, Australia and the US, have been doing business in Indonesia from neighbouring Singapore for a while: magic circle firm Allen & Overy has done so since as far back as 1992. The recent trend, though, has been to form alliances with indigenous firms to offer clients Indonesian legal advice.
Allen & Overy, Stephenson Harwood, Linklaters and White & Case, to name but a few, have all sealed tie-ups with Indonesian law firms over the past three years. The latest is DLA Piper, which in May tied the knot with Indonesian law firm Ivan Almaida Baely & Firmansyah. Meanwhile, other international firms such as Berwin Leighton Paisner and Jones Day are considering similar moves.
Kevin Wong, corporate partner at the Singapore office of Linklaters, a firm with a 20-year history in Indonesia, notes that the country has ‘always been a very interesting market for law firms’, and affirms the recent flurry of high-profile alliances. ‘There is a genuine need to be able to provide Indonesian law services to international clients and it’s fair to say that the market has grown over the last few years,’ he adds.
Although there are no restrictions on foreign lawyers serving clients on a fly-in and fly-out basis, it is illegal for foreign law firms to open offices in Indonesia or to practise Indonesian or foreign law. Foreign lawyers are only allowed to work in Indonesia if they are employed by Indonesian law firms as consultants on foreign and international law, in a ratio of 1 to 4 local lawyers – and no more than five foreign lawyers in total. They must first obtain a work permit from the Ministry of Law and Human Rights, which regulates foreign lawyers, and are required to do 10 hours’ pro bono work a month.
These restrictions are unlikely to be relaxed in the near future, although there is speculation that progress within the Association of Southeast Asian Nations (Asean) – of which Indonesia is a member – could lead, at a regional level, to a gradual liberalisation of the legal services market. Even so, there are acute sensitivities about opening the market to foreign firms. Late in the 1990s, a handful of international firms were probed by Indonesian authorities over allegations that they had transgressed local bar rules on foreign advocates.
Faced with these constraints, international law firms have opted for different strategies, including seconding one or two of their lawyers to a local firm, or forming association agreements. Matthew Gorman, head of the corporate practice and a partner at Stephenson Harwood in Singapore, says his firm has an ‘arm’s-length association’ with Indonesia’s Christian Teo Purwono & Partners (CTPP), which is led by two Indonesian partners and a foreign legal counsel. ‘We knew them reasonably well, we liked working with them and we decided to enter into a slightly more formalised relationship,’ says Gorman.
There’s no profit- or fee-sharing in the deal. Instead the firms jointly pitch for work where there is both an Indonesian and English law component and operate an exclusive referral agreement – unless there is a client conflict or lack of expertise, or because of an existing client’s preference or relationships. ‘We are not seeking to impose CTPP on people who already have a very satisfactory local counsel in the same way we wouldn’t expect CTPP to impose Stephenson Harwood on an existing relationship in the opposite direction,’ says Gorman.
DLA Piper’s ‘strategic alliance’ with IAB&F, a three-partner Indonesian commercial law firm, involves co-operation along similar lines. ‘We are not precluded by this association with IAB&F from going to another firm, on a needs basis,’ says Peter Monk, managing partner of DLA Piper’s Melbourne office, pointing out that the Anglo-American firm will continue to work with the larger, longer established Indonesian advocates’ firms, including Makarim & Taira, Soewito Suhardiman Eddymurthy Kardono and Ali Budiardjo, Nugroho, Reksodiputro. The entire staff of IAB&F, comprising about 20 fee-earners, is Indonesian, but Monk says: ‘They are looking very closely at a couple of expatriate appointments. We are not at that point yet, but obviously it is something that we know a lot about and we are looking to help them with that.’
Allen & Overy has had an exclusive association with local law firm Ginting & Reksodiputro (G&R) since 2010. G&R managing partner Daniel Ginting was previously energy and infrastructure projects partner at Hadiputranto, Hadinoto & Partners, an affiliate of Baker & McKenzie in Jakarta, but following discussions with Kenneth Aboud, managing partner of Allen & Overy in Singapore, he branched out on his own and established the link with Allen & Overy. Ginting says of his firm’s association with the magic circle firm: ‘We sell our capability to clients locally and outside Indonesia as a one-stop service. But we have two separate books, two independent offices.’
Berwin Leighton Paisner is currently assessing its own strategy and looking at various options, including an alliance with a local firm. Ken Cheung, a partner in the firm’s Singapore office, says: ‘I think traditionally it has been effective for international law firms not to have a presence on the ground in Indonesia and to do it remotely, on a fly-in fly-out basis.’ However, he says, market growth and heightened interest from international firms have changed the dynamics. ‘It’s becoming increasingly important to have some sort of alliance or close association,’ he says.
Still, it is a challenge to find appropriate local affiliations. Although there are exceptions, the larger and more established Indonesian law firms do not tend to see the same value in exclusive relationships with international law firms as smaller Indonesian practices. ‘The number of good Indonesian firms is quite limited. That is probably why you have seen some foreign law firms picking a lawyer they want and taking them out and helping them set up their own firm,’ Cheung says.
The choice of affiliations is limited by the size and quality of the country’s legal profession. The Perhimpunan Advokat Indonesia – or Peradi – which is the country’s main bar association only has around 22,000 members, despite Indonesia’s population of 240 million.
Stuart Adams, whose firm Rouse Legal has been working in Indonesia since 1997 in association with local firm Suryomurcito & Co, adds: ‘While there are some good local legal service providers, generally the standards are poor compared to what western multinationals have come to expect.’ Firms in Japan, Malaysia and Singapore are also seeking local alliances as they follow their clients into Indonesia. Singapore’s largest law firm, Rajah & Tann, recently established a strategic alliance with Indonesia’s fourth-largest law firm, Assegaf Hamzah & Partners.
Bribery and corruption
A bigger issue is corruption. Transparency International ranked Indonesia 118th out of 176 countries in its 2012 Corruption Perception Index. Adams, whose firm Rouse Legal focuses on intellectual property work, describes bribery and corruption in Indonesia as ‘endemic’.
The Corruption Eradication Commission, the Indonesian body set up in 2003 to investigate and prosecute alleged offenders, is making headway in fighting against graft, and the country’s public sentiment against corruption is changing, he argues. But Adams adds: ‘There is still a long way to go. Indonesia is still the most corrupt environment in south-east Asia.’ UK companies operating in Indonesia have to comply with the UK Bribery Act, which came into force in July 2011. Yet in Indonesia bribery and corruption touch every aspect of public life. ‘In days gone by it would be very tempting to fall into the corruption trap, but now we have the UK Bribery Act to worry about,’ says one UK senior lawyer, who wished to remain anonymous.
A related problem concerns the courts. ‘It is fair to say that there is some degree of unpredictability in Indonesian judicial decisions and that does present some challenges,’ says Linklaters’ Wong. Some Gazette interviewees, who preferred not to be identified, allege judges tend to be biased towards Indonesian companies. One senior lawyer contacted by the Gazette says: ‘We have much reduced expectations of success in court at the preliminary and even appellate level. It is so easy to buy off the judge. We will generally say to clients: anything could happen even though we have got the best case going. There are absolutely no guarantees of success and we will probably have to take the case to the Supreme Court [the final court of appeal], to get the correct result.’
This issue is leading to a rising number of commercial disputes being resolved through arbitration outside Indonesia, such as in Singapore, Gorman says: ‘It is a function of the realisation that the court system in Indonesia can be a fairly difficult process to go to in terms of time, energy and outcome.’ John Goulios, managing partner of DLA Piper’s Singapore office, adds that the Singapore International Arbitration Centre scores well on convenience, in terms of distance and cost, and because of the country’s perceived ‘neutrality’ in the region.
Pastiche of regulations
There is also the matter of regulatory uncertainty, or as Bauerschmidt puts it, ‘the pastiche of inconsistent regulations that are passed every year, some of which openly conflict with former and current regulations’. He argues that this leaves investors ‘wondering how they are going to comply’.
In the past year or so, the government has been reining in foreign investment in sectors deemed strategic. Last year, it introduced rules restricting foreign investment in mining and banking – the banking sector had been the most open in south-east Asia, with no limits on foreign ownership.
Gorman says that foreign investors and law firms are disappointed with these changes, but a contributing factor is the elections scheduled for April 2014. ‘It will be interesting to see whether or not some of the things that have been done or threatened or proposed might actually be unwound or not followed through,’ he says. However, the uncertain regulatory environment is part and parcel of doing business in Indonesia and more generally, US- and UK-based international law firms should not compare its developing legal system with their own. ‘If you are coming to Indonesia with that mindset you are not going to survive. Indonesia is a different market, you just can’t expect a consistent and predictable legal system,’ Ginting says.
And that is why alliances with local firms are on the increase. As Cheung puts it: ‘The role of the international lawyer becomes less important in a way and you have to rely more heavily on local advice. That’s why you are finding a lot of firms trying to tie up with local partners.’ That goes for the alliance between IAB&F and DLA Piper, a firm that, like Linklaters, has been doing business in Indonesia for 20 years. Monk says: ‘Indonesia has been towards the top of our list in terms of the complexity of doing business and navigating through the regulatory environment. Our clients wanted us to have a solution for them in this market place.’
Chancery Lane plans bar linkup
The steady increase of associations between UK and Indonesian law firms has not escaped the attention of the Law Society. Head of international policy Nankunda Katangaza (pictured) says: ‘We are monitoring developments in Indonesia, and are in regular contact with members interested in the market and addressing any issues that arise.’ The Law Society has a relationship with PERADI, its Indonesian counterpart, and plans a visit to Indonesia later this year ‘to explore how to build further on the relationship between the professions as our members increase their presence in Indonesia’, says Katangaza. PERADI is among the international bars that have been invited to attend this October’s Opening of the Legal Year events.
For more information on joining the Law Society’s international section see the website
Whether through alliances with local firms or from Singapore, where international firms oversee their south-Asian business, international law firms are reaping significant benefits from Indonesia, in sectors such as energy and natural resources, M&A, capital markets, banking and finance, and dispute resolution. Bauerschmidt says Jones Day’s Indonesian business has ‘grown exponentially’ in the past couple of years, driven by clients in the energy and natural resources sectors, including US energy corporation Chevron, Indonesia oil company Samudra Energy Ltd, Perusahaan Gas Negara – the country’s largest natural gas transportation and distribution company – and Indonesia coal producer PT Berau, a subsidiary of London listed Indonesian mining group Bumi plc.
To underpin this growth, last year Jones Day increased its partner headcount from five to 11 in its Singapore office, beefing up its projects and energy teams, and adding to its corporate and M&A, capital markets and dispute capability in Indonesia. These and other recent lateral hires include Darren Murphy from Australia’s Allens, and Mike Pollen and Steven Potter from K&L Gates. All – like Bauerschmidt, who was taken on five years ago – have a strong track record of advising in the Asia-Pacific region. ‘The typical Indonesian corporate group is family-run. They don’t trust people in their 30s. They want law firm partners with a lot of experience in the region,’ Bauerschmidt explains.
For Stephenson Harwood, business has been driven by the rapidly expanding consumer market which has in turn boosted the firm’s aircraft finance practice. The firm has advised Indonesia’s low-cost carrier Lion Air on a number of financing deals, including last March the purchase of 234 Airbus planes, valued at $24bn.
Other Indonesian clients include tea producer PT Sariwangi and telecommunications retailer Trikomsel – both were advised on M&A deals. Work is expected to expand in the energy and mining sectors, where the firm is making the most of the strong expertise in these areas of Bill Sullivan, CTPP’s foreign legal counsel, who has been working in Indonesia for some 20 years. Rouse Legal, a niche intellectual property firm, is also capitalising on Indonesia’s booming consumer market, acting for Starbucks, British American Tobacco, Coca-Cola and Viacom.
In co-operation with Suryomurcito, Rouse Legal has also been involved in high-profile intellectual property litigation in Indonesia. Last year it successfully acted for Adidas over the use of its three stripes logo on shoes. The Jakarta Commercial Court declared that the logo is a well-known trademark. ‘Enforcement authorities were previously unconvinced that the three stripes are protectable as a trademark,’ says Adams.
Adidas is among a number of foreign companies hit in Indonesia by counterfeiting, piracy and trademark registration ‘squatters’. Adams says that when some well-known western brands eventually entered the Indonesian market, they got a rather nasty surprise. ‘They found out that some local outfit had already registered their trademark,’ he says. Indonesia is one of 10 countries – along with Russia, China and India – on the US Trade Representative’s IPR Priority Watch List, due to insufficient IPR protection and enforcement.
Firms have also noted a changing client mix. More Indonesian clients are seeking financing from international banks and institutions. Although DLA Piper advises a number of international corporations, banks and institutions – among them ANZ Bank, Ports America, Wipro and the Clinton Foundation – one of DLA Piper’s long-standing clients is the Indonesian government, which the firm has represented on a $3bn global bond offering. Non-western corporates are featuring on the client list too. Linklaters recently advised Japan’s second-largest bank, Sumitomo Mitsui Financial Group Inc, on its $1.5bn acquisition of a 40% stake in Indonesia’s PT Bank Tabungan Pensiunan Nasional Tbk, which provides general banking services in Indonesia.
Allen & Overy, pointing to Japanese and other far-east investors, is now using not only Singapore, but other offices to serve the Indonesian market. ‘Japanese corporates have been big investors in Indonesian projects, so they work together with our Tokyo office,’ Aboud says. Allen & Overy and Ginting & Reksodiputro have been advising domestic and international clients, including sponsors, governments and lenders, on projects and project financings for toll roads, power plants and mining. For example, they have acted for the lead arranger, ING Bank, in the financing of a 60MW diesel-fired power plant in Pare Pare, Sulawesi, Indonesia. They have also advised on the initial structuring aspects of a sharia-compliant financing of PT Arutmin Indonesia, a coal-mining company owned by Bumi plc, of which British financier Nathaniel Rothschild is a founding shareholder.
For all the challenges of doing business in Indonesia, external interest in its economy is now an established feature of the global business landscape.
Marialuisa Taddia is a freelance journalist