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Resource Nationalism in the Law and Policies of Indonesia: A Contest of State, Foreign Investors, and Indigenous Peoples
This paper examines resource nationalism in the legal system of Indonesia under the interpretation of Articles 33(2), 33(3), and 18B(2) of the 1945 Constitution. It will describe the evolution of the meaning of resource nationalism since independence to the present day, in the context of foreign investment, to investigate the extent to which resource nationalism has benefited indigenous peoples. This paper argues that resource nationalism in the legal system of Indonesia has been driven by state-centric goals and has strayed far away from considerations of the benefits to the indigenous people (Masyarakat Hukum Adat/MHA), so as to dominantly benefit the elites of government and foreign investors. This paper will introduce a new conceptual framework in order to develop an effective argument about resource nationalism using International Human Rights Law.
Indonesia proclaimed its independence from the Dutch colonial power on 17 August 1945. This was then followed by a four-year war of independence, culminating in the end of Dutch administration in the country. During this process, the constitution was developed to regain control over the Dutch colonial administration. In particular, Articles 33(2) and 33(3) of the 1945 Constitution confirmed that all land, water, and natural resources therein are controlled by the state for the maximum benefit of the people, without precise definition or explanation. In 1949, international law was silent about the post-independence transfer of natural resources from a colonial power to a newly created state. It was excluded that year from the Roundtable Conference in The Hague. Confrontation with the Dutch moved from the military and the political to the economic, particularly in respect of the economic control of natural resources.
The aim of this paper is to chart the rise of resource nationalism in Indonesia and show how this might be regarded as a manifestation of sovereignty. It examines, in particular, the use of the Constitution by the Indonesian judiciary in protecting natural resources, such as oil, gas, and fisheries from external control. In this sense, it stands as a clear expression of sovereignty and not, necessarily, an argument that the state should be the exclusive provider of services based on natural resources. Thus, outside investment is permissible, and perhaps desirable, to achieve the successful exploitation of natural resources. Instead, what it does prevent is the central government ceding control of natural resources to external actors to the detriment of national and regional governments, along with the local inhabitants. In looking at the issue of resource nationalism in the context of Indonesia, the paper takes a broadly linear approach. It begins, in Section I, with the immediate declaration of independence and Indonesia's constitution. Next, Section II concerns the period from 1966 to 1998, the Suharto era, and charts the strengthening of the central government and the liberalization of Indonesia to foreign investors. Suharto's period of government was followed by a period of reform, described in Section III, a period in which resource nationalism rose to greater prominence and concern. It was during this period that the role of the Indonesian courts increased and a more muscular approach, based on the Constitution, to sovereignty over natural resources developed. Section IV then examines the Indonesian approach to resource nationalism, raising some of the issues experienced in this context and offering suggestions for the future.
I. THE ORIGINS OF RESOURCE NATIONALISM IN INDONESIA
Key to understanding the Indonesian approach to resource nationalism is the Constitution itself. This outlines the foundational nature of anti-colonialism and sovereignty over natural resources. The Preamble to the 1945 Constitution stated: “[w]hereas independence is the inalienable right of all nations; therefore, all colonialism must be abolished in this world as it is not in conformity with humanity and justice.” The term “all colonialism” applied to the economy of the country, in particular its natural resources, as the main concern in the immediate post-colonial era. Articles 33(2) and 33(3) of the 1945 Constitution stated that:
(2) Sectors of production, which are essential for the country and affect the life of the people shall be controlled by the State. (3) The land, the waters and the natural resources contained therein shall be controlled by the State and exploited to the greatest benefit of the people.
Article 33 has been a benchmark of resource nationalism in Indonesia. Despite the varying interpretations of the Constitution by different regimes, Article 33 has survived without any amendments to its interpretation since independence. In the first generation, it was construed as the right of the state to regain control over colonial-based investment in natural resources and its affiliated system, as reflected in the Bandung Conference held on 18–23 April 1955, the 1957 Juanda Declaration, and the nationalization of Dutch companies in 1958.
The Bandung Conference was associated with the Asia-Africa Conference held in the city of Bandung in the West Java province of Indonesia and attended by representatives of twenty-nine countries from Asia and Africa. It was considered an important movement of the Third World [TW] states’ coalition, as it entailed creating a new political power in the international sphere, the so-called Non-Aligned Movement or the group of 77 in the United Nations [UN] system. The conference produced a “Bandung Final Communiqué”, which can be formulated into five principles:
1) a peaceful coexistence between nations, 2) the liberation of the world from the hegemony of any superpower, from colonialism, from imperialism, from any kinds of domination of one country by another, 3) the equality of races and nations, 4) building solidarity toward the poor, the colonised, the exploited, the weak and those being weakened by the world order of the day, 5) their development.
Following these principles, at least three main messages conveyed during this conference remain relevant today. First, it succeeded in gathering political support and raising awareness in colonial countries and newly independent states of the remaining colonial peoples seeking independence, such as in Africa and the Middle East. This voice was then heard in the UN system, which contributed to the UN Declaration of Decolonization in 1960 and the acceleration of the independence of several colonies such as Tunisia, Morocco, Algeria, and Kenya.
Second, this promotes the notion that being politically independent does not automatically mean economic independence. This is particularly the case with respect to natural resources. Such awareness was further manifested in the formation of post-colonial states as a new political power in the UN system. Colonialism was highlighted as “a common abhorrence of imperialism”, set against the idea of “a common hope and desire for economic development and social progress” following decolonization. The idea was the continuation of the anti-colonial spirit over the “modern dress” of economic colonization, as highlighted by Sukarno, the first president of Indonesia, when opening the Bandung Conference. He noted that colonialism had not yet ended, it had instead donned a “modern dress, the forms of economic control, intellectual control, actual physical control by a small but alien community within a nation”. Colonialism changed “its dress” from colonialism through physical territories into diplomacy, economics, and international treaties, but the substance remained the same.
Sukarno stated: “[W]e are often told colonialism is dead, let us not be deceived or even soothed by that. I say to you, colonialism is not yet dead”. He went on to elaborate:
I beg of you, do not think of colonialism only in the classic form which we of Indonesia, and our brothers in different parts of Asia and Africa knew. Colonialism has also its modern dress, in the form of economic control, intellectual control, and actual physical control by a small but alien community within a nation. It is a skilful and determined enemy, and it appears in many guises. It does not give up its slot easily. Wherever, whenever and however it appears, colonialism is an evil thing, and one which must be eradicated from the earth.
Hence, the Bandung Conference defined independence (self-determination) as an anti-colonial movement, and extended the meaning of colonialism “in all its forms and manifestations”. It also confirmed the strong relationship between self-determination and human rights, following the UN Charter of 1945 and the Universal Declaration of Human Rights [UDHR 1948]. The final recommendation of the Bandung Conference in Part C on “Human Rights and Self-determination” stated:
[t]he Asian-African Conference declared its full support for the fundamental principles of Human Rights, as set forth in the Charter of the United Nations and took note of the Universal Declaration of Human Rights as a common standard of achievement for all peoples and all nations … which is a pre-requisite of the full enjoyment of all fundamental Human Rights.
Equally, some concerns on exporting the raw materials of post-colonial states also emerged, such as in Point 6 of the Final Resolution in economic co-operation, which explicitly highlighted that “Asian-African countries should diversify their export trade by processing their raw material, wherever economically feasible, before export”. This idea then developed into the formulation of the Declaration of Permanent Sovereignty over Natural Resources in 1962, the Charter of Economic Rights and Duties of States [ERDS] in 1972, and the New International Economic Order [NIEO], and was eventually embedded within the formulation of the Anti-colonial Clause of Self-determination under Common Article 1 of the International Human Rights [IHR] Covenants.
It is the first political consolidation of newly independent states from their former colonial powers, to reflect the missing part of sovereignty achieved under the existing international legal system. The core problems of economic deficit and the resistance of colonial powers to taking any responsibility from colonialism for their economic and natural resources would require a solid power to change the existing colonial-based international system. For example, the Bandung Conference proposed “the establishment of the Special United Nations Fund for Economic Development” of post-colonial states even though it had not been welcomed by developed states.
Hence, in this generation, Indonesia led the TW states to utilize the right of self-determination differently from the one promoted by the UN under its decolonization programme in terms of scope and content. This constraint on self-determination then moves to the right of development now, despite there being no agreed definition.Such a contribution might be a part of the Third World Approach to International Law [TWAIL] movement, which seeks to create a universal International Law to rectify the colonial interpretation and application of International Law since the sixteenth century.
On 13 December 1957, this spirit was manifested in a more concrete way in relation to the International Law of the Sea on Archipelagic States, as announced in the Juanda Declaration. This was followed by the enactment of Law Number 4/1960, which proclaimed that all water surrounding, between, and connecting the islands constituted “the exclusive sovereignty of the Indonesian State”. Conversely, the US and other Western maritime powers considered themselves as having free use of the high seas until the development of the United Nations Conference on the Law of the Sea [UNCLOS] in 1982.
The declaration also triggered Arvid Pardo, a Maltese representative at the UN, to propose a collective approach for the TW states on the common heritage of humankind. This was to the effect that resources beyond territorial boundaries should be controlled by, and for the benefit of, post-colonial states. This approach encapsulated and represented the worries of the TW states about the continued exploitation, beyond a state's territorial jurisdiction, because of the TW states’ admitted lack of scientific and technological capacity for successful extraction. The proposal was designed to share the benefits of natural resources amongst the people in the world, not only for those who have the ability to exploit them. In particular, it was to declare that sharing the control and benefits of the sea bed and ocean floor “underlying the seas are beyond the limits of present national jurisdiction”. Unsurprisingly, perhaps, the proposal was supported by the majority of the TW states, as then formulated in the UNCLOS 1982. However, the rejection by Western states, on the basis that it was “contrary to the interests and principles of industrialized nations”, as expressed by President Reagan, has rendered this principle devoid of proper legal content.
Anand stated that the US insisted in not accepting the twelve-mile territorial sea boundary, as adopted in the 1982 UNCLOS, unless its freedom of transit passage was recognized and accepted in the Convention. This resistance was then accepted in UNCLOS III through hard bargaining and a concession to the US and other maritime powers for their agreement to accept a wider coastal state jurisdiction in the Exclusive Economic Zone [EEZ] and the continental shelf, and international machinery for the exploration and exploitation of deep sea bed resources. The TW states, recognized as the group of Coastal States at UNCLOS III, declared:
[t]he group of Coastal States noted with surprise and concern recent media reports that the government of the United States had ordered its navy and air force to undertake a policy of deliberately sending ships and planes into, or over, the disputed waters of nations that claim a territorial limit of more than three miles.
The Common Heritage of Humankind proposal can be seen as not merely for sharing the benefits of, but also the impact of, the exploitation of natural resources. This concept confirmed the idea of the internationalization of resource nationalism in terms of placing obligations on developed states to share the benefits of natural resources beyond a state's territory.
In 1958, Indonesia claimed its control over Dutch companies through Statute Law Number 86/1958, followed by the implementation of various government regulations to regain control over colonial Dutch companies in Indonesian territory. Article 1 of the Law held that: “the Dutch companies in Indonesia's territory which were decided by the government regulations, shall be nationalized and become full and free possessions of the State of Indonesia.” Compensation would be decided by a committee, which was to be appointed by the government (Article 2). If any disputes were to arise on the amount of compensation, the committee will decide it, with appeals to the National High Court constituting the final decision (Article 3). However, no case was filed in the National High Court, as the Dutch companies preferred to use International Courts, although they mostly found in favour of Indonesia. Overall, the process of nationalization went without violence, but with a virtual collapse of the Dutch-Indonesian relationship for decades.
Following nationalization, Indonesia also introduced the first Law on Oil and Gas (Law Number 44/1960), as a review to the colonial mining Dutch law—the Indische Mijnwet 1899—that was amended in 1904 and 1918. This confirms that “[a]ll oil and gas found within the territory of Indonesia is national property and controlled by the State of Indonesia”. This law was introduced to rectify the colonial characteristic of the law, which gave control to the colonial government without concern to benefit the people in its colony. The colonial mining law favoured the Dutch in concession rights, i.e. mining concessions for seventy-five years, and were limited to Dutch companies. All taxes went to the colonial government, and gave the Dutch all mining rights under the establishment of the Special Committee for Mining in 1852. In 1960, the Indonesian government took all powers from the Dutch government and transferred them to Indonesian state enterprises.
In 1967, Sukarno also issued the first law concerning foreign investment (Law Number 1/1967), which involved concluding the idea of the restrictive access of foreign investments in the strategic self-defence sector, limiting tax and royalty concessions for five years, and fulfilling the obligation to recruit national resources in the first instance and to transfer knowledge through providing training for national staff and the like. Under this law, foreign investment was limited to thirty years, and a strong emphasis was placed on transferring skills and technology to the host state, and inviting foreign investments on a temporary basis, with a social mission to facilitate the transition of economic development in Indonesia.
In this early period, there was a mainstream consensus about the central government and the Masyarakat Hukum Adat [MHA] as a newly independent state, but there was no discussion on how to benefit indigenous peoples, or how to compensate for personal or collective ownership of land and resources in the affected areas. Thus, this early period of Indonesian independence established many of the ideas pertaining to resource nationalism prevalent today, but failed to achieve their realization. In the subsequent period, when Indonesia was ruled by the Suharto regime, as seen in the next section, the gap between the central government and MHA widened as the central government assumed the role of the absolute representative of colonial peoples.
II. THE SUHARTO ERA: NEW ORDER (1966–98)
Soon after Suharto came to power, he established a new cabinet of Ampera and issued two Presidential Decrees to change the previous Decrees during the Sukarno era, i.e. the Presidium Cabinet Instruction No.28/U/IN/12/1966, returning foreign enterprises to former owners on 12 December 1966, and another instruction on 30 December 1966. These decrees aimed (1) to abrogate the Decree of Sukarno's Dwikora Cabinet Presidium on the establishment of the Body of Enhancement of National Endurance in the Field of Petroleum; (2) to abrogate the Decree on the placing of the oil companies Caltex, Shell, and Stanvac under the temporary control/supervision of the government; and (3) to abrogate the decree placing the Pan Am Oil Company under the temporary supervision of the government.
Thus, during Suharto's administration, the power of colonial and foreign enterprises was strengthened, along with a centralization of government power in Jakarta. On 7 January 1967, Suharto also signed an Indonesian-US Investment Guarantee Agreement in Jakarta, the first Bilateral Investment Treaty [BIT] of Indonesia with a foreign state. The US set out a strict protection of its investment in Indonesia, evident in paragraph 4 stating that “[t]he Guaranteeing Government (US) does, however, reserve its rights to assert a claim in its sovereign capacity in the eventuality of a denial of justice or other question of state responsibility as defined in International Law”, referring to International Law on the Protection of Foreign Investments.
Foreign Investment Law Number 1/1967 was applied for the first time to formally liberalize natural resources for foreign investors, attracting various BITs and several big investors in mining, oil, and gas. The first foreign investor in gold mining (Freeport) signed its first contract for a thirty-year period (1967–97), and extended it for another twenty-five years. Its operations covered 10,000 hectares of land, without clear compensation to the people. Subsequently, on 24 August 1971, natural gas was discovered in the village of Arun in the Aceh province, with onshore and offshore reserves estimated at 17.1 trillion cubic feet of reserves within a 271-hectare area. Other natural resources were exploited in various parts of Indonesia, such as oil and gas in Riau and Kalimantan and mining in Nusa Tenggara Timur [NTT], exploited with the support of military power and all benefits controlled and referred to the central government of Java, while the MHA in associated areas were increasingly marginalized.
Additionally, the transmigration policy under the centralistic Suharto regime moved the marginalized poor people on Java Island to other territories, i.e. Sumatra, Kalimantan, Sulawesi, and Irian, along with the entitlements to the lands. This migration changed land ownership in certain areas, increasing the difficulty of defining indigenous people.
The government interpreted resource nationalism in a manner which secured more benefits for the elites and foreign investors to the dissatisfaction of many marginalized substates and peoples around the country. In particular, it fuelled the self-determination conflict in the Aceh province, where resources benefited the indigenous people little. Eventually, popular pressure from all over the country forced Suharto to step down and a reformation era started. Centralization caused the inequity in the allocation of natural resources, so decentralization to district-level autonomy aimed to rectify the historical wrongs of the previous administration. However, as will be seen, it is questionable whether the governments of the autonomous regions were capable of protecting indigenous peoples vis-à-vis foreign investors. The Suharto era gave birth to a centralized and consolidated state at the expense of regional governments and the people themselves. However, this began to change once the Suharto regime ended.
III. REFORM ORDER GENERATION (1998–2015)
After the fall of Suharto, the Reformation Order was a turning point for resource nationalism in Indonesia. Article 33 of the Constitution remained untouched throughout four constitutional amendments. The Constitutional Court [MK] was established to provide a space for individuals and the people to review laws considered to be not in conformity with the constitution. In this era, arguments about resource nationalism emerged through judicial review in the MK and subsequently the imposition of a new legal regime in mining, negotiating BITs, and challenging international arbitration awards. There is, however, a mixed picture, with the MK more readily finding breaches in some areas than others. The vague concept has contributed to different interpretations. Thus, this section is broken into three subsections. The first assesses the developing doctrine of constitutional review pertaining to natural resources and Indonesian law, the second addresses the export ban on raw materials, while the third considers the status and effect of BITs.