As Indonesia elects its new president, international firms are gearing up for a new phase of development in the resource-rich state. But are they playing by the rules? Elizabeth Broomhall reports

Foreign investors and international law firms breathed a sigh of relief this week as Southeast Asia's largest economy elected its new president – Joko 'Jokowi' Widodo. The elections, the third since Indonesia became a democracy in 1998, have been a key source of anxiety for many corporates and lawyers, who feared that a victory by Widodo's rival – former military general and hard-line nationalist Prabowo Subianto – might push the country into a period of economic regression. 

While Subianto looks set to challenge the election result in court, the appointment of Widodo, dubbed 'Indonesia's Obama', has been welcomed by the financial markets. This new-era politician, entrepreneur and former Mayor of Jakarta is seen as the region's best hope for infrastructure spending and economic reform, given his perceived openness to foreign investment and modern politics. 

Looking to the immediate future, questions still remain around how far Widodo's policies will go towards maintaining a steady flow of foreign investment, and what impact this may have on the legal market. While there is still a lack of clarity on his plans, lawyers doubt even he can resist the country's move towards nationalism.

Of course there are other concerns for law firms doing business in Indonesia besides politics. One is the onshore-offshore debate and whether there is real value in having a Jakarta tie-up, and another is the ban on overseas firms from setting up fully fledged branch offices in the country, a matter that came under the spotlight in the 90s. Here we look at whether it is necessary for firms to set up on the ground and the extent to which they are putting themselves at risk by moving towards closer integration with local partners. 

New leader, new start?

Home to almost 250 million people and vast energy reserves, Indonesia is a market that has long held the interests of international lawyers. Dominated by mining and natural resources work, it has historically yielded higher fees than markets such as Singapore and Malaysia, with local lawyers suggesting this is down to the familiarity of Indonesian companies with Western documentation and a willingness to use structures similar to those in international capital markets. The fact that GDP growth continued even at the height of the global financial crisis has also helped.

The last few years have seen the country introduce controversial new regulations in the hope of boosting the domestic economy, such as restrictions on foreign ownership of Indonesian banks, a ban on the export of unprocessed mineral ore and a mining export tax. Lawyers say there are concerns that these could impact on foreign investment, so they are hoping for positive changes post-election.

"There is a risk of regression at the moment," says one Jakarta-based lawyer. "There is a deficit, the budget is not so good, the rupiah is weak and some of the things that have done well previously are at risk of regressing. [But hopefully now] there may be some improvement."

Latham & Watkins' Singapore finance head, Timothy Hia, adds that he doesn't anticipate significant change with the new leader, but warns that a more nationalist agenda may impact on transactional details and client bases. "Policies will likely stay the same from an investment perspective, but I expect that nationalism will become more of a feature in the management of the economy," he says.

"Gas will likely become more of a domestic industry. Oil will continue to be exported to some degree but local industry will be more involved in that. There could be a change in client profile as we see more domestic involvement in how projects are run. International clients will also need to be more careful about how they structure their involvement; for example, how they set up joint ventures for the development of projects."

Berwin Leighton Paisner (BLP) Singapore project finance partner Marius Toime agrees that future reforms may vary depending on sector. He says that mining may continue to be subject to some restrictions, but there is hope for areas such as energy. "Certainly on the mining side no one is expecting a major U-turn on the ban on exports of unprocessed mineral ore," he explains.

"However, Jokowi has said that he will replace the upstream oil and gas regulatory special task force with a new energy management system. He also indicated that he intends to revise the oil and gas law to prioritise national capacity and provide legal certainty for business. But we are still short on details about how these objectives might be achieved."

To be there, or not to be there?

Despite the looming political shift, since the start of 2013 firms including Clyde & Co, Squire Patton Boggs, Clifford Chance, BLP and Bird & Bird have all entered Indonesia through associations that allow them to second lawyers into a local Indonesian firm, but not to share profits, open offices or advise on local law. Market sources say a host of new firms are considering similar moves. For these firms, there seems to be a confidence about being on the ground irrespective of Widodo's plans. 

"Our clients expect us to be here in some form or another," says Alistair Duffield (pictured below), BLP's head of Southeast Asia. "Given the number of firms that have formed associations, that seems to be a pretty clear pathway. If you're looking at Indonesian clients with disputes in Singapore then you probably don't need to be there, but if you're looking at power, oil and gas, mining and infrastructure projects it's different."

Shamim Razavi, a lawyer with Norton Rose Fulbright's local affiliate firm, Susandarini & Partners, agrees. "It would seem strange not to be able to service our clients in an economy that is the 10th largest in the world and has a massive growth future. Undoubtedly we have clients that we become closer to because we work for them here, and also clients that we would not have been working for elsewhere that we have initiated a relationship with in Jakarta."

There could also be regulatory concerns for those without an association, according to Haydn Dare at Herbert Smith Freehills' Jakarta partner firm, Hiswara Bunjamin & Tandjung. He stresses that foreign lawyers are not permitted to fly in and out to do work on the ground without a permit, only to attend meetings. From a legal perspective, this is limiting.

However, not everyone agrees that an association is necessary. According to one lawyer based in Singapore whose firm does not have an Indonesia presence, many of the larger international players are actually better off having a choice of local firms to work with. "If you're one of the big international firms and you're doing $10m (£5.8m) worth of business already then what more do you get out of it? You just bill your own time. But if you have nothing, I guess there is no downside. You provide some training to the Indonesian firm and pick up some deals you normally wouldn't get."

It is also important to consider where your clients are located, Hia argues. For example, many banks currently service the Indonesian market from Singapore. And given the limited amount of outbound work generated by domestic banks and investors, the business case for tie-ups is even less compelling. A shift here could make setting up a local office more important, Hia says, but choosing the right association partner would be challenging. 

"It is critical to choose the right partner and to consider if that firm has the right relationships," he argues. "You don't want to exclude potential clients. It is different from Singapore and Malaysia, where you have two or three firms with the lion's share of the market."

Playing by the rules?

Another major concern about operating in Indonesia relates to a ban on foreign firms from having formal branch offices in the country, advising on local law or sharing profits with their local counterparts. The issue first came into the spotlight following US firm Morgan Lewis & Bockius' lateral hire of Michael Hooton in 1997 from local outfit Makarim & Taira, which sparked an investigation by local police, justice, immigration and tax departments into the activities of Morgan Lewis and reportedly other foreign law firms, and resulted in lawyers being detained in the Jakarta jail for questioning over the period of a month. 

The case is understood to have been instigated by Indonesian lawyer Hotman Paris Hutapea at Makarim & Taira, who launched a petition against foreign firms following the hire of Hooton. Neither he nor Morgan Lewis responded to Legal Week's requests for comment. The matter was ultimately dropped following the overthrow of President Suharto in 1998, but has had a lasting effect on the legal community. "For many years afterwards people just went back and forth," says one lawyer working in Indonesia at the time of the investigation, who asked not to be named. "This has to be responsible in part for the explosion of the legal market in Singapore. It's only been in recent years that more firms have been getting comfortable with seconding international lawyers into Indonesian firms."

However, the situation in the 90s was very different from now, he explains. "Law firms were set up as consulting firms… this made getting permits easier and gave us a bit of distance; it was a way of operating in a more autonomous fashion. This could be legitimately challenged… the Indonesian firms were within their rights. We took the position that we weren't doing law, we were acting as business and trade consultants… but we were practising business law."

In spite of these differences, partners point to some ongoing risks. They refer specifically to partnerships that have 'closer' associations and may have raised some eyebrows locally.

"The question arises where international firms appear to have hand-picked individual lawyers out of Indonesian firms, financed those lawyers in setting up their own Indonesian firms and then those new firms hire people from the international firm and act as the branch office – this may make some observers uneasy," says the anonymous lawyer. "With marketing materials and unified websites and email addresses and billing coordination, one may start to wonder how independent the Indonesian law firm really is."

BLP's Duffield agrees, saying firms and authorities seem to have no problem with those who enter the market in line with regulations. "Earlier this year, there were some issues with the Indonesian Bar issuing work permits – with a temporary suspension," he says. "We were told this was related to sensitivities around the activities of foreign law firms in Jakarta. Given that presidential candidates were looking towards nationalism or resource nationalism and [there was] some anti-foreign sentiment, I think there is a risk for firms that go too far. The way Indonesia has always worked is: don't overstep the mark and we can work together."

A separate issue is the type of work lawyers are doing. On this some lawyers believe the Indonesian system is not in keeping with the modern world, and that foreign lawyers should be given more freedom. "There is a requirement that overseas lawyers in Indonesia only advise on international law, but that's not what we're hired to do," one partner explains. "[Foreign lawyers] apply what they know about foreign law to Indonesian law. The ones that have been there a long time are experts on Indonesian law… that's their value. Indonesia really hasn't caught up with how the world works… [deals often involve] multi-jurisdictional teams and there is a lot of overlap."

The future

In truth the outlook for international firms in Indonesia remains unclear. Lawyers are confident that there will be long-term economic growth and a subsequent strong flow of mandates post-election, but there are still no signs of market liberalisation – with no hints from the government in this regard despite efforts by Korea, Malaysia, Singapore and to some extent China to open up their markets.

Among local firms there is a desire for training and knowledge transfer from their international counterparts and, as such, they welcome foreign players provided they keep their distance from local work. One local lawyer, Tony Budidjaja, proposes that international firms be invited to Indonesia but monitored by a special committee. Perhaps this could work. But those on the ground believe it will be difficult for Indonesia – and other developing countries – to shut out foreign lawyers for too long. 

"The day will come when it will be very hard to limit professionals [from practising local law]," says one lawyer. "That's what comes with globalisation: you've got to have some foreign lawyers there." 

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International firms with Jakarta associations

UK

• Allen & Overy with Ginting & Reksodiputro 
• Ashurst with Oentoeng Suria & Partners
• Berwin Leighton Paisner with Mataram Partners
• Bird & Bird with Nurjadin Sumono Mulyadi & Partners 
• Clifford Chance with Linda Widyati & Partners
• Clyde & Co with Lubis Ganie Surowidjojo
• DLA Piper with Ivan Almaida Baely & Firmansyah
• Herbert Smith Freehills with Hiswara Bunjamin & Tandjung
• Hogan Lovells with Hermawan Juniarto
• Linklaters and Allens with Widyawan & Partners
• Norton Rose Fulbright with Susandarini & Partners 
• Stephenson Harwood with Christian Teo Purwono & Partners

US

• Baker & McKenzie with Hadiputranto Hadinoto & Partners 
• O'Melveny & Myers – ended tie-up with Tumbuan & Partners. Currently looking at options including a joint venture with a local law firm
• Squire Patton Boggs with Melli Darsa & Co
• White & Case with MD & Partners