Safeguarding Water Contracts in Indonesia

Due to financial and technological reasons, water undertakings are oftentime being conducted by large scale Multi National Corporations (MNC). Governments often positioned Regional Authorities as a regulator to these MNCs, and at the same time engaged in water contracts with them. However, the relationship between Water MNC and Governments is assymetrical as MNCs can move their assets overnight, transfer their ownership to third parties, seek various means of redress through bilaterall, regional or international investment treaties and avoid confiscation by allocating their assets. These are often done by hiding behind multiple jurisdictions enjoyed either by their parent companies, subsidiaries or shareholders.

The positions of Governments are the opposite as they do not have the flexibilities enjoyed by MNCs. This paper attempts to prescribe practical guides that need to be highlighted when signing a contract with MNC. The first part adresses the legal nature of MNC; the legal relationship between consumer, regional governments, local water companies and its parent company; the legal obligation imposed by state due to international water norms and assymmetries under state responsibility rule (the problem in attributing “failure to provide water” to the state) and in private state-MNC agreements.

Second part of the paper listed down regulatory mechanisms in Indonesian context, more specific towards the Constitutional Court 's review of the Water Act (2004). It discusses the issues that should be adresses in the implementing regulation of the Water Act including regulation to water companies (share ownerhsip, transfer of assets, audit requirements) and regulation of water undertakings (tender, compensation to prior users, consultation) and identifies which norms should be regulated in which level in the hierarchy of laws.

The third part of the paper examines the provisions existing normally in water contracts between a local subsidiary of MNC and regional authorities and presents a point of view in drafting the clauses. This part of the paper discusses which covenants should be contained in the contracts, what warranties and indemnities it should gives, which choice of law and forum the parties should make, how the contract should be interpreted, pricing and the use of currencies selected, payment methods, rights and obligations in emergency situations and in drafting the “terms of agreement”. This analysis is put under the context of assymetrical relationship between MNC and governments in water undertakings.