Indonesia stands as a significant jurisdiction for the ICC due to its rapid development in Southeast Asia and the numerous business opportunities it offers. Under Jokowi’s leadership, the Indonesian Government has embarked on an ambitious plan to relocate the capital city from Jakarta to East Kalimantan. This move is partly in response to the threat of climate change, a commendable step given Jakarta’s status as a “disappearing city” as reported by the World Economic Forum in 2018. The new capital city, Nusantara, is envisioned to solve the challenges of urban congestion, environmental issues, and the constant need for enhanced infrastructure currently faced in Jakarta.
A Gateway to Opportunities
The relocation presents both investment opportunities and potential disputes. Notably, Nusantara aims to be a carbon-neutral city by 2045, raising questions about Indonesia’s commitment to this ambitious goal and the legal implications if it falls short. The project also entails legal challenges like land clearance, indigenous rights, and comprehensive infrastructure construction in Nusantara and its surrounding ecosystem, vital for Kalimantan’s development. The Nusantara National Capital Authority’s report outlines that construction will be the focus from 2025 onwards, aiming for overall infrastructure completion by 2039.
This substantial undertaking will inevitably increase the prospects for foreign investors, contractors, consultants, and various entities to participate in. The Indonesian government offers different, rather flexible, funding schemes for Nusantara that would allow for private entities be involved, which are: (a) fully sourced from the state budget, (b) public-private partnership, (c) participation from State Owned Enterprises, (d) bilateral or multilateral direct funding, and (e) other creative financing schemes such as crowd funding and philanthropic grants.
The anticipated contracts to be signed and executed with various financial and service providers is poised to increase significantly as these key parties will contribute their expertise and resources to the project. The relocation project will also give rise to several other legal issues such as land clearance and rights of indigenous population, and most dominantly, how project owners ensure a complete construction of infrastructure at Nusantara and its surrounding ecosystem to accelerate Kalimantan’s development.The sheer volume and complexity of construction contracts introduce a higher degree of intricacies, and further increasing the potential for disputes to arise in the construction sector down the pipeline.
Increased Dispute Probability
With the construction sector experiencing an anticipated a surge in contracts, the likelihood of disputes naturally rises. Differing interpretations, unforeseen circumstances, delays, and conflicting payment terms and project specifications are some prime examples of cause of conflicts among the parties involved.
Projects will likely to be governed by standard forms of contract such as those of the FIDIC (International Federation of Consulting Engineers) with the involvement of foreign engineers. This will mostly be relevant to electricity plantation developments under an EPC mechanism and/or turnkey projects and like in many standard forms of contract, arbitration is the default disputes resolution mechanism. Given the role of foreign parties and investors, we may see an uptick in the selection of foreign seated arbitration and the role of main international arbitral institutions.
However, given that historically there is a lack of understanding of foreign procedural rules and the perception that the enforcement of international arbitral award is cumbersome, the choice of seat and the administering institutions need to be approached with caution as various local stakeholders will undoubtedly want to ensure that their dispute resolution clauses guarantee expertise, neutrality and enforceability.
The necessity for robust dispute resolution mechanisms becomes evident. This is where mechanisms such as ICC arbitration and ADR play a pivotal role, offering a balanced, efficient, and internationally recognised framework for resolving disputes.
Relevance of ICC Arbitration and ADR
The construction of Indonesia’s new capital city presents a monumental opportunity for the utilisation of ICC Dispute Resolution Services (“ICC DRS”) to address the demand for efficient and effective dispute resolution mechanisms. More specifically, large-scale infrastructure projects often give rise to complex disputes, which is where ICC can become relevant in providing swift and equitable resolutions.
ICC arbitration, administered by the ICC International Court of Arbitration (the “Court”), is a renowned institution offering a structured platform for resolving disputes arising from the construction endeavour, a role it has fulfilled for over a century. ICC arbitration serves as a neutral ground for foreign investors, contractors, and consultants likely to be involved in constructing the new capital city.
Complementing the above, ADR methods are likely to gain prominence in the context of Nusantara construction. Notwithstanding negotiation efforts, there are several services that the ICC International Centre for ADR can provide for the parties, such as the administration of mediation and dispute boards services to the ensure a timely resolution of conflicts.
In conclusion, Indonesia’s ambitious venture to construct the new capital city of Nusantara heightens the potential for disputes, necessitating efficient and internationally recognised dispute resolution mechanisms. In that vein, services under the ICC DRS stand as relevant mechanisms for swift and fair conflict resolution with the anticipated surge of construction contracts. These mechanisms not only ensure equitable outcomes but also foster a conducive environment for sustained progress in this landmark undertaking.
For further information, please contact:
Narendra Adiyasa, Partner, Widyawan & Partners
Indiana Rai – Deputy Director, Arbitration & ADR, ICC Indonesia