INDONESIA 2006 SECTION 527 INVESTMENT DISPUTES

UNCLAS JAKARTA 006335

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA JROSELI, L/CID EDAUGHTRY

E.O. 12958: N/A
TAGS: EINV CASC KIDE OPIC PGOV ID
SUBJECT: INDONESIA 2006 SECTION 527 INVESTMENT DISPUTES
REPORT

REF: SECSTATE 60294


1. As requested in reftel, the following is post,s
submission for the Department,s annual Section 527 report to
Congress on U.S. citizen expropriation claims and other
investment disputes involving foreign governments/economies.
This cable updates post,s 2005 submission.


2. The United States Government is aware of one (1) claim of
United States citizens against the Government of Indonesia
(GOI). This case occurred in the power industry and was the
direct result of the 1997-1998 Asian financial crisis.

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Power Case
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3. a. Claimants A - B

b. September 1997 and January 1998

c. Status of case: Claimants A and B are joint investors in
a project company called the Karaha Bodas Company (KBC). KBC
entered into contracts with Pertamina and PLN Persero,
companies wholly owned by the GOI, to construct, and provide
electricity from, a geothermal power plant. After the GOI
cancelled the power plant project, KBC filed for
international arbitration against Pertamina. In December
2000, an international arbitration panel in Geneva,
Switzerland awarded KBC $261 million plus interest for the
lost investment and potential future profits. Between
December 2000 and June 2003, KBC succeeded in freezing
approximately $600 million of liquefied natural gas (LNG)
revenues in GOI and Pertamina trust accounts in New York. A
lengthy appeal process by Pertamina ensued.

In February 2003, the GOI asked the US Government to file a
Statement of Interest in its appeals before the US Courts of
Appeal for the Second and Fifth Circuits. The Department of
State replied that the US Government had found no compelling
interest in this private legal dispute between Pertamina and
KBC. The State Department recommended that Pertamina and KBC
enter into negotiations to resolve the dispute and offered to
facilitate a meeting between the parties.

In January 2004, the US District Court for the Southern
District of New York defined which funds KBC was entitled to
receive out of Pertamina,s frozen bank accounts. The Court
also denied, for the time being, the release of other frozen
funds belonging to the GOI. At the same time, the Indonesian
Energy Minister requested that the Department of State
facilitate a KBC-Pertamina meeting to discuss an out-of-court
settlement. The State Department arranged for both parties
to meet in February 2004; those discussions did not lead to a
settlement of the dispute. In March 2004, the Fifth Circuit
denied Pertamina,s request to nullify the original
arbitration award, which had grown to approximately $294
million including interest. Pertamina indicated publicly in
April 2004 that it would pay the award, but began talks with
the GOI to share in that payment.

In May 2004, the Indonesian police began to summon and
question former KBC employees and ex- Pertamina officials
involved with the project. Investigators from the national
police,s anti-corruption squad indicated that corruption
long had been suspected in the business dealings between
Pertamina and KBC. Two former KBC employees (one US citizen
and one Indonesian national) have contacted post to voice
their concerns over police intimidation as it attempts to
develop a corruption case against the two companies. The US
citizen departed Indonesia as a result of the police summons.
When his family also received a summons, he arranged for his
family to depart Indonesia. The police have yet to make an
arrest in connection with the investigation. Separately, a
senior GOI official told us on May 28 that Pertamina lacks
the funds needed to pay the arbitration award. The official
indicated that Pertamina would likely seek to have the US
Supreme Court hear the case.

In March, 2006, the U.S. Court of Appeals for the Second
Circuit issued a &Minute Order8 affirming the district
court,s November 19, 2004 judgment against Pertamina. The
Court of Appeals said that because the presumption that
Pertamina owns the refinery funds situated in Bank of America
is unrebutted, the district court correctly held that those
funds belonged to Pertamina, rather than to the GOI, and
ordered the Bank of America to turn over the balance of the
underlying money judgment to KBC. Because the appellants may
seek review of the 2d Circuit,s ruling in the Supreme Court,

the Second Circuit denied KBC,s motion of July 5, 2005, to
vacate the district court,s stay of execution and turnover.


4. List of Claimants:


A. Florida Power and Light

B. Caithness Energy

(Note: none of the above claimants has signed a privacy act
waiver.)
PASCOE