Foreign Direct Investment: Replacing The Contract Of Work System In Indonesia

Abstract

Indonesia created a novel system to administer Foreign Direct Investment (FDI) in mining. This Contract of Work (CoW) system served the country well from 1967 up to 1997 until the national political (democracy revolution) and economic (Asian Currency) crisis, coupled with the Busang fiasco (where large scale fraud in gold discovery claims caused billions in losses) led to total collapse and cessation of FDI in the countrys extraction industry. Since the stabilization of the political and economic framework in Indonesia after free elections in 1999, the government has attempted to create a new law to replace the CoW system which was finally passed in December 2008. This paper evaluates the new proposals and compares them to the previously successful system and suggests concerns and reforms that need be addressed. Specific focus is placed on issues of security of tenure, taxation and royalties, local government involvement, and environmental damage.