The elements of ‘state control’

The elements of ‘state control’ Mohamad Mova Al’Afghani ;  The writer lectures in Law at Ibn Khaldun University, Bogor, West Java

JAKARTA POST, 14 Januari 2013

In November, the Constitutional Court invalidated the upstream oil and gas regulatory body (BPMigas). A few years earlier, the court declared the Electricity Law, several provisions in the Oil and Gas Law and the Water Law “conditionally unconstitutional”.  A number of mass organizations have threatened to file a judicial review against other laws governing natural resources in the near future. Judging by the court’s verdicts, there is no certainty as to whether laws which are currently in force are constitutional. Many perceive Article 33 of the Constitution, which mandates the state’s control over natural resources for the good of the people, as the driving force behind the judicial reviews. However, I am of the opinion that the problem lies not in Article 33, but the Constitutional Court’s interpretation and perception of state functions. Article 33 is not particularly clear on what it really means. Thus, in the judicial review of the 2003 law on electricity, the court revived the 1960 debate about the state’s right to control. In order to implement interpretation of Article 33, the court created an analytical framework of state control that consisted of five cumulative elements: policy making (beleid), administrative (bestuursdaad), managerial (beheersdaad), supervisory (toezichthoudensdaad) and regulation (regelendaad).  The court provided examples of how this would work in practice. In terms of administrative functions, the Court suggested that the government would issue permits, licenses and concessions. Whereas, to exercise its regulatory function, the House of Representatives and the government enact laws and the government create rules. The managerial function, according to the court, is exercised through shareholding or direct involvement in the management of state-owned enterprises or state-owned legal entities.  Ever since the court granted the judicial review against the electricity law, these five elements have become a doctrine that has been practiced by the Court in its later decisions and is well-accepted by legal academics. Where do these elements come from? Certainly not from the Constitution, but rather they are constructed by the court as a tool to interpret Article 33.  Partially, the debate on “state control” emerged in the 1960s during the drafting of the Agrarian Law. I suspect the five-element construction is heavily influenced by the writings of Wolfgang Friedmann, a celebrated German jurist and an émigré to the United States. The late Professor Friedmann wrote several books in the 1970s to defend the welfare state and mixed economies.  In his defense of mixed economies, Friedmann stated four primary state functions: as a provider, umpire, entrepreneur and a regulator. One could easily see the link between Friedmann’s idea of the welfare state and the five-element construction developed by the court. If these assumptions are correct, the question then becomes, whether Friedmann’s construction of the welfare state, which was written in the 1970s and now practiced by Indonesian jurists, is still relevant to the present-day situation?  Two decades after Friedmann’s influential books were published, the welfare state was in crisis and neoliberalism was on the rise, followed by a divestiture of state assets, privatization and deregulation. However, total deregulation was not possible. Privatization was unwillingly accompanied by heavy regulation. Europe and many other parts of the world then moved to the phase of the “regulatory state”. The court’s perception of regulation is somewhat different than the mainstream contemporary academic view found in “regulatory state” debates. As discussed previously, regulation is viewed by the court narrowly, as only one part of the five-element construction used by the court in its judicial reviews, the regelendaad.  In the recent judicial review of the Oil and Gas Law which dissolved BPMigas, the court rejected the idea that the state function in the sector was “only” in regulating, and asserted that the other four elements must also be applied. This narrow understanding of regulation by the court differs from contemporary mainstream academic understanding of regulation which also includes supervisory activities, as well as license-granting, standard-setting, in addition to the traditional understanding of enacting rules.  Of all the five elements, the beheersdaad function, according to the court in its judicial review of the Oil and Gas Law, should be considered the primary and the first in hierarchy of the expression of “state control”.  The court said BPMigas was unconstitutional because it restricted the state from expressing its managerial functions. Because of the Oil and Gas Law, the state, the court said, no longer held the authority to directly appoint state agencies or corporations in exploiting oil and resources as they had to go through the proper competition and market mechanism.  This is a very important issue, because when it is applied to oil, it must also be applicable to other natural resources and other “vital branches” of the production sector. We will see an increase in resource nationalism.  In practical terms, the court decision means two things: First, the involvement of state-owned enterprises in the natural-resources sector should increase and second, they may be protected from competition. If these two prerequisites are not met, then a law may not be constitutional. The challenge for Indonesian scholars now is to deconstruct and reinterpret the meaning of Article 33 by proposing an alternative framework. As I have said, the five elements of state control are nowhere to be found in the Constitution. They are the court’s own invention, influenced heavily by Friedmann’s idea of state functions in the context of the welfare state and then reformulated by the court and applied to interpret Article 33 of the Constitution in its review of the 2003 Electricity Law. The Court then refined its formulation in the 2012 oil and gas ruling so that the element of beheersdaad became the first and primary element in determining state control. This too, is another construction which can be debated by the legal community. One way to do this is by drawing on Hatta’s interpretation. One of the founding vice president’s interpretations of Article 33 was that “state control” “[…] does not mean that the state functions as entrepreneur, instead it means that the state enacts rules to support the economy, the rules of which should also forbid exploitation of the weak by the economically powerful”.  Hatta’s interpretation is much more in tune with the contemporary debate on the “regulatory state”, which emphasizes “state control” as a public service obligation, protection of vulnerable groups, transparency, accountability and participation, rather than on share ownership. Furthermore, it is naïve to suggest that state control can be exercised through ownership alone. State-owned companies are not free from corruption, nepotism, capture by political elites or various forms of inefficiencies. As Judge Harjono said in his dissenting opinion of the Oil and Gas Law judicial review last November, the state could still be dragged into investment arbitration which in turn limits the state’s control.  Indeed, private companies are not free from those problems either. Thus, the real “state control” lies in regulatory mechanisms which guarantee human rights and create transparency in extractive industries. Unfortunately, these have not been the main concern of the court or the government as they both continue to wrestle in the never-ending debate over whether ownership and private sector participation can limit state control. ●