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Indonesia – No More Bi-Lateral Investment Treaties.

19 May, 2014

 

Legal News & Analysis – Asia Pacific – Indonesia –  International Trade

 

Introduction


The Government of Indonesia has recently (i) informed The Netherlands that its bi-lateral Investment Treaty with Indonesia, for the promotion and protection of investment, will be terminated from July 2015 and (ii) indicated that it will, at the earliest possible opportunity, terminate all of its 62 Investment Treaties with other countries including Australia, China, France, Germany, India, Singapore, South Korea and the United Kingdom.


Background

 
The Investment Treaties guarantee (i) basic rights for foreign investors in Indonesia and (ii) basic rights for Indonesian investors in foreign countries.


There are significant variations in the wording as between different Investment Treaties and that wording has changed over time. However, the Investor Treaties generally guarantee basic investor rights of (i) fair and equitable treatment, (ii) adequate physical security and protection, (iii) most favoured nation status, (iv) no expropriation or nationalisation without market value compensation, (v) free repatriation of capital and profits and (vi) arbitration of disputes in Washington DC. 


Analysis


Rationale For Termination: There have been various speculations and justifications for the termination of the Investment Treaties. These justifications include that Indonesia is now an advanced and stable country, enjoying considerable economic prosperity, while the Investment Treaties are the legacy of an earlier time when foreign investors had to be provided with all sorts of inducements and special protections to come to Indonesia. A more cynical speculation is that the Government is keen to avoid being taken to arbitration under an Investment Treaty. The current most high profile example of this is the ongoing Churchill Mining arbitration which involves the revocation of Churchill Mining’s Production Operation IUPs in respect of valuable mining concessions in Indonesia’s East Kutai Regency.


Process Of Termination: Fortunately for foreign investors, terminating all the Investment Treaties is an extended and time consuming process which will take much longer than the remaining few months in office of the current Government. There are two aspects to this extended process.


First, the Investment Treaties generally provide that the right of termination can only be exercised by a contracting State in the period immediately prior to the expiry of the current term of the relevant Investment Treaty. Accordingly, the Government cannot immediately move to terminate all the Investment Treaties in a single go but, rather, must wait until the appointed time to exercise its termination right in respect of each Investment Treaty. 


Second, the Investment Treaties generally provide for an Extended Protection Period which ensures that foreign investments, made during the life of an Investment Treaty, continue to enjoy the protections of the Investment Treaty for many years after the relevant Investment Treaty is terminated. Accordingly, terminating the Investment Treaties should have no immediate effect on foreign investors in Indonesia and the protection of their existing investments. Instead, the principal impact will be on those foreign investors which make a new or additional investment in Indonesia after the relevant Investment Treaty has been terminated.


Notwithstanding the foregoing, investments in the mining and oil & gas sectors are, typically, of a very long term nature. Accordingly, it is entirely possible that existing foreign investments in Indonesia’s mining and oil & gas sectors, made when the Investment Treaties were in place, will still be continuing and in need of protection even after the relevant Extended Protection Periods expire.


Assessment

 
Although Indonesia has undeniably made great advances, economically, politically and socially, over the past 50 years, one area where the progress has been much less significant is in developing a domestic legal system which is efficient, independent and transparent As such, Indonesia is still not able to offer foreign investors a reliable domestic legal basis for the protection of their investments in Indonesia. Without such a reliable legal basis for protection of their investments, the other benefits of foreign investment in Indonesia will usually bediscounted by foreign investors.


Conclusion

 
We believe current and prospective foreign investors should keep abreast of further developments in this area. It is to be hoped that the new Government, to take office in November 2014, will rethink the wisdom of proceeding with the proposed termination of the Investment Treaties. Please do let us know if you would like us to forward you any further SH Flyers on this topic or if you would like a specific analysis of the particular situation for your company if the relevant Investment Treaty were terminated.

 

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For further informaton, please contact:

 

Dirk Janssen, Partner, Stephenson Harwood

dirk.janssen@shlegal.com

 

Tom Platts, Partner, Stephenson Harwood

tom.platts@shlegal.com

 

Peter Church, Stephenson Harwood

peter.church@shlegal.com

 

International Trade Law Firms in Indonesia

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