Jurisdiction - Indonesia
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Indonesia – The BITs Saga.

23 July, 2014

 

 

Introduction


A surprising decision was issued by the Government of Indonesia (GoI) in March 2014 when it communicated to the Netherlands that the GoI will end and renegotiate all bilateral investment agreements (BITs) with nations such as France, Singapore, Spain, the People’s Republic of China and the United Kingdom. In fact, this verdict had been decided since February 2014 based on Diplomatic Note No. D/00405/02/2014/60, dated 17 February 2014, pursuant to which the GoI has agreed to end and renegotiate the BITs, starting with the Netherlands.


The Ending Of BITs?


The decision by the GoI was echoed by President Susilo Bambang Yudhoyono in respect of the Churchill case, an arbitration case filed by Churchill Mining at ICSID against the GoI in respect of the dispute over coal assets in Kalimantan, Indonesia based on the GoI and the United Kingdom Bilateral Investment Treaty. President Susilo Bambang Yudhoyono is of the view that the GoI does not want multinational companies to put pressure on Indonesia by using an international arbitration provision as also reflected in the approach taken by the GoI in relation to the the recent international arbitration case against the GoI submitting by Newmont Mining Corp. on the dispute over export taxes.


Learning from the arbitration claims submitted by the multinational companies, the GoI intends to revisit all provisions under the existing BITs. This is in order to ensure that the investment agreements will not jeopardise Indonesia’s new investment laws and regulations and also create another protection of the national interests of Indonesia. We suspect that, as most of the BITs were made back in 1960s, the terms and conditions are neither suitable nor particularly relevant to reflect the country’s current investment situation, specifically regarding the investment dispute settlement. 


From the perspective of the GoI, one of the major changes will be related to the rights of foreign investors to submit a case against the GoI to an international arbitration, without having to go through Indonesian courts. We understand that there is a view that the GoI is attempting to apply the ‘exhaustion of local remedies’ principle in the formation of new bilateral investment agreements (as usually eliminated under most BITs and also under the NAFTA and the ICSID Convention). This is something that is currently worrying to foreign investors due to the uncertainty of laws and decisions made by local courts. A dispute settlement mechanism is one of the key points of an investment treaty. This provision is used as a protective mechanism for foreign investors against nationalisations or expropriations issued by the government, as well as any other unfriendly policies or regulations issued by the government. Foreign investors are doubtful that they will have other recourse to protect their investments in Indonesia, other than the protections afforded under the existing BITs. 


The Alternative Protections For Foreign Investors


Aside from the protections offered under the BITs, a further question to be asked is, “does Indonesia have any other investment protections available under its prevailing laws and regulations?” The answer is yes. Normally, under Law No. 25 of 2007 on Capital Investment (Law No. 25) which shall be applied for all investments (including foreign investments) in Indonesia, the GoI acknowledges the applicability of the national treatment principle and the most favoured nation principles in Indonesia and the GoI shall provide equal treatment to all investors, regardless of their country of origin. 


Further, Law No. 25 stipulates that the GoI will not undertake any nationalisation actions to take over ownership rights of investors, unless it is allowed to do so by law. In the event of nationalisation, the GoI shall grant compensation, which amount shall be based on the market value. A settlement through arbitration may be conducted if there is no consensus achieved on the amount of compensation by the parties. Law No. 25 recognises the use of international arbitration as an investment dispute settlement between the GoI and the foreign investors. 


In addition, other than BITs, the GoI is also a party to various multilateral investment agreements, such asthe ASEAN Comprehensive Investment Agreement and the Convention on the International Centre for Settlement of Investment Disputes. In the case of the ASEAN Comprehensive Investment Agreement, the resolution of investment disputes can be achieved through a local court or international arbitration. The protection granted under the ASEAN Comprehensive Investment Agreement is not only for ASEAN investors but also for non-ASEAN investors, subject to the conditions stipulated under the agreement. It is interesting to note that compared to other multilateral investment agreements, the ASEAN Comprehensive Investment Agreement adopts the ‘exhaustion of local remedies’ principle in the agreement.


The Exhaustion Of Local Remedies: Using Indonesian Courts?


The opinion of some that entering into the Indonesian sphere of law is the same as entering into the Amazon jungle may be true in the case of using local remedies in an investment dispute settlement. We understand that foreign investors may not be familiar with Indonesian laws and regulations, as well as its court procedures and, therefore, it is more convenient and familiar ground for them to use international arbitration methods to settle their investment disputes, which is more depoliticised. If the foreign investors have to go through local courts in order to resolve their investment disputes, they have to face a prolonged judicial process and local courts are often unfamiliar with sophisticated commercial transactions. 


However, it is likely that the GoI has learned from the Churchill case and the recent Newmont case. Therefore, it is apparent that the GoI is attempting to avoid another international arbitration case initiated by foreign investors by revisiting the dispute settlement provision in the BITs and using the ‘exhaustion of local remedies’ principles in the new BITs even though in fact, Law No. 25 recognizes the use of arbitration to settle investment disputes in Indonesia. It means that in any case, foreign investors may need to go to local courts before they can directly submit their claims to a dispute settlement at an international level. This mechanism may not be favourable for foreign investors but on the other hand, the GoI has its own homework i.e. finishing the reformation of its judicial institutions and processes in order to create a clear decision-making system in its local courts and government administration which will gain the trust from the foreign investors.


Comments


It is clear that the reason behind the GoI’s decision to end and re-negotiate the current BITs is basically a matter of protecting the sovereignty and national interests of Indonesia, within the world order. We understand the importance of revisiting all BITs entered into by the GoI back in 1960, in order to ensure that the new BITs are going to be relevant to the current investment situation in Indonesia. However, it is still not clear what dispute settlement mechanism will be offered by the GoI under the new BITs. 


With the upcoming presidential election in July 2014, this issue is also one of the issues that are still being debated between the current two candidates, in addition to the nationalisation issue where the foreign investors are afraid of sudden nationalisation by the upcoming government without having a proper mechanism and indemnification. We are aware that there is a growing concern from foreign investors on how the upcoming government will deal with and solve this issue. Bearing in mind the huge potential of natural resources in Indonesia, foreign investors will have to seriously consider having a good bargaining position when participating in discussions in relation to this matter with the upcoming government.

 

This article was supplied by Lewi Aga Basoeki and Nathaniel Mangunsong, Ginting & Reksodiputro in association with Allen & Overy

 

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