New Foreign Control Restrictions in Indonesia Follow on Heels of Similar Steps Elsewhere: How Public International Law May Provide Protection
Recent measures by the Indonesian government, and in other jurisdictions, suggest a growing trend toward resource nationalism and tighter regulation of foreign mining companies.
Developments in Indonesia
On February 21, 2012, the Indonesian President signed into law a regulation (the Regulation) that requires foreign investors to divest shareholdings in Indonesian mining concession companies to the state or local investors so that the foreign investors hold no more than 49 percent of shares in those companies by the 10th year of production.1The Regulation amends a 2010 regulation,2 which required divestiture so that Indonesian participants own at least 20 percent of shares by the fifth anniversary of production, by extending the local ownership requirement to 30 percent by the sixth anniversary of production, 37 percent by the seventh anniversary of production, 44 percent by the eighth anniversary of production and 49 percent by the ninth anniversary of production. The Regulation applies to existing contracts of foreign investors and does not contain any grandfathering provisions for foreign-owned mining companies already in production for more than five years and otherwise in compliance with the former regulations. Existing foreign investors will, therefore, be forced into contractual renegotiations.
The Regulation is likely to significantly impact the benefits that foreign investors expected of existing investments in the mining sector. It also creates uncertainty over the expected profitability of foreign investments in that sector, which will now depend upon contractual renegotiations.
In a separate development, Indonesia’s Ministry of Energy and Mining Resources passed a new regulation on February 9, 2012 prohibiting new contracts on exports of some unprocessed commodities after May 7, 2012.3 A complete ban on exports of some unprocessed commodities from Indonesia is due to become effective in 2014. The purpose of the ban is to require miners to process the commodities in Indonesia.
These two developments are likely to have a significant impact on many foreign investors in the Indonesian mining sector. Although expropriation and forcible divestment of investments remain a risk for foreign investors in many parts of the world, governments often employ less direct methods to increase mining revenues, such as through taxes, including windfall profits taxes and higher royalties. The Regulation highlights that measures directly targeting foreign ownership of investments remain a real risk for foreign investors in the mining sector.
Similar Regulatory Trends in Other Jurisdictions
Indonesia is by no means the only country to have recently taken new steps affecting foreign mining investments. Numerous jurisdictions, including developed states such as Australia and the province of Quebec, Canada as well as emerging and developing states, have recently imposed or announced regulatory or tax changes that will affect foreign investors’ mining sector investments that will in some cases considerably impact profitability.
In Guinea, a new mining Code promulgated in September 2011 increased the state’s potential share in mining projects from 15 percent to 35 percent. In Mali, the government revised its mining code in February 2012 to increase the state’s minimum share in mining projects from 20 percent to 25 percent. Finally, under Zimbabwe’s “indigenization” policy, foreign companies are required to divest shares so that 51 percent are held by local investors. These are just some examples of measures directly targeting foreign ownership of investments. Regulatory changes that can implicate foreign investors’ rights in other ways are far more numerous. Indeed, resource nationalism appears to be resurgent in many parts of the world in the context of sustained price increases in mined commodities.
How Investment Treaty Protection May Help
Aside from contractual dispute resolution options that foreign investors may have, including by recourse to international commercial arbitration, foreign investors may have rights under multilateral and bilateral investment treaties (BITs). Such investment treaty rights can be very valuable for investors, including by providing leverage in the context of negotiations with governments.
BITs often provide investors with broad substantive protections against state measures, whether by the government, legislature, courts or regulatory bodies whose actions are attributable to the state. These substantive protections often include a requirement of prompt, adequate and effective compensation for direct or indirect expropriation of investments. But they typically extend much further than compensation for expropriation. For example, the majority of BITs also require host states to treat qualifying investors and investments fairly and equitably, which has been interpreted to mean in accordance with investors’ legitimate expectations. Other common substantive protections in BITs include free transfer provisions, an obligation on host states to treat foreign investors and investments in accordance with full protection and security and a requirement that host states treat foreign investors and investments as well as they treat local investors and investments (national treatment) and investors and investments of third states (most-favored-nation or MFN treatment).
An investor does not need a contract with the state or state entities in order to have these rights. However, it does need to be a qualifying investor with a qualifying investment under a BIT in force.
At least as important as the substantive rights accorded to qualifying investors in BITs is the procedural right that many BITs afford investors to commence international arbitration directly against the host state for damages for violating those substantive rights. Many BITs provide for international arbitration at the International Centre for Settlement of Investment Disputes (ICSID), an arbitration centre established under the auspices of the World Bank. ICSID provides a self-contained arbitration regime whose arbitral awards cannot be challenged in local courts.
Indonesia, for example, is a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). Indonesia is also a party to almost 50 BITs, including with European, Asian, Middle Eastern, Latin American and African states. Investors may benefit from specialist advice on the applicability and scope of BIT protections, whether or not they are engaged in an investment dispute.
Investors in this sector in other countries should be alert to similar measures. They should consult with qualified international lawyers who can identify options and assist them in obtaining protection that may be available to them under treaties in that jurisdiction.