Indonesia is terminating (or not renewing) all of its bilateral investment treaties (BITs). Accordingly, the BIT between Indonesia and its fifth largest foreign investor, the Netherlands, was terminated on 1 July 2015. The termination of BITs is a significant change to Indonesia’s foreign investment framework. It may impact the level of protection afforded to foreign investors and their investments.

BITS

BITs are agreements between two states with respect to the rights of persons from either state investing in the other. BITs commonly contain foreign investment protection such as:

  • National treatment: Foreign investors will be treated no less favourably by a state than its domestic investors.
  • Most-favoured nation treatment: Foreign investors will be treated no less favourably by a state than investors from other states.
  • Expropriation compensation: Foreign investors’ assets will only be expropriated for a public purpose, on a non-discriminatory basis and with fair compensation.
  • Investor-state dispute settlement (ISDS): Foreign investors will be able to pursue dispute settlement through international arbitration against a breaching state before an independent tribunal, such as the International Centre for Settlement of Investment Disputes (ICSID).
  • Termination with notice: BITs can only be terminated with extensive notice prior to the end of any initial or renewal period.
  • Grandfathering: If a BIT is terminated, prior investments will continue to benefit from the BIT for a further period (for example, the Indonesia-Netherlands BIT will still apply to pre-termination investments until 1 July 2030).

BITS GLOBALLY

There are several thousand BITs in force globally. Other states have already moved to terminate some or all of their BITs, often due to their ISDS provisions.

Originally, ISDS provisions were designed to encourage foreign investment in developing economies, especially where dispute settlement through the local courts was perceived to be unpredictable or unfair.

Subsequently, however, concern has developed as to the ability of BITs to potentially render states liable to compensate private companies for public policy decisions. Such concern is not confined to developing economies.

Recently, Philip Morris Asia (PMA) instituted arbitral proceedings against Australia under the Australia-Hong Kong BIT of 1993. PMA claims that the Australian tobacco plain packaging law constituted an expropriation (without fair compensation) of its Australian investments.

Similarly, Vattenfall (a Swedish company with nuclear power investments across Europe) initiated arbitral proceedings against Germany after it shut down its nuclear power industry in response to the 2011 Fukushima disaster.

The public discourse around the Trans-Pacific Partnership (TPP) has also touched on potential ISDS concerns.

INDONESIA’S BITS

Indonesia has 67 BITs, including with China, France, Singapore and the UK. In early 2014, Indonesia notified the Netherlands that it would terminate the BIT between the two states and that it intended to terminate all other BITs. Since then, Indonesia has clarified that it will terminate those BITs which would otherwise be automatically renewed, while the remainder will be allowed to expire.

Indonesia may have decided to do so in response to proceedings initiated by foreign investors against Indonesia under ISDS provisions. In 2012, Churchill Mining brought arbitral proceedings against Indonesia in ICSID (based on its BITs with the UK and Australia) claiming over US$1.3 billion. Indonesia was unsuccessful in its jurisdictional challenge, with the arbitral tribunal determining that a standard paragraph in the Investment Licence issued by Indonesia’s Investment Coordinating Board (BKPM) to Churchill Mining constituted consent to ICSID’s jurisdiction. While Churchill Mining’s substantive claim remains to be determined, since 2013 the standard paragraph has been removed from new Investment Licences and the termination of all BITs may be another consequence.

AUSTRALIA-INDONESIA BIT

Australia entered into a BIT with Indonesia in 1993. After its initial 15 year term, it was automatically renewed in 2008 for a further 15 years and will be renewed again in 2023, unless terminated in 2022. If it is terminated then, the BIT will still apply to any pre-termination investments until 2037.

Accordingly, Australian businesses with investments in Indonesia should have access to the BIT protections for some time. If, however, such investments are structured to benefit from BITs that are closer to termination (for example, if an Australian company has a Dutch subsidiary with investments in Indonesia), careful consideration may be required as to which treaty protections to invoke.

NEXT STEPS

Indonesia may seek to replace the BITs with new and more favourable bilateral economic partnership and/or free trade agreements. The prospect that all BITs may be terminated might be used as leverage in negotiating deals on more favourable terms.

BKPM has stated Indonesia should negotiate fundamentally different agreements, which would:

  • not permit ISDS, with any foreign investment disputes resolved only through local courts, whose decisions would be final;
  • last for only 10 years (without automatic renewal), but be subject to termination at any time; and
  • provide for limited grandfathering.

At present, any such agreement is likely to offer foreign investors limited comfort.

It seems that Indonesia’s Ministry of Foreign Affairs prefers to emphasise the importance of “regionalism” in its approach to foreign investment. Indonesia is part of the emerging ASEAN Economic Community and the ASEAN Comprehensive Investment Agreement (which provides BIT protections, including ISDS provisions).

While Indonesia has expressed limited interest in the TPP, it has joined in the negotiations for ASEAN’s Regional Comprehensive Economic Partnership (RCEP). It is unclear what ISDS provisions might ultimately be incorporated into any RCEP.

CONCLUSION

As previously discussed, BITs are an important part of Indonesia’s foreign investment architecture. The termination of all of its BITs and the lack of certainty around replacement protections, complicates the availability of treaty protections to foreign investors. Given the timelines for termination, as well as grandfathering, there appears to be enough time for the Indonesian government to articulate its new approach to foreign investment protection.