As we reported in our previous blog post, the Government of Indonesia recently indicated to the Dutch embassy in Jakarta that Indonesia intends to terminate all of its existing bilateral investment treaties (BITs), starting with its treaty with the Netherlands. Indonesia has entered into BITs with over sixty countries, including Australia, China, Singapore and the United Kingdom. Each of the BITs contains specific provisions regulating the procedure for termination.

There has been much press speculation as to the reason for Indonesia’s decision. In particular, commentators have speculated that it is it as a response to the two high profile multi-million dollar arbitration claims that Indonesia is currently defending, both of which arise out of the Investor-State Dispute Settlement mechanisms contained in BITs.

The outright removal of any future treaty protection for investments in Indonesia would be a cause of considerable concern for existing and prospective investors, as the investment protections afforded by BITs can play a significant part in the final decision to invest, particularly in developing countries such as Indonesia. In the absence of treaty protection, the only remaining recourse for some investors might be the Indonesian courts or diplomatic channels, neither of which may provide investors with sufficient comfort.

Some commentators have posited that, in reality, Indonesia intends to use the termination of its BITs as a means of renegotiating their terms, in order to reflect Indonesia’s strengthened economic and trading status over the last decade. Certainly, many of Indonesia’s existing BITs were concluded at a time when the investment landscape in Indonesia was very different, and the country has subsequently experienced exponential economic growth as well as political stabilisation.

This view is supported by recent comments made by the Chairman of BKPM, Indonesia’s investment co-ordination agency, who indicated to the Financial Times that the Government’s aim is not to weaken investor protection but rather to reset Indonesia’s investment framework. The Chairman also suggested that Indonesia is considering the adoption of a “model” BIT to act as a starting point for negotiations, mirroring the approach taken by many countries such as the UK.

It is of course possible that Indonesia will consider replacing its current BITs with treaties on more favourable terms. However, in reality, at least in the short-term, this seems unlikely. It would entail the initiation of separate discussions with over sixty nations regarding investment protections. Moreover, even if this was Indonesia’s intention, it is unclear whether any amended terms proposed by Indonesia would be acceptable to the wider international community.

What will be the impact of a decision to terminate all of Indonesia’s BITs without substituting them for alternative arrangements?

First of all, the impact on existing investors will not be immediate. Under certain BITs, Indonesia will have to wait for the expiry of the BIT’s initial term before it will have the opportunity to terminate. Further, under what are known as “sunset clauses”, existing investors may still be entitled to rely on the BIT protections for a period after the BIT’s termination. For example, Indonesia will only have the right to terminate the Australia-Indonesia BIT in 2022, following which the sunset clause will be in force for a further 15 years – providing existing investors as at the date of termination with treaty protection through to 2037.

Indonesia also continues to be a signatory to a number of multilateral investment treaties, some of which afford investors protections equivalent to those contained in the BITs. Therefore, some investors may still have recourse to an international tribunal for potential breaches of Indonesia’s investment obligations under relevant multilateral treaty arrangements. In particular:

  • Indonesia is a signatory of the ASEAN Comprehensive Investment Agreement (ACIA), a multilateral investment treaty which provides ASEAN nations with many of the protections offered by BITs, including most favoured nation treatment, fair and equitable treatment, full protection and security, protection from expropriation without compensation and the ability to commence arbitration proceedings against the State.
  • Indonesia is a signatory of ASEAN free trade agreements with Australia, New Zealand China, Japan, Korea and India. In particular, the AANZFTA contains national treatment obligations, fair and equitable treatment, full protection and security, protection from expropriation without compensation and the ability to commence arbitration proceedings.
  • Indonesia is a member of the Organisation of Islamic Cooperation (OIC) and has ratified the OIC agreement for the protection, promotion and guarantee of investments alongside over 20 other member states, including the UAE and Saudi Arabia. This agreement contains provisions equivalent to those found in BITs. Indeed, an arbitral tribunal recently held that the OIC investment agreement permitted arbitration proceedings to be brought against Indonesia and therefore other host states.
  • Indonesia is a contracting state to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).

Looking to the future, Indonesia has also expressed an interest in signing up to certain multilateral treaties, including the Trans-Pacific Partnership Agreement (TPP). Although no draft texts of the TPP have yet been officially released, it is likely that the agreement will contain an investor-state dispute resolution provision to enable investors from signatory states to bring claims for compensation against other signatory states where there has been a breach of the TPP’s investment protections (see recent blog post on this topic). The EU is also currently engaged in discussions with ASEAN countries regarding a free trade agreement which will include certain investment protections.

It also bears emphasis that Indonesia’s potential withdrawal from its BITs will not prevent future investors from the benefit of equivalent investment protections and dispute resolution mechanisms under the Indonesian Investment Law. This law specifically provides for investment protections such as most favoured nation treatment, fair and equitable treatment and protection from expropriation without compensation. It also enables foreign investors to to settle disputes with the Government of Indonesia by way of international arbitration.

Despite these possible alternative avenues for recourse under other treaties, if Indonesia does terminate all of its BITs, its investment landscape will look very different. This recent news is understandably unsettling. Whilst existing investors in Indonesia should rest assured that any changes will not have immediate effect, investors are advised to carefully consider how their investments are structured in order to ensure the best possible protection, particularly in terms of any new investments in the future.