(JG Graphics/Modina Rimolfa)

Commentary: Indonesia Should Get Serious on Investment Treaties


FEBRUARY 08, 2015

In light of the current policy of reviewing and renegotiating Indonesia's Bilateral Investment Treaties ("BITs"), Indonesia's Foreign Affairs Ministry in cooperation with the International Institute on Sustainable Development and the United Nations Conference and Trade Development hosted a Regional Interactive Meeting on Investment Treaty Models from Jan. 20 till Jan. 22. Foreign Minister Retno L.P. Marsudi, in her opening remarks, reemphasized the necessity of reviewing and renegotiating the current generation of BITs in force involving Indonesia, with the goal of striking a new and more equitable balance between the protection of foreign investment on the one hand, and the national economic interest and the sovereign rights of Indonesia on the other.

Indonesia, like many developing countries and emerging markets, feels that the previous generation of BITs contains language that is too broadly formulated so that over time, the interpretation of this language has tended to favor foreign investors, thus diminishing Indonesia's sovereignty.

The recent cases of Churchill Mining and Newmont Mining against Indonesia are very good examples of how foreign companies use BITs to bring an investment dispute to international arbitration and force democratically elected governments to reverse decisions taken in the exercise of their economic policy sovereignty or face the prospect of having to pay potentially enormous arbitration awards.

In fact, the government of Indonesia began the process of implementing this policy last year when it sent Diplomatic Note No. D/00405/02/2014/60, dated Feb. 17, 2014, to the Netherlands, informing it that it would not renew its BIT after the agreement expires on June 30, 2015, with the same policy applying to the remainder of Indonesia's 66 BITs. Indonesia is not the only country that has adopted this approach, but rather stands alongside other developing countries like South Africa, Ecuador, Venezuela, the Czech Republic and Bolivia. In fact, in 2013 South Africa chose to cancel its BITs with the Netherlands, Germany, Belgium, and Luxembourg.

Back to the Regional Interactive Meeting: the 3-day meeting focused primarily on the necessity of an investment treaty model for states and the controversy currently surrounding investor-state dispute settlement ("ISDS"). However, for Indonesia what was most important was not whether it should have its own investment treaty model, but the need to first distinguish its investment objectives as a country. It was noted by participants and speakers, including Jonathan Bonnitcha from the IISD and Abdulkadir Jailani from the Foreign Affairs Ministry, that the investment objectives of a state must first be identified before drafting an investment treaty model or negotiating BITs. A state's investment objectives and purpose are a vital element of its foreign and domestic economy policies, as it is one among several instruments that establish and signal the direction a given economy wishes to go.

In this regard Indonesia is a curious case as President Joko Widodo in an international forum, most notably at the Asia Pacific Economic Cooperation forum in Beijing last year, sent a message to all potential foreign investors to consider investing in Indonesia. This despite the fact that, in reality, the Indonesian investment climate is not particularly friendly to foreign investors, characterized as it is by inconsistent and overlapping laws and regulations, the complexity of multiple tax regimes and procedures, and protectionist policies, particularly the recent ban on exports of raw materials. These measures are in addition to restrictions on foreign investments in certain economic sectors, and the cumulative effect of all these measures, which is to place Indonesia at number 114 out of 189 countries according to the 2015 Ease of Doing Business Report by the World Bank Group. Hence, the government of Indonesia and its executives should not offer false hope to or raise the expectations of foreign investors in a way that is not reflective of the prevailing legislative and regulatory realities in Indonesia, since this could lead to legitimate expectations being frustrated further down the road.

In fact, the gaping chasm between statements being issued by high-level policymakers on the one hand and the actions of lower-level government officials on the other has been a long-standing problem for Indonesia, which suffers systemic and wide-ranging problems of implementation across the entirety of the law-making spectrum, on everything from the protection of intellectual property rights to enforcing a smoking ban inside buildings. In addition, few relevant Indonesian officials understand the many complexities surrounding the issue of investment protection under BITs.

In short, now with the review to take place of the country's BITs, this is the perfect time for policymakers in Indonesia to come together with one purpose, namely to understand the substantive issue of investment treaties and come up with a model or at least some guidelines for BIT negotiations based on a clearly formulated set of investment objectives. It is of the utmost importance that the substantive contents of all of Indonesia's BITs are broadly consistent in order to avoid mishaps in the future like the one presently unfolding in the context of ISDS as well as the recent issue of Most-Favored Nation ("MFN") clause, that requires a state to treat foreign investment under one investment treaty no less favorable than the treatment it provides under other investment agreement.

That being said, with an investment treaty model or a set of guidelines, Indonesia will be able to equip itself with more knowledgeable policymakers and the negotiating expertise needed to successfully and effectively prosecute treaty negotiations with a view to achieving Indonesia's investment objectives.

Sianti Candra is a research associate at the Center for International Trade and Investment (CITI) at Pelita Harapan University (UPH). The CITI team contributed to this article.