Earlier this month Indonesia informed the Dutch embassy in Jakarta that
it was terminating its bilateral investment treaty (BIT) with the Netherlands
as of July 1, 2015. “Sunset” clauses mean that current
investments will continue to be covered until July 1, 2030. This termination was confirmed by Indonesian
vice president Boediono. Moreover, the Dutch embassy said that it had been
informed that Indonesia intended to terminate all 67 BITs.
The main legal protection
offered by the Indonesian BITs is the ability for foreign investors to invoke
investor-state arbitration. This is seen
as a must, as most foreign investors do not have confidence in the Indonesian
domestic judicial system. Arbitration in
neutral international forums such as the International Center for the
Settlement of International Disputes (ICSID) reassure foreign investors that
their investments will be protected.
This move does not
necessarily mean that Indonesia is moving away from international
arbitration. Rather, Indonesia is moving
the arbitration option from its BITs to regional agreements such as the ASEAN
Comprehensive Investment Agreement (ACIA), the Regional Comprehensive Economic
Partnership (RCEP) agreement between ASEAN and its trading partners, and its
own bilateral free trade agreements (FTAs).
First, the ACIA, which
Indonesia ratified in 2011, requires ASEAN member states to provide for dispute
resolution for investments from other ASEAN member states. Article 33 of ACIA
allows investors to seek dispute resolution in domestic courts or arbitration
through ICSID, regional arbitration centers, UNCITRAL or on an ad hoc basis. The ACIA contains other protections commonly
found in BITs. Hence foreign investors
worried about investing in Indonesia (or
other ASEAN member states with more uncertain domestic judicial systems) will
relocate or reroute their investments through other ASEAN member states. This, of course, will raise issues regarding
whether multinational investors invoking the ACIA actually qualify for its
protections, but this is a common issue that arises in all investment treaties.
Second, by taking BIT investor-state arbitration off the table, Indonesia is also taking a tactical approach to the RCEP and its FTA negotiations with the EU. With an RCEP agreement (which conveniently should be reached by end 2015), investors from China, India, Japan, Australia-New Zealand and Korea would have investment protections such as investor-state arbitration. Tellingly, the initial alarm from the foreign investor community about Indonesia’s intended terminations has not come from these countries.
Instead, the initial alarm
bells have been raised by Europeans, particularly from the British and
Dutch. Perhaps this is as intended by
Indonesia, which is negotiating an FTA with the EU that could include
investor-state arbitration. Yet the EU-Indonesia
FTA talks have slowed down recently; Indonesia’s taking the BITs off line
incentivizes the EU to seek investor-state arbitration in the EU-Indonesia FTA
talks, much as the EU’s removal of Indonesia from Generalized System of
Preference (GSP) preferential tariffs incentivizes Indonesia to conclude the
EU-Indonesia FTA quickly as well before it loses too much market share in the
EU.
In the end, Indonesia’s move
to end its BITs marks a tactical and strategic shift in how Indonesia approaches arbitration and
investment protections. These could strengthen the ASEAN institutions, as the
ACIA and RCEP will become more important over time. This move should also speed things along for
the EU-Indonesia FTA talks, and even for an EU-ASEAN FTA.
