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.