July 1, 2014
In March 2014, Indonesian Vice President Boediono confirmed that Indonesia would not renew its Bilateral Investment Treaty ("BIT") with the Netherlands, and indicated a similar intention in respect of the rest of its BITs, numbering more than 60. Although under the 'sunset provisions' of its BIT with the Netherlands, investments made prior to 1 July 2015 would remain protected for a further period of fifteen years, some commentators saw this as a retrograde step, taken in reaction to the case brought by a UK-listed company, Churchill, at the International Centre for the Settlement of Investment Disputes ("ICSID"). Hearings were held in Singapore and in February 2014 the ICSID Tribunal rejected Indonesia's jurisdictional challenges allowing Churchill to proceed with a claim for damages in excess of a billion US dollars.
BITs multiplied after the Second World War. As decolonisation gathered pace, dismantling the imperial frameworks within which trade and investment had occurred during the previous hundred years, former colonial powers and other capital exporters sought protection for their investors doing business in newly independent nations. Host states, seeking capital for their own development, agreed to enter into such treaties. A BIT commits the host state to fair and equitable treatment for all foreign investors who originate from the country that is the counterparty to the treaty. Investors obtain a direct remedy in arbitration against the host government if they are unfairly treated or their property has been expropriated. Over the years, arbitral tribunals have broadened the meaning of 'fair and equitable' and claims by investors have boomed, even in rather unlikely circumstances. Recently, for example, the Swedish energy company, Vattenfall, filed a claim against the German government for the loss occasioned to its business by Germany's change of nuclear policy following the Fukushima incident.
Initial alarm that these moves by the Indonesian Government presage a wholesale retreat from investor protections is certainly overblown. A more accurate assessment would be to see this as part of a rebalancing of interests, in which the Indonesian Government is not alone. South Africa and Australia are in the process of doing the same. Reviewing the older BITs to which Indonesia is a signatory is important as they typically focused on the protection of foreign investors without offering host governments sufficient policy space to consider other aspects of the public interest, such as health and safety, the environment or even the exigencies of sudden financial crisis. When a host government tightens environmental regulations, in the interests of its own citizens, this can trigger an investment treaty claim by a foreign investor whose business is affected. This is not the situation in the Churchill case, whose complaint is that the coal mining concession it thought it had secured was, in its view, unfairly revoked in favour of the Nusantara Group. Nonetheless, President Yudhyono has described that case as one of unwarranted pressure by a multinational company on a developing country.
More recent treaties have allowed host governments to retain greater power of regulation in such matters as health and the environment. These include the 2009 Asean Comprehensive Investment Agreement (ACIA) and the Asean investment agreements negotiated with Australia/New Zealand, China and Korea. Indonesia remains committed to these treaties. The concept of balance underpins the Investment Policy Framework for Sustainable Development issued in 2012 by the UN Conference on Trade and Development (UNCTAD). Another change, the shift from bilateralism to multilateralism, which the ACIA exemplifies, has also been beneficial by providing developing economies with common standards. This has mitigated the pressure on developing economies to compete to protect investors while neglecting safety and environmental concerns - an unfortunate race to the bottom.
Indonesia's adjustment of its investment policy is a change on which Indonesia's next President can build. The rise and rise of Jakarta Governor Joko "Jokowi" Widodo, the Indonesia Democratic Party of Struggle's (PDI-P) presidential candidate is the natural next step along Indonesia's path of political and economic development. Popular and in touch with ordinary people through his down-to-earth manner and impromptu visits, Jokowi is also focused on practical improvements, such as pushing through two long-stalled public transport projects - a monorail and an underground system - sorely needed to alleviate Jakarta's chronic traffic congestion. He is likely to continue with the rebalancing of investor protection in relation to the public interest generally, with more weight given to domestic concerns for the environment.
Jokowi's personal background - he graduated in forestry in 1985 from Gadjah Mada University (UGM) in Yogyakarta, and then worked in a forest concession area in Aceh - gives credence to his promise to rehabilitate and reforest a hundred million hectares of degraded land.
Indonesia's new, more nuanced approach to investor protection and specifically investment treaty arbitration is likely to continue, and be a point of reference for other developing economies seeking greater balance in their investment policy as well.
The article was first published as 'Jakarta's new approach to investor protection to stay' in The Business Times on 26 June 2014.