Foreign investors into Indonesia have taken note of the following brief paragraphs posted on the website of the Embassy of the Netherlands (see http://indonesia.nlembassy.org/news/2014/03/bilateral-investment-treaty%5B2%5D.html with our additional underline, below):

“Indonesia has informed the Netherlands that it has decided to terminate the Bilateral Investment Treaty (official title: Agreement between the Government of the Republic Indonesia and the Government of the Kingdom of the Netherlands on Promotion and Protection of Investment) per July 1, 2015.

From that date onwards the provisions of the Agreement will continue to apply only to investments made prior to that date, for a period of fifteen years. The Indonesian Government has mentioned it intends to terminate all of its 67 bilateral investment treaties. The Netherlands is discussing the matter with the Indonesian authorities.”

The underlined sentence above, indicates that the Indonesian Government’s may be considering terminating all of its bilateral investment treaties (BIT), not just the one with the Netherlands. The implication of this statement (which has not been commented on by the Indonesian Government) is potentially wide-ranging as BITs provide the principles for protection against expropriation and nationalization. These principles apply equally to Indonesian outbound investment. In particular, most BITs provide an option for foreign investors to adjudicate disputes at international arbitration forums (ICSID being the most prominent), rather than relying on courts within Indonesia and the foreign host country.

If indeed the Indonesian Government intends to end all BITs that Indonesia is currently a party to, future foreign investors who are nationals or corporations of countries that have entered into BITs with Indonesia would lose this crucial benefit. However, existing investors are generally still protected by BITs.

Given that the Indonesian Government has not commented on this news from the embassy of the Netherlands, we believe that some clarification by the Government is in order before we can thoroughly assess the implications.

However, it is clear now that foreign investors should no longer take protection of foreign investment for granted. It is clear that foreign investors should now consider alternative strategies to protect their investments. One such strategy is to base their investments in ASEAN, that is to invest through an ASEAN entity that will qualify as an ASEAN investor under the 2000 ASEAN Comprehensive Investment Agreement (ACIA). The following provisions of ACIA, in particular, are worth looking into:

  • Article 14 of the ACIA provides that no expropriation or nationalization shall be undertaken against an ASEAN investor, except (a) for a public purpose, (b) in a non-discriminatory manner, (c) on payment of prompt, adequate and effective compensation and (d) in accordance with due process of law.
  • Article 33 of the ACIA provides that an ASEAN investor may choose between the following options for dispute resolution, after following a 180-day period of consultation with the disputing member state (e.g., Indonesia, the country hosting the investment):
  1. proceedings in the courts or administrative tribunal of the disputing member state;
  2. ICSID arbitration provided that the disputing member state and non-disputing member state (i.e. investor country of origin) are both parties to the ICSID Convention;
  3. arbitration under the ICSID Additional Facility Rules if either the disputing member state or non-disputing member state is a party to the ICSID Convention;
  4. arbitration under UNCITRAL arbitration rules;
  5. arbitration at the Regional Centre for Arbitration at Kuala Lumpur or any other regional centre for arbitration in ASEAN; or
  6. any other forum of arbitration agreed by the parties.

It should also be noted that provisions that are very similar to the above-mentioned provisions of ACIA are also included in Agreements on Investments under the ASEAN-China, ASEAN-Australia and New Zealand and ASEAN-South Korea Free Trade Agreements. So, there is also an option to invest in Indonesia through a Chinese, Australian, New Zealand or Korean entity. We remain hopeful that BITs are not finished, that over 40 years of progress in protecting foreign investment through bilateral arrangements is not being reversed. All the more so, considering that Indonesian investors who invest overseas also benefit from BIT protection. Even if our hopes are unfounded, however, foreign investors should not dismiss Indonesia as unprotected territory. As ACIA and the Investment Agreements under the Free Trade Agreements between ASEAN and its partners show, protection should still be available. Obviously, other elements, such as tax considerations would need to carefully assessed, but the basic elements of protection are there.

 

By Wimbanu Widyatmoko, Mochamad Fachri, and Andi Kadir (Hadiputranto, Hadinoto & Partners, a member firm of Baker & McKenzie International)

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