Background

On 9 March 2021, the latest Singapore-Indonesia Bilateral Investment Treaty (the “BIT“) entered into force and updates the countries’ investment protection framework vis-a-vis each other. This BIT was previously signed on 11 October 2018 with the goal of promoting stronger economic ties and cooperation between the countries, and replaces the previous Singapore-Indonesia Bilateral Investment Treaty which had entered into force on 21 June 2006 and expired on 20 June 2016 (the “Previous BIT“).

Singapore and Indonesia have historically maintained strong trade ties with each other. Despite trade disruptions brought about by the COVID-19 pandemic, Singapore was Indonesia’s largest foreign investor in 2020, with investments totalling USD 9.8 billion; the countries also enjoyed strong bilateral trade in 2020 of approximately USD 36.8 billion.

Updates to Singapore-Indonesia investment provisions

We summarise some of the more salient updates to the Singapore-Indonesia investment provisions below (where applicable, Singapore and Indonesia will hereafter each be referred to as a “State“):

  • Broadened express definition of “investment”: Whilst the categories of assets which qualify as an “investment” are not closed, the express definition of assets which fall within the meaning of “investment” for purposes of the BIT has been broadened. In particular, the express definition now explicitly includes inter alia construction, production or revenue-sharing contracts, licences, authorisations, permits and similar rights conferred pursuant to the applicable domestic law, and other tangible or intangible property. However, the overarching requirement is that such assets must have the characteristics of an investment.
  • Most-Favoured-Nation Treatment Clause: Article 5 of the BIT (i.e. the Most-Favoured Nation Treatment clause) clarifies that its provisions will not be construed to oblige a State to extend to the investors of the other State benefits of any treatment, preference or privilege from bilateral investment agreements that were initialled, signed or entered into force prior to the entry into force of the BIT, or geographical arrangements within the framework of specific projects. Article 5 also clarifies that it does not apply to options or procedures for the settlement of disputes available in other agreements, and substantive obligations in other international investment treaties or trade agreements do not themselves constitute “treatment” and will not give rise to a breach of Article 5 per se.
  • Restrictions on transfer of assets: Article 8 of the BIT now clarifies circumstances in which a State may prevent an investor’s transfer of assets out of said State through the equitable, non-discriminatory and good faith application of its laws relating to inter alia, bankruptcy, insolvency or the protection of creditors’ rights; dealing in securities, futures, options or derivatives; criminal or penal offences; financial reporting or record keeping as necessary to assist the authorities; ensuring compliance with judicial and administrative orders or proceedings; or severance entitlements for employees. Article 9 of the BIT also provides that a State may in exceptional circumstances, impose reasonable and non-discriminatory restrictions on the transfer of assets or capital.
  • Right to regulate: Article 11 of the BIT sets out expressly the States’ right to regulate within their respective territories to achieve legitimate policy objectives, and clarifies that the mere fact that a State regulates, including through modification of its laws, in a manner which negatively affects an investment or interferes with an investor’s expectations, will not amount to a breach of an obligation under the BIT.
  • Longer pre-arbitration consultation period between disputing investor and State: Article 17 of the BIT provides for a 1 year consultation period (or recourse to mediation processes) before the investor may submit the dispute to arbitration or relevant national court, this consultation period was 6 months in the Previous BIT.

Comparison with previous generation of investment treaties

The above updates to the investment protection framework between Singapore and Indonesia must be seen in context, and it would be apposite to examine the language of the BIT’s articles in light of key characteristics of other investment-related treaties concluded recently in the region.

The Regional Comprehensive Economic Partnership Agreement (“RCEP“) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP“) are similar to the BIT in being modern treaties promoting regional economic partnerships, containing investment protection provisions. The RCEP was signed on 15 March 2020, whereas the CPTPP was signed on 8 March 2018 and entered into force on 30 December 2018.

An examination of the BIT, the RCEP’s investment provisions and the CPTPP’s investment provisions makes clear that these treaties are part of a new generation of investment treaties which rebalances and recalibrates rights and obligations vis-à-vis contracting States and investors. This has been done by inter alia expressly carving out sufficient regulatory space for the host State through express language of investment provisions, and drafting said treaties with the intent of ensuring that tribunals do not interpret investment protection provisions beyond the scope of what contracting States had intended.

In relation to the BIT’s investment provisions specifically:

  • Sufficient regulatory space for the host State: Article 8(3) allows a host State to restrict investors’ transfer of capital into and out of its territory in connection with legitimate regulatory purposes, and Article 9 allows a host State to impose calibrated restrictions in exceptional circumstances where said transfer may cause serious difficulties for the State’s macroeconomic management. Most pertinently, Article 11 expressly provides for a State’s right to regulate, and clarifies that a State’s regulatory acts do not amount to a breach of the BIT’s obligations per se. Such provisions were uncommon in previous generations of investment treaties.
  • Preventing investment protection provisions from being interpreted too widely: It is apparent that the BIT was drafted with the objective of ensuring that tribunals do not interpret its Articles beyond the scope of what contracting States intended. In this connection, the draftsmen of the BIT have drawn lessons from tribunals’ interpretation of previous generations of investment treaty terms to significantly narrow the scope of interpretative uncertainty in the BIT. For example, the BIT curtails the scope of its Most-Favoured-Nation Treatment clause (Article 5) by expressly providing that it does not apply to dispute resolution procedures and substantive obligations in other agreements. In the same vein, the language of the BIT (Articles 3(2) and 3(3)) expressly clarifies what the BIT means by “fair and equitable treatment” and “full protection and security”, in attempts to foreclose the possibility of such provisions being interpreted in an excessively wide manner (as had notoriously been the case for previous generations of investment treaties).

Concluding observations

The BIT serves as a prime modern example of investment treaties which seek to rebalance the distribution of rights between host States and investors, whilst retaining familiar investor State dispute settlement mechanisms which provides for recourse to ad hoc tribunals. This stands in contrast to the other strand of modern investment treaties, which adopts the more drastic approach of doing away with (or phasing out) traditional investor State dispute settlement mechanisms in favour of a public investment court system (e.g. Chapter 8 of the Comprehensive and Economic Trade Agreement). Only time can tell which approach will set the standard for the next generation of investment treaties.

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