The end of the line for Indonesia’s Bilateral Investment Treaties?

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Introduction

Reports confirmed by a statement from the Netherlands embassy on 21 March 2014 are that Indonesia is to terminate its Bilateral Investment Treaty (“BIT”) with the Netherlands. Other statements suggest it “intends to terminate all of its 67 bilateral investment treaties” with other nations.

Although termination of the Netherlands BIT would need formal implementation (by formal notice of termination) this appears to be concerning news for existing investors into Indonesia and companies which may be considering investment into South-East Asia’s largest economy. The eyes of the investment world will be on Indonesia in the coming months to see if this comes to pass.

Bilateral Investment Treaties

BITs are intended to offer certain protections to foreign investors, guaranteeing fair and equal treatment, protection and security and no arbitrary or discriminatory measures. They effectively prevent expropriation and effectively act to mitigate country risk. Non-observance results in recourse against the host state in arbitration.

BIT system will be “adjusted to recent developments”

Indonesia signed its BIT with the Netherlands in 1968 and its importance derives in part from the fact that its protections apply not only to Dutch owned investors, but to investors of other states investing through Dutch incorporated vehicles. Though the termination has effect from 1 July 2015 an inbuilt “sunset clause” means all current investment in Indonesia falling under the BIT and those investments entered into before 1 July 2015 will retain the protection of the Indonesia-Netherlands BIT for a further 15 years.

It is not clear whether the reported intention to terminate up to 67 additional BITs will result in the removal of such treaties in their entirety or just their amendment or updating: Indonesia’s Vice President Boediono is quoted as stating that the BIT system will be “adjusted to recent developments.”

Why has this happened?

The reason behind these developments is not entirely clear. Some reports argue that some multinational companies are perceived as exploiting BITs to side-step national regulations. This is no doubt particularly sensitive in election year. Indonesia’s President Susilo Bambang Yudhoyono has stated that he does not want multinational companies to “pressure developing countries like Indonesia.”

Churchill Mining

Certainly Indonesia did not agree with the International Centre for Settlement of Investment Dispute’s (“ICSID”) rejection of their jurisdictional challenges in the matters of consent to ICSID arbitration under the Indonesia-UK BIT in the case of Churchill Mining PLC and Planet Mining Pty Ltd v. Republic of Indonesia, ICSID (Case No. ARB/12/14 and 12/40) (“Churchill”) ICSID’s decision leaves Churchill Mining Plc free to proceed with a claim worth more than USD1bn against Indonesia as a result of cancellation of mining licences in the East Kutai province.

What happens if Indonesia terminates its BITs?

The removal of current BITs could mean that investors have no recourse in circumstances said to apply in Churchill. Although arbitration under a BIT is a last resort remedy, its removal will concern foreign investors. We have reported previously that if upheld, the closely watched Churchill claim may in any event cause some investors to question Indonesia’s reputation as a reliable target for foreign investment, irrespective of whether or not the BITs are cancelled.

Is this unprecedented?

Certainly there is some controversy in many countries about use of BITs. If Indonesia does decide to terminate its BITs, it will follow in the footsteps of South Africa, which has cancelled BITs with a number of countries, including Germany, Belgium, Luxembourg and the Netherlands following the UK Department of Trade and Industry’s findings that the South African BITs were skewed towards foreign investors and that aspects of its BITs were incompatible with their local constitution.

In comparable circumstances the Mongolian Parliament passed legislation in 2012 to cancel the Mongolia-Netherlands tax treaty on grounds that the relevant tax benefits were being improperly used for tax avoidance purposes.

Is this bad news for investors?

It has been reported that the South African Government, rather than cancelling foreign investor protections, is making changes to the way in which these investment protections are safeguarded, whilst maintaining its right to implement policies and protect local interests.

This too appears to be the attitude of Indonesia with the chairman of Indonesia’s investment co-ordination agency, Mahendra Siregar, stating that the Indonesian Government’s aim is to ensure consistency between local and international laws, rather than to weaken investor protection.

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