Indonesia has recently announced plans to terminate its bilateral investment treaty with the Netherlands. It is likely to be the first of many such treaties to be ended, and potential investors in the country may be put off by what they see as the removal of a key means of protection.
Indonesia jumps on the bandwagon
In March 2014 Indonesia joined South Africa, Ecuador, Venezuela, the Czech Republic and Bolivia in terminating bilateral investment treaties (BITs) when it announced to the Dutch embassy in Jakarta its intention to terminate the two countries’ bilateral investment treaty (IND–NL BIT) with effect from July 2015. Under the treaty’s ‘sunset clause’, its provisions will remain in force for current investors for 15 years from the date of termination, or until July 1, 2030.
Shortly after the announcement, Indonesia’s Vice President Boediono pledged that Indonesia would negotiate a new BIT that would be ‘adjusted to recent developments’. These ‘recent developments’ may have included a series of arbitration decisions favouring investors, amendments to model BIT frameworks, and a growing perception among less-developed nations that tribunals at ICSID favour investors, even where the government has attempted to act in the interests of its people.
The IND–NL BIT is unlikely to be the only BIT that Indonesia terminates. The Indonesian government has indicated that it will terminate all 67 of its BITs and has not yet revealed when or whether it would seek to renegotiate them. Most BITs provide for a period during which they are in force, at the expiry of which either contracting party may signal its intention to terminate the treaty. If no notice of termination is issued, the BIT will remain in force for a further set period. The IND–NL BIT provides that if either contracting party wishes to terminate the BIT, it must denounce it in writing one year before the expiration date, which is July 1, 2015.
Benefits of BITs for investors and host countries
BITs – of which there are currently over 2,860 – are intended to protect and promote reciprocal investments in their respective contracting states. The more general provisions commonly found in BITs concern fair and equitable treatment of investors and (physical) protection and security of investments. Most BITs also include protection from expropriation or nationalisation by the host state.
Vital to the success of BITs as a measure to promote investments are the arbitration provisions, which provide investors with an effective tool to enforce their rights under the treaty. Like many BITs, the IND–NL BIT includes an ICSID arbitration clause. Arbitral awards rendered in ICSID arbitrations can be enforced in all 150 contracting states; pecuniary obligations in these awards must be treated by contracting states as final judgments of the relevant national courts.
In the context of current events in Indonesia, the government’s termination of the IND–NL BIT has been perceived as more than an accident of timing. Pre-election nationalism, the recent implementation of a ban on the export of raw mineral ore and investment treaty claims have all been cited as reasons for the eagerness to terminate BITs.
A surge of nationalism swept Indonesia in the months leading up to the parliamentary and presidential elections of April and July 2014. Politicians used increasingly nationalistic themes in their speeches, and the presidential front-runners emphasized the need to reduce dependence on foreign investment and increase domestic use of Indonesia’s minerals.
Raw mineral ore export ban
The Indonesian government appeared proactive in responding to claims arising from a recently implemented ban on the export of unprocessed mineral ore. The law originally contemplated an onshore processing requirement and a ban on the export of all mineral ore less than 100 per cent pure. However, the night before the ban was due to come into force, President Susilo Bambang Yudhoyono relaxed the ban slightly to allow mining companies to continue exporting unrefined minerals until 2017. By then, all companies are required to have built smelters to process mineral ore domestically.
The implementation of the ban was immediately followed by an announcement by one of the two largest mining companies in Indonesia that it would initiate international arbitration against the Indonesian government for breach of contract.
The prospect of additional BIT-related litigation due to the implementation of the raw mineral ore export ban seems particularly ominous after an ICSID tribunal rejected Indonesia’s jurisdictional challenge and allowed a US$1 billion investment treaty arbitration to proceed. In Churchill Mining plc v Indonesia, UK-listed Churchill Mining initiated an ICSID arbitration against Indonesia in 2012 under the Indonesia–Australia and Indonesia–UK BITs, claiming damages sustained due to the revocation of mining concessions.
Position of the Netherlands
The Netherlands is one of the five largest investors in Indonesia. Aside from the historic ties between the two countries, the Netherlands has long been an attractive jurisdiction for foreign investors, who often place their investments via holding structures in the Netherlands, with its favourable tax climate. It is also valued by investors for its plentiful and extensive investment protection treaties, and currently has 98 BITs in force.
The Lisbon Treaty, which came into effect in 2009, established the EU’s exclusive competence in respect of foreign investments as part of the common commercial policy. This provides the EU with the ability to draw up an investment policy which is set to determine the applicability of existing member state BITs, the competence of member states to conclude BITs, and the outlines of future EU investment agreements. This development is likely to influence the ability of the Netherlands to enter into or renew BITs in the future.
Options for investors
Owing to the sunset clause included in the IND–NL BIT, the protection afforded under the BIT will not immediately come to an end for existing investors. It is mainly new investors that will be considering their options to protect their investments.
For now, Indonesia still appears committed to its multilateral investment treaties, including the ASEAN Comprehensive Investment Agreement (ACIA). ACIA came into force on March 29, 2012 and provides ASEAN nations with similar standards of protection to those provided under the BITs with Indonesia.
An alternative could be to structure investments via Indonesia’s existing BITs which have recently been renewed and therefore cannot be terminated in the near future, including those with Australia, China and South Korea.
Whether these options will provide a viable alternative is a question of protection measures and tax implications. In light of this and the current political climate in Indonesia, some investors may decide to look elsewhere for investment opportunities.
Predicting Indonesia’s next move – renegotiation of the IND–NL BIT, termination of other BITs, or a decision to reverse the mineral ore export ban – remains difficult. Mahendra Siregar, chairman of Indonesia’s investment co-ordination board, signalled that the government’s aim was not to weaken investor protection but to ensure consistency between local and international regulations.
Investors might not be so easily persuaded. Investors tend to view BITs as providing key protective measures for their investments and the steady dismantling of all of a country’s BITs would be viewed as a sign of greatly elevated risk. Investors after July 2015, who would not be covered by a BIT, will certainly consider the lack of a BIT in their risk calculations when determining whether to invest in Indonesia.
Investors who have missed or will lose coverage by the IND–NL BIT may still be able to obtain the same protections from ACIA or Indonesia’s BITs with other countries, provided they have some basis for claiming such protection. However, the government’s recent actions indicate a level of uncertainty that will raise concerns for the prospects of significant long-term investments.