Do we need investment treaties?
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The Jakarta Post | 27 October 2015

Do we need investment treaties?

Ronald Eberhard

As of the end of 2009, a total of 2,750 investment treaties had been concluded globally. The essential purpose of investment treaties is to promote and protect foreign investment. This view is likely to be the reasoning of Indonesia when making bilateral investment treaties.

Currently, Indonesia has 64 bilateral investment treaties (BITs) — 20 BITs have been discontinued — and six investment treaties under the framework of free trade agreements (FTA). Most of these treaties were concluded during the 1990s.

The question now is whether those investment treaties serve the purpose of increasing the flow of foreign investment, and whether Indonesia needs new investment treaties in the future.

When ascertaining the purpose of investment treaties, there is a need to look at the basic provisions of investment treaties. One possible argument is that investment treaties affect foreign direct investment (FDI) positively if they offer liberal admission rules, which are enshrined in the provisions of national treatment (NT) and most-favored nation (MFN) in the pre-establishment phase, as well as strong investor-state dispute settlement (ISDS) clauses.

To put these provisions in simple terms, a possible explanation is that investment treaties should guarantee the same treatment for foreign investors as our national investors at the stage where they are seeking to invest in a country.

Furthermore, those foreign investors should be granted with a provision by which they may sue the state if they do not receive that treatment. In the 64 BITs concluded by Indonesia, most include an ISDS clause, the basis of the claims mentioned above. This is complemented by the NT and MFN clauses granted to foreign investors.

Investment treaty negotiators from capital-exporting states report that investors very rarely inquire about investment treaties, and when they do it is typically when disputes have arisen and not when they are planning their investment.

Quantitative and qualitative data currently available clearly suggest that while investment treaties undoubtedly play a role in some investment projects, they are highly unlikely to be a determining factor for the vast majority of foreign investors determining where, and how much, to invest.

The host country determinants for FDI comprise (a) the general policy framework for foreign investment, including economic, political and social stability, the legislation affecting foreign investment and any other policies affecting FDI location decisions; (b) economic determinants such as market size, cost of resources and other input or the availability of natural resources; and (c) business facilitation, including investment promotion.

All three groups of determinants interact, enhancing or reducing the attractiveness of countries to foreign investors. Investment treaties are part of the policy framework for foreign investment, and are thus only one of many factors that impact a company’s decision where to invest.

As a consequence, investment treaties alone can never be a sufficient policy instrument to attract FDI. Other host country determinants, in particular economic determinants, play a more powerful role.

The current Indonesia Investment Law actually provides similar provisions of investment treaties. The current law is made based on the practice of Indonesia in making investment treaties.

If there is a question over how to protect our investors abroad without investment treaties, the answer may be that protection should be left to investors themselves through the network of investment treaties.

For example, Indonesian investors abroad could benefit from the vast network of investment treaties by channeling their investment through countries that have investment treaties with the targeted countries.

For example, an Indonesian oil and gas company could have a subsidiary company located in Singapore if Singapore has an investment treaty with the targeted country. This subsidiary company has the right to benefit from that treaty, including its liberal admission rules and protection of investment.

Based on the arguments above, there is no direct relation between investment treaties and inflow of FDI.

Another problem with investment treaties is the protection of foreign investment through investor-state dispute settlement clause. In the 1990s, there was a general consensus that investment treaties were instruments that accomplished liberalization in foreign investment, not because they contained liberalization norms, but because of the belief that protection increased the flow of foreign investment. This view has been proven wrong.

By the end of 2013, there had been 568 known investment treaty disputes. In 2013 alone, investors initiated at least 57 ISDS cases pursuant to investment treaties. Of the 57 new cases, 45 were brought by investors from developed countries against developing countries. Indonesia had faced six claims arising from ISDS treaties, including a recent claim from Newmont. Out of three disputes concluded, Indonesia lost one, its dispute with AMCO, and had to pay US$2.6 million.

A good example of the magnitude of the impact this clause might have is a recent investment arbitration decision that ordered Russia to pay $50 billion to Yukos Company on the grounds of violation of investment treaties.

The existence of ISDS has proven to threaten the policy space needed by governments to ensure public welfare. Such policy space may include measures to protect public health and the environment.

If Indonesia needs proof of the pointlessness of investment treaties, it could look at the example of Brazil. Brazil has never used investment treaties, but was nonetheless able to attract FDI to the tune of $80.8 billion in 2013 alone. The FDI inflow of Indonesia in 2013, meanwhile, was $23.9 billion.