Renegotiating the bite of our BITs

Jakarta Post | May 18 2015

Renegotiating the bite of our BITs

John Lumbantobing, Bandung | Opinion

Last week, Coordinating Economic Minister Sofyan Djalil announced the government’s intention to review and renegotiate our bilateral investment treaties (BIT), emphasizing that the new treaties should provide more balance and certainty to both foreign investors and the government.

This development is most welcome as a clear signal of the path to be taken by the government. Indonesia has signed more than 60 such treaties. Ever since we decided to let the Indo-Dutch BIT expire last year, there has been a lot of speculation about the fate of the other BITs.

A BIT contains states’ reciprocal undertakings to guarantee a host of rights and protections for investors from the other state party.

A BIT typically includes an investor-state dispute settlement (ISDS) system whereby foreign investors will be able to take the host state to international arbitration for an alleged breach of the treaty. The last few years have seen growing discontent both in Indonesia and worldwide against certain standard provisions, which appear to encroach states’ right to regulate ISDS.

The case of Newmont is a one example. The mining company objected to the imposition of an export tax for copper concentrate following the promulgation of the new Mining Law in 2009. Newmont argued that such an additional tax violated its contract of work (KK) and submitted a claim under the Indo-Dutch BIT to the International Center for Settlement of Investment Disputes (ICSID), an investor-state arbitration under the auspices of the World Bank.

In Australia, opposition to ISDS grew after Philip Morris instituted an UNCITRAL arbitration alleging that Australia’s tobacco plain-packaging regulation expropriated the cigarette producer’s investment and constituted unfair and inequitable treatment.

The question now is how to reach the balance and greater certainty? Against the backdrop, essentially two issues arise: preserving more policy space for the government under the treaties and limiting the scope of (if not discarding entirely) the ISDS mechanism in future BITs.

The ISDS system may look set to remain, at least for a certain class of foreign investment.

With regard to the first issue, a common controversy concerns vague obligations such as providing “fair and equitable treatment” to foreign investors or seemingly arduous ones such as providing “full protection and security”.

Looking at a model BIT recently drafted by India, the government may consider agreeing only to more concrete and narrower scopes of protections such as those against “un-remedied and egregious violations of due process” or “manifestly abusive treatment involving continuous, unjustified and outrageous coercion or harassment”.

The government can also define foreign investment more restrictively, for instance by excluding portfolio investment such as shares and bonds that do not require substantial commitment of capital or resources in the host state. There are many other complex and detailed substantive issues.

But the bottom line is that balance is achieved when the rights and protections conferred to foreign investors under the treaties do not unreasonably stand in the way of the state’s regulatory and police powers. Meanwhile, certainty is achieved when the clauses in the BITs are more precisely drafted.

The ISDS issue may prove to be more complicated. Historically, the ISDS system was conceived exactly because of distrust in host states’ legal institutions to dispensing justice. It is no coincidence that the first wave of BITs came after rampant nationalization by newly independent states in the 1950s and 1960s.

In this context, one of the reasons that Australia and some other developed states like Germany now push against ISDS is because they believe that local courts already provide reliable and effective protection for foreign investors.

Sadly, the same cannot be said of Indonesia. There is little reason (if any) to put much confidence in our judiciary and other law enforcement apparatus.

In practice, foreign investors seldom take BITs and the ISDS system into account, the main considerations to invest being tax and other financial or practical issues. However, there is no telling what might happen if we do not provide an ISDS system at all.

At least investment in specific projects on a massive scale will likely give rise to demands for recourse to investor-state arbitration in the event of a dispute with the government. For example, KKs for mining and production sharing contracts (PSCs) for oil and gas normally contain an arbitration clause.

Crucially, substantial foreign investments in infrastructure projects are among our urgent needs. Hence, the ISDS system may look set to remain, at least for a certain class of foreign investment if not for all foreign investments under BITs.

The next step is to preserve as much authority to settle disputes as appropriate within our own legal system, leaving recourse to arbitration only for exceptional cases. Some of the possible revisions that the government can consider include the requirement to exhaust local remedies.

In other words, foreign investors must first bring its claim to the Indonesian courts until obtaining a final and binding judgment before taking the case to investor-state arbitration.

Further, the scope for arbitration can be also limited. For instance, it can be reserved only in case of denial of justice in the administration of local court proceedings (as opposed to allowing the investor to re-litigate the whole claim before the tribunal).

Again, these and many other ISDS issues are complicated, but in any case the government should carefully weigh the benefit of any restriction against the possible impact on the efficacy of the dispute settlement mechanism.

Despite all the arguments, it is important to remember that apart from a network of BITs, Indonesia is also a party to a number of multilateral and regional investment agreements such as the ASEAN Comprehensive Investment Agreement (ACIA). Those agreements still contain an ISDS clause, including recourse to ICSID arbitration.

Hence, even after the overhaul of our BITs, foreign investors can still structure their investment in such a way that they simultaneously enjoy the protection of at least one multilateral investment agreement.

This may turn out to be a much tougher issue and the government will need to make its stance and policy clear in this regard.

The writer teaches international law and arbitration at the School of Law, Parahyangan Catholic University, Bandung.

source: Jakarta Post