Foreign investors in Indonesia have long benefited from
international investment treaties, but the recent announcement to
terminate the country's bilateral treaty with the Netherlands
signals a change in approach by the Indonesian government. This
Commentary looks at the changes ahead and explains how
investors can ensure their Indonesian investments remain
protected.
Indonesia's international investment treaties have provided a
great deal of comfort for foreign investors in managing sovereign
risks associated with their investments, such as unfair and
inequitable conduct by the government, or denials of justice by its
judicial entities. Indonesia signed its first bilateral investment
treaty with Denmark in 1968 and has since signed additional
agreements with 69 countries, including the Netherlands, Australia,
China, Singapore, and the United Kingdom.
But despite Indonesia's history of embracing bilateral
investment treaties, the tides have turned. In March 2014, the
Indonesian government announced it will not renew its treaty with
the Netherlands. Given the breadth of its terms, the
Indonesia–Netherlands investment treaty is one of the most
commonly relied upon for foreign investments in Indonesia, but it
will expire on July 1, 2015. Signaling additional actions to come,
the Indonesian government has indicated its intention to terminate
all of its remaining bilateral investment treaties.
The announcement is not surprising given the changing landscape for
foreign investment in Indonesia. It comes at a time when Indonesia
is making numerous regulatory changes in its mining, natural
resources, and finance sectors, which may adversely affect foreign
investors (e.g., its recent ban on raw-ore exports). It also
follows a recent decision regarding jurisdiction in a US$1 billion
investment treaty arbitration claim, which went against Indonesia.
The Indonesian government's stance is also consistent with
actions by other developing countries, like Venezuela and Ecuador,
to terminate or renegotiate investment treaties, and it emerges
amid growing global backlash against these treaties on the basis
that they provide greater protection to foreign investors than
benefit to host countries.
While the announcement is rightly cause for concern, foreign
investors can still take steps to ensure that their investments in
Indonesia remain protected.
Make or Restructure Investments Before the Treaty
Terminates. Thanks to a "sunset clause" in the
Indonesia–Netherlands bilateral investment treaty, investors
will still be able to access the protections available under the
treaty until 2030, if their investment is made or restructured
through the Netherlands before July 1, 2015.
Consider the Association of Southeast Asian Nations
("ASEAN") as a Potential Safe Haven. Various
multilateral investment treaties and free-trade agreements to which
Indonesia remains a party may protect investors. For example,
Indonesia is party to the ASEAN Comprehensive Investment Agreement,
which provides robust provisions for the protection of
investments.
Assess Treaty Suitability. When considering
whether to make a new investment or restructure an existing one
through a jurisdiction protected by an investment treaty, investors
need to carefully consider which investment treaty provides the
optimal range of protections for its specific circumstances.
Investors will also need to watch out for so-called "denial of
benefits" provisions that may, in certain circumstances,
disqualify an investor from treaty protections.
The Indonesian government is clearly positioning itself to minimize
its exposure under bilateral investment treaties, and it will be
interesting to see if the country's new president and incoming government take a
different stance. In any event, foreign investors in Indonesia
should be diligent and take steps to secure, or assess, their
protection under investment treaties before it is too late.
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