13 October 2014

Turning Tides: What Indonesia's Reconsideration Of Bilateral Investment Treaties Means For Foreign Investors

Jones Day


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The recent announcement to terminate the country's bilateral treaty with the Netherlands signals a change in approach by the Indonesian government.
Indonesia International Law
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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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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