Indonesia announces renegotiation of BITs

Since the Dutch government’s announcement last year that Indonesia had terminated the 1995 Bilateral Investment Treaty (BIT) between those countries, speculation has been rife regarding the status of Indonesia’s remaining BITs, signed with more than 60 countries.

On 12 May 2015, The Jakarta Post reported that the Indonesian Government intends to renegotiate its BITs, to bring greater certainty both to foreign companies doing business in Indonesia and to the Indonesian government. In particular, The Jakarta Post quotes Azhar Lubis, deputy director for investment monitoring and implementation at the Indonesian Investment Coordinating Board (BKPM), as suggesting that Indonesia may seek to restrict access to Investor State Dispute Settlement under its treaties to cases where the government has expressly consented that disputes with a particular investor may be referred to arbitration. Lubis stated that such a revision would be consistent with Indonesia’s 2007 Direct Investment Law, which stipulates that international arbitration claims should be filed based on an agreement between both parties.

Hikmahanto Juwana, international law expert at the University of Indonesia, told The Jakarta Post that provisions in existing BITs that permit one party to commence arbitration without the other party’s consent disadvantage Indonesia, which has often experienced losses in international arbitration.

Indonesia’s position is not entirely surprising, in light of Churchill Mining Plc v Indonesia (ICSID Cases ARB/12/14 and 12/40), in which it sought to challenge the tribunal’s jurisdiction on the basis that the Investor State Dispute Settlement clause in the Indonesia-Australia BIT had not been triggered. The government submitted that a further positive act was required before Indonesia could be said to have consented to arbitration. On 24 February 2014, the Tribunal rejected Indonesia’s jurisdictional challenges, leaving it susceptible to a claim for damages of not less than US$1.05bn, excluding interest.

As noted in a previous post, UNCTAD recognised in a 2013 report a possible trend away from bilateral arrangements and towards wider, regional, multilateral agreements involving greater economic integration and free trade obligations. This may ultimately impact on whether Indonesia is willing to expend resources on negotiating or renegotiating bilateral agreements, when the trend worldwide seems to be towards negotiation of “mega-regional” agreements, such as the Transatlantic Trade and Investment Partnership, the Trans-Pacific Partnership and the ASEAN Regional Comprehensive Economic Partnership. If Indonesia, and other states, shift their focus from BITs to such multilateral agreements, we may see a dramatically different investment protection landscape in future.

For further information, please contact Antony Crockett, Senior Associate, Catherine Eglezos, Solicitor, or your usual Herbert Smith Freehills contact.

This post was first published at Herbert Smith Freehills - Arbitration Notes Blog on 13 May 2015.

The possible consequences of the termination of Indonesia’s Bilateral Investment Treaties

The Government of Indonesia recently indicated to the Dutch embassy in Jakarta that it intends on terminating all of its existing bilateral investment treaties starting with its treaty with the Netherlands. Indonesia has entered into bilateral investment treaties with over sixty counties including Australia, China, Singapore and the United Kingdom.

The outright removal of any future treaty protection for investments in Indonesia is of considerable concern to existing and prospective investors. In the absence of this treaty protection, the only remaining recourse for many investors are the Indonesian courts or diplomatic channels.

Some commentators have suggested that Indonesia instead intends to use the termination as a means of renegotiating the terms of all the bilateral investment treaties. However this appears unlikely as it would involve separate discussions with over sixty nations regarding investment protections.

If Indonesia did terminate all of its bilateral investment treaties without substituting them for alternative arrangements, the consequences for investors would not be immediate. Many of the bilateral investment treaties will still not expire for a number of years and Indonesia is not able to terminate them until their expiry. Further, many bilateral investment treaties have 'sunset periods' during which investors can continue to rely on the protections in the treaty.

Indonesia continues to be a signatory to a number of multilateral investment treaties. These will continue to afford protection to investors through international tribunals. The protections and dispute resolution mechanisms under Indonesian investment law also continue to apply.

Despite there being a number of alternative protections for investors, this recent news changes the investment landscape in Indonesia. Investors are advised to carefully consider how their investments are structured in order to ensure that they remain protected in the future.

The full article, written by Haydn Dare is available here.

For further information, please contact Haydn Dare, Senior International Counsel, Jakarta or your usual Herbert Smith Freehills and Hiswara Bunjamin & Tandjung contact.

Indonesia indicates intention to terminate all of its Bilateral Investment Treaties?

According to the Netherlands Embassy in Jakarta, Indonesia has informed the Netherlands that it has decided to terminate the Bilateral Investment Treaty between the two nations from 1 July 2015. The Embassy also states that “the Indonesian Government has mentioned it intends to terminate all of its 67 bilateral investment treaties“.

Nearly all Bilateral Investment Treaties expressly stipulate a period of time during which the agreement is in force; most commonly, 10 years. Either Contracting State is then allowed to terminate the treaty after that initial period. If notice of termination is not given then, the treaty will provide for the agreement to remain in force for a further period. In the case of the Netherlands, its BITs usually provide for a further 10 year extension and require notice of termination to be given at least twelve months before the expiry of the current period of validity. However, under what is known as a 'sunset clause', existing investors are then still entitled to rely on the protections found in those BITs that have been terminated and remain able to do so for a period after the BIT’s termination. In the case of the Netherlands-Indonesia BIT the ‘sunset’ will last for a 15 year period.

It is not clear whether this move to terminate the Indonesia-Netherlands BIT is the first in a programme of terminations as the Netherlands Embassy suggests. The Indonesia-Netherlands BIT is the oldest of Indonesia’s BITs and the intention may simply be for Indonesia to negotiate a more “modern” Investment Treaty, providing for more clearly defined protections and dispute resolution provisions.

However, it would not be surprising if the Churchill Mining Plc v Indonesia cases (ICSID Cases ARB/12/14 and 12/40) have prompted more sweeping action by the Indonesian Government. Churchill and Planet Mining Pty began arbitration against the Indonesian government in May 2012 at ICSID in Washington. On 24 February 2014 the ICSID Tribunal rejected Indonesia’s jurisdictional challenges leaving Churchill free to proceed with a claim for damages of not less than US$1.05bn, excluding interest. This decision has caused outrage in Indonesia.

If the Indonesian government has decided to begin a programme of terminating its BITs, this would be a bold move. However, it would not be without precedent. South Africa has begun a similar programme of termination, terminating its BIT with Belgium-Luxembourg in 2012 and issuing cancellation notices for its BITs with Germany and Switzerland. Nor are these countries alone in expressing concern about the availability of investor-state dispute settlement. Australia has previously indicated its reluctance to agree to such mechanisms. Just last week, Germany announced that it did not want investor-state dispute settlement provisions included in a trade agreement between the United States and the European Union.

Termination of its BITs does not, however, indicate that Indonesia is withdrawing from all investment protection obligations and mechanisms. Even if all its BITs were terminated, Indonesia would still be subject to its obligations under ASEAN. Furthermore, Indonesia has also expressed interest in joining the Trans Pacific Partnership (or TPP), should that proceed.

In its 2013 report, UNCTAD noted the possible future trend away from bilateral arrangements and towards wider, regional, multilateral agreements involving greater economic integration and free trade obligations. It will be interesting to see whether Indonesia’s move prompts yet more nations to follow suit. If they do, we may well be looking at a dramatically different investment protection picture in future.

For further information, please contact Craig Tevendale, Partner, Vanessa Naish, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.

Foreign mining investors to be stripped of majority ownership

Foreign mining investors will be required to divest majority ownership in companies holding mining business permits under a new Presidential Regulation issued recently.

On February 21 this year, the Indonesian Government implemented a forced divestment framework to capture and ultimately control mining projects.  This new regulation, Government Regulation No.24, deals with a number of issues including the procedures for the extension of Contracts of Work and Coal Contracts of Work but the provisions that are getting most attention are those requiring an increased compulsory divestment of ownership to Indonesian Participants.

The new Indonesian Mining Law enable foreign investors to hold mining business permits for the first time.  But here’s the kicker – foreign investment companies that hold licences for a producing mine of 5 year maturity are required to divest 20% of the mine to Indonesian Participants, and after ten years the shareholding percentage held by Indonesian Participants must be not less than 51% (it goes up incrementally from 5 years).  There is also stipulation on which Indonesian Participants have priority.  Shares must be offered to the Central Government and if it is not interested, then to the Provincial Government or Regional Governments; State owned and regional owned enterprises; and finally to national private business entities that are 100% owned by domestic investors.

Shares offered to State and regional owned enterprises or  to national private business entities must be offered by way of auction, but it is not yet clear how this process will work. Others areas of concern are that the regulations are yet to provide any details on the pricing of offers made to the a Government.

There are of course a number of technicalities around what happens to existing Contracts of Work and Coal Contracts of Work including how and whether they can be extended – but what is clear is that companies operating in this area need to familiarise themselves with these laws, and quickly as they are already in effect!