BILATERAL INVESTMENT TREATIES (BITS) IN INDONESIA: A PARADIGM SHIFT, ISSUES AND CHALLENGES.

Author:Hamzah
Position::Report
 
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INTRODUCTION

Any government strongly believes that the best means to attract the foreign capital and to avoid the conflicts with foreign investors in international arbitration tribunals is to enter into bilateral Investment Treaties (BITs) with the investor countries. Indonesia also understands this fact and it had signed over sixty BITs with several nations. But recently Indonesia decided to terminate all its BITs in order to review their provisions before renewal. A few investments experts have criticized Indonesia's decision to end all the existing BITs and view this decision as not investor-friendly or perceive Indonesia as nationalistic and being unreasonable to recall or terminate all its BITs in one instance. On the other hand, a few countries have called Indonesian move as "a brave decision" since most of the "western BITs" were aggressive and only protected corporate interests. (Freehills, 2015; Oegroseno, 2014; Price, 2016; McKanzie, 2017) Indonesians, however, do not want this decision to be seen as a nationalistic or a jingoistic attitude but a desire to be fair and honest in dealing with matters (Budidjaja, 2013)

Indonesia had signed bilateral investment treaties (BITs) with 52 states including Australia, Belgium, China, Denmark, Egypt, France, India, Italy, Malaysia, the Netherlands, Syria, Thailand, South Korea, the United Kingdom, Germany, Turkey, Singapore, Russia and many others. Most of the BITs have been in force as of their respective date until the announcement came not to renew these BITs and terminate them to sign each BIT afresh.

Historically speaking, all BITs of Indonesia with developed countries were signed during a time when Indonesia was neither a stable democracy nor a member of G20; a few of them were actually signed during the Cold War; they were signed when China and Korea were not global economic players and Asia had not become a global economic hub and the Indonesian economy was not USD 1.2 trillion That was the time when Indonesia was under the spell of the Dutch-led Intergovernmental Group on Indonesia (IGGI). It was a time when "foreign investment" was same as Western investment (David, 2016). In such a state of affairs, many of the Indonesia's BITs were intended to protect foreign investors' investments in Indonesia and did not provide any protection to the Indonesian investment in the home countries of the investors. In other words, the BITs had no reciprocity; Indonesia was just a one-way street, a place to play, not a player.

In the 21st century, the world economy is changing which has affected the nature of Indonesian economy as well and so has come the Indonesian decision to "terminate" all the BITs and renegotiate most of them. ASEAN has a big promise to establish a regional economic partnership; therefore it was a wise decision to ask most European powers to re-negotiate their treaties and agreements with the developing nations like Indonesia in order to continue their partnership. It was therefore quite rational for Indonesia to end its BITs upon their conclusion. Indonesia was not terminating all BITs unilaterally or illegally; it intends to discontinue the BITs in accordance with their terms agreed upon. Indonesia is thus allowing its bilateral treaties lapse in order to negotiate better ones. After announcing the termination it's BIT with Netherlands (Freehills, 2017), Indonesia has also given notice to Hungary, France, Italy and Singapore among others that BITs with those countries shall not be renewed.

The question that Indonesia now faces is whether it needs a template for a standard BIT or it should negotiate each BIT individually without any consistent approach and without considering its domestic legal system. What Indonesia needs is a BIT template that is compatible to its national interests as well as the international law. It should identify and terminate all unfair investment practices by making strong laws against multinationals or laying provisions of international adjudications to the international tribunals like The International Centre for the Settlement of Investment Disputes (ICSID) or the Investor State Dispute Settlement (ISDS) platforms to report all kinds of unfair trade practices imposed on Indonesia by the developed nations. This study investigates such issues and attempts to understand how this situation evolved at the first place, what led Indonesia to terminate and renegotiate all its existing BITs and what steps Indonesia must take on its domestic grounds as well as internationally to protect its interests.

Bits and International Arbitration Laws

Bilateral Investment Treaty (BIT), as the name indicates, solely governs the investment relationship between two signatory states with the intent to manage investment between the parties (Ruttenberg, 1987). The primary aim of the BITs is to encourage overseas investments, by promising safety to foreign investors. This mitigates the profound worries faced by the developing countries. The worries were mainly due to the fear of confiscation that could possibly deter the investments. Till date, most BITs are formed between two developing countries or between one developed and one developing country (Zachary, 2006).

Actually, BITs initially aimed at defining and monitoring the conduct between states and a manifestation of their sovereign acts in dealing with one another. The general objective assigned to the BITs in the field of investment is for "promoting and protecting" the rights of two states while one of them exports those investments (Tobin, 2005) and the other would be the host. This was done mainly to mitigate risks to host states. BITs also allow for an alternative dispute resolution mechanism, whereby an investor whose rights under the BIT have been violated could seek recourse to international arbitration, at tribunals like ICSID rather than suing the host state in its own courts. A majority of such types of agreements take place between a developed nation and a state in the path of growth, with the observation that a large number of agreements aim at upgrading and protecting investments in these developing countries. But contrary to most treaties, BITs created direct benefits for individual investors rather than the state at large.

Moreover, the role of International Arbitration is to act as a transnational system and ensure justice to both parties of a BIT. It is often argued whether International arbitration is allowed to remain autonomous and free from the influence of national legal systems of the host country. The International Centre for the Settlement of Investment Disputes (ICSID) was founded in 1966 as an independent, depoliticized and effective dispute-settlement institution with the objective to settle cross-border investment disputes and to act as an international body to monitor the dispute resolution (James and Gump, 2000). It was also created to enhance international investments and create a healthy and harmonious environment between foreign investors and states to enter in their investment endeavours. Since its establishment, ICSID has consistently administered and negotiated several cases of bilateral, international investment disputes. It has also contributed in modelling investment laws and contracts and signing most BITs. Indonesia also signed the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) on 16 February 1968, followed by the issuance of Law No. 5 of 1968 on the Settlement of Investment Disputes between States and Nationals of Other States on 29 June 1968. The ICSID Convention entered into force for Indonesia on 28 October 1968.

ICSID also emphasizes upon states and investors to be governed by norms of International Investment Agreements (IIAs) to be used as norms for signing Bilateral Investment Treaties (BITs). The principal norms of IIAs and BITs are free transfer, nationalization and expropriation, compensation for damages due to war and similar events, settlement of dispute between the investor and the host state, subrogation and promotion and protection of investments which includes a few sub norms such as security, equitable treatment, Most Favoured Nation (MFN) provisions (Rivkin, 2013). The BIT norm of national treatment (NT) or most favoured nation (MFN), for instance, exercises an influence on investors and their "covered investments" (investments in the territory of the other Party) and mandates that each foreign investor or his investment will be treated as favourably as the host Party would treat its own investors and their investments. Thus, this BIT norm ensures national treatment (NT) or most favoured nation (MFN) treatment during the whole life cycle of investment, i.e., from its establishment or acquisition, through its management, operation and expansion, until its disposition. (Rivkin, 2013)

Another norm of the expropriation of investments provides for the payment of prompt, adequate and effective compensation in the event of expropriation. Similarly, the free transfer norm deals with the transferability of funds into and out of the host country without delay according to the market rate of exchange. This obligation is applicable on all transfers including the "covered investments." There is another norm that puts a limit on the events or circumstances that amount to impose restrictions on performance requirements. Such restrictions are applicable to such specific circumstances that would force covered investments to resort to inefficient and trade distorting practices by the parties.

There is also a norm that allows investors from both parties the right to opt for international arbitration in the event of any investment dispute with the host government. The norm also removes the requirement to use that country's domestic courts. Last, but not the least, there is a BIT norm which gives covered investments the...

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