Indonesia urgently requires foreign investment due to the limitedness of domestic capital. The existence of foreign investment is expected to accelerate national economic growth. Data shows that the implementation of investment in Indonesia in January to December 2016 comprised of Foreign Investment (PMA) 64.7% and Domestic Investment (PMDN) 35.3%. In 2017 of same period, Foreign Investment rate reached 62.1% and Domestic Investment rate reached 37.9% (BKPM, 2018). This fact means, foreign investment still is a pedestal for development in Indonesia.
There is some important factor for host state to increase the number of foreign investment such as provide ease of doing business and investment protection. The character of the host state's investment law should be conducive, promotive, equity, efficient and give legal certainty. World Bank Report 2018 for ease of doing business placed Indonesia in ranking 72 from 189 states. This level is under Singapore (2), Malaysia (24), Thailand (26), Brunei Darussalam (56) and Vietnam (68) (World Bank, 2018).
Investment protection is provided by investment legislation, investment contract between host state and investor and international investment treaty (Riyatno, 2017). Investment protection by national legislation can be found in Law No. 25 of 2007 on Investment. This law replaces Law No. 1 of 1967 on Foreign Investment and Law No. 6 of 1968 on Domestic Investment. This replacement complies to the mandate of international investment law which prohibits state to discriminate foreign investors with domestic investors. Investment protection provides by Law on investment such as equal treatment; guarantee for non-nationalization without compensation, flexibility of transfer and repatriation of profit and dispute resolution mechanism.
Equal treatment to investors is provided in article 6 of Law on Investment which stipulated:
The government provides equal treatment to all investors who carry out investment in Indonesia regardless of which state they came from, in accordance with the provisions in regulation.
Treatment as stipulated in section (1) is not applicable for investor from a state which is granted such privileges based on treaty with Indonesia.
Provision of article 6 above is in accordance with the principle of Most Favoured Nations (MFN) which is adopted by Trade Related Investment Measures (TRIMs) GATT/WTO which Indonesia is a state party.
Not only non-discrimination, law on investment also guarantees that Indonesia as host state won't take any nationalization measures without compensation. The amounts of compensation are based on the market price. If there is no consensus regarding the amount of compensation, the settlement will be made through arbitration (Law No. 25 of 2007, Article 7). Article 32 of Law on investment prioritizes consensus as dispute resolution mechanism (Law No. 25 of 2007, Article 32 (1)). If consensus could not be reached, the dispute can be referred to alternative dispute resolution or court in accordance with legislation (Law No. 25 of 2007, Article 32 (3)). In case there is dispute between Indonesian government and foreign investor, disputing parties will deliver the dispute before international arbitration which must be agreed by the parties (Law No. 25 of 2007, Article 32 (4)). There is no explanation in this provision regarding international arbitration which must be agreed by the parties and how the appointment of that arbitration.
Investment Protection by International Investment Agreements (IIA) is conducted by Indonesia through the Treaties of Improvement and Protection for Investment (TIPI). Bilateral Investment Treaty (BIT) is one of them. The other forms are the Comprehensive Economic Partnership Agreement (CEPA), as well as the Regional Comprehensive Economic Partnership (RCEP) which both generally contain the Investor State Dispute Settlement (ISDS). Furthermore, to attract more investors, Indonesia also plans to join the Trans Pacific Partnership Agreement (TPPA) (Hasan, 2017). There are also other agreements such as Treaties with Investment Provisions (TIP), Trade Relations Agreement (TRA), Free Trade Agreement (FTA), Trade and Cooperation Agreement (TCA) and Cooperation Agreement (CA).
It can be conveyed that the current government priority scale is to continue or start negotiations and accelerate the settlement of various international economic cooperation which includes investment areas, such as: Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU-CEPA); Indonesia-Australia Comprehensive Economic Partnership (IA-CEPA); Indonesia-European Free Trade Association (IEFTA-CEPA); and Trans-Pacific Partnership (TPP) Agreement; ASEAN-Japan Economic Partnership Agreement (AJEPA) and Regional Comprehensive Economic Partnership (RCEP). The government believes that these agreements can provide a significant attraction for foreign investors to come to Indonesia.
BIT is one of the most frequently forms of IIA used by Indonesia. Theoretically, BIT should be able to benefit both parties, based on the principle of reciprocity, equality and nonintervention in international law. However, in practice the existence of BIT is much complained by developing countries including Indonesia. First, the substance of majority of BIT is imbalance. Almost all of the articles in BIT contain protection and enormous rights for foreign investors; on the contrary there are so many obligations for the host state. There is no protection and rights for the host. It is not such exaggeration to say that IIT has reduced the principle of equality in international law, because host states enjoy no actual benefits from the treaties, only obligations (Mills, 2018).
Second, BIT eliminates the sovereignty of the state to adopt policies that protect the public interest. The host state will be sued before Investor State Dispute Settlement (ISDS) forum when the policy to protect the interests of the public is deemed inconsistent with commitments in international investment treaties and detrimental to foreign investors (Hasan, 2017).
Third, BIT contain unclear parameter for such terms such as fair and equal treatment, full security, un clear definition for investment, foreign investor. This condition potentially interpreted extensively by ISDS in such a way as to (Mills, 2018):
"Afford treaty protection to parties to whom the state never intended it to extend; apply to contractual relationships even where contract calls for different dispute resolution mechanism; impose upon contracting states obligations, restrictions, and force them to give protections they never intended when entering into the treaties; restrict states' sovereign right to regulate their own economy and society; force states to pay crippling damages to foreigners at the expense of their local citizenry; punish governments for laws they pass for the benefit of their populace; overrule decisions of contracting state's highest courts; cause states virtually to guarantee high returns for foreign investors."
Fourth, BIT is often used by foreign investors to conduct treaty shopping. For example, an Australian investor is granted an investment protection from BIT Indonesia-Australia and the ASEAN-Australia-New Zealand FTA. Furthermore, it will also be granted an investment protection through RCEP and Indonesia Australia-CEPA if later this agreement is agreed upon. If Indonesia also joins with TPPA, Australian investors are protected by five international agreements. With many instruments of agreement available to them, Australian investors can choose which agreement is most favourable to them, both in terms of substance and dispute resolution procedures. This certainly raises the risks for the government, in particular the risk of violating the treaty and being sued in international arbitration (Hasan, 2017). Fifth, BIT in practice is also often used by investors from other countries which don't have an agreement with the host state. The trick is to establish a business entity without a business activity or a shell company in a state that has an agreement with the host state and then take advantage of the agreement. For the record, there is some of Indonesia BIT with state partners that have no investment realization at all or it exists in a small amount (Hasan, 2017).
Base on the explanation above, it is not surprising that there are many parties who question the necessity of BIT and even recommend the government to terminate such agreements. The doubt on the necessity of BIT is reinforced by the fact that in recent years the number of lawsuits using BIT as legal bases has increased significantly (Hertanti, 2017). There were five cases of lawsuit of foreign investors against Indonesia from 2011 to 2016, namely Ravat Ali Rizvi case (Century Bank Case) in 2011, Hesham Al Warraq (Century Bank Case) in 2011-2014 Churcill Mining and Planet Mining (2012), Newmont Nusantara BV (2014), Indian Metals and Ferro Alloys Ltd. (IMFA, 2015) and Oleovest Pvt. Ltd (2016). The highest lawsuit filed by Churchill Mining which reached amount of US $1 billion (Mills, 2018). This significant increase refers to the number of cases within 5 years (2011-2016) is almost equal to the number of lawsuits faced by Indonesia from 1980 to 2011 (Mills, 2018).
The increasing number and amount of lawsuit filed by foreign investors toward Indonesia encourages the government to terminate and review tens of BITS in Indonesia (Profesi, 2017). Based on record from Indonesia Investment Coordinating Board (BKPM), in period of 2013-2016 there were 67 BITs of which 20 BITs have not been ratified by either Indonesia or State Partner, 25 BITs have been suspended, not renewed, and the remaining 22 are still valid and now in the review process for its sustainability (BKPM, 2016). The first BIT terminated was BIT with the Netherlands which became effective since July 1st, 2015.