There is nothing new in the statement by Coordinating Economic Minister Sofyan Djalil on Monday that the government would soon revise more than 60 bilateral investment treaties because the same issue has been raised by Cabinet ministers, senior government officials and lawmakers since early 2014.
We were, however, surprised to learn that Sofyan failed to explain how far along the review was and which of the bilateral investment agreements would be given top priority. He only emphasized that the government needed to make a new set of guidelines to ensure that both national interests and foreign investors got fair and balanced protection. It is not clear as to whether revisions will be made only to treaties that are soon to expire or if the revisions will be across the board.
As early as last year, Mahendra Siregar, then the chief of the Investment Coordinating Board, had stated that the government was drafting a new template for the investment treaties and promised that the new set of guidelines would be introduced to foreign partners within that year.
It is true that many of the investment treaties signed in the late 1960s, soon after the enactment of the 1967 Foreign Investment Law, and in the 1970s, are now outdated in relation to the many laws in the economic sector made over the past four decades. But given the rash of lawsuits filed against the Indonesian government by foreign investors at the international tribunal, notably the Washington-based International Center for Settlement of Investment Disputes (ICSID), a unit of the World Bank, the issue of arbitration to settle disputes seems to be one of the most crucial issues within the revision of the investment agreements.
The government apparently has been frustrated by the clauses in the investment treaties that empower foreign investors, in cases of dispute over policies or changes in contracts, to sue the government at an international tribunal, thus bypassing national laws and courts.
Indonesia is not the first country to become fed up with foreign investors who could easily exploit the clauses on arbitration or the investor-state dispute settlement (ISDS) system.
Not only such emerging economies as South Africa, India and Brazil, but also developed countries such as Australia and Germany and regional economic groupings like the European Union have shown their utter disillusionment with the ISDS clauses stipulated in bilateral investment treaties.
Indonesia seems to have been one of the most adversely affected because most of the investment agreements were signed in the mid-1960s and 1970s, when the government was disadvantaged by its desperate need for foreign investment to lift the economy out of virtual bankruptcy. Its institutional capacity for negotiations with foreign parties also was still low.
The government then signed the investment agreements with their ISDS clauses without fully realizing that the arbitration provisions left it vulnerable to litigation that foreign investors could take up under the loosely worded clauses to win claims that they had been treated unfairly.
Concerns over the ISDS system, which has for decades been a fixture of investment treaties, have been increasing even in developed countries, as multinational companies have exploited woolly definitions of changes in contracts or policies to claim huge compensation for losses.
The European Commission last year suspended negotiations with the US on the investment chapter of the transatlantic deal and is poised to launch public consultations over whether to include a dispute settlement mechanism.
The ISDS provisions were originally designed to attract foreign investors by protecting them from discrimination or expropriation, but the enforcement of these clauses has been seen by most developing countries as disastrous. The filing by a foreign investor of a lawsuit against a government at the ICSID, for example, could immediately result in negative publicity and exact big costs for hiring foreign lawyers or consultants.
There is also a perception in Indonesia, which has big extractive industries yet has a weak law enforcement system and a corrupt bureaucracy, that the treaty-based ISDS system tends to favor foreign investors.
What is needed is new investment treaties that are more equitable in protecting national interests and the interests of foreign investors.
But requiring or forcing foreign investors to settle disputes only at local courts or a national tribunal without any chance of the last resort to go to international tribunal, would scare away investors, given the notorious reputation of our corrupt court system.
Businesspeople rightly argue that a fair, independent and transparent arbitration mechanism is vital to protect investors’ interests from unfair treatment, and most foreign investors are doubtful that they would get a fair hearing in the legislative and court processes, especially if the opponent was the government or a well-connected local.
Hence, whatever changes are to be made in the ISDS system within the revised bilateral investment treaties should take into account the urgent need for a credible court system and national arbitration.
We still need a steady flow of foreign investment to bring in expertise, new technology and international best practices to the business world. But the government also needs to see to it that foreign investors cannot so easily file lawsuits at the ICSID or other international tribunals.
