As Indonesia restructures its regulations regarding foreign investors, news came this month that the country plans to terminate all 67 of its bilateral investment treaties (BITs) including those with China, France, the Netherlands, Singapore and the UK. While the news is naturally a cause for concern for foreign investors into the country, a little-known agreement between OIC countries could mean that Islamic investors in fact remain protected.
Investment treaties allow the management of sovereign risk by protecting a qualifying investor or investment against what law firm Freshfields Bruckhaus Deringer defines as: “Unfair, inequitable, arbitrary or politically motivated conduct by the government of the state hosting the investment, or a denial of justice by its judicial organs.” In a recently released bulletin on the decision, Freshfields warned that: “The clear message for foreign investors in Indonesia is that they should take steps immediately to secure protection under one or more investment treaties before it is too late.”
The benefits of BITs
Investors still have a number of avenues of recourse open to them: including the agreed referral of disputes to the International Center for Settlement of Investment Disputes (ICSID), of which Indonesia is a member; as well as the country’s 2007 Investment Law which provides varying degrees of protection for foreign investment. In addition, the BIT provisions will continue to apply to existing investors for a set period after termination (usually 15 years) under a “sunset clause”.
However, bilateral treaties have traditionally been viewed as the strongest level of investor protection: typically guaranteeing full compensation in the event of an expropriation of the investment, as well as the right to be treated on a par with domestic investors, the right to full protection and security of person and property. They also usually include the right to transfer capital and returns out of the country – a key factor reassuring the investor against economic, financial and political volatility. “Structuring investments to take advantage of a BIT is the primary way of claiming investment protection,” confirmed a spokesperson from legal experts Herbert Smith Freehills. “The renunciation of these treaties removes a key protection that investors consider when they are looking at country risk.”
Indonesia claims that the move is to protect its domestic industry against multinational companies that are exploiting the treaties to sidestep regulations. “There is a new modus operandi of foreign investors using these treaties to threaten weak governments,” said Riza Damanik, the director of Indonesia for Global Justice, in a recent interview. “We do not want it like this. We want dignity.”
Setting a precedent
The country has suffered from a number of recent cases brought against its government by foreign investors, which may have stimulated the move. In May 2012, UK-based Churchill Mining and its Australian subsidiary Planet Mining raised a dispute with the ICSID against the Indonesian government under the UK-Indonesia and Australia-Indonesia treaties, claiming damages of over US$1.05 billion for allegedly revoking its rights over the East Kutai coal mine in Borneo. And in January of this year, Indonesia agreed to pay Japan-based Nippon Asahan Aluminium US$557 million to prevent a dispute over the ownership of a hydroelectric and aluminium project from going to ICSID arbitration.
Although Mahendra Siregar, the chairman of the Indonesia Investment Coordinating Board (BKPM), has confirmed that a new template for investment treaties should be introduced this year, this has done little to allay concerns that protection for foreign investors under the new regulations will be weaker. In February of this year, Churchill won the first round of its dispute when the ICSID rejected Indonesia’s claim that it had no jurisdiction over the case. However, the government plans to object to the ruling, and it is expected that the case will add fuel to the movement to restrict foreign investment. Hatta Rajasa, the coordinating minister of the economy, is quoted as saying that: “We must be more cautious [in giving licenses] to foreign investors.”
Islamic advantage
However, investors from Islamic countries could find themselves in a more favorable situation. A rarely-used and little-known agreement for the “protection, promotion and guarantee of investments among member states of the OIC”, signed in Baghdad in 1981 by 27 members including the UAE, Saudi Arabia, Oman, Libya, Pakistan and Syria, was in August 2012 dusted off and put to use for exactly this purpose, setting a reassuring precedent for Islamic investors in Indonesia.
In the case of ‘Hesham al-Warraq v Indonesia’, a Saudi Arabian investor claiming against the government of Indonesia for losses following the nationalization of a bank in which he held capital took his case to a United Nations Commission on International Trade Law (UNCITRAL) tribunal in Singapore, citing the OIC investment treaty. The tribunal ruled in favor of Hesham, confirming that he had the right to take arbitration proceedings against the government of Indonesia – and dismissing Indonesia’s claim that the OIC agreement only provided for a state-to-state arbitration mechanism (rather than allowing investors to claim against the state).
Under the OIC agreement, the decision of tribunals are final and binding, meaning that in future Indonesia is likely to have to abide by the ruling that OIC investors have the right to proceed to arbitration should they fail to receive adequate protection and/or compensation. According to law firm Allen & Overy, the broad definition of the term ‘investor’ under the OIC agreement covers “any corporate person established in accordance with the laws…” and, importantly, the agreement also does not specify requirements regarding the nationality of the owner of the company – meaning that it also covers subsidiaries and foreign owners and investors of OIC-based companies.
While the range of safeguards afforded by the OIC agreement are limited, they will ensure that both current and new investments into Indonesia from OIC countries remain protected — a privilege which could become increasingly valuable, as it appears to be one that non-OIC nations may no longer enjoy. — LM