BIT by BIT: Indonesia's move away from Bilateral Investment Treaties continues

Since announcing last year its intention to let its existing Bilateral Investment Treaties (BITs) expire (see our earlier briefing here), the Government of Indonesia has remained true to its word. Earlier this year Indonesia gave notice to Hungary, France and Italy that BITs with those countries will not be renewed. Most recently, the Singapore authorities have been informed that the Singapore-Indonesia BIT will not be renewed when it expires on 20 June 2016. With little indication that replacement BITs are imminent, Rob Palmer and Baldev Bhinder assess the implications of these developments for foreign investors.

Effect of BIT Expiry

BITs traditionally provide comfort to foreign investors, giving them rights in the form of certain investment protections and the means to enforce those rights through arbitration. But what happens if a BIT expires without a renegotiated BIT to replace it?

Much turns on the terms of the BIT concerned. Some BITs may provide indefinite protection, while others may contain "sunset clauses" that protect authorised investments for a specified period after expiry. As to Indonesia's BITs which have recently expired or will soon do so:

• Indonesia-France BIT: provides that its protections continue to be effective for investments covered by the BIT and admitted by the Contracting Party (that is, Indonesia or France as applicable) prior to notification of termination.
• Indonesia-Italy BIT: contains a ten-year sunset clause, meaning that investments made before the expiry of the BIT on 23 June 2015 will be protected for ten years (until 23 June 2025).
• Indonesia-Hungary BIT: also contains a tenyear sunset clause, meaning that investments made before the expiry of the BIT on 2 February 2015 will be protected for ten years until 2 February 2025.
• Indonesia-Singapore BIT: again, a ten-year sunset clause means that investments made before the expiry of the BIT on 20 June 2016 will be protected for ten years until 20 June 2026.

Renegotiation?

There has been media commentary suggesting that Indonesia's stance is motivated by a desire to revisit some of its unbalanced and outdated BITs that have resisted standardisation so far.₁ Certainly, attempts to secure BIT terms that better reflect Indonesia's rise in global economics would be unsurprising.

However, few official signals have been given as to whether – or how – Indonesia intends to renegotiate its BITs. Despite press reports of Indonesia's intention to create a new BIT template, none has been finalised yet.₂

Indeed, given the growing importance of multilateral agreements (discussed below), it is questionable whether efforts to renegotiate expiring BITs would be a worthwhile use of resources for Indonesia.

The Rise of Multilateral Agreements

Recent years have seen states increasingly looking to implement multilateral treaties (that is, treaties involving numerous countries) rather than BITs.

The ASEAN member states (including, of course, Indonesia) have concluded investment agreements with a range of countries. Through ASEAN, Indonesia is party to several investment agreements with the regional powers of China, India, Korea and Japan as well as Australia and New Zealand.³ It is also a signatory to the multilateral ASEAN Comprehensive Investment Agreement, which provides protections to foreign investors from ASEAN nations such as Singapore.

In addition, Indonesia remains involved in negotiations over the China-backed Regional Comprehensive Economic Partnership (RCEP), which covers ten ASEAN member countries and their six major trading partners-China, Japan, India, South Korea, Australia and New Zealand. The RCEP is expected to create a targeted integrated market worth US$21.4 trillion by 2025 and reports suggest that substantive negotiations of the RCEP can be concluded as early as this year. The agreement will encompass trade in goods and services, economic and technical issues, intellectual property and investments, and dispute settlement mechanisms.⁴ Negotiations for the RCEP are being carried out in tandem with the US-led negotiations for the Trans-Pacific Partnership Agreement (TPPA), which also envisages dispute resolution mechanisms. Indonesia has not yet committed to the TPPA but continues to review the possibility of doing so.

Implications for Foreign Investors

Foreign investors are likely to look on with concern as Indonesia's BITs continue to expire. In reality, however, the situation may be less dire than it at first appears.

In particular:

• subject to the terms of the particular BITs concerned, existing investments are likely to retain protections for some time under sunset clauses;
• many of Indonesia's BITs still have a considerable time to run prior to expiry, and it may be possible to structure future investments to take advantage of the relevant protections; and
• the trend towards multilateral treaties will continue to ensure that foreign investors have options available in structuring their agreements. For example, investments which would have been protected under the Singapore-Indonesia BIT may well obtain similar protections under the ASEAN Comprehensive Investment Agreement.

Nevertheless, the situation remains a fluid one. To that end, the publication of a standard BIT template by the Indonesian authorities or, alternatively, confirmation that multilateral treaties will be prioritised ahead of BIT renegotiation, would go a long way in allaying investor fears.

_Notes

_{¹ The Jakarta Post, "Revamping bilateral treaties", 7 July 2014.}

_{² cogitAsia, "Indonesia's Foreign Policy under Jokowi: A Giant Comes Knocking", 13 January 2015. http://cogitasia.com/indonesiasforeign- policy-under-jokowi-a-giant-comes-knocking/}

_{³ Agreement on Investment of the Framework Agreement on Comprehensive Economic Cooperation between the People’s Republic of China and ASEAN; Agreement on Investment under the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and the Republic of India; Association of Southeast Asian Nations-Republic of Korea Free Trade Agreement; Agreement between Japan and the Republic of Indonesia for an Economic Partnership; Agreement establishing the ASEAN-Australia-New Zealand Free Trade Area}

_{⁴ The Jakarta Post, "Asia-Pacific to strike deal by year end", 9 March 2015.}