Indonesian Legal Review: Bilateral Investment Treaties

Indonesia's international investment policy has been in the spotlight since the Government of Indonesia (the GOI) conveyed in 2014 its intention to terminate all of its existing bilateral investment treaties (BITs).

This announcement has raised concerns among current and foreign prospective investors in Indonesia, since BITs provide the foundation for protection against governmental expropriation and nationalization. Most BITs also offer an investor-state dispute settlement mechanism that can and has played a decisive factor for foreign investors to invest in developing countries such as Indonesia.

True to its announced intention, in 2015 the GOI terminated existing BITs with several countries, a move that received a negative response from the international community. These countries were the Netherlands, Bulgaria, China, France, Italy, Laos, Malaysia, and Slovakia.

In addition, Indonesia delivered diplomatic notes in 2015 to India, Cambodia, Romania, Turkey, Spain, Hungary and Vietnam conveying its intention to terminate its BITs with those countries in 2016.

Indonesia's former coordinating minister for economic affairs, Mr. Sofyan Djalil, shed light during his tenure on the reason behind such terminations. He attributed the terminations to the unsuitability and irrelevancy of the BITs with Indonesia's current development and that, as a result, the BITs needed to be reviewed, with termination being a necessary precursor to that end. In addition, he said that several arbitration disputes had been brought against Indonesia and the preliminary decisions had been unfair and contrary to Indonesia's interests.

At the same time, the GOI has indicated that it does not intend to withdraw from BITs permanently but will concurrently with the terminations seek to renegotiate the investment treaties. The Indonesian Capital Investment Coordinating Body (Badan Koordinasi Penanaman Modal or BKPM) has reported that the GOI is currently drafting a new model BIT for that purpose or renegotiating the investment treaties. There is little information regarding the draft model BIT. However, according to the BKPM, the draft will limit BIT terms to 10 years and will exclude the automatic renewal provision that is usually contained in BITs. According to the BKPM, the draft model BIT is scheduled to be finalized and proposed in 2016.

For existing foreign investors from countries whose BITs have been terminated by Indonesia, such terminations do not necessarily mean they will immediately lose the protections of the BITs, since most BITs have a "survival"€ or "sunset" clause that provides the BIT will survive termination for a certain period of time. The sunset period is different under each BIT.

This article is from SSEK's Indonesian Legal Review, which looks at recent legal and regulatory developments in almost 50 sectors, from Airports to Tourism. This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user's own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.