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Safeguarding Indonesian interests through investment treaties

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Jakarta Post - January 2, 2025

Divka Talulla, Jakarta – Speaking at the recent Asia-Pacific Economic Cooperation (APEC) Summit in Peru, President Prabowo Subianto assured that all foreign investments entering Indonesia will be protected because foreign investment plays a vital role in driving economic growth, bringing in capital, creating jobs and advancing technology.

For Indonesia, bilateral investment treaties (BITs) have long been a primary tool to attract foreign investors by offering legal protections for their investments. However, these treaties often tilt in favor of investor rights, sometimes at the expense of the host state's interests. Indonesia has faced challenges arising from provisions that limit its ability to regulate investor activities and protect its own sovereignty.

In 2014, Indonesia undertook a bold initiative, conducting a comprehensive review of its 67 BITs. The result? The BITs with 25 countries, including Australia, France, Germany and China, were terminated after they expired. This strategic move was driven by concerns over the investor-state dispute settlement (ISDS) mechanisms, which enable investors to bypass local courts and seek compensation through international arbitration, which is often disadvantageous to the host country.

During the review period, Indonesia refrained from negotiating new BITs until 2018, when it signed a new agreement with Singapore, followed by the United Arab Emirates. These "new generation" BITs aim to address the imbalances in the older treaties. Additionally, Indonesia has joined broader trade agreements, such as the ASEAN-Japan Comprehensive Economic Partnership Agreement (AJ-CEPA) and the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA).

The renegotiated BITs reflect Indonesia's efforts to protect its interests while remaining attractive to foreign investors. Key innovations of the new agreements include the exhaustion of local remedies, where the investors must now pursue domestic legal options before turning to international arbitration, enhancing trust in Indonesia's judiciary and public policy exceptions. These provisions safeguard Indonesia's right to regulate in critical areas such as public health, environmental protections and labor rights without breaching treaty obligations.

Despite these advancements, a significant gap remains. The post-2014 BITs, including those with Singapore and the UAE, lack explicit provisions for Indonesia to file counterclaims against investor misconduct. This omission limits Indonesia's ability to hold investors accountable for violations such as environmental damage, labor exploitation, corruption or tax evasion.

Past ISDS cases highlight the significant hurdles Indonesia faces when pursuing counterclaims. In Amco Asia Corporation v. Republic of Indonesia, Indonesia filed a counterclaim seeking the return of unpaid taxes and import duties, alleging tax evasion by Amco. While the arbitral tribunal acknowledged the validity of Indonesia's claims and confirmed Amco's misconduct, it ultimately rejected the counterclaim. It stated that Indonesia's Investment Coordinating Board (BKPM) had unlawfully revoked Amco's tax license, undermining the legal foundation of the counterclaim.

Foreign investment is essential for Indonesia's development, yet the nation must carefully balance its commitment to protect investments with the safeguarding of its sovereignty. Future BITs should include counterclaim provisions in ISDS clauses, enabling Indonesia to hold investors accountable for misconduct.

Additionally, strengthening institutional capacity, meaning training legal teams and aligning domestic laws with international standards, will empower Indonesia to navigate ISDS processes more effectively. By adopting these reforms, Indonesia can create a fair and balanced investment framework that attracts capital while ensuring investments contribute positively to the nation's development. With the right approach, Indonesia has the potential to set a global example for equitable and sustainable investment agreements.

[The writer is a lawyer.]

Source: https://www.thejakartapost.com/opinion/2025/01/02/safeguarding-indonesian-interests-through-investment-treaties.htm

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