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HR Standard and Investor Liability in the New Model of Indonesian BITs

IGJ Monitoring – Investment, September 2015

HR Standard and Investor Liability

in the New Model of Indonesian BITs

Jakarta, 3rd September 2015.  Along with the increasing cases filed by investors against Indonesia to the International Centre for Settlement of Investment Disputes (ICSID), the Government plan to reassess the 64 Bilateral Investment Treaties (BITs) that have been signed by Indonesia immediately. The Indonesian government then formed a team named Expert Team of Bilateral Investment Treaty (BIT) Assessment.

Last month, Indonesia for Global Justice (IGJ) had the opportunity to discuss specifically with Rahmat Purnama Hadi, a member of the Expert Team of BIT Assessment.  In Indonesia, BIT is also called Treaty on Promotion and Protection of Investment (P4M).

The old BIT model is very detrimental to Indonesia, especially as an investment importing country. The provision that a Host State shall provide protection to foreign investors by providing a conducive regulatory climate to investment has very serious impacts to sovereign states.

BITs have removed the rights of the State to regulate, and impacted to the loss of the protection of the people’s rights who have been deprived of as a result of actions by corporation which are legalized by the national regulation. Changes to the national legislation which subsequently causing loss to investors will be considered as violation to the provisions of the agreement.  Consequently this  may lead Indonesia to be sued to the international arbitration court.

Human Rights Protection and Investor Liability

In the discussion, Hadi explained that the expert team had produced a draft of a new model of Indonesian BITs with provisions that are considered more effective in protecting the national interests. In the draft model, it does not only regulate the obligations of the Host State but also the obligations of the Home State and the Investors themselves.

The new draft does not only change some provisions of the old BIT model which are considered most critical, such as the definition of investment, fair and equitable treatments, expropriation, dispute settlement mechanism, and survival clause. However, the attempt to incorporate the provision to protect the rights of community is a major idea of the model drafting.

There is a special chapter in the draft of BIT new model governing the Rights and Obligations of Investors and the State, which contains provisions such as: common obligation against corruption; minimum standards for human rights, environment, and labor; the principles of good company governance; investor accountability; the right of the State to organize, the right to achieve development goals; as well as the general exception provision related to the protection of health, public morals, and the security of the State.

The argument that emerged in the assessment by the expert team was that the development of international human rights law instruments should be recognized in the standard of BIT. It is a form of the State’s responsibility in providing protection and enforcement of human rights. In addition, the investor obligations to respect human rights in their business must adhere to the principles that had been developed by John Ruggie in the General Principles on Business and Human Rights.

The most interesting part of the BIT draft model is that the principles of Extraterritorial Obligations will be applied to investors.  This is reflected in the provision of ‘Liability of Investors in the Home State’.  The expert team considered that this clause would make the investor actions that resulting in losses to the host country can be sued by their home country. This is based on the doctrine of non-conveniens forum.

Concerning the dispute settlement mechanism, Hadi explained that the mechanism of the Investor-State Dispute Settlement (ISDS) in the new model of Indonesian BIT would still be there because Indonesia is a member of ICSID Convention. It just needed a strategy to avoid it, such as administering the provision of the right to sue for the host state, which is provided in the provision of the Right of Host Country Related to Dispute Settlement which states: “The Host State may initiate a claim or file a counterclaim (as the case may be) against the investor …… “

The Investment Law Must be Revised

With the new model of investment protection agreement which is owned by Indonesia, the revision of the Investment Law No. 25/2007 must be conducted immediately. This is because the content of the Investment Law is not in accordance with the values ​​of national interest protection set out in the draft model of the new Indonesian BIT.

Hadi also added that the existing provisions in the Investment Law was very liberal and directly adopted the old BIT model without taking into account the protection of the national interests. In fact, Hadi reminded the importance of the Indonesian government to immediately stop the negotiations of Free Trade Agreement (FTA) containing chapter on investment. Alternatively,  reviews can be conducted toward the FTAs already signed, e.g. ASEAN Comprehensive Investment Agreement (ACIA), Indonesia-Japan Economic Partnership Agreement (IJEPA), Indonesia-China Economic Partnership Agreement, etc.

Moreover, the commitments already undertaken by the Government of Indonesia in all agreements of trade in services, both in the World Trade Organization (WTO) and bilateral FTAs, should also be reviewed. This is because there would be discrepancies between the commitments that the government tied up in an investment agreement that uses a negative list approach and the service agreements which use positive list approach.

Currently, a draft model of Indonesian BIT has entered the stage of legal drafting coordinated by the Investment Coordinating Board (BKPM). The drafting should be monitored, particularly in maintaining the provisions containing human rights protection and accountability for investors.

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For more information, please contact:

Rachmi Hertanti

Manager of Knowledge Management

Indonesia for Global Justice

Email: rachmihertanti@gmail.com / amie@igj.or.id

Or IGJ Secretariat: igj@igj.or.id

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