Fellowship for Journalist on The ISDS Report
Eliminating Century Case Trauma through the New Models
of Foreign Investment Agreement
Report by: Maria Yuniar Ardhiati
Until last year, Indonesia has terminated 22 bilateral investment treaty (BIT) with partner countries as it is considered detrimental and prone to disputes in international arbitration. Since the last four years, Indonesian government has been aggressively terminating bilateral investment treaty (BIT) with many countries. This step taken so that the Indonesian position is stronger in the presence of foreign investors and not susceptible of being sued in international arbitration. It also an attempt to eliminate the trauma of Century Bank case.
Based on Indonesia for Global Justice (IGJ) notes, in 2015 government has been terminated 18 bilateral agreements of a total of 64 BIT. Those 18 was such a bilateral investment treaties with various countries, including the Netherlands, Bulgaria, Italy, South Korea, Malaysia, Egypt, Slovakia, Spain, and China. There was also an agreement with Kyrgistan, Laos, France, Cambodia, India, Norway, Romania, Turkey, and Vietnam. The number of terminated agreements will continue to grow. Head of the Legal Aid Center of Investment Coordinating Board (BKPM) Riyatno stated, there are additional four BITs that has been terminated last year, with Hungary, Pakistan, Argentina and Switzerland.”From the reviewresults, by 2016, Indonesia had done discontinued against 22 BIT with partner countries,” he told Katadata, last Friday (24/3).
Since 2013, the government has started to make a comprehensive review against all of bilateral investment treaty. Instead of being profitable, many bilateral agreements that have been existed in past decades is detrimental to the Government of Indonesia. Protection of investments agreement also failed to provide guarantee improvement of investment in Indonesia. In fact, the agreement has the potential to be misused by investors to sue the government to international arbitration. (Read: International Arbitration, Foreign Investors Tools of Bluffing Government). As a result, Indonesia is often received a number of lawsuits from several foreign companies through international arbitration institution or the International Center for Settlement of Investment Dispute (ICSID). ” It has been found BIT weaknesses,” he added.
The most striking Investment Disputes case for IndonesiaGovernment is bailout case of CenturyBank in 2008. The government is trying to save the Bank in order to NOT trigger any systemic problem in Indonesian Banking System, by injected capital up to 6.7 trillionrupiahs.Later on, the dying conditions of Century Bank later known due to act of two controlling shareholders namely, Besheer Hesham Talaat Mohamed Al-Warraq and Rafat Ali Rizvi.
They secretly transferred Bank Century the assets to shell companies in tax havens countries as collateral for a new loan. The government attempted to seek al-Warraq and Rizvi responsibilities through the domestic courts. In absentia court or without the presence of Rizvi and al-Warraq in Jakarta accuses them of corruption and money laundering. The threat of sentence is 15 years’ imprisonment and obliged to pay sum of money. However, they remain untouched even though Interpol has issued a red notice.
In fact, al-Warraq and Rizvi later, use the arbitration court with ISDS mechanism to ‘wash’ their sins. Courts in Indonesia accused of unfair and political nuance to blame al-Warraq Rizvi and related the government decisions on commiting bailout of Century Bank. In the end, the fugitive status of citizens of Saudi Arabia and the United Kingdom was lifted by the Interpol. The account was canceled to be frozen. Now, Rizvi travel freely, run their business while al-Warraq imposed mandatory status report every week to the police of Saudi Arabia.
Addition to the Bank Century case, filed an arbitration claim against the Government of Indonesia foreign investors mostly from the energy sector. One was a lawsuit from Churchill Mining in 2012 worth US $ 1.2 billion. The lawsuit was filed by using bilateral investment treaty signed by Britain and Indonesia in 1976.
|No.||The Plaintiff||Origin Country||Arbitration|
|2.||Churcill Mining Plc.||England||ICSID|
|4.||Cemex Asia Ltd.||Mexico||ICSID|
|5.||Amco Asia Corporation||USA||ICSID|
Source : Indonesia for Global Justice (IGJ)
Reflecting on Century Bank case and Indonesia always being defeated in international arbitration, Executive Director of Indonesia for Global Justice (IGJ) Rachmi Hertanti assessed that, it is important for the government to stop the bilateral investment agreements which allow the presence of ISDS arbitration mechanism. “Domestic investment policy reform could be an alternative or a solution,” said Rachmi in the webinars regarding on multilateral investment court, in last March 22th. For an information, IGJ is an NGO specialized raised an awareness on global trade issues related to Indonesia.
New BIT Model
IGJ noted that there are a number of reasons the necessity for government to review the BIT. First, the inclusion of the term “loans” as an investment. Second, the definition of the activities that are classified as investments, such as organizing and running the business facilities, acquisitions, wear or carry out the disposition of the property rights, including intellectual property rights, as well as fund-raising activities through foreign exchange trading. Third, the investment sectors listed in the agreement. This point complicates the government’s position when it should choose the sector that is off limits to foreign investment in the Negative List (DNI). Fourth, regarding matter related to the re-investation. These activities could potentially harm the government which currently supervise the investment in a different format. (Read: BI Predict the Foreign Funds in shares and bonds eroded Fed Rate Increment). Fifth, the commercial contract that contains the definition of investment. This contract regulates the activities of providing goods and services, and in fact is not an investment.
On the other hand, the government, through the Investment Coordinating Board also mapped out a number of weaknesses in the BIT which are detrimental to Indonesia. Among them is the inconsistency clause of the BIT with the legislation in the field of investment, including inconsistencies between Indonesia BIT clauses and another.
In addition, a clause setting is not clear thereby giving a gap for investors to treaty shopping or evasion of tax payment obligations. (Read: Investment Coordinating Board Targeting Rp 678.8 Trillion Investment next year). Based on these findings, the government recommends renegotiation of bilateral investment treaties that provide a major contribution to the Indonesian economy. In addition, terminate the BIT, or that are considered not contribute enough, especially for investment in the country.
“Several BITs’ has a greater risk of lawsuit arbitration than the potential contribution to Indonesia,” he added. Besides terminate a number of bilateral investment treaties, Riyatno explained that the government is finalizing a new model BIT. The draft contains Indonesia’s right to sue investors for any losses arising from an investment agreement.
The lawsuit can be filed in the State Court in Indonesia, but could not be brought to the international arbitration process. However, Investment Coordinating Board cannot explain the detail settings in the BIT. “Because it is still under discussion. “Its clear that, Riyatno mentions there are four aspects of the new model BIT. First, the clearer definitions. Second, a more detailed description of the investment scope and protected investors. Third, the article of right to regulate for the government. Fourth, clearer rules on dispute settlement mechanism with the investor (Investor Dispute Settlement Mechanism). On the other hand, Rachmi aware of 30 clauses that experienced significant changes in the BIT draft. One of them is on the priorities of national interest in the protection of investors. In addition, the fulfillment of obligations, not only by the recipient investment country but also by the investor and the investor’s origin country.
Related to the ISDS mechanism, the government also made a number of changes to reduced the use of ISDS as problem-solving method in the investment agreement. There are four strategies planned by the government to anticipate the emergence of arbitration lawsuit through the ISDS. First, the dispute settlement mechanism should be started from the district court in the investment recipient country. Final decision that binding from the district court process is cannot be registered as an arbitration cases by the investor to fight against the state. Second, the ISDS as a dispute resolution method can only be done with an approval letter of the investment recipient country, as set in the New York Convention, which refers to the state’s sovereignty. This provision will be enforced to suppress the possibility of approval of the using ISDSautomatically based on the investment agreement. Third, ISDS mechanism can still be used, but merely to resolve any dispute which relating among others to the National Treatment and Most Favored Nation (MFN). Referred to the National Treatment is a fundamental principle of the General Agreement on tariffs and Trade (GATT), which was published by the free world trade organization (WTO), that prohibits discrimination between imported goods and domestic.
Meanwhile, the MFN clause regulate an equal treatment of all parties in accordance with WTO agreements. The state cannot discriminate against trading partners. (Databoks: Half 2016 Foreign Investment poured in Java). Fourth, the general exception in Indonesia BIT cannot serve as basis of the lawsuit. The goal is to ensure the interests protection to the state, including protecting public morals, living and nonliving natural resources. Exceptions also include to some certain economic conditions, particularly in the global financial crisis.
Rachmi explained that the new draft of Indonesia BIT model also provide maximum protection against the national interests of a possible threat from the impact of the investment agreement.
Meanwhile, the Executive Director of the Indonesian Center for Taxation Analysis (CITA) Yustinus Prastowo highlighted the need of government for re-check the track record of potential foreign investors to the country origin. The aim is to filter out foreign investors who want to invest in Indonesia. “Moreover, the increased foreign investment or foreign direct investors from many countries at the moment. “He stated that there are a number of sectors which are prone of an influx by theproblematic foreign investors. One is the financial services sector, including banking, non-banking, insurance, and securities.
Riyatno explained that the foreign investor now has been through the selection process before investing in Indonesia. The initial filter is the Presidential Decree No. 44 Year 2016 on the list of closed and openbusiness fields for investments. Based on the regulation, foreign investment in the banking sector, especially conventional banks and Islamic banks need to have a special license from the Financial Services Authority (FSA). According to him, for the banking sector, at least two regulations that limit foreign ownership. First, the Financial Services Authority Regulation No. 56 / POJK.03 / 2016 on stock holdings of commercial banks. Secondly, the Financial Services Authority Circular Letter No. 39 / SEOJK.03 / 2016 about the fit and proper test for prospective controlling shareholders, prospective members of the board of directors, as well as potential board members of the bank. Riyatno explained, with the regulation existence, the FSA give responsibility to each bank to conduct more rigorous selection of candidates for the board or managers. Which should be examined include the track record of the candidate and the ownership of another position. Meanwhile, the FSA hopes uniformity BIT will strengthen Indonesia’s position in bilateral agreements. Head of the Department of Communication and International FSA Triyono revealed that stock ownership rules for investors have been a lot for the financial institutions. “It seems to be enough to protect investor interests, both domestic and foreign,” he added.***