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Indonesia should not withdraw from the ICSID

The recent Financial Times article, “Indonesia to terminate more than 60 bilateral investment treaties” published on March 26, on Indonesia’s plan to review its bilateral investment treaties (BITs) has triggered strong reactions from academics and the business community around the world

Michael Ewing-Chow and Junianto James Losari Singapore (The Jakarta Post)
Singapore
Thu, April 24, 2014

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Indonesia should not withdraw from the ICSID

T

he recent Financial Times article, '€œIndonesia to terminate more than 60 bilateral investment treaties'€ published on March 26, on Indonesia'€™s plan to review its bilateral investment treaties (BITs) has triggered strong reactions from academics and the business community around the world.

The usage of the word '€œterminate'€ does not adequately capture the nuanced process that Indonesia is going through to review its BITs by letting the old ones lapse so that new and better ones can be renegotiated.

The opportunity provided by the lapsing old BITs is also one that merits deep consideration of the need to provide policy space for the government, the importance of signaling to foreign investors that Indonesia welcomes such investments and the importance of protecting Indonesian investors investing abroad.

One area of the BITs under review is the Investor-State Dispute Settlement (ISDS) mechanism which is contained in over 60 of Indonesia'€™s BITs. Hikmahanto Juwana'€™s article '€œIndonesia should withdraw from the ICSID'€ in The Jakarta Post April 2 edition, in this regard strongly questions one of the ISDS mechanisms available in most International Investment Agreements (IIAs), namely submission of a dispute to the International Center for the Settlement of Investment Disputes (ICSID) under the Convention for the Settlement of Investment Disputes between States and Nationals of Other States.

He suggests '€œwithdrawing from ICSID is in line with the current government policy with regards to BIT moratoriums'€.

This need not be the case. Most BITs actually have multiple fora for ISDS arbitration and ICSID is only one of them. Thus, before suggesting that Indonesia withdraw from ICSID, we should consider how the ICSID compares to the other fora for dispute resolution.

ICSID, by far the most often used ISDS forum, had registered 433 cases under the ICSID Convention and Additional Facility Rules as of June 2013. Other than ICSID, there are several other institutions administering ISDS, including the Stockholm Chamber of Commerce (SCC), the International Chamber of Commerce (ICC) and the Permanent Court of Arbitration (PCA). On the other hand, many cases have also been submitted to ad-hoc international arbitration under the United Nations Commission on International Trade Law (UNCITRAL) Rules.

The difference between ICSID arbitration and non-ICSID arbitration lies mainly with the rules governing the proceeding, the challenge of awards, as well as the enforcement of the awards.

The ICSID Convention provides a self-contained system of arbitration, fully autonomous and independent of any national legal system '€” including the legal system at the place and seat of arbitration.

On the other hand, other non-ICSID arbitration (including under ICSID Additional Facility Rules) regulate the conduct of arbitration under the rules chosen by the parties, complemented with the rules of procedure of the seat of arbitration.

Being both a capital importing and exporting country, Indonesia also has an interest to protect its investors who invest abroad.

As such, being a party to the ICSID Convention helps for enforcement of an arbitral award in a host state that is an ICSID party but is not a party to the New York Convention. Conversely, the ICSID Convention has an annulment provision that arguably provides a broader scope to challenge an award to a state.

Hikmahanto also suggests that decentralization requires Indonesia to exit the ICSID because it is unfair that the actions of local governments may be attributable to the central government.

While decentralization is underway through growing pains, it is a fundamental principle of international law that all states are responsible for the actions of their local government otherwise local governments (and states) would be free to breach their international obligations.

More can and should be done to improve the coordination between the regional authorities and the central government. The existing review mechanism that exists within the Indonesian legal system is probably a good place to start.

Experience of other countries suggests that the ISDS mechanism, including ICSID arbitration, may actually contribute to better governance in this regard. In Mexico, after some measures by local authorities resulted in awards against the state, the central government thereafter would often cite these awards in negotiations with the local authorities about the need to comply with domestic and international legal obligations.

This often resulted in compromises once the local authorities realized that their position could have fiscal implications to the state. In the case of recalcitrant local authorities, it may even be possible to create a mechanism where the liability for such a breach of an investment obligation is taken from the regional budget.

In this way, the ISDS mechanism could actually promote better regional governance.

While Indonesia is reviewing its BITs, it remains committed to the ASEAN Comprehensive Investment Agreement (ACIA) and other ASEAN investment agreements negotiated with Australia/New Zealand, China and Korea. These agreements all represent an attempt by the states to balance the interest of protecting investors while providing policy space for regulation in the public interest on issues such as health, the environment or to deal with financial crises.

All of these new investment agreements also provide for ISDS mechanisms, including resort to the ICSID Arbitration. They encourage the regional rule of law and require governments to comply with their international obligations not to act arbitrarily against foreign investors.

In fact, certain provisions promote transparency by requiring governments, among others, to publish new laws and regulations and to clarify the applicable approval mechanism for foreign direct investment (FDI), thereby cutting the most-often cited complaint of investors in Indonesia: that the procedure for getting required approvals is not clear.

Finally, Hikmahanto argues that the ICSID mechanism does not give the same level playing field to both domestic and foreign investors because foreign investors have recourse to both the domestic court and the ICSID whereas the domestic investor only can access the local courts. This is true but this is not necessarily problematic. Foreign investors have many choices about where to invest. By providing an investor with a transnational system, ICSID reduces the concerns about the legal risks.

The argument that through ICSID, investors may demand compensation which could amount to billions of dollars does not consider the counterfactuals.

The right of investors to claim losses is not exclusive to ICSID but is found in other ISDS mechanisms as well as in the domestic courts of all countries.

Whether the demand is granted by an adjudicative tribunal will very much depend on whether the government is responsible for its actions. In conclusion, Indonesia should remain very careful before taking such a decision to withdraw from the ICSID.

All things considered, Indonesia should not withdraw from ICSID unless the alternatives to ICSID arbitration provide compelling advantages. We do not believe that they do.

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The authors work for the Center for International Law at the National University of Singapore. The views expressed are their own.

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