ICSID claim filed against Indonesian Government

• Herbert Smith Freehills LLP
• Jay Leary
• Indonesia
• July 7 2014
• __________________________________

On 1 July, PT Newmont Nusa Tenggara and its majority Dutch shareholder Nusa Tenggara Partnership BV, announced that they have filed international investment arbitration proceedings against the Indonesian Government to seek relief from export restrictions that have halted production at the Batu Hijau mine and are said to have inflicted hardship and economic loss on PT Newmont Nusa Tenggara’s employees, contractors, and other stakeholders.   

The claimants allege that the government’s imposition of new export conditions, a new export duty and a ban on the export of copper concentrate breach PT Newmont Nusa Tenggara’s Contract of Work with the Indonesian Government, and the bilateral investment treaty between Indonesia and the Netherlands. The claimants have indicated that they will seek interim injunctive relief, so that work at the mine can resume. 

This claim follows an announcement earlier this year that Indonesia intended to cancel all of its 67 bilateral investment treaties, and draw up new treaties. The bilateral investment treaty between Indonesia and the Netherlands was among the first to be cancelled, with effect from July 2015 (though a sunset clause in the treaty means it will continue to apply for a period after that).

Indonesia revises its negative investment list for new foreign direct investment

• (original text)
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• Herbert Smith Freehills LLP, 
• David Dawborn and Haydn  Dare

May 21, 2014

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The Indonesian Government recently issued a new negative investment list in Presidential Regulation No. 39 of 2014 on the List of Business Fields that are Closed to Investment and Business Fields that are Conditionally Open for Investment (“Regulation No. 39/2014”) . This changes the permitted levels of new foreign investment in certain sectors, as outlined below.

1. Background

Indonesia’s Law No. 25 of 2007 concerning Investment mandates that BKPM is responsible for implementation of Indonesia’s investment policies. In performing this role BKPM sets out procedures for foreign entities to obtain a license issued by BKPM (the Investment Coordinating Board) in order to invest in and acquire shares in companies in Indonesia. The Indonesian government has over time issued a series of Presidential Regulations setting out an evolving list of sectors that are either wholly closed to foreign direct investment or in which foreign direct investment is limited to a certain percentage investment in the entity licensed by BKPM (the “Negative List”).

2. Changes to the Negative List

A key change introduced by Regulation No. 39/2014 is the reduction to the level of new permitted foreign share ownership in the trading sector i.e. main distributor activities which previously were open for 100% foreign ownership, have now been restricted to a maximum 33% foreign ownership. Main distributor activities include importing goods for and on behalf of the distributor and distributing goods to local distributors/retailers. Importing services performed for and on behalf of other parties (ie. not for the importer’s own goods) are, however, still open for 100% foreign ownership. Another significant change is that onshore oil and gas drilling is now closed for new foreign investment, whereas previously these services were open for up to 95% foreign ownership. New Offshore oil and gas drilling is also reduced to 75%, previously 95%.

In the telecommunications sector, new foreign investments in data communication systems are now reduced from 95% to 49%. Content services and call centres and other value added telephony services now have their own specific maximum foreign capital ownership limit of 49%, rather than previously being categorized as requiring a “partnership” with a local party (without a specific maximum foreign capital ownership level, but deemed to be permitted to have up to 100% foreign ownership). Internet interconnection services (network access point) is now also restricted to 49% foreign ownership from 65% previously - unless integrated with wired/wireless/satellite telecommunication services in which case the maximum is still 65%.

Restrictions on foreign ownership in some sectors have been relaxed in cases where they are in the context of a government approved PPP (Private Public Partnership) and where the investor company is from an ASEAN member country. For example, Power plants > 10MW, power plant transmission and electricity distribution now are open for 100% under PPP, previously 95%. Seaport facilities services are now opened for 95% if conducted under PPP, previously 49%. Specialist hospital services are now open for 70% ASEAN ownership, previously 67%. The making of film promotion facilities, advertising, posters, still, photos, slides, banners, etc is now open for up 51% ASEAN ownership, previously these were closed.

Set out below are specifics of the changes the new Negative List.

1. Sectors that are now open for foreign investment, but previously closed

• Film promotion facilities and advertising (now 51% ASEAN ownership, previously closed);
• Public opinion polling and market research (now 51% ASEAN ownership, previously closed);
• Motor vehicle periodic testing (now 49%, previously closed);
• Land transportation terminal for passenger construction (now 49%, previously closed);
• Public cargo terminal construction (now 49%, previously closed);

2. Sectors now open to a higher level of foreign investment (including due to Private Public Partnerships – PPP or ASEAN Investor treatment)

• Pharmaceuticals Manufacturing (now 85%, previously 75%);
• Venture capital financing (now 85%, previously 80%, amended to be in line with the existing regulation issued by the Minister of Finance);
• Fish catching integrated with processing (now to open 100%, previously 80%);
• Wired telecommunication services (now 65%, previously 49%);
• Internet service providers, public internet telephony services or other multimedia services (remain 49%, where integrated with wired/wireless/satellite telecommunications services the maximum foreign ownership has now increased 65%);
• Power plant >10 MW (now 100% under PPP during concession period, previously 95%);
• Power plant transmission (now 100% under PPP during concession period, previously 95%);
• Electricity distribution (now 100% under PPP during concession period, previously 95%);
• Provision of Seaport Facilities (now 95% under PPP during concession period, previously 49%);
• Technology development for electric power supply equipment (now unregulated and could be 100%, previously 95%);
• Motel and lodging services
  • now (i) 70% ASEAN Investors, in Bali and Java region only, (ii) 49% ASEAN Investors in other regions, and (iii) 51% for Non ASEAN Investors with an Indonesian small scale business partnership;
  • previously (i) 51% ASEAN Investors in all regions, (ii) 49% for Non ASEAN Investors and (iii) 51% for Non ASEAN Investors with an Indonesian small scale business partnership);
• Golf courses
  • now (i) 100% ASEAN Investors, outside Bali and Java, (ii) 70% ASEAN Investors, in Bali and Java, (iii) 49% for Non ASEAN Investors and (iv) 51% for Non ASEAN Investors with an Indonesian small scale business partnership;
  • previously (i) 100% ASEAN Investors, in Eastern Indonesia, (ii) 51% ASEAN Investors, outside Eastern Indonesia, (iii) 49% for Non ASEAN Investors and (iv) 51% for Non ASEAN Investors with an Indonesian small scale business partnership;
• Specialist/subspecialist hospital services and medical specialist clinics, and dental clinics
  • now (i) 70% ASEAN Investors in all capital cities and (ii) open 67% for all ASEAN and Non ASEAN Investors in other regions;
  • previously 67% for either ASEAN or Non ASEAN Investors in all regions;
• Specialist nursing treatment services (nursing services under CPC93191)
  • now (i) 51% ASEAN Investors in Makassar and Manado, (ii) 70% ASEAN Investors in all capital cities and (iii) 49% Non ASEAN Investors in all regions;
  • previously (i) 49% Non ASEAN investors and (ii) 51% ASEAN Investors in Medan and Surabaya;

3. Sectors that are now expressly opened to foreign investment, previously unregulated

• Biomass pellet producers (now being categorized as requiring a partnership without a specific maximum foreign capital ownership level, but deemed as permitting up to 100% foreign ownership, previously unregulated);
• Survey service for geothermal (now 95%, previously unregulated);
• Futures Broker (now 95%, previously unregulated);
• Management and disposal of non hazardous waste (now 95%, previously unregulated);
• Platform oil and gas construction (now 75%, previously unregulated);
• Wired/wireless/satellite telecommunications services integrated with internet service providers, data communication services, public internet telephony services, internet interconnection services (network access point), or other multimedia services (now 65%, previously not specifically unregulated);
• Multimode transportation (now 49%, previously unregulated);
• Spherical tank (now 49%, previously unregulated);
• Survey service for oil and gas (now 49%, previously unregulated);
• Survey service for geology and geophysics (now 49%, previously unregulated) Offshore pipe line installation for oil and gas (now 49%, previously unregulated);
• Horticulture research venture and horticulture quality test laboratory venture and other horticulture service business (now 30%, previously 95%, amended to be in line with the existing law);
• Security services, namely security consulting, provision of security guards, cash and valuables escort, provision of security services with animals, security system devices, and security education and training (now 49%, previously unregulated);

4. Sectors that are more restricted for foreign investment:

• Import and distribution as main distributors (now 33%, previously 100%);
• Storage, warehousing (now 33%, previously 100%);
• Cold storage (now Java, Bali and Sumatra: 33%, from 100%; East Indonesia/ Kalimantan, Sulawesi and Papua: 67%, previously 100%);
• Horticulture which includes cultivation, seeding and processing (now 30%, previously 95%, amended to be in line with the existing law);
• Data communication system services (now 49%, previously 95%);
• Content services and call centres and other value added telephony services now have a specific maximum foreign capital ownership of 49%, rather than being categorized as requiring a partnership (without a specific maximum foreign capital ownership level, but deemed as permitting up to 100% foreign ownership);
• Internet interconnection services (network access point) (now 49%, previously 65% - unless integrated with wired/wireless/satellite telecommunication services in which case the maximum is still 65%);
• Power plants 1-10 MW (now have a specific maximum foreign capital ownership of 49%, rather than being categorized as requiring a partnership (without a specific maximum foreign capital ownership level, but deemed as permitting up to 100% foreign ownership);
• Offshore oil and gas drilling (now 75%, previously 95%); and

5. Sectors that now confirmed closed, previously open or unregulated

• Onshore/on land oil and gas drilling (now closed, previously 95%);
• Oil and gas well operation and maintenance (now closed, previously not specifically regulated);
• Oil and gas design and engineering service (now closed, previously not specifically regulated);
• Electricity utilisation and installation (now closed, previously 95%);
• Installation of offshore oil and gas upstream production (now closed, previously unregulated);
• Onshore pipe line installation for oil and gas (now closed, previously unregulated);
• Horizontal or vertical tank (now closed, previously unregulated);
• Installation of onshore oil and gas storage and marketing (now closed, previously unregulated);
• Inspection and testing of electrical power installations (now closed, previously unregulated);
• Oil and gas technical inspection service (now closed, previously unregulated);
• Implementation of Alternative Trade (now closed, previously unregulated);
• Retail sale via mail order houses (pos) or via internet (now closed, previously unregulated);
• Textiles retail (now closed, previously unregulated);
• Games and toys in stores retail (now closed, previously unregulated);
• Cosmetic retail (now closed, previously unregulated);
• Footwear retail (now closed, previously unregulated);
• Electronics retail (now closed, previously unregulated);
• Food and beverages retail (now closed, previously unregulated);
• Futures trading (now closed, previously unregulated);
• Manufacture of crumb rubber (now closed, previously 95%);
• Retail of motorcycles and commercial vehicles (now closed, previously unregulated); and
• Passenger land transport on scheduled routes (cross border transport) and unscheduled routes (tourism transport specific destination transport, specific area transport) (now closed, previously unregulated).

3. Impact of the changes

Pursuant to Article 9 of Regulation No. 39/2014, the changes to the Negative List do not apply retrospectively to investment in specified business fields approved prior to the regulation being issued, unless such provisions are of more benefit to the relevant investment.

Indirect or portfolio investment with transactions being made through Indonesia’s domestic Stock Exchange continue to be permitted.

Santi Darmawan and Sakurayuki

Challenging the constitutionality of Indonesia’s Investment Law

By Yudha Fathoni, IIED Publication, 2014.

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In 2008, a high-profile case was filed by a coalition of civil society organisations in the Constitutional Court of Indonesia to challenge the validity of the 2007 Investment Law. SPI (Serikat Petani Indonesia, the Indonesian Peasant Union), and a wider national coalition, considered aspects of this law to be a threat to the rights of peasants. The court ruled that the law did not accord with the Constitution.

Initiating constitutionality review processes is one strategy used by SPI’s legal unit to advance the rights of peasants through legal avenues on behalf of its members – that is, taking a case to the Constitutional Court in order to challenge the compatibility of legislation with the national Constitution. This paper distils lessons from SPI’s experience. It discusses the steps taken, the court decision, and the lessons learnt on how to make more effective use of this legal strategy. It also touches on important parallel strategies.

To download the report English or French.

Indonesia terminates its Bilateral Investment Treaty (BIT) with the Netherlands

By Hogan Lovells LLP, 26 march 2014

Indonesia has decided to terminate its Bilateral Investment Treaty (BIT) with the Netherlands, pursuant to a statement issued by the Dutch Embassy in Jakarta on 21 March 2014.  The termination will be effective from 1 July 2015.  However, because of a "sunset" provision in the BIT, its protections will extend for existing investments of investors until 1 July 2030.  

Indonesian Vice President Boediono confirmed Indonesia's decision at a summit in The Hague on 23 March 2014.  He pledged that "Indonesia will create a new bilateral investment agreement that will be adjusted to recent developments", though Indonesia has not yet presented details on any proposed new investment treaty framework.  "The Indonesian Government has also mentioned that it intends to terminate all of its 67 bilateral investment treaties," according to the Dutch Embassy in Jakarta.  However, it is not yet apparent whether Indonesia will indeed choose to terminate additional BITs.   

Indonesia has not yet given reasons for its decision.  Commentators have speculated that the move may be connected with certain unfavourable decisions against the country in existing BIT claims by foreign investors.  For example, Churchill Mining of the UK has recently overcome Indonesia's challenges to the jurisdiction of an arbitral tribunal.  Its claims for damages of over USD 1 billion excluding interest will therefore proceed to the merits stage.  This decision was heavily criticised in Indonesia.  

While certain countries have terminated individual BITs, termination of all BITs would be unprecedented.  South Africa recently decided to review all of its BITs, to terminate its BITs with certain EU countries, and to consider a new investment policy that eliminates recourse to international arbitration and certain substantive investment protections.  Further, certain Latin American countries, such as Argentina, Ecuador and Venezuela have also taken steps to curtail their international investment protection regimes.   

A termination of additional BITs by Indonesia would ironically come at a time when many of Indonesia's neighbours such as Singapore, Malaysia, Vietnam, Australia and New Zealand are negotiating the Trans-Pacific Partnership Agreement, a 12-country multilateral trade and investment treaty which it is understood will likely include an Investment Chapter providing for recourse to arbitration.  Even if Indonesia chose to terminate additional BITs, the ASEAN Comprehensive Investment Agreement would still subject Indonesia to significant investment protection obligations for investors from ASEAN countries such as, for example, Singapore, Malaysia and Vietnam.

http://www.lexology.com/library/detail.aspx?g=2a596886-3ad2-464b-a510-ab3b0cff503b

Investment law in Indonesia

Normin S. Pakpahan, " The critical evaluation of investment laws as a tool of progress within ASEAN : The case of Indonesia ", Asean law association, 2009, (online version).

Melli Darsa, " Critical issues on investment law harmonization in ASEAN : The indonesian perspective", Asean law association, 2012, (online version).