Under Indonesian Investment Law No. 25 of 2007 (the “Investment Law’), foreign investors may only invest in Indonesia through a locally incorporated company, either by new incorporation or by acquiring shares in the existing local company. There are some exceptions of such general rules provided in specific laws. In order for foreign investors be able to set up a locally incorporated company or acquire shares in the existing local company, prior approval from the Indonesian Capital Investment Coordinating Board (“BKPM”) is required. BKPM is the Indonesia’s government body in charge of giving approval to foreign direct investment to Indonesia. The approval constitutes admission for foreign investors to invest in Indonesia.

As of April 2013, however, BKPM has changed its practice in the approval for foreign investment. Such change of practice is reflected in the BKPM Regulation No. 12 of 2013 and its subsequent amendments. Prior to 2013, it had been the practice of BKPM to include dispute resolution clause in its investment approvals. The dispute resolution clause mandates to settle the dispute between the investor and Indonesia first by consensus. If the dispute cannot be resolved by consensus, Indonesia is willing to follow the settlement according to the provision of ICSID Convention which has been ratified by Indonesia. Typically such dispute resolution clause reads as follows:

“In the event of a dispute between the company and the Government of the Republic of Indonesia that cannot be resolved by consensus, the Government of Indonesia is willing to follow the settlement according to the provisions of the Convention on the settlement of disputes between States and Foreign Citizen regarding investments in accordance with the Law Number 5 Year 1968”.

The above dispute resolution clause serves as standing offer or advance consent to foreign investors to resort to ICSID arbitration. So far such clauses have been invoked successfully in two ICSID arbitrations: in Amco Asia v. Indonesia and Planet Mining Pty. Ltd. v. Indonesia. Such dispute resolution clauses have been interpreted by ICSID tribunals to mean that the State has given a standing offer to consent to arbitration. Such offer extends not only to the local company, but also to its shareholders named in the investment approval.

In investment arbitration, foreign investors normally rely on the consent of host States to arbitrate as provided in either bilateral investment treaties, domestic legal instruments on admission of foreign investments or domestic legislation of the host State. The State’s consent is provided in the form of advance consent or a standing offer to arbitrate. In the absence of such advance consent or standing offer, it would be difficult for foreign investment to invoke investment arbitration.

The change of practice by BKPM does not impact foreign investors investing from the countries that have bilateral or multilateral investment treaties with Indonesia. Such treaties provide clear and express advance consent or a standing offer to arbitrate investment disputes. In the Singapore-Indonesia bilateral investment treaty (BIT) for example, Indonesia and Singapore have each given advance consent to resolve dispute between the State and investor of the other contracting State which cannot be settled within a period of six months via, among others, ICISD proceedings. The following shows advance consent: “For this purpose, each Contracting Party hereby irrevocably consents in advance under Article 25 of the Convention to submit any dispute to the Centre”. In the absence of BKPM’s advance consent or standing offer, Singapore investors can still rely on the Singapore-Indonesia BIT to invoke ICSID jurisdiction.

However, the change of BKPM’s practice would have significant implications for new foreign investors from the countries that have not entered BITs with Indonesia or from countries that have entered into BITs with Indonesia, but such BITs have been terminated. Recently Indonesia has official notified its several treaty partners that their BITs with Indonesia would not be extended on their expiry dates.

The impact also extends to investors from countries having BITs with Indonesia, but the advance consent or standing offer as contained in such BITs have not been expressly provided. For example, the Australia-Indonesia BIT which the Tribunal in Planet Mining Pty. Ltd. v. Indonesia ruled did not give necessary advance consent or standing offer to investor. The Tribunal stated:

In light of the foregoing, the Tribunal holds that Article XI of the Australia-Indonesia BIT contains no standing offer to arbitrate Planet’s claims before ICSID. Planet is therefore only entitled to resort to ICSID arbitration if Indonesia’s consent was given through a further act. This leads the Tribunal to review whether the BKPM approvals can be construed as containing Indonesia’s separate consent to ICSID arbitration.”

Even though Indonesian Investment Law offers certain protection to foreign investments such as protection against nationalisation or expropriation and fair and equitable treatment, in the absence of advance consent or standing offer to specific arbitration, it would be difficult for foreign investors to enforce such protection. The enforcement of investor’s protection will be depending on the willingness of Indonesia to arbitrate.

In the light of foregoing, foreign investors intending to invest in Indonesia should carefully structuring their investments in order to gain investment protections such as those provided by existing bilateral and multilateral investment treaties.

Jakarta, 05 April 2018

The above article is written by our member A. Setiadi of 36 Sovereign Chambers. The article set out above is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.

36 Sovereign Chambers is a set of Indonesian advocates’ chambers specialising in international trade law, international investment law and international arbitration with focus on Indonesian related litigation and ASEAN related arbitration in those areas. Its members  has expertise and deep understanding on Indonesian and international investment law including dispute resolution related to investment and in particular in the area of investment claim.

For more information about the article, please contact the author:

A Setiadi | Advocate-Barrister
36 Sovereign Chambers
Sovereign Plaza, 21st Floor
Jl. T.B. Simatupang Kav. 36, Jakarta 12340
Email: as@36sovereignchambers.com.