Indonesia should withdraw from the ICSID!

 On Rabu, 02 April 2014  

Indonesia should withdraw from the ICSID!

Hikmahanto Juwana  ;   Professor of International Law at the University of Indonesia
JAKARTA POST, 02 April 2014
The Washington-based International Center for Settlement of Investment Disputes (ICSID) is a dispute resolution mechanism for investment issues between the government of a particular state and citizens of other countries.

Even though the ICSID is referred to as an arbitration apparatus, it is, however, distinct from commercial arbitration mechanisms such as the Indonesian National Arbitration Board (BANI), or the Singapore International Arbitration Center (SIAC). What differentiates the ICSID from both BANI and SIAC is that it purely oversees cases where a government is being sued.

Under the Indonesian judicial system the ICSID is similar to an administrative court, which oversees cases in which an individual or private entity is suing the government for its actions. However, unlike an administrative court, the ICSID can grant compensation to the investors as the plaintiff.

The ICSID was established through an intergovernmental agreement referred to as the Convention on the Settlement of Investment Disputes between States and National of Other States. This World Bank sponsored agreement disseminated the convention to its member states for signature in 1965, the convention entered into force in October 1966 and Indonesia became a party to the convention on Oct. 28, 1968.

Most developing countries, especially the newly independent countries, ratified the treaty for the purpose of attracting investors from developed countries. Foreign investors at that time were worried about the risks of their investments being nationalized by host governments. Such fear had been justified by rampant practices of nationalization of assets in many newly independent states.

In the 1960s, Indonesia followed many other developing countries in ratifying the Convention. At that time, under the Soeharto administration, Indonesia was in dire need of foreign investors for their capital, know-how and technology.

The government realized that decisions to invest in Indonesia did not depend only on tax facilities, natural resources or cheap labor, but most importantly on the legal basis for investment protection.

In order to protect foreign investments, the government did not only ratify the Convention but also concluded the bilateral investment treaty (BIT) with most developed countries, the primary source of most investors. Under the BIT, should there be a dispute between a host country and a foreign investor such a dispute would be referred to the ICSID.

During the Soeharto administration there was only one case where a dispute between an investor and the government was referred to the ICSID. The dispute is known as the AMCO (AMCO Asia Corporation) case.

During post-Soeharto administration there have been several cases brought to the ICSID, with the most notable ones being the Century Bank case brought by Rafat Ali Rizvi and the East Kutai coal mining concession case brought by Churchill Mining Plc.

The challenging question for the current government and future governments is whether Indonesia should remain a member of the ICSID.

As a member, Indonesia has the right to withdraw as stipulated under article 71 of the convention. It states, “Any contracting state may denounce this convention by written notice to the depository of this convention. The denunciation shall take effect six months after receipt of such notice.”

Why should Indonesia withdraw from the ICSID? There are many reasons:

First, withdrawing from the ICSID is in line with the current government policy of with regards to BIT moratoriums. Under this policy the government will not extend expired BITs and also it will not create new ones. This is a brave policy taken by President Susilo Bambang Yudhoyono’s administration.

Second, the government seems to have confidence to say Indonesia’s current situation is different from that between the late 1960s and the 1990s. In those days it was Indonesia who badly needed investors. Today it is investors who need Indonesia.

For sure Indonesia is a lucrative market with its huge population and its growing middle class consumers. Indonesia is also a member of the World Trade Organization, which prohibits governments to render discriminate policies against foreign investors. Furthermore, the Indonesian market is accessible to foreign goods and services under various free trade agreements.

Third, with the increasing power of local governments under the regional autonomy policy, the central government can no longer exercise full control of regional administrations (regency, mayoralty and provincial) as during the centralized government system under Soeharto.

It would, thus, not be fair for the central government to be brought to ICSID due to local government actions. This is because under the Convention, it is only the central government that can be sued by foreign investors, not the local government (regional administrations).

Given the large number of regional governments or administrations( lastly estimated at more than 450 regency, mayoralty and provincial administrations), President Yudhoyono had once quipped that the central government could face the risk of coping with many litigation cases at ICSID due to the actions of regional administrations.

Fourth, under ICSID mechanism the government cannot give the same level playing field for both domestic and foreign investors. If a foreign investor has dispute with the government and it loses the case under local remedies, this investor still has recourse to ICSID. This is not the case with domestic investors. Under ICSID jurisdiction it can only examine cases brought by foreign investors, not domestic ones.

Lastly, the demand for compensation in an ICSID case is so immense. It may mount to billions of dollars.

The current situation in Indonesia with its democratic system and more independent judiciary should be similar to that in developed states. If there is dispute against the government, investors, be they foreign or local, they should bring their cases to the Indonesian judiciary or other available national dispute mechanisms.
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