The Lack of the Environmental Concern in Indonesia ’ s Bilateral Investment Treaties

DOI: 10.20956/halrev.v3i3.1202 In the modern era, Bilateral Investment Treaties (BITs) are relatively effective to attract more foreign direct investment (FDI). Many countries then eagerly concluded BITs, including Indonesia. Considering the adverse impact of FDI on the environment, most countries then start putting the environmental concern in their BITs, assisting them to prevent and mitigate any adverse impact of FDI on the environment. Indonesia, however, did not follow this measure. This paper then shows the lack of the current Indonesia’s BITs in putting the environmental concern in their provisions. The fact that Indonesia has terminated some BITs becomes a right momentum to start putting the environmental concern in the updated and modified Indonesia BITs in the future. From other countries’ practices, there is evidence to suggest that BITs can and do contain provisions aimed at ameliorating environmental damage caused as a result of FDI within host countries’ territories.


Introduction
Globally, Foreign direct investment (FDI) declined 16 percent from US$1.47 trillion in 2013 to US$1.23 trillion in 2014 due to unfavorable situations, including geopolitical tension, policy uncertainty, and the brittleness of the global economy. 1 According to World Investment Report 2016, nevertheless, FDI increased significantly by 38 percent to be $1.76 trillion in 2015, recording the highest level since the global economic and financial crisis of 2008-2009. 2 The presence of FDI has contributed huge benefits for host countries.Firstly, FDI has created job opportunities that are crucial for reducing unemployment and poverty in host countries.For instance, Richards and Schaefer unveiled that foreign-owned American firms employed 6.1 million people 3 and 2.4 million indirect and induced jobs, resulting a total of 8.5 million jobs in 2013. 4Meanwhile, Lipsey and Sjoholm concluded that from 1975 to 2005, foreign-owned manufacturing plants provided more jobs compare to plants that remained under the national ownership during the same period in Indonesia. 5e next benefit of FDI is the increase of productivity and export capacity.Arnold and Javorcik stated that the acquisition process from local to the foreigner improved productivity in the manufacturing sector in Indonesia. 6This progress was reached by means of technological advancement, superior know-how, managerial enhancement, marketing strategies, and motivational lesson for employees. 7With respect to export expansion, the presence of FDI is an important source for local firms to gain information relating how to export products, and then launch distribution channels in foreign markets. 8Specifically, Chen and Swenson summarised that FDI has contributed to the increase of transaction unit values up to 6,3 percent, assisting local firms to expand new product exports by 1.3 percent in China. 9aring in mind the benefits of FDI almost all countries then eagerly concluded Bilateral Investment Treaties to attract more FDI. 10Medvedev analysed the impact of PTAs on the net FDI inflows of member countries, utilising a comprehensive database of PTAs in a panel setting. 11The research found that PTA contributed a positive change in net FDI inflows. 12To illustrate, Costa Rica can expect its net FDI inflows to rise by 11.5 percent after signing a PTAs with the U.S. 13 Neumayer and Spess that used econometric analysis, showed the participation of developing countries in BITs with capital-exporting countries could hugely increase FDI inflows up to 93%. 14 Turning now to the discussion between FDI and environment, there have been critics from the existing Bilateral Investment countries. 15Evaluating the existing investment treaties, a closer look at the OECD data in 2011 reported that from 1,623 IIAs, which equal to 50 per cent of existing IIAs, only 8.2 per cent of IIAs expressly put environmental concerns in their provisions. 16evertheless, this figure fairly different if a time dimension was employed. 17There was a progressive movement, showing how the environmental concerns in IIAs began to rise since the mid 1990s. 18Moreover, starting from 2002, nearly 89% of newly concluded investment treaties explicitly mentioned environmental concerns in their provisions. 19though 89 percent of newly concluded investment treaties have accommodated the environmental concern, Indonesia did not follow this trend.Along with Egypt, Indonesia has only one treaty with the environmental concern. 20The lack of environmental concerns in Indonesia's BITs may cause difficulties for the government to anticipate any environmental damage from FDI projects, and to impose measures if the presence of FDI within Indonesia's territory has damaged the environment.
From 2014, Indonesia has denoted a tendency that it is no longer eager joining BITs.At the time of writing, according to UNCTAD Data, Indonesia has terminated approximately 24 BITs. 21There are several potential explanations for why Indonesia has terminated the BITs.Instead of a termination, Michael Ewing-Chow analysed this measure, arguing that "Indonesia is letting its bilateral treaties lapse so as to negotiate better ones". 22Indonesian Ambassador to the European Union, Arif Havas Oegroseno then supported this assumption, stating that Indonesia intended to "update, modernise and balance its BITs". 23is paper argues that Indonesia's BITs has significant deficiencies in putting the environmental concern in its provisions.This paper then shows how other countries have expressly stated the environmental concern, assisting their governments to prevent and mitigate any adverse impact of FDI on the environment.The termination of some Indonesia's BITs will then likely be the right momentum to put any environmental concerns in the updated or modified version of Indonesia's BITs.This paper starts by showing the dynamics development of BIT, covering the period before BITs were exist, traditional BITs, and modern BITs wherein the rise of environmental concern has taken place.The dynamics development of Indonesia's BITs are the next explanation, showing how the government has developed it BITs from old order to the reformation order in which most of its BITs have not accommodated yet the environmental concern.Looking at other countries' practices, this paper will show why and how Indonesia should include the environmental concern in its future BITs.

Before BITs
The history of investment treaties can be traced from the Friendship, Commerce, and Navigation (FCN) treaties before the nineteenth century, providing for the protection of property and the commercial interests of foreigners. 24This type of protection emanated from the principle of an "international minimum standard", granting to aliens abroad. 25Equally important, as part of customary international law "the Hull Rule" required "prompt, adequate, and effective" compensation for any expropriation of property owned by foreigners. 26In this era, trade and property protection provisions existed in the same agreement. 27Equally important, the establishment of commercial relations among countries was the main priority of such treaties, with protection of property a secondary matter. 28The absence of an enforcement mechanism was a drawback of treaties in this period. 29

Traditional BITs
After World War II, treaties typically prioritised "favourable conditions" and "nondiscrimination" and required host states to pay compensation for any expropriation committed. 30Some improvements arose in this era including provision of protection for corporate entities in addition to individuals 31 and protection against exchange controls. 32Moreover, as an enforcement mechanism, provision for dispute resolution before the International Court of Justice was available to resolve uncertainties regarding the interpretation or application of the treaties. 33aditional BITs mainly involved developed countries and developing countries. 34nlike the FCN treaties, which had been focussed on economic relations, 35 BITs existed to promote and protect investment.On the one hand, developed countries intended to protect their nationals investing abroad. 36On the other hand, developing countries intended to promote inward investment as a means of bolstering economic development. 37Typically, a developed country drafted the agreement and then offered it to a developing country for signature, with only minor changes in the final agreement compared to the proposed draft. 38e important breakthrough in the mid-1960s was the adoption of Investor-State Dispute Settlement (ISDS) whereby host countries agreed in BITs to resolve their disputes with investors via arbitration. 39This process was inspired by the conclusion of a 1965 convention establishing the International Centre for Settlement of Investment Disputes (ICSID). 40The presence of ISDS under investment treaties denoted a considerable shift under international investment law through the recognition of nonstate entities (ie investors) as subjects of international law. 41In the past, pursuant to "diplomatic protection", an investor could only sue the state hosting its investment through its home state taking action on its behalf. 42Through ISDS, an investor could hold the host state responsible for violation of a BIT without depending on its home state. 43Moreover, ISDS does not generally require an investor to exhaust domestic remedies prior to submitting a claim. 44

Modern BITs
In the late 1980s, developing countries started providing more favorable environment for foreign investment, acknowledging how hostile policies to foreign investment were no longer effective. 45They then ignored the Calvo Doctrine and agreed to the adoption of international minimum standards for the protection of foreign investment. 46BITs provided greater protection for foreign investors than the Hull Rule ever did. 47Besides, they provided substantive protections such as national treatment, most favored nation treatment, free transfer of assets, 48 and a prohibition on performance requirements. 49inally, BITs adopted the Hull Rule's stipulation of prompt, adequate, and effective compensation for expropriation. 50ile traditional BITs mainly arose between developed and developing countries, developing countries began concluding BITs with each other, 51 in view of their capital exports to each other. 52For example, Thailand-Vietnam BIT in 1991 53 and China-Argentina BIT in 1992. 54Next, the purpose of modern BITs is not only intended to protect investment, but also to stimulate the flow of private capital and the economic development of the parties. 55For example USA-Uruguay BIT in 2005 56 and Norway Model BIT. 57 this period, some countries have expressly included environmental concerns in relation to the sustainable development in their treaties, both in the preambles and/or provisions, reflecting the balance between rights and obligations of states and investors.
From those existing treaties, Norway model BIT expressly admits how investment should be undertaken with the principle of sustainable development.It states that:

Old Order
In the old order, Sukarno made Indonesia an inhospitable country for foreign investors through its nationalization policy.Almost all foreign enterprises were nationalized, commencing with Dutch-owned enterprises in 1957. 59Military officers, who had no experience in business, took over all those enterprises. 60The goal of this policy was to build a national industry organized by state-owned enterprises ('SOEs') 61 and to respond to hostile measures by the Netherlands.After invading Indonesia in 1947 and 1949, the Netherlands refused to transfer sovereignty over West Irian territory, resulting in military conflict between Indonesia and the Netherlands during 1958-1959. 62The expropriation policy over foreign investors then resulted in dire consequences in which Indonesia did not join to any BITs in this period.

New Order
In the new order under Suharto's Administration, Indonesia experienced its golden era of investment agreements in which Indonesia had been active joining many BITs and treaties with investment provision (TIPs).Indonesia-Denmark BIT in 1968 63 was the first BIT and the last investment agreements in this period was Indonesia-Thailand BIT in February 1998, only three months before Suharto was finally resigned. 64 Almost all Indonesia's BIT includes provision requiring "fair and equitable treatment" and "full protection and security".Only Indonesia-Denmark BIT in 1968 did not require the host state to provide "fair and equitable treatment" and enjoy "full protection and security".For example, Indonesia-Korea BIT states that investors "shall at all times be accorded fair and equitable treatment and shall enjoy adequate protection and security in the territory of the other Party". 66 expropriation, almost all Indonesia BIT stipulates that expropriation either directly or indirectly must only be conducted with certain strict requirements.For instance, Indonesia-Jordan BIT in 1996 explains the following requirements of expropriation: The measures are taken for a lawful purpose or public purpose and under process of law; the measures non-discriminatory; and the measures are accompanied by provision for the payment of prompt, adequate and effective compensation shall amount to the fair market value without delay before the measure of dispossession became knowledge... 67 Almost all Indonesia's BITs provides MFN treatment.For example, Indonesia-Malaysia BIT in 1994 explains that: Investments made by investors of either Contracting Party in the territory of the other Contracting Party and/or return accrued, shall receive treatment which is fair and equitable, and not less favorable than that accorded to any third State. 68most all Indonesian BITs require compensation for losses that has to be conducted under non-discriminatory basis.For instance, Indonesia-Australia BIT in 1992 states that: When a Party, in respect of investments in its territory, adopts any measures relating to losses owing to war or other armed conflict, revolution, a state of national emergency, revolt, insurrection, riot or other similar event in its territory, it shall accord to investors of other Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favorable than that which it accords to investors of any third country. 69

Reformation Order
Indonesia continues its participation under investment agreements.In this period, Indonesia is less active in signing BITs, but more active in signing multilateral TIPs compare to those in previous eras.Indonesia's BITs have similarities with the previous one particularly related to the definition of investment, protection of investment, treatment of investment, expropriation, compensation for loss and transfer.
66 Agreement Between the Government of the Republic of Indonesia and the Government of the Republic of Korea for the Promotion and Protection of Investments, signed 16 February 1991 (entered into force 10 March 1994) art 2(2) ("Indonesia-Korea BIT"). 67

Agreement Between the Government of the Republic of Indonesia and the Government of The Hashemite
Kingdom of Jordan on the Promotion and Protection of Investments, signed 12 November 1996 (entered into force 9 February 1999) art 4 ("Indonesia-Jordan BIT"). 68Agreement Between the Government of the Republic of Indonesia and the Government of Malaysia, signed 22  January 1994 (terminated) art 3 ("Indonesia-Malaysia BIT"). 69Agreement Between the Government of Australia and the Government of the Republic of Indonesia concerning the Promotion and Protection of Investments, signed 17 November 1992 (entered into force 29 July 1993`) art V ("Indonesia-Australia BIT").
Some differences of Indonesia's BITs in this period are hereby explained.With respect to the application of other provisions, some BITs have included the provisions that are commonly known as "umbrella clause".To illustrate, Indonesia-Germany BIT in 2003 states that: "each Contracting Party shall observe any other obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party". 70e number of BITs that include National Treatment provision is increased, covering Indonesia's BITs with India (1999), 71 Germany (2003) 72 and Singapore (2005). 73One TIP, that is Indonesia-Japan FTA (2007) also includes national treatment provision. 74For instance, Indonesia-Germany BIT in 2003 indicates that: Neither Contracting Party shall subject investments in its territory owned by investors of the other Contracting Party to treatment less favorable than it accords to investments of its own investors or to investments of investors of any third State. 75th respect to expropriation, Indonesia-Singapore BIT in 2005 elaborated the expropriation relating to land by stating that: Any measure of expropriation relating to land, which shall be as defined in its domestic legislation of each Contracting Party, shall be for a purpose and upon payment of compensation in accordance with the aforesaid legislation and any subsequent amendment thereto. 76

The Recent Development: Termination BIT
From 2014, Indonesia has shown a tendency that it is no longer enthusiastic joining BITs.At the time of writing, according to UNCTAD Data, Indonesia has terminated approximately 24 BITs. 77The Netherlands embassy even revealed that the Indonesia had intended to terminate all of its BITs. 78ere are several potential explanations for why Indonesia has terminated the BITs.Instead of a termination, Michael Ewing-Chow analysed this measure, arguing that "Indonesia is letting its bilateral treaties lapse so as to negotiate better ones". 79ndonesian Ambassador to the European Union, Arif Havas Oegroseno then supported this assumption, stating that Indonesia intended to "update, modernise and balance its BITs". 80Government then allowed its BITs to "discontinue" thereby providing an opportunity to renegotiate them with better terms. 81me scholars then analysed how Indonesia will likely want to secure its regulatory autonomy, especially in public policy matters.For instance, Trakman (2014) stated that Indonesia, which has a better economic stability, intended to renegotiate its BITs to provide greater capacity to regulate the 'public interest for health, the environment or financial reasons'. 82Price (2017) analysed how Indonesia will likely intend to balance investor protection with sustainable developmet issues in its new BIT model 83 because the sustainable development has been a major concern in many countries that led to the importance of reorientation of the global IIAs regime. 84

The Lack of the Environmental Concern and Other Countries' Practices
Muchlinski, 85 pointed out how the rise of investment treaties tended to only focus on economic factors, ignoring the implications of certain detrimental impacts.Hence, it is important to balance the legitimate interests of investors, such as transparent and predictable investment policy and the legitimate interests of the host country to reach its development targets, including a "right to regulate" for policy goals, especially environmental concern. 86UNCTAD (2015) stated that IIAs should not only include features of investment liberalization, protection, promotion and facilitation, but also features, enabling host countries to minimize any negative social or environmental impacts. 87This process then can be reflected through the inclusion of environmental concern both in the preamble and provision in the current IIAs, including BITs.
A study from Gordon and Pohl (2011) revealed that 133 international investment treaties, equal to 8,2 percent of the sample, contained environmental concerns. 88evertheless, from 2002 onwards, 89 percent of newly concluded agreements contained environmental concerns in their preambles and/or provisions. 89The study also showed how 30 out of 49 countries (assessed by this study) have put environmental concerns in at least one of their treaties. 90The following countries have a high percentage of such concern: Canada (83 percent), New Zealand (75 percent), Japan (61 percent), the United States (34 percent) and Finland (26 percent). 91In contrast, Egypt and Indonesia have just one agreement with environmental concern out of 73 and 45 agreements in the sample, respectively. 92e above-mentioned study then supports the fact that Indonesia did not follow the trends of incorporating environmental concern in international investment agreements.This situation potentially contributes to the environmental damage after the presence of FDI.The lack of environmental concerns in Indonesia's agreements may cause difficulties for the government to anticipate any environmental damage from FDI projects, and to impose measures should the presence of FDI within Indonesia's territory has damaged the environment.
Some other countries have put environmental concerns in the preamble of their agreements.The US-Uruguay BIT (2005) notes that the parties desire to achieve the economic objectives "in a manner consistent with the protection of health, safety, and the environment". 93Meanwhile, the Switzerland-Kosovo BIT (2011) recognizes the need to promote and protect foreign investment with the objective to achieve the economic prosperity and sustainable development of both states. 94Next, the preamble of the Economic Partnership Agreement between the Cariforum States and the European Community ('EC-CARIFORUM EPA') (2008) considers the need of the parties "to promote economic and social progress for their people in a manner consistent with sustainable development by respecting basic labour rights … and by protecting the environment". 95e preambles reflected the main objective and purpose of the international investment agreements that become a vital element of their interpretation although there are no legally binding obligations imposed by the preambles. 96If parties do not include environmental concern in their preambles, the interpreters (such as tribunals) of the that the other Party has offered such an encouragement, it may request consultations." 102nada-Cameroon BIT (2014) then includes the issue of corporate social responsibility by stating that: "[e]ach Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies, such as statements of principles that have been endorsed or are supported by the Parties.These principles address issues such as labour, the environment, human rights, community relations and anticorruption." 103

Conclusion
Considering the huge benefits of the FDI countries, most of countries then eagerly concluded BIT to attract more FDI.Due to the adverse impact of FDI on the environment, there have been some critics, arguing the lack of the environmental concern from BITs.Responding this issue, almost 90 percent of newly concluded BITs have included the environmental concern in their provisions.Indonesia's BITs, however, has significant drawbacks in relation to the environmental concern.Most of Indonesia's BITs have not included yet any environmental concerns in their provisions.
The fact that Indonesia has terminated its BITs becomes a good momentum to start putting the environmental concern in the future Indonesia BITs.From other countries' practices, there is evidence to suggest that BITs can and do contain provisions aimed at ameliorating environmental damage caused as a result of FDI projects, both in the preamble and the provision.For these reasons, the host country's government is more likely be able to anticipate any environmental damage from FDI projects, and to impose measures if the presence of FDI within its territory has damaged the environment.
Treaties (BITs) and other International Investment Agreements (IIAs) that they have not yet significantly encouraged the sustainable development principle in host countries, in particular developing Jobs Attributable to Foreign Direct Investment in the United States, International Trade Administration.Available online at: http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_005496.pdf.[Assessed on 22 March 2017].Indirect jobs are those created outside commercial firms, but they have strong relation with those firms.For examples, suppliers or material or independent contractor increasing the number of employees because they involve in the firm's project.Induced jobs are those that were made because of the economic impact created by the commercial firms.Lipsey, R., and Sjöholm, F. (2010)."FDI and Growth in East Asia: Lessons for Indonesia", Working Paper No. 852, IFN, p. 20.Arnold, J.M., and Javorcik, B.S. (2009)."Gifted Kids or Pushy Parents?Foreign Direct Investment and Plant Productivity in Indonesia".Journal of International Economics, 79: 42-48.Chen, H., and Swenson, D.L. (2014)."Multinational Exposure and the Quality of New Chinese Exports".Oxford Bulletin of Economics and Statistics, 76: 41-56.
Some important provisions of BITs are hereby explained.Most of Indonesia's BITs provide wide definition of investment, covering any type of assets in compliance with host state's laws and regulations.For instance, Indonesia-Jordan BIT in 1996 states: Adrian Vickers.(2013).A History of Modern Indonesia.Cambridge: Cambridge University Press, p. 150. 63Agreement Between the Government of Denmark and The Government of the Republic of Indonesia concerning the Encouragement and the Reciprocal Protection of Investments, signed 30 January 1968 (entered into force 2 February 1968) ("Indonesia-Denmark BIT"). 64Agreement Between the Government of the Republic of Indonesia and the Government of the Kingdom of 60Ibid.61Ibid.62Thailand on the Promotion and Protection of Investments, signed 17 February 1998 (entered into force 5 November 1998) ("Indonesia-Thailand BIT").65AgreementBetween the Government of the Republic of Indonesia and the Government of The Hashemite Kingdom of Jordan on the Promotion and Protection of Investments, signed 12 November 1996 (entered into force 9 February 1999) art 1 ("Indonesia-Jordan BIT").
87United Nations Conference on Trade and Development.(2015).Investment Policy Framework for Sustainable Development.Geneva: United Nations, p. 30.88Gordon,K., and Pohl, J. (2011)."Environmental Concerns in International Investment Agreements: A Survey".OECD Working Papers on International Investment, p. 9. Treaty between the United States of America and the Oriental Republic of Uruguay concerning the Encouragement and Reciprocal Protection of Investment, signed 4 November 2005 (entry into force 1 November 2006) the preamble. 94Treaty between the Swiss Confederation and the Republic of Kosovo concerning the Encouragement and Reciprocal Protection of Investment, signed 27 October 2011 (entered into forced 13 June 2002) the preamble. 95Economic Partnership Agreement between the Cariforum States, of the one part, and the European Community and its Member States, of the other part, signed 15 October 2008, the preamble. 96Bonzon, A.J. (2014)."Balance Between Investment Protection and Sustainable Development in BITs: The Example of Switzerland" The Journal of World Investment and Trade, 15: 822.agreements will have less guidance how their obligations should be interpreted, leaving more discretion to the interpreter. 97Hence, putting environmental concern in the preambles can ensure that this concern is taken into account by the interpreters of the treaty. 98Some countries have gone further by incorporating some additional requirements in relation to the protection of the environment in their agreements.Firstly, the provision that prohibits countries to relax environmental standards while attracting FDI. or retention in its territory of an investment of an investor.If either Party considers 97 Van Duzer, J.A., Simons, P., and Mayeda, G. (2013).Integrating Sustainable Development into International Investment Agreements: A Guide for Developing Country Negotiators.London: Commonwealth Secretariat, 2013, p. 45. 98 Ibid. 99Agreement between the Government of Canada and the Government of the Republic of Equador for the Promotion and Reciprocal Protection of Investments, signed 29 April 1996 (entered into force 6 June 1997) art.XVII(2), See also, for example North American Free Trade Agreement, signed 17 December 1992 (entry into force 1 January 1994) art.1114. 100Agreement between Japan and the Republic of Colombia for the Liberalization, Promotion and Protection of Investment, signed 12 September 2011 (not yet in force) art 21(2). 101The United States Model BIT (2012) art.12 (2).
89Ibid.90Ibid.91Ibid.92Ibid.93Specifically,Article12(2) of the US Model BIT (2012) states that:"[t]he Parties recognize that it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic environmental laws.Accordingly, each Party 'shall' ensure that it does not waive or otherwise derogate from or offer to waive or otherwise derogate from its environmental laws in a manner that weakens or reduces the protections afforded in those laws, or fail to effectively enforce those laws through a sustained or recurring course of action or inaction, as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory." 101icle 3 Switzerland and Mexico BIT (1995) then shows:"[t]heParties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures.Accordingly, neither Party should waive or otherwise derogate from, or offer to waive or derogate, such measures as an encouragement for the establishment, acquisition, expansion