Looking Up: The Indonesia-Australia Comprehensive Economic Partnership Agreement.

Legal News & Analysis - Asia Pacific - Indonesia - Australia - FDI

9 April, 2019

 

What you need to know

 

  • On 4 March 2019, Indonesia and Australia signed the Indonesia-Australia Comprehensive Economic Partnership Agreement.
  • The agreement will provide better and more certain access to the Indonesian market for Australian exporters.
  • The services and investments sectors will be provided with increased certainty and market access, including guaranteed levels of Australian ownership. 
  • Investments will also be afforded certain protections that may be enforced by investor-state arbitration. 
  • Indonesia and Australia will now follow their respective domestic treaty making processes to bring the Indonesia-Australia Comprehensive Economic Partnership Agreement into force.

 

Introduction

 

On 4 March 2019, Australia and Indonesia signed the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA). The IA-CEPA is a free trade agreement that builds on each parties' commitments under the existing and multilateral ASEAN-Australia-New Zealand Free Trade Agreement.

 

In this article we discuss how the IA-CEPA (if it is ratified) will create a framework for Australia and Indonesia to foster closer economic engagement, particularly by liberalising the current investment laws between the two countries and by affording investments protections that may be enforced by investor-state arbitration. 

 

In that regard, there is an established record of investors in Indonesia successfully using investor-state arbitration to enforce investment protections under other bilateral investment treaties and free trade agreements. The IA-CEPA will now provide Australian investors with the opportunity to protect their investments in this way.

 

Background

 

From being a humble agricultural-based economy only decades ago, Indonesia’s economy was ranked by the World Bank as being the sixteenth largest in the world in 2017, with a mixed base and significant output from its manufacturing and services sectors. By 2030, however, it is expected by some economists to be the fifth largest economy in the world, its middle class to more than triple, and its skilled workers to more than double. 

 

It follows that Indonesia is already a significant and growing market for Australian goods and services exporters. In 2017-18, Australia's total two-way trade in goods and services with Indonesia was worth AUD$16.8 billion, making Indonesia Australia's thirteenth largest trading partner.

 

The signing of the IA-CEPA is the culmination of eight years of negotiations between Australia and Indonesia, which commenced in 2010 between the then-Labor Prime Minister Julia Gillard and, the then-President of Indonesia, Susilo Bambang Yudhoyono. 

 

The negotiations for the IA-CEPA concluded on 31 August 2018 but the signing of the IA-CEPA was delayed by Indonesia reportedly in reaction to the now-Liberal Prime Minister Scott Morrison's announcement that Australia was considering moving its embassy in Israel to Jerusalem and recognising it as the capital. 

 

On 15 December 2018, Prime Minister Morrison announced that Australia would acknowledge only West Jerusalem as the capital of Israel, and delay any decision on moving the embassy until a peace agreement was reached. On 15 February 2019, Indonesia announced that it was prepared to sign the IA-CEPA.

 

Key outcomes

 

AUSTRALIA
 GOODS  SERVICES
  • Over 99% of Australian goods exports by value to Indonesia will enter duty free or under significantly improved preferential arrangements by 2020.
  • Indonesia will guarantee automatic issue of import permits for key products such as live cattle, frozen beef, sheep meat, feed grains, rolled steel coil, citrus products, carrots and potatoes (Key Products).
  • Cuts to tariffs or duty free access for Key Products.
  • Duty free access for 99.8% of manufactured goods by 2025.

Guaranteed levels of Australian ownership in the Indonesian market in certain sectors including: 

  • work training (67%)
  • mining and related services (67%)
  • hospitals, medical and dental clinics (67%)
  • tourism (51 – 100%)
  • architectural, urban planning and most engineering services (67%)
  • construction (67%)
  • energy (51 – 95%) 
  • wastewater management (67%) and 
  • transport (51 – 67%)
 
INDONESIA
 GOODS   SERVICES
  • Elimination of remaining tariffs on Indonesian imports into Australia.
  • Liberal origin requirements for components of Indonesian electric motor vehicles.
  • 6 month work training opportunities for up to 200 Indonesians per year.
  • An increase in the number of Australian work and holiday visas (from 1000 today to 4100 in year one, growing to 5000 over six years).
 

Investment protections

 

In addition to liberalising the current investment laws between Indonesia and Australia, the IA-CEPA affords investments from each country protections that may be enforced by investor-state arbitration.

 

These protections will be of particular interest to Australian investors that are investing in Indonesia in light of the perceived risks of doing business there. For example, despite recent attempts to increase foreign direct investment in Indonesia, starting a new business there remains a burdensome and bureaucratic process by both world and regional standards. Dealing with construction permits and registering property are also considered to be challenging.

 

INDONESIA - WORLD BANK DOING BUSINESS RANKINGS
Ease of Doing Business Rank Starting a Business Dealing with Construction Permits Registering Property Protecting Minority Investors
73 134/190 112/190 100/190 51/190
 

Moreover, resolving commercial disputes in the Indonesia courts can be both time consuming and expensive by world standards. In 2018, the World Bank ranked Indonesia 146 (out of a total of 189) in respect of the ease of enforcing commercial contracts. This poor performance is attributable to the high costs of litigation (on average 70.3% of the value of a claim), and a low score on the "quality of judicial processes" index (8 out of 18).

 

Indonesia’s legal system is also unfamiliar to Australian Investors because it is based upon the civil law tradition of the country’s former Dutch occupiers. Judges are not bound by precedent, trusts are generally not recognised, and contracts are subject to the requirement of good faith. For those reasons, the litigation process in Indonesia can be unpredictable and the general nature of the Indonesian litigation process can involve numerous formal hearings and substantial delays. 

 

Despite improving in recent years, Indonesia also continues to rank lowly on the Transparency International Corruptions Perceptions Index at 89 out of total of 180 (with a score of 38 out of 100).

 

The investment protections afforded to investors under the IA-CEPA are similar to those commonly contained in other investment treaties. Further information in relation to the common investment protections contained in investment treaties can be found in our previous update here.

 

The specific investment protections afforded to investors under the IA-CEPA include those summarised below.

 

INVESTMENT PROTECTIONS
 PROTECTION  DESCRIPTION
National treatment: Article 14.4 Each host State shall treat the investors and covered investments (that is, an investment in the territory of the other State at the date of entry into force of the IA-CEPA, or an investment that is made subsequent to that date) of the other host State no less favourably than its own investors and investments (in like circumstances). 
Most favoured nation treatment: Article 14.5

Each host State shall treat the investors and covered investments of the other host State as favourably as investors and investments from other States (in like circumstances).

This article does not extend to investors being able to use more advantageous ISDS mechanisms contained in other treaties.

Minimum standard of treatment: Article 14.7

Each host State shall treat covered investments fairly and equitably with full protection and security. 

This requires the State to take measures that are reasonably necessary to ensure the protection and security of the investment and not to deny investors the right to legal or administrative action. 

Investors should note that the mere fact that a State has acted (or omitted to act) inconsistently with an investor's expectations does not constitute a breach of this article, even where it results in loss or damage. 

Prohibition of performance requirements: Article 14.6

A host State cannot impose or enforce performance requirements in relation to an investment in its territory including, among other things, performance requirements in relation to:

  • exporting a given level or percentage of goods or services;
  • achieving a given level or percentage of domestic content; 
  • purchasing, using or according preference to goods produced in its territory; 
  • restricting sales of goods or services in its territory that the investment produces or supplies; or
  • supplying exclusively from the territory of the host State the goods or services the investment produces or supplies.

Some performance requirements are, however, permissible including requirements to locate production, supply a service, employ workers, construct or expand particular facilities or carry out research and development. 

Free transfer of investments: Article 14.9

Each host State shall allow all transfers relating to a covered investment to be made:

  • freely;
  • without delay into and out of its territory; and
  • in a freely usable currency at the market rate of exchange (at the time of transfer),

except where the host State may prevent or delay a transfer through the application of its laws and regulations relating to certain topics enumerated in Article 14.9(3).

Compensation for expropriation: Article 14.11 A host State shall not expropriate or nationalise (directly or otherwise) a covered investment unless it occurs for a public purpose, in accordance with law, in a non-discriminatory way and in exchange for fair compensation. 
 

Investor-State Arbitration

 

The investment protections under the IA-CEPA may be enforced by investors in accordance with the Investor-State Dispute Settlement (ISDS) mechanism of the agreement. This mechanism provides investors from both countries with the ability to ultimately appoint an independent arbitral tribunal to resolve disputes in respect of breaches of the investment protections.

 

Relying on the ISDS mechanism means that Australian investors may avoid having to have recourse to the domestic courts of Indonesia, and the perceived risks of doing so, when an investment protection as been breached. This introduces a limited measure of protection that may mitigate against the perceived risks of having recourse to the domestic courts of Indonesia that is in addition to the utilisation if international commercial arbitration as a way to resolve commercial disputes. 

 

Where a dispute has arisen between an investor and a State, the parties are first required by the IA-CEPA to attempt to amicably resolve the dispute through consultation. The disputing investor is required to initiate consultations via a written request to the disputing State (Consultation Request) and, prior to the commencement of the consultations, must provide the disputing State with information regarding the legal and factual basis for the dispute. 

 

If, within 180 days of the Consultation Request being submitted, a dispute cannot be resolved by consultations, the disputing State may require the disputing investor to participate in a conciliation process. If a disputing country chooses to initiate a conciliation process then participation will be mandatory for the disputing investor. 

 

A disputing investor may submit a claim to arbitration if:

 

  • a dispute cannot be resolved by conciliation; or 
  • the parties choose not to go through a conciliation process, provided that at least 180 days have lapsed since the Consultation Request was submitted. 

 

A claim may be submitted to arbitration under either: 

 

  • the Convention of the Settlement of Investment Disputed between States and National of other States (ICSID Convention) and the ICSID Rules for Procedure of Arbitration Proceedings or the ICSID Additional Facility Rules; 
  • the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules; 
  • where Indonesia is the disputing party, to the courts or tribunals of Indonesia; or
  • any other arbitration institution or arbitration rules as agreed to between the parties. 

 

Certain matters cannot be the subject of a dispute under the ISDS mechanism. For example, public health measures, including for Indonesian investors in Australia those relating to tobacco, the Medicare Benefits Scheme, the Pharmaceutical Benefits Scheme, the Therapeutic Goods Administration and the Office of the Gene Technology Regulator. Significantly for Indonesian investors, decisions of the Foreign Investment Review Board also cannot be the subject of disputes under the ISDS mechanism. 

 

The ISDS mechanism in the IA-CEPA reflects recent develops in both international investment arbitration and international commercial arbitration practice. For example, the ISDS mechanism provides that, subject to some exclusions, the disputing party shall make available all awards and decisions produced by the tribunal. This obligation is broadly aligned with disclosure obligations in the United Nations Commission on International Trade Law (UNCITRAL) Transparency Rules and reflects a broader trend in investment arbitrations towards greater transparency. 1  In this regard, the transparency provisions in the IA-CEPA will allow for increased public participation and oversight over disputes the subject of ISDS which should, in turn, serve to increase public confidence in the process. You can read more about the trend towards transparency in investment arbitrations here.

 

There are no express prohibitions in the IA-CEPA against the third party funding of disputes. However, disputing investors should be aware that if they receive third party funding, they have an obligation to notify the name and address of the third party funder to the tribunal and the disputing country. Failure to do so may result in the tribunal ordering the suspension or termination of the proceedings.

 

Investors should also be aware that they will be barred from submitting a claim to arbitration if more than three years and six months have elapsed since the disputing investor first acquired, or should have acquired, knowledge of the alleged breach of the IA-CEPA.

 

Analysis 

 

The inclusion of an ISDS mechanism in the IA-CEPA is notable given the recent controversy surrounding these mechanisms in Indonesia, Australia and otherwise around the world. 

 

In 2014, the Indonesian Government announced its intention to terminate more than 60 bilateral treaties that contained ISDS mechanisms on the basis that claims made under them were an affront to Indonesia's sovereignty. The announcement coincided with the commencement of the investment-arbitration of Churchill Mining PLC and Planet Mining Pty Ltd v. Republic of Indonesia. 2 Churchill and Planet Mining alleged that Indonesia contravened its treaty obligations under respective bilateral investment treaties (BITs) between the United Kingdom and Indonesia, and Australia and Indonesia (namely, its expropriation obligations) by revoking a mining exploration permit on the island of Borneo. Indonesia responded by objecting to the jurisdiction of the arbitral tribunal on the grounds that it did not consent to the arbitration and that Churchill's investments did not fall within the ambit of investments protected under the UK-Indonesia BIT. 3  The arbitral tribunal ruled that it had jurisdiction over the dispute, rendering Indonesia potentially liable to pay compensation exceeding USD$1.35 billion. However, in the final award handed down in December 2016, the tribunal held that all the claims were inadmissible as they were effectively based on documents that were forged to fraudulently obtain mining rights and, therefore, the investments could not benefit from investment protections provided under the BITs. 4

 

In Australia, ISDS mechanisms attracted controversy following the high-profile investment arbitration commenced by Philip Morris arising from the enactment of what was commonly known as the "Tobacco Plain Packaging Legislation": Phillip Morris Asia Limited v Commonwealth of Australia. 5  The tribunal ultimately rejected Phillip Morris' claims on jurisdictional grounds. Nevertheless, the then-Labor Government adopted a policy of banning the inclusion of ISDS mechanisms in future investment treaties. The policy of the now-Liberal Government, however, is to consider the inclusion of such mechanisms on a case-by-case basis.

 

Australia's recent case-by-case approach to the inclusion of ISDS mechanisms has in practice resulted in such mechanisms usually being included in BITs and multi-lateral investment treaties. For example, both the Peru-Australia Free Trade Agreement signed on 12 February 2018 and the Australia-Hong Kong Free Trade Agreement signed on 26 March 2019 contain ISDS mechanisms, as did the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (also known as the CTPP) signed on 8 March 2018. 

 

Next Steps

 

Both countries must now follow their respective domestic treaty making processes to bring IA-CEPA into force. In Australia, treaties are tabled in Parliament with a National Interest Analysis that explains the impact of the proposed treaty action on the national interest. The Joint Standing Committee on Treaties will review the treaty and report to Parliament within a 20 day period.

 

Following this, legislation effecting the IA-CEPA will be introduced into Parliament using the normal legislative processes.

 

If it is ratified, the IA-CEPA will liberalise trade and foster closer engagement between Australian and Indonesian businesses.

 

The additional opportunities created by the IA-CEPA will, however, inherently give rise to additional risks for investors. Investors from both countries should be aware of the investment protections afforded to them under the IA-CEPA and the ISDS mechanism contained in the agreement to enforce those protections.

 

Authors: Matthew Saunders, Partner; Georgia Quick, Partner; Luke Carbon, Senior Associate and Prajesh Shrestha, Lawyer.

 

1 Australia is a signatory to the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration that implements the United Nations Commission on International Trade Law (UNCITRAL) Transparency Rules but Indonesia is not.

2 ICSID Case No. ARB/12/14 and ICSID Case No. ARB/12/40.

3 ICSID Case No. ARB/12/14 and ICSID Case No. ARB/12/40, Decision on Jurisdiction (Churchill Mining Plc) dated 24 February 2014 para 67, 77.

ICSID Case No. ARB/12/14 and ICSID Case No. ARB/12/40, Award dated 6 December 2016 para 582.

UNCITRAL, PCA Case No 2012-12.

 

Oentoeng Suria & Partners (OSP) in association with Ashurst focus on managing high-profile projects and resolving complex transactions and disputes in Indonesia.  As a leading Indonesian law firm, OSP provides legal services to both foreign and domestic entities on their investments, business activities and projects in Indonesia. OSP is a full service firm providing incisive advice on matters including corporate and M&A, private equity, finance, capital markets, energy, resources and infrastructure, restructuring and disputes. Our deep understanding of the Indonesian legal, commercial and cultural environment means we are well equipped to help you achieve your business objectives in Indonesia.

 

Read more about Oentoeng Suria & Partners in Jakarta here.

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For further information, please contact:

 

Matthew Saunders, Partner, Ashurst

Matthew.Saunders@ashurst.com