If you want to make your developing country more attractive for foreign investors, try signing bilateral investment treaties (BITs) with rich countries. With these treaties countries promise to look after each others’ investors.
That is the dominant idea in the world. Up until now, that is. More and more countries discover that BITs can be quite risky. Indonesia, for example. Last year it received a so-called ISDS claim from an American mining company, which used the Indonesia-Netherlands investment treaty to get exemptions from certain requirements.
Problem number one
“Our perspective on BITs has changed,” says Abdulkadir Jaelani, director of Economic and Social Affairs of the Indonesian ministry of Foreign Affairs in Jakarta. “It seems very much in favor of the investor. Our number one problem is ISDS.”
ISDS (Investor State Dispute Settlement) is a clause in BITs that enables investors to sue a host country, if it feels it has been treated unfairly. The investor will generally claim financial compensation from the host state. This claim will be judged by a panel of three arbitrators, appointed by the investor and the state. The verdict is binding.
Indonesia received five such claims in recent years. Financial compensation was not always the goal. A claim can be used by an investor to block new legislation.
Indonesia started to terminate BITs last year. The Dutch BIT was one of the first to go.
The most recent claim against Indonesia came from the American mining corporation Newmont in the summer of 2014. Newmont has had an active copper mine on the Indonesian island of Sumbawa since 1999. Curiously, financial compensation appears never to have been the goal of Newmont. “I believe Newmont used the arbitration case to enforce an export license,” said Bill Sullivan, legal counsel in Jakarta and expert on the Indonesian mining industry.
In 2009, the Indonesian parliament voted for a new mining law, that served to kickstart the domestic processing industry. Every mining company was told to build a smelter, a plant to process mineral ores. “Indonesia is too dependent on natural resources for its budget,” said Rani Fabrianti, head of legal information at the Mining and Energy Ministry. “The Mining Law enables us to grow into an industrial economy and eventually to a service-oriented economy.”
The Mining Law dictated the mining companies to build a smelter no later than 12 January 2014. After that time, the government would enact an export ban on mineral ores.
On 11 January 2014, certain mining sectors, including the copper sector, were delayed. Copper mining companies would receive an export license for copper concentrate, if they showed progress with the building of smelters. In the meantime, the Indonesian government introduced export tariffs on copper concentrate from 25 per cent in 2014 to 60 per cent in 2017.
The two biggest copper miners in the country, the American corporations Freeport and Newmont, were not amused. Still, Freeport reached a compromise with the government soon after and received its export license. The company pledged over 100 million dollars for the construction of a smelter.
The negotiations with Newmont were more difficult. The company said building a smelter would be ‘uneconomic’ and that its mining contract with Indonesia dating from 1986 safeguarded it from such activities.
When its storage facilities reached capacity just before the summer of 2014, Newmont called into force the Force Majeure clause of its contract. It means that the company had to stop production for reasons beyond its power. Force majeure is generally used when the contract area is hit by natural disasters or violent conflict.
80 per cent of the 4000 employees of the Batu Hijau mine on Sumbawa were sent on unpaid leave. After that, Newmont filed for financial compensation from the Indonesian government, through a Dutch business entity, citing the investment treaty between Indonesia and the Netherlands. It was able to do so, because the Dutch government does not require companies to have any economic activity in the Netherlands for using its investment treaties.
But just two short months later, news broke that Newmont and the Indonesian government had reached an agreement. Newmont received its export license and can export for significantly lower tariffs than before: 7.55 in 2015 and 0 per cent in 2017. Newmont in turn pledged 25 million dollars to the smelter that Freeport was set to build and annulled its ISDS claim.
Jaelani says he is satisfied with the compromise. “We negotiated, which we prefer over ISDS”, he says. But many Indonesians think differently. Yani Sagaroa is a mining activist on Sumbawa and is often consulted by the Mining ministry in Jakarta. He blames the government for inconsistency. “Newmont had to build a smelter between 2009 and 2014, but did not. Still they can export copper,” he said. “They did not abide by the law.”
In October 2015, Newmont responded to questions about the smelter by saying it is still negotiating with Freeport.
Meanwhile, Indonesia is writing a new model text for its investment treaties, of which the Dutch journalists have gotten hold. One of the most eye catching changes is that Indonesia will only allow ISDS, if they have provided written consent before each case. This means that companies can never use it as a threat or bargaining tool. Whether western countries are willing to swallow this radical departure from the current practice, remains to be seen.
This article is part of a research by De Groene Amsterdammer, Oneworld and Inter Press Service, supported by the European Journalism Centre (made possible by the Gates Foundation). See www.aboutisds.org.