Implication of Bilateral Investment Treaties on Sustainable Development:

Indonesia Mining

Adinda Balqis Tegarmas G. and Derry Krisna Susanto

Universitas Airlangga

Keywords: bilateral investment treaty, protection to foreign investors, international investment law, mining, sustainable

development.

Abstract: This paper examines the role of political factors play in the investment location decisions of multinational

enterprises. It has been found that foreign direct investors shy away from countries with excessive government

spending, especially when this spending is directed towards the military. They also seem to have a slight

preference for leftist executives and be negatively predisposed toward situations in which the ruling party has

held power for prolonged periods of time. “Ceteris paribus”, more foreign direct investment (FDI) flows to

countries that have presidential systems which mostly developing countries, established political parties and

where the party of the executive controls all houses with law-making powers. The foreign investors who

mostly liberal-minded are spoiled with the political economy system of developing countries which rather

can be manipulated to fulfill their desire of protection and full access of the desired resources. However, after

World War II, the political constellation has changed dramatically that caused an emergence of rising-new

countries and forceful demand of developing countries to obtain equity in free market economy system

through a modern mechanism known as bilateral investment treaty (BIT). A continuous changing dynamics

in global political economy leads the mankind to the era where the scarcity of natural resources almost become

a realization. One way to sort of postpone the scarcity is by implementing so called sustainable development

in business activities especially in mining investment sector. This research aims finding BIT advantages on

Indonesia’s mining to implement sustainable objectives.

1 INTRODUCTION

The international economic relation has always been

an endless intriguing topic to discuss in any platform.

Unbelievable dynamic changes makes international

economic relation unpredictable. This particular

circumstance has affected the international relations

by creating new trends in economy sector. One of the

new trends is known as “investment” which has

already conducted since before the World War II

occurred. Notwithstanding the adequately long period

of time of existence, there is still no common legal

definition of the term “investment” due to the variety

meaning in accordance to the object and purposes of

different investment instruments which contain it

(OECD I 2008). However, Trygve referred to two

classical notions of investment which; first, is the

transfer of a certain amount of wealth from one

ownership, or employment, to another that may cause

single individuals or firms to carry out such “spot

investment” operations in a closed economy

environment; and second, investment is derived from

the idea of capital as a revolving stock. That means a

part of gross current output must be “invested” each

year in order to keep the stock of capital constant

(Trygve Haavelmo 1960). As a consequence of those

notions that are still inclusive, practically speaking,

investments may be done in domestic or foreign

territory. Sornarajah confirms the first notions of the

term of investments by explaining so called foreign

investment which involves the transfer of tangible or

intangible assets for one country to another for the

purpose of their use in that country to generate wealth

under the total or partial control of the owner of the

assets. In practice, the said investment can be done by

transfer of physical property that is bought or

constructed such as equipments or plantations, which

later known as direct investment. Another form of

transfer of assets, known as indirect investment,

normally be represented by a movement of money for

the purpose of buying shares in a company formed or

functioning (M. Sornarajah 2010).

The emergence of investment activities was as the

result of major changes in the international political

G., A. and Susanto, D.

Implication of Bilateral Investment Treaties on Sustainable Development: Indonesia Mining.

DOI: 10.5220/0010273400002309

In Proceedings of Airlangga Conference on International Relations (ACIR 2018) - Politics, Economy, and Security in Changing Indo-Paciﬁc Region, pages 79-85

ISBN: 978-989-758-493-0

constellation caused by the World War II.

Establishment of new emerging countries that

resulted in changes in the mindset of countries in the

world in conducting international relations from

previously dominated by the developed countries to

coordination between countries with upholding their

sovereignty. The post-war circumstance caused the

developing countries in need to attract foreign capital

as their wish to foster their emerging equity markets

(Sir Kenneth Berrill 1990; M. Sornarajah 2010). A

desire to lower countries’ trade-barriers as a way to

encourage international economic development was

generally proposed by both developed and

developing countries, although there is no doubt that

this system was proposed by developed countries who

carry out the “liberalism” perspective; this system

later be known as liberalization. In spite of the system

is prefered by both developed and developing

countries in various point of views, financial crises

have occured over the years, and the world has

become rather more non-resistant to them with the

growth of financial market liberalization since 1970s

(T. Chon 2012). Nevertheless, the establishment of

two international economic organizations (i.e.

International Monetary Fund (IMF) and International

Bank for Reconstruction and Development (IBRD) or

World Bank) resulted from Bretton Woods

Conference in July 1944 and the General Agreement

on Tariffs and Trade (GATT) which led to the

Marrakesh Declaration in 1994 constituted the

Agreement on Establishing the World Trade

Organization (WTO Agreement) brought a “fresh air”

to the global economy.

Throughout historical timeline, from the

mercantilist period before the World War II to the

WTO mechanism, there has been changing trends in

global economy, for instance, the existence of cross-

border investment agreements such as Bilateral

Investment Treaty (BIT) and International

Investment Agreement (IIA) in general. Based on the

data compiled by United Nations Conference on

Trade and Development (UNCTAD), Indonesia had

signed throughout its history approximately 71 BITs

and only 28 of them has been terminated.

This change in trend may be due to the substantial

role of the international agreements as the guideline

for countries, especially by developing countries, on

conducting international relations. It may also be due

to the increasing number of world population which

leads to a situation where the consumption of natural

resources, notably minerals and gas, also increases to

meet the needs and demands of the population itself.

A balance between business which in this case is

represented by investment, with the environmental

protection and preservation has become a crucial

issue for mankind from generation to generation.

This paper is intended to examine the political

factors that embodied in investment activities of

multinational enterprises while also ensuring the

sustainability of environment by bridging between

investment law and environment. The authors argue

that by having a decisive guideline such as BIT can

ensure the energy sustainability of a country,

especially Indonesia, while also conducting

promising business activities to enhance its

development.

2 METHOD

This research has adopted doctrinal, historical, and

analytical research methods to study the political and

legal concepts, laws and regulations, international or

municipal, applied to investor-state disputes and

arbitrations, also interconnection between investment

or business activities in general and sustainable

development so as to address to the issues raised in

this research. Such a method declares, explains and

highlights the active laws and global political

economy relations in any given field. A library based

research is rated by the authors as the most convenient

methods used in this research. It is also referred to as

“arm-chair” based research. Hence all the tools of

library research have been used as sources of data

collection to carry out this research including

published official reports; special volumes of

journals; articles and books; working papers;

legislations and any other relevant information from

online databases.

3 RESULTS

BIT offers various advantages for developing

countries especially Indonesia despite some of its

characteristics that still need further development. As

a results of structural economic change, BIT can

attract foreign investment because indirectly it create

a suitable investment climate and provide legal

certainty and adequate protection for investors. In

addition, the basic principles in free-trade mechanism

can also be applied into the agreement which makes

BIT even more appealing to the developing countries

come under Indonesia.

Continuous sustainability of minerals and coal

can be accomplished if the clause in the BIT does not

pose a problem. So far the clauses in BITs have been

ACIR 2018 - Airlangga Conference on International Relations

detrimental to Indonesia. Implementation of mineral

and coal mining business activities is aimed at

implementing policies in prioritizing the use of

minerals and/or coal for the benefit of the country.

4 DISCUSSION

Interlacing the previous argument in the introductory

section and in order to able to understand the rationale

of this research, it is necessary to know the correlation

between investment law and environment. It is

noticed that investment law and environment have

some sort of a “gap” between those two fields.

Martijn Scheltema acknowledged that there are

various possible approaches to bridge this “gap”. One

would be modifying the content of investment treaties

from an approach that only aims to protect the

financial interests of investors towards an approach

that also secures public interests including

environmental concerns. Environmental issues are

treated quite differently in the context of investment

law. Although most countries agree that investment

laws should leave room for national policymakers to

regulate environmental issues, there is still no global

understanding about what we should do to align

investment protection with maintaining a healthy

environment on a global scale. Scheltema points out

that there is a real challenge to implement

environmental issues into investment treaties in a

proper manner. The second approach would be

amending the procedures in investment law disputes.

For instance, arbitrators should be chosen from

different legal backgrounds than today, e.g. they

should also have experience in dealing with

environmental law issues (Rosalien Diepeveen and

Yulia Levashova and Tineke Lambooy 2014).

Natural resources, besides as a part of

environment, are the basic capital of a country's

development. Among countries in the world, natural

resources may be relatively more prevalent for

developing countries due to the modest size of the

modern sector of economy makes agriculture and

natural resource-based economic activities play a big

role in its development (Thorvaldur Gylfason and

Gylfi Zoega 2001). However, a serious and long-term

issue so-called climate change, awaits countries all

around the globe that may cause global challenge in

social and economic development, especially

developing countries, which are expected to

experience larger percentage losses of gross domestic

product (GDP) than developed countries (OECD

2009; IPCC 2007). Besides, natural resources have

high economic value. High economic value is

obtained which caused by natural resources as the

main factor for human needs. Such factor could lead

to an injustice of resource distribution. A term known

as environmental justice is noteworthy and should be

addressed in this discussion, for which it refers to the

equitable distribution of environments among

peoples in terms of access to and use of specific

natural resources in defined geographical areas, and

the impacts of particular social practices and

environmental hazards on specific populations (as

defined on the basis of class, occupation, gender, age,

tribe, caste and ethnicity) (Rob White 2013). If the

said matter is put aside or at least not being a common

concern in business activities, what was put forward

by Garrett Hardin with the Tragedy of Common

which is a theory when natural resources are

increasingly limited in number but on the other hand

each individual has a rationality to incentive utilize

which then leads to decreasing availability of

resources and adversely affecting all circles or classes

might come into a realization (Ahmad Redi, 2017).

For the completion of the tragedy of common, the

emergence of property rights over natural resources

occurs. Distribution of ownership classification by

Neil Mayer among others:

1. Private Individual;

2. Public Individual;

3. Public Group;

4. Private Group.

Emily E. Harwell and Owen J. Lynch's Spectrum

of Property Rights schemes are divided into four:

1. State ownership;

2. Private control or ownership;

3. Individual mastery;

4. Mastery of community groups (Emily E.

Harwell and Owen J. Lynch, 2002).

The distribution of ownership mentioned above

affects the distribution of benefits of natural

resources. Natural resource exploitation must be

balanced that takes into account all natural resource

owners.

Among all kinds of natural resources that lay on

or beneath the surface of the earth, due to their

effortless utilization and solid trading power,

minerals and coals have an important role in meeting

the many needs of human life despite their non-

renewable nature. This is shown by and consumption

throughout the year of 2007 to 2016. Started at the

number of 258,190,629 barrel of oil equivalent (BOE)

for supply in the year 2007, Indonesia has managed

to maintain the number of supply between

250,000,000 to 290,000,000 BOE from 2007 to 2010

although there was sort of declining number of coal

supply in 2008 that reached 224,587,657 BOE. Then,

Implication of Bilateral Investment Treaties on Sustainable Development: Indonesia Mining

since the year of 2011 until the most recent data

collected of the year of 2016, Indonesia’s coal supply

has not reached the number below 300,000,000 BOE

and nearly made its way to the number of

400,000,000 BOE, approximately 380,310,000 BOE.

Surprisingly, in the range of 9 years, in spite of

following the increasing dynamics of coal supply,

Indonesia has managed keeping its consumption

below 150,000,000 BOE. Moreover, from 2013 to

2016, Indonesia has never reached the number above

71,000,000 BOE on coal consumption while its

supply was beyond 300,000,000 BOE (MoEMR

2017).

The description above shows that the presence of

the state as the manifestation of people’s sovereignty

is crucial to ensure the balance of the usage of natural

resources which is the right of the people of the state.

Therefore, management of natural resources must be

controlled by the states to provide added value for

their economy in order to achieve national prosperity

and prosperity of the people fairly. Mining business

activities have an important role in providing real

activities in the national economic growth and

sustainable regional development. In other words,

substantially minerals and coal are under the control

of the state. The concept of state control of natural

resources in Indonesia is regulated under Article 33

paragraph (2) and (3) of the 1945 Constitution of the

Republic of Indonesia in essence, referring to the

guidelines and legal basis in the management of

resources owned by Indonesia. Basically, the concept

of state control belongs to the ideology of socialism.

The term “controlled by the state” is included in the

explanation of the 1945 Constitution of the State of

the Republic of Indonesia namely "the important

branches of production and which control the life of

many, must be controlled by the state and used the

greatest prosperity of the people". The prosperity of

the people is part of socialism which is also

mentioned in the fifth of “Pancasila” (Indonesian

ground norms) which comprised in the preamble of

the 1945 Constitution of the Republic of Indonesia

that stated in translation:

“Social justice for all the people of Indonesia”.

The motive underlying the conception of the

Article 33 of the 1945 Constitution of the Republic of

Indonesia basically makes the natural resources in

Indonesia as national property which the people of

Indonesia have an exclusive rights over it.

As two kinds of natural resources, minerals and

coal were originally public property but changed at

the time of legal subjects. It metamorphs from public-

group becomes public-individual property. For

example, sand can initially be utilized freely by a

community and is not restricted by anyone and/or

required some expenses to utilize it. But in present

circumstance if it will be attempted by the party

(individuals or private) who wish to commercialize it,

whosoever must submit a request for permission to

the government as a representative of the state

(Ahmad Redi, 2017). The division of the above rights

in practice can be a boomerang weapon or even a

conflict. The conflict is intended to seize the right to

the minerals and coal between the existing

community and the companies that will cultivate the

minerals and coal.

Mining disputes involve almost all aspects,

among others; investment, forestry, industry, labor,

the environment and indigenous peoples. The forms

of mining disputes may include government disputes

with business entities, disputes between state

institutions, disputes between government and state

governments and disputes between business entities

and mining communities (Ahmad Redi, 2017).

In recent years, Indonesia continues to be one of

notable role-players in the global mining industry

with definite rise of mining production such as

copper, tin, gold, coal, and nikel. As early the

Government of Indonesia (GOI) started its

“liberalization” program by enacting its Investment

Law No. 1 (Abdul Khaliq and Ilan Noy 2007).

However, in green-field project there has been limited

investment in mining. In addition, natural resource

investment, including mining, tend to require high

capital costs up front for instance to build a mine, oil

pipeline or agro-processing facility for agriculture-

based enterprises (Lorenzo Cotula 2016). Likewise,

on 24 April 2014, the Government of Indonesia has

made the long awaited modifications on so-called

“The Negative List” effective under the Presidential

Regulation No. 39 of 2014 which did not provide any

real liberalization but a tightening of foreign

investment restrictions in some key sectors (KPMG

2015). The implementation of this regulation has had

an adverse effect on investment activities in Indonesia

especially in the mining sector. As survey conducted

by PwC, Indonesia decreased by 31% from US $ 7.4

billion in 2014 to US $ 5.2 billion in 2015 (Table 1)

based on data obtained from Ministry of Energy and

Mineral Resources Republic of Indonesia shown in

Table 2 (PwC 2017).

ACIR 2018 - Airlangga Conference on International Relations

Table 1: PwC Survey on Indonesia’s Mining Investment

Survey

Results

2015

US$ milli

ons

2014

US$ milli

ons

Year-on-year

movement

Greenfields

exploration

spending

29 36 -20%

Other

exploration

and feasibility

58 75 -22%

Total

exploration

87 110 -22%

Development 126 198 -36%

Fixed assets 1.701 2.109 -19%

Total

investment

1.913 2.418 -21%

Table 2: Ministry of Energy and Mineral Resources Data

Government

Data

2015

US$

millions

2014

US$

millions

Year-on-year

movement

Total

investment

5,152 7,430 -31%

(source: Ministry of Energy and Mineral Resources)

In spite of the declining growth of mining

investment in Indonesia in 2014-2015, international

surveys on mining companies continues to rank

Indonesia highly in terms of mining prospectivity, but

poorly in terms of its mineral policies and investment

climate (PwC 2017). The necessity of mining law

framework and regulatory to encourage new

investment by providing the investors the certainty

needed to commit the investment activities in

Indonesia and also reinforce Indonesia position as the

main role in the mining sector. Beside PwC, OECD

as one of the leading international organization in

global economic development suggests that policy

reform is essential to make investment of a country

more attractive destinations for potential investors.

Improving the enabling environment for investment,

including in specific sectors such as infrastructure,

agriculture or clean energy and promoting

responsible investment and responsible business

conduct in home and host countries are two

significant roles of OECD in terms of encouraging

reform and promoting international good practice in

all parts of the world (OECD 2015).

Nevertheless, such policy reform is not something

that can be done overnight which the changes is

radical or fundamental and comprehensive for some

countries, it will take an adequately long period of

time to satisfy the potential investors with the

certainty they need. Yet there have been various

attempt to create a multilateral framework of

investment. Combined with the regulation of cross-

border trade, in 1994, WTO has produced several

agreements covering important aspects related to

investments in General Agreement on Tariffs and

Service (GATS) and Trade-Related Investment

Measures (TRIMs). Unfortunately, the arrangement

by the WTO is more focused on market access rather

than investment protection. As a consequence, the

issue is taken up by the OECD which has held several

international conferences related to the making of

multilateral agreements on investment. However, the

fact had shown that there were some countries,

developing countries in particular, to participate into

such agreements and in result is a network of over

2,750 bilateral and regional agreements, which

UNCTAD describes as “a universe in constant

expansion and change, formed by variable

constellations that are linked by overlapping

membership and complex interactions (IISD 2012).

BIT similar as contract or policy to countries

specifically between investors. To date, there are

divergence BITs template between one with another.

For instance, what is mentioned and set forth in the

2012 investment treaty model by the United States are

different with other countries. While the Indonesian

government is still compiling the model of the BIT.

Globally, it creates problem about legal certainty.

However, be found minimum standard of forming the

BIT which consists of:

1. Definition

2. Scope and Coverage

3. National Treatment

4. “Most-Favoured Nation” Treatment

5. Expropriation and Compensation

6. Investment and Environment

7. Consultation and Education

8. Arbitration

9. Dispute Settlement

Despite the divergence exists, the very basic

principles of free trade mechanism may apply to

investment law. Trade without discrimination is one

of these basic principles, guaranteed through the

operation of various clauses included in the

multilateral agreements on any trade means. The non-

discrimination principles embedded in the WTO

Agreement are first, “most-favored nation treatment”

which oblige the Contracting Parties of WTO

Implication of Bilateral Investment Treaties on Sustainable Development: Indonesia Mining

Agreement to grant to the products of other

contracting parties treatment no less favorable than

that accorded to products of any other country;

second, “national treatment” condemns

discrimination between foreign and national goods or

services and service suppliers or between foreign and

national holders of intellectual property rights; and

third, “transparency principles” are set out in the

WTO Agreement and its Annexes, with the objective

of guaranteeing the fullest transparency possible in

the trade policies of its Members in goods, services

and the protection of intellectual property rights (Eun

Sup Lee 2012).

A discussion on the doctrine of sustainable

development which derives from a discipline in

economics has been evolving since early 1800s

initiated by the work of English political economist

Thomas Malthus. Since the days of Malthus,

economists tend to neglect the dilemma of resources

depletion and only focus on the efficiency usage of

resources because they have been reluctant in

developing economic models that adequately account

the rareness of resources and pollution. Moreover, it

was only rarely that the economists worried that some

resources may be in short supply and these resources

may become exhausted and constrain the very growth

for which they are developed if they are used

indiscriminately (A. D. Basiago 1999). Sustainable

development refers to the development that meets the

needs of the present without compromising the ability

of future generations to meet their own needs (WCED

1987). With the definition on sustainable

development given, mankind are demanded to be able

to account or even predict the state of nature in the

future while increasing their economic growth.

Hence, a question arises whether sustainable

development can be in line with economic growth. To

answer that, it should be noted that the principle of

sustainable development is essentially a balance

between economic, equity, ecology which can be

ensured by renewing the global economic models.

Van der Heijden suggests to fulfil the need of new

global economic models by applying so called the

“green incentives” i.e. greening the tax system;

removing environmentally harmful subsidies, such as

subsidies for fossil fuels; making pollution more

costly by pricing externalities; valuing natural assets

and ecosystem services; encouraging green

innovation and devising effective regulations

(Rosalien Diepeveen and Yulia Levashova and

Tineke Lambooy 2014).

Although Heijden has given some options

regarding reformation of the economic models, the

issue of sustainable development can not only be

solved by just using one way and in a short period of

time. It requires structural economic change and can

only be brought about by investment, and in those

countries with low levels of domestic savings that

investment must come from abroad. One of many

steps commonly taken by governments in the pursuit

of investment is to carry out cross-border cooperation

is, traditionally done by concluding agreements such

as BITs or IIAs (IISD 2004). Indonesia has reformed

its mining law sufficiently comprehensive. In respect

of natural resources sustainability, Indonesia’s

Regulation of the Government of Substitutes of the

Law No. 37 of 1960 and Law No. 11 of 1967 have

never alluded to the term “sustainable”. It is

illustrated by the underlying considerations of the

drafting of the regulation which at that time, the main

of concerns is to accelerate the national economic

growth alone regardless the sustainability of the

natural resources required for it. 40 years later, the

characteristics of regulations of Indonesian

Government began to indicate a significant change in

which one of them is Law No. 4 of 2009. The main

objective of the management of mineral and coal

business activities as stated in Law No. 4 of 2009 on

Mineral and Coal Mining as follows:

1. Ensure the benefits of mineral mining and

coal in a sustainable and environmentally sound

manner;

2. Increase the income of local, regional and

state communities and create jobs for the greatest

prosperity of the people;

3. To ensure legal certainty in the conduct of

mining business activities;

The aforementioned objectives, containing

various elements of interest that is economic, social

and environmental. It has to do with the nature of

minerals and coal as a non-renewable natural

resource, the concept of sustainable development

seeks to collaborate on the concept of mining

management with economic, social and

environmental aspects.

Most Favored Nation (MFN) as international

business law principle can be inhibit to Indonesia’s

sustainability. The principle of MFN emphasize equal

treatment all members countries of WTO. With

difference quality and ability in one and another can

create barriers to developing and undeveloped

countries. Based on Regulation Of The President Of

The Republic Of Indonesia Number 44 of 2016

About List Of Closed Business Fields and Open

Business Fields With Requirements In The Field Of

Investment, Mining investment classified as Open

Business Fields. In the case of an individual foreign

legal entity engaging in investment in Indonesia, shall

ACIR 2018 - Airlangga Conference on International Relations

pay attention to the provisions of Article 112 of the

Mining Law. In accordance with the mandate of

Article 112 Paragraph (2) of the Mining Law, the

Government Regulation no. 23 of 2010 concerning

the Implementation of Mineral and Coal Mining

Business Activities. Implementation of mineral and

coal mining business activities is aimed at

implementing policies in prioritizing the use of

minerals and / or coal for the benefit of the country.

Thus, in the preparation of bit models, Indonesia

needs to

pay attention to domestic interests especially for

the implementation of sustainable mining business

that consider to the economic, social and

environmental aspects.

5 CONCLUSION

Emerging new trends of investment and environment

makes BIT become more “mature” than it used to.

Providing promising advantages and legal certainty

makes BIT as a mechanism for developing countries

to seek an equity in free market access and trade

regardless the power of their partner.

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