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Backlash Against Foreign Investment Regime: Indonesia’S Experience

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Backlash Against Foreign Investment Regime: Indonesia’S Experience Backlash against Foreign Investment Regime: Indonesia’s Experience Herliana A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy University of Washington 2017 Reading Committee: Dongsheng Zang, Chair John O. Haley Melissa Durkee Program Authorized to Offer Degree: School of Law ©Copyright 2017 Herliana ii University of Washington Abstract Backlash against Foreign Investment Regime: Indonesia’s Experience Herliana Chair of the Supervisory Committee: Professor Dongsheng Zang School of Law This study investigates Indonesia’s changing attitude from embracing to repudiating foreign direct investments. Opened its door for foreign investment in the late of 1960s and enjoyed significant economic growth as the result, the country suddenly changed its foreign investment policy in 2012 to be more protectionist towards domestic investors and skeptical towards foreign investors. The essential issues to be discussed in this research are: what motivates Indonesia to move away from global investment regime; what actions the country has taken as manifestation of resentment against the regime; and who are the actors behind such a backlash. This is a qualitative study which aims at gaining a deep understanding of a legal development of Indonesia’s foreign investment. It aims to provide explanation of the current phenomenon taking place in the country. Data were collected through interviews and documents. This research reveals that liberalization of foreign investment law has become the major cause of resentment towards the foreign investment. Liberalization which requires privatization and openness toward foreign capital has failed to deliver welfare to the Indonesian people. Instead, foreign investors have pushed local business players, especially small and medium enterprises, out of the market. This is not only disadvantageous for local iii industries but also in contrary to the economic principle stipulated in the Indonesian Constitution. Liberalization also carries the risk of regulatory chill due to the government’s fear of being sued before an international arbitration if such regulations inflict financial loss for investors. A key finding is the adverse impacts of ‘openness’ toward foreign investors were responded by civil society organizations and several individuals to file judicial review towards various Laws which give opportunity to foreign investors operating in strategic sectors such as electricity, oil and gas, and water resources. As a result, the Constitutional Court annulled the laws or provisions which give legal basis for foreign investor participation in the country. In addition, various measures are taken by the government to reduce the effects of liberalization including the enactment of protectionist policies, bilateral investment treaty moratorium, and drafting a model Bilateral Investment Treaty (BIT). Therefore, privileges and protections given to foreign investors are significantly reduced. From the examination of judicial review cases and interview, this research discovers that various civil society organizations and some prominent figures actively engage on the backlash by seeking judicial review on laws that give way for foreign investors’ operation in the country. By rendering decisions in favor of the plaintiffs and annulling the laws, the Constitutional Court itself can also be classified as an actor. On the other end of the spectrum, the Indonesian government also plays a crucial role in the shift through more subtle approaches. Its protectionist policy, BIT moratorium and the model BIT are powerful tools to cut down the privileges and protection enjoyed by foreign investors since the late of 1960s. A combination of factors between people’s power and government legal actions emerge as the most important driver for the current backlash against foreign investment in Indonesia. iv ACKNOWLEDGEMENTS I would like to express sincere appreciation to DIKTI-Fulbright scholarship for funding the most part of my study. In addition, I also thank the Indonesian Directorate of Higher Education, Gadjah Mada University, the United States-Indonesia Society (USINDO) and the American-Indonesian Cultural and Education Foundation (AICEF) for providing additional funding. My appreciation especially goes to Professor Dongsheng Zang who always believes in me and positions me as ‘the general’ of this long battle. Professor John Haley, Professor Melissa Durkee, and Professor Sarra Curran thank you for your knowledge, comments, and questions to sharpen this dissertation. I would also thank Dr. Hilary Soderland and Melissa Kane Ph.D. for their kind assistance during my study. My sincere gratitude goes to Professor Jonathan Eddy who opened the door for me to enter this outstanding Law School. My PhD journey started with the kindness of my mentors at the University of Gadjah Mada Faculty of Law: Professor Marsudi Triatmodjo, Professor Sigit Riyanto, Professor M. Hawin, and Professor Tata Wijayanta who tirelessly wrote me the letter of recommendation for school and scholarship applications. In addition, this academic adventure is also made possible by my colleagues: Dr. Sutanto, Retno Supartinah, Kunthoro Basuki, Hasrul Halili, Sandradini, and Laras Susanti who allow me study abroad and took over my jobs for 4,5 years without expecting anything in return. To them, I am forever indebted. I would also like to thank your help and friendship: Mbak Linda Yanti Sulistiawati Ph.D and Mas Ahmad Muswanto, Alfitri Ph.D and Rini, Yu Un Opposunggu Ph.D and Keya, Mbak Evi Sutrisno, Amira Paripurna, Wathcaracai, Luke, Mas Totok, Ninin, Putri, Iqbal, Dhila, and all friends in Seattle known as the residents of ‘Kelurahan Blakeley 2013-2017’ whose names are not mentioned here but very meaningful to me. My Ph.D journey might be unbearable without you around. Thank you also to Pusat Studi Hukum dan Kebijakan (PSHK) for giving me an opportunity to be a research fellow during my field research in Jakarta. Finally, my deepest gratitude goes to my families in Jogja and Klaten, thank you for the endless prayers and support. My husband, my daughter and my son, you make this dream comes true. Thank you. v DEDICATION To my father who passed away 46 days before my defense. For every step that I make in life, you are always there with me. vi TABLE OF CONTENTS Title Page…………………………………………………………………………………..i Copyright Page…………………………………………………………………………….ii Abstract……………………………………………………………………………………iii Acknowledgements………………………………………………………………………..v Dedications……………………………………………………………………………….vi Table of Contents………………………………………………………………………...vii List of Tables……………………………………………………………………………...xi List of Abbreviations……………………………………………………………………..xii Chapter I Introduction………………………………………………………………..….1 A. Background of the Indonesian Foreign Investment Regime……………………….5 B. Significance of Research………………………………………………………….12 C. Research Question………………………………………………………………...14 D. Literature Review…………………………………………………………………15 E. Methodology………………………………………………………………………26 F. Road Map………………………………………………………………………….28 Chapter II Indonesian Foreign Investment Legal Landscape………………………...31 A. Pre-Independence Era………………………………………………………………...32 1. The Vereenigde Oost-Indische Compagnie (VOC)……………………………….32 2. The Dutch Colonialization………………………………………………………...33 B. Post-Independent……………………………………………………………………..38 1. The Old Order……………………………………………………………………..38 a. National Economy…………………………………………………………………38 b. Indonesianization……………………………………………………………….....42 c. The FDI policy making: Ambivalence……………………………………………..44 d. Theory in Context………………………………………………………………….48 vii 2. The New Order…………………………………………………………………….51 a. The Group of Policy Experts………………………………………………………51 b. The New Investment Regime……………………………………………………….58 c. The Economic Fall…………………………………………………………………70 d. The International Monetary Fund Assistance……………………………………...72 3. Reform and Post-Reform Era………………………………………………………74 a. A Divided Economic Team…………………………………………………………75 b. The Succeeding Government……………………………………………………….77 c. Interface between Domestic Law and International Commitment………………...82 C. Conclusion……………………………………………………………………………...94 Chapter III Liberalization of Foreign Investment and Arbitration………………….96 A. Liberalization of Foreign Investment in Indonesia………………………………100 1. Privatization………………………………………………………………………105 2. Bilateral Investment Treaty………………………………………………………118 a. Indonesia BIT Program…………………………………………………………..120 b. Features of Liberal Investment Regime…………………………………………..128 1. Expropriation……………………………………………………………………...130 2. Repatriation of Funds……………………………………………………………..132 3. Free movement of personnel………………………………………………………133 4. Investor-State Dispute Resolution………………………………………………...134 c. Criticisms on Indonesia’s Liberalization………………………………………….138 B. Arbitration…………………………………………………………………………139 1. Theoretical Debate………………………………………………………………..141 2. Arbitration under the ICSID………………………………………………………143 3. Indonesia and the ICSID Arbitration……………………………………………...146 a. Cases………………………………………………………………………………146 viii b. Indonesia’s Concerns on Investor-State Arbitration………………………………155 C. Conclusion…………………………………………………………………………167 Chapter IV Forms of Backlash: Protectionist Policies, Constitutional Court Judicial Review, Bilateral Investment Treaty Review and Limited Arbitration………………169 A. Increase Protectionist Policies……………………………………………………..173 1. Nationalism as the Driving Factor…………………………………………………173 2. Areas of Protectionist Policy……………………………………………………….176 B. Constitutional Court Cases…………………………………………………………179
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