Exchange of letters terminating the Agreement between the Government of Australia and the Government of the Republic of Indonesia concerning the Promotion and Protection of Investments
This chapter examines the Exchange of letters terminating the Agreement between the Government of Australia and the Government of the Republic of Indonesia concerning the Promotion and Protection of Investments which was signed on 6 February 2020 in Jakarta and tabled in the Parliament on 14 May 2020.
During its examination of the Comprehensive Partnership Agreement between the Government of Australia and the Government of Indonesia (IA-CEPA) at the end of 2019, the Committee was made aware of concerns that investment provisions contained in the new IA-CEPA would overlap those in an existing bilateral investment agreement, the Agreement between the Government of Australia and the Government of the Republic of Indonesia concerning the Promotion and Protection of Investments (IPPA).
There were concerns that if the IA-CEPA entered into force without the IPPA being terminated there would be two sets of bilateral rules covering investment between Indonesia and Australia. In particularly, there were concerns regarding the overlapping Investor-State Dispute Settlement (ISDS) provisions in the two agreements. The Committee was advised that consideration should be given to terminating the existing IPPA in order to prevent future complications:
The existence of overlapping investment treaties complicates Australia’s compliance with these treaties and makes it harder to understand the nature and scope of Australia’s investment obligations and harder to predict the outcomes of an ISDS claim alleging breach of these obligations.
The Committee raised the issue with the Department of Foreign Affairs and Trade (DFAT) during that inquiry and were told that as the IPPA was a separate treaty action, it would be possible to negotiate the termination separately. DFAT assured the Committee at that time that the Australian Government recognised the benefits of terminating the IPPA. However, DFAT explained that a decision had to be made during the negotiations for the IA-CEPA whether to prolong the current negotiations to this end or conclude those negotiations and treat the termination of the IPPA separately.
The Committee acknowledged the uncertainty that could result from the two treaties remaining in force and noted that accepted practice had been to terminate existing older bilateral investment treaties when updated provisions came into effect. Accordingly, the Committee recommended that the Government pursue the termination of the IPPA.
This treaty action will implement that recommendation.
Reasons for Australia to take the proposed treaty action
The NIA indicates that since its implementation in 1993, the IPPA has provided protection for Australian investors through a framework of investment obligations, including an ISDS mechanism. However, DFAT explained that, when the IA-CEPA enters into force, the IPPA will become redundant:
Upon entry into force of IA-CEPA on 5 July 2020, it will no longer be necessary for the bilateral investment treaty [IPPA] to remain in force. This is because the IA-CEPA investment chapter contains a set of high-quality rules governing the treatment of investors and their investments, balanced with explicit safeguards reaffirming the right of both parties to regulate in the public interest. These detailed modern investment provisions will usefully update and replace the older style bilateral investment treaty in regulating bilateral investment between Australia and Indonesia.
Additionally, DFAT re-iterated that terminating the IPPA is in keeping with Australia’s approach to updating existing investment provisions:
… terminating the bilateral investment treaty is also in line with the work the government is undertaking on international investment treaty reform, both with respect to Australia’s investment obligations as well as work being progressed in multilateral forums.
During its inquiry into the IA-CEPA, the Committee expressed particular concern over the 15-year survival clause incorporated into the IPPA. This clause states:
In respect of investment made prior to the date of termination of this Agreement, the provisions of the Agreement shall continue to be effective for a further period of fifteen years from the date of termination of the Agreement.
If this clause were to remain in force after the IPPA was terminated, it could leave Australia open to an ISDS claim being brought for up to fifteen years after the IPPA was terminated. The Committee asked for confirmation that this Agreement will definitely terminate the clause as, by its nature, it was designed to remain operative once the IPPA ceased. DFAT assured the Committee that it would be effective:
Paragraph D of the exchange of letters provides that notwithstanding the 15-year survival clause contained in paragraphs 1 and 2 of Article 15 of the [IPPA], which concern entry into force, duration and termination, the provisions in the proposed agreement, that is this exchange of letters, will supersede the 15-year survival clause in the [IPPA] and therefore will be effective to terminate the [IPPA] itself.
The Committee inquired if there were any current disputes that have been submitted under the IPPA and were assured that DFAT was unaware of any such disputes.
Investor-State Dispute Settlement (ISDS)
IA-CEPA is expected to deliver both general investor protections and ISDS provisions. Submitters to previous trade agreement inquiries have raised concerns with the Committee regarding the possible risks posed to the Australian government by ISDS provisions, particularly in the area of public health policies. The Australian Fair Trade and Investment Network (AFTINET) restated those concerns and drew attention to the initiatives implemented by the Government to address the current COVID-19 pandemic, suggesting that the Government faces a heightened risk of claims from global corporations under ISDS provisions over these policies. DFAT assured the Committee that they foresaw no issues in this area:
… we are confident that the updated procedural safeguards and protections in IA-CEPA are broad enough to cover all issues of public health. That would include circumstances that have arisen more recently under COVID-19. Those include regulatory objectives, procedural safeguards in the agreement … and also the explicit safeguards in the ISDS mechanism, which exclude claims relating to public health measures. That means that public health measures cannot be challenged under ISDS.
During its inquiry into the IA-CEPA, the Committee noted that overlapping ISDS provisions in the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) to which both Australia and Indonesia are Parties, could further complicate these issues. DFAT acknowledged that while this avenue was still available to investors, they could not take advantage of the provisions in both agreements:
… if you wanted to take action under AANZFTA or under IA-CEPA you would in either case have to waive your right to take dispute settlement action under domestic law or under any other international dispute law. If you want to take an action under either of those agreements, you have to waive your right to take dispute settlement action under the other options available.
The Committee noted that the IA-CEPA is due to come into force on 5 July 2020, and inquired if the termination of the IPPA would automatically take effect on that date. DFAT explained that it would not take effect immediately as it is a separate treaty action and the domestic processes of both Australia and Indonesia must be completed first:
There are two requirements for entry into force of this agreement. One, the date of entry into force of IA-CEPA; and, because this is a separate treaty action, the date on which both of our respective domestic treaty-making processes have been finalised. It is our understanding that Indonesia has completed its own processes, although it has yet to notify us of that fact … so it’s both the date of termination of IA-CEPA and the date on which Australia and Indonesia notify that we have completed our respective treaty-making processes to terminate this agreement.
The Committee commends those negotiators involved in ensuring that this treaty action was finalised so promptly after the completion of the IA-CEPA.
The Committee acknowledges that its implementation will provide certainty and improve conditions for investors.
The Committee supports the termination of the IPPA and recommends that binding treaty action be taken.
The Committee supports the Exchange of letters terminating the Agreement between the Government of Australia and the Government of the Republic of Indonesia concerning the Promotion and Protection of Investments and recommends that binding treaty action be taken.