Still room for improvement despite progress

Environmental destruction on concession areas of Indonesia's largest palm oil company in Kapuas Hulu in the province of West Kalimantan on the island of Borneo.
Article as analysis
At first glance, the new Investment Protection Agreement between Switzerland and Indonesia paves the way for regulations in the public interest. It does however contain provisions that could thwart this prospect.

Like a handful of other countries, Indonesia too has abrogated almost all its Investment Protection Agreements (IPAs) – including the one with Switzerland, in 2016. This came as the State found itself facing arbitration proceedings running into the millions. In the renegotiations, however, Jakarta is meeting resistance from industrialised countries, even though its new model investment protection agreement does not include some of the usual new features.

The Swiss Confederation also negotiated a new agreement with Indonesia, and the consultation procedure was initiated in the summer of 2022. "The new investment protection agreement between Switzerland and Indonesia contains key improvements and incorporates approaches that have recently proved their worth. Compared to the previous agreement, it undoubtedly represents progress, yet in certain respects, one may have expected more from an agreement concluded in 2022", says Suzy Nikièma, Sustainable Investment Lead at the International Institute for Sustainable Development (IISD), an international think-tank that provides technical support and possibilities for cooperation, conducts research and formulates sustainable investment solutions.

Agreement failing to promote sustainable development

Today there is broad consensus that these investment protection agreements are problematic. But what is to be done? According to Suzy Nikièma, "They were drawn up in the context of decolonisation and the Cold War to protect the rights of investors operating abroad, at a time when sustainable development was not a central concern. It is therefore vital to reconsider the role, the added value and the content of these crucial instruments in the light of present-day challenges and goals".

As Josef Ostřanský, Investment Law and Policy Adviser at the IISD also notes, the concept of investment is interpreted very broadly in the agreement with Switzerland; besides, no distinction is made between polluting, carbon-intensive and low-emission investments. That is the principal flaw in this agreement. It provides no scope for classifying foreign companies: the upshot is that the agreement also protects a Swiss mining company that is polluting the environment in Indonesia. Although this distinction has so far not found its way into any agreement, Switzerland could have taken this opportunity to set a good example.

More clear-cut definition of "investor", but with very few obligations

The more precise definition of the concept of "investor" does nonetheless help to preclude treaty shopping, in other words taking recourse to a more advantageous agreement that has been concluded by another country. The term “investor” describes any natural person who is a citizen of one of the contracting parties, and also any legal person that is engaged in substantial economic activity in the country, is registered there, and maintains an office there. These investors are subject to only very few obligations, however. Only two of the agreement’s 44 articles address corporate social responsibility and the fight against corruption – and this only in the form of non-binding warnings. There is no provision either for an enforcement mechanism or for legal consequences in the event of breaches.

Efforts were made to implement the principle of fair and equal treatment, the most-favoured-nation clause and the right to regulate. All of this could nonetheless be thwarted by one dubious article (37). It states that investors may invoke the more advantageous of the legal systems in force between the parties. That is one of the most problematic provisions of the IPA.

Compulsory licensing lawsuits excluded from the scope of expropriation

On the other hand, Alliance Sud welcomes the provision in Appendix A of the IPA whereby the enactment of regulations in the public interest, such as protecting public health, security and the environment, do not represent indirect expropriation and may not result in any financial compensation. Yet the effectiveness of the Appendix could be undermined by the following additional provision: "exceptions to this are the rare cases in which the effects of an action or a series of actions are so severe, considering their purpose, that they seem patently disproportionate."

Contrastingly, article 7(6) is to be welcomed, as it stipulates that indirect expropriation does not apply to the granting of compulsory licences, if such granting is done in accordance with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

Alliance Sud has repeatedly criticised the pressure being exerted by Switzerland on Colombia to refrain from issuance a compulsory licence for Glivec (an anti-cancer drug produced by Novartis), as well as the threat by Novartis to bring an action against Colombia based on the IPA between the two countries. The new article should rule out such actions.

Investor-State Dispute Settlement retained

Lastly, one of the principal problems with the new agreement is that it still provides for Investor-State Dispute Settlement (ISDS) through arbitration. There is also no requirement to have recourse to national courts, let alone exhaust domestic legal remedies beforehand. No provision is made for third-party involvement in the litigation, that of an amicus curiae, for example. The possibility of mediation is indeed contemplated, but remains optional.

Against this backdrop, Alliance Sud and International Trade Law and Policy Specialist Rambod Behboodi have jointly formulated a proposal to strengthen and promote conciliation and mediation during trade and investment disputes. Conceived chiefly with the WTO in mind, the proposal contains structural and institutional elements that can be transposed to investment protection agreements with a few adjustments.

It is entirely possible for such an agreement to dispense with the ISDS mechanism altogether. Abas Kinda, International Law Advisor to the IISD, notes that "Brazil's new model agreement places the emphasis on prevention, mediation and dispute settlement between States – without the ISDS."