Balancing Investment Protection and Regulatory Chill: How Indonesian Investment Agreements Impact the Regulation and Enforcement of Mining Licenses

Abstract

Investment agreements continues to be welcomed by host states for the investment it attracts, but a growing body of work supports the idea that investment agreements may also restrict host states from enacting specific public regulations for fear of capital flight, reputational damage and costs involved within ISDS proceedings, an effect known as Regulatory Chill. Previous works on Regulatory Chill in Indonesia’s mining industry have analyzed the partial rollback of a ban on open pit mining in protected forests as a response to the affected investors’ threat for the commencement of the arbitration. Following the change of Indonesia’s mining system from contracts of works to licenses, 3 new investor-state disputes involving mining licenses have been raised to ISDS. This article sets out two main objectives: (i) to establish the existence of the Regulatory Chill effect in connection with Indonesia’s mining sector and (ii) to examine potential solutions through amendments to Indonesia’s investment agreement. This article has found one instance of the Regulatory Chill effect in the form of policy response from the case of Nusa Tenggara v. Indonesia. However, it failed to find enough evidence of an internalization chill. In regards to Indonesia’s investment agreements, this article recommends maintaining the host state’s regulatory space by amending investment agreements to include exclusions to sensitive regulatory areas, greater elaboration of FET and Expropriation clauses, as well as the elimination of MFN clauses, and to a lesser extent, the use of exception and incorporation of international environmental obligations.

Keywords: ISDS, Regulatory Chill, BIT, Mining License, Indonesia

DOI: 10.7176/JLPG/139-06

Publication date: January 31^st 2024