4 What can be learnt from the Indonesian experience?
4.4 Enhancing policy space
International commitments have been shown to limit policy space, but despite these limitations, there is still substantial scope for the state to manoeuvre and make use of its right to regulate. Most interestingly, it appears that IIAs concluded in line with the protection model of investment treaties may limit the amount of policy space more significantly than those concluded in line with the liberalisation model. Despite offering treaty coverage at the pre-establishment phase of an investment, IIAs drafted on the basis of the liberalisation model have a large variety of clarifications and limitations built into the treaty that potentially enhance the regulatory flexibility of the governments concluding the treaty. In line with this, an interesting finding of this study is that the newer, more elaborate IIAs with pre-establishment provisions are not necessarily the ones that result in the initiation of investment disputes. Indonesia’s experience shows that very old BITs negotiated on the basis of the protection model are being used to file a claim in international investment arbitration. This may be because – despite larger commitments on issues such as liberalisation and market access being made in newer agreements – these treaties also include more elaborate language with the purpose of hedging against risks and creating more regulatory flexibility.
The actual utilisation of policy space, however, occurs within the realm of domestic investment-specific or -related laws and regulations, and especially the relevant implementing measures. Policy space becomes a reality not through the mere existence of laws and regulations that seek to make use of available policy space, but through the ability to implement and enforce them in a strategic way. In other words, policy space is indeed present when laws are not only drafted but actually implemented and enforced.
An examination of how development considerations are featured in domestic investment law illuminates the discrepancies between the rules and laws in existence and actual implementation and enforcement in light of the
221 Conceptually, the bargaining triad separates inter-ministerial coordination from the government entities making the ultimate decisions on investment law and policy, although this distinction is not that explicit in practice.
interaction between international and national laws. This study has found that many development considerations are featured much more strongly in domestic law, illuminating the desire of the Indonesian government, but that they are practically absent from Indonesia’s IIAs. Table 10 provides examples of such development-oriented aspects that are emphasised much more in national law compared to IIAs. They appear to resemble an attempt by the Indonesian government to legislate investment matters in favour of economic development. But the dilemma may be that international commitments restrict the implementation and enforcement of these measures in practice, especially where the national law is more restrictive than the international commitments made, as in the cases of definitions, personnel and manpower,
Table 10: Examples of discrepancies between IIAs and national laws
IIAs National law Nature of discrepancy
Broad definition of
and investor obligations. Policy space is broader with regard to facilitating measures, such as in the area of investment promotion, which Indonesia is also implementing more actively. Therefore, one possible conclusion may be that the utilisation of policy space should focus more on facilitating measures than on restricting measures, in particular as the former are likely to be much less contentious, and hence less risky for the government.
The risk of getting involved in ISDS cases depends in part on the degree to which laws in areas where discrepancies exist are actually enforced in practice. In particular, with respect to some of the development-oriented provisions in Law No. 25/2007, enforcement and implementation of regulations may actually be lacking, indicating a lack of policy space. In other words, the consequences of a law are not only dependent on the nature of the formal laws and legal texts – what is also important is the extent to which these laws and regulations are actually implemented in practice. It is possible to have many laws and a solid legal framework, but unpredictable levels of enforcement and implementation. This study suggested earlier that investors are likely to focus more on national laws and their enforcement rather than on international commitments. Therefore, a transparent and consistent approach to national legislation, together with appropriate implementation and enforcement of such rules, may be as important as the issue of consistency with international commitments. If the policy space is not there, both the laws and the implementing regulations should reflect this.
Similarly, disputes are unlikely to emerge directly on the basis of the interlocking law. This is because the law in itself has no significant effect on investors and their investments, as long as it is not followed up with relevant implementing regulations. It is likely that those implementing regulations – found in column 4 from left in Table 6 and in section 3.5 of this study – are the measures that could lead to an investment dispute.
Given this danger that implementing regulations might trigger investor-state disputes, and in view of the already existing disputes, governments may be deterred from legislating in the first place or from implementing already existing laws, resulting in a “regulatory chill” effect that could go against the achievement of public policy objectives. It might be possible to avoid such an effect by using available policy space and the right to regulate with caution and foresight. In developing the appropriate implementing regulations, the state can draw on inter-ministerial coordination and stakeholder consultations to better determine how far it can go with any new measures. This will allow
the state to adapt new measures as optimally as possible to its development needs, whilst taking potential consequences into account, such as the emergence of investor-state disputes. Through a process of “negotiated rule-making”, governments can achieve greater certainty about the kinds of measures that still lie within the available policy space. Caucusing viewpoints among government ministries and domestic as well as foreign stakeholders – including the investors themselves or their associations – could help in avoiding inappropriate measures from being developed that might require readjustments at a later stage, or even lead to investor-state disputes.
Communication is key in this context, which includes communicating and explaining clearly the purpose and content of anticipated new measures prior to their enactment, and openly involving government agencies and other interested stakeholders alike in the development of the measures.
The communicated objective of a measure should be in line with the public interest, such as addressing a development objective of the state. Appropriate reasoning, including plausible economic logic, should be behind a measure, and stakeholders should be allowed to contest measures where this is in doubt.
Governments should make sure that measures are implemented after they have been fully developed, and the consequences and feasibility sufficiently examined, in order to avoid any backtracking or amendments. In other words, it is better to develop measures with due care and allowing substantial amounts of time than to backtrack on a hastily enacted measure. Finally, it is important to emphasise that governments should have the final say about a measure, and not become pressured by the stakeholders (or agencies) consulted. In the end, the government must remain the ultimate decision-maker.