Governance mechanisms matter

To advance appropriate governance of investment matters, Indonesia has introduced procedures of inter-ministerial coordination and stakeholder consultations into the process of rule-making on investment. This study suggests that these procedures have been put in place and are being used, but their degree of effectiveness and impact has been questioned, and there is a necessity to review and improve these procedures. Despite existing controversies over the process, the involvement of a variety of stakeholders on issues of investment law is probably an important and useful activity as part of the rule-making process, especially as it might help identify – at an early stage of the rule-making process – potential areas where new measures that are not in line with Indonesia’s international commitments could potentially trigger the emergence of ISDS cases.

Processes of rule-making that involve the participation of affected institutions and stakeholders are not new to the field of policy-making. Quite similar is the practice of “regulatory negotiation” or “negotiated rule-making” applied in administrative procedures in the United States. The concept emerged in the United States during the 1980s and was endorsed by the US Congress in 1990.²²⁰ It formed part of the alternative dispute-resolution movement, suggesting that prior negotiations of regulations that are acceptable to all would prevent disputes and court proceedings at later stages. The procedure

220 See USDA, “What is negotiated rulemaking”; online: http://www.ams.usda.gov/

AMSv1.0/getfile?dDocName=STELPRDC5089434 (accessed 17 Nov. 2013). See also:

Negotiated Rulemaking Act of 1990, 104 Stat. 4970 (1990) (codified as amended at 5 U.S.C. §§ 561–570 (2000)) (Funck 2009).

of negotiated rule-making is not without controversy and has both proponents and opponents in governmental and academic circles in the United States (Funck 2009). We do not engage in the debate about the advantages and disadvantages of this approach (see, e.g., Harter 2001; Coglianese 2001), due to limitations of space, and refer this debate and the discussion on whether this approach is functional in the specific case of Indonesian investment law and policy to future research projects. We do, however, believe that this process is valuable, at least to a certain degree, in managing the interaction between international and national laws and regulations on investment, and in identifying policy space. UNCTAD has also suggested that dispute-prevention policies, such as information-sharing, establishing a lead agency, state-state cooperation in dispute prevention etc., have some potential in reducing the likelihood of ISDS cases (UNCTAD 2010), without allocating explicit attention to the role of negotiated rule-making.

One of the main findings of this study is thus that there is not only international negotiation of investment rules, but also national bargaining of such rules, and both processes interact. The structure of international rules governing investment is largely a result of negotiation among treaty parties and has been widely discussed in the literature on IIAs and investment law.

The assumption has often been that other government ministries only need to be informed or made aware of what the agency negotiating investment treaties is doing, attached with a warning about the potential implications that measures enacted by other agencies may have – with international arbitration as the worst-case scenario. But this study has illustrated that, in reality, domestic bargaining among ministries is actually a common feature in the development of domestic investment law – at least in the case of Indonesia – and potentially, domestic bargaining may even occur with stakeholders outside of the government. In other words, international bargaining of investment rules – that is, the negotiation of IIAs – and national bargaining of such rules are happening in parallel, but within very different contexts and in pursuit of different sets of objectives. Not only are there inconsistencies in formal regulations and rules on investment between the international level and the national level, but there are considerable levels of inconsistency between international bargaining (focused on the negotiation of IIAs) and national bargaining (focused on the development of domestic investment-specific laws).

We illustrate this in what we call the “bargaining triad”, which consists of negotiations at the inter-governmental level, inter-ministerial level coordination

and stakeholder consultations, as shown in Figure 6. Bargaining at the inter-governmental level consists of the familiar negotiations of IIAs, in this case involving Indonesia and its treaty partners. Although countries can have an influence on the development of national laws in other countries, their focus is on the conclusion of IIAs through inter-governmental negotiations. Inter-ministerial coordination and bargaining focus on the development of national laws, although ministries can have a considerable impact on international negotiations as well. Finally, consultations with stakeholders can involve national and foreign interests, which may seek to influence international and national laws and policies through the bargaining process.

Figure 6: The bargaining triad

Source: Authors

All members of the triad seek to influence the development of investment-specific national laws, which, in Indonesia’s case, is akin to its interlocking law. Foreign governments have a larger influence on IIAs than on domestic investment laws, whereas national ministries have the strongest influence on their respective investment-related laws, with diminishing impact on the development of the interlocking law or the negotiation of IIAs. The impact of non-governmental stakeholders depends on their precise roles and nationalities.

This power structure has to be managed by the national government in the process of managing the interaction between international and national

investment law and policy. A specified agency, such as the BKPM, can be made responsible for negotiating between these different sets of interests.²²¹