News / 11 oktober 2019

Rights for people, rules for corporations: the case of Indonesia

In Indonesia, US-based mining companies succeeded to roll back new laws that were meant to boost the country’s economic development and protect its forests.  This is the level of impact that investment treaties can have on social, environmental and economic development and rights. Why? Because of the ‘Investor-to-State Dispute Settlement’ (ISDS) clauses that are included in many such treaties.

For many developing countries, natural resources are an important asset to increase their fiscal revenue and income, and to reduce poverty. The extraction and processing of raw materials creates domestic jobs and the livelihoods of many poor people depend on these activities. However, to ensure that natural resources will contribute to a country's economic development, relevant policies need to be in place. First, such policies should guarantee that the governments of resource-rich countries obtain a 'fair share' of the revenue of natural resource exploitation, instead of all profits flowing abroad with the mining companies. Secondly, governments face the task of implementing a strategic industrial plan that can help to escape the 'dependency curse', which often goes together with the extraction and export of unprocessed raw materials.

In Indonesia, as in many other countries, investment treaties with ISDS have been used by foreign companies as a powerful tool to prevent exactly these two government responsibilities. ISDS has proven to be a powerful tool to challenge and stop laws that protect the environment and to prevent host countries from sharing in the profits of the extractive industries.

In 1999, the Indonesian government passed a new Forestry Law (4/1999). While the old law from 1967 had focused mainly on timber management, this new law for the first time included policies aimed at forest conservation. Importantly, in response to the devastating environmental impacts of mining activities, the new law forbade open-pit mining in protected forest areas. International mining companies that were already operating in these protected areas immediately inundated the government of Indonesia with legal threats and substantive compensation claims. The government's response was to relax the law, allowing mining companies that had been granted contracts prior to 1999 to continue their open-pit operations in protected forest areas.

Indonesian government hoped to create jobs for own people

Ten years later, a similar situation occurred. The government passed the Mineral and Coal Mining Law (4/2009), aimed at reducing the country's dependency on exports of raw materials and instead encouraging the development of a national processing industry for natural resources. The new law ordered all holders of mining permits to build mineral refinery plants within 5 years. By obliging mining companies to refine and process minerals inside the country prior to export, the government hoped to increase Indonesia's income from extractive industries and to create jobs for the Indonesian workforce.

In December 2013, a more detailed rule for mineral processing prior to export was issued. The Minister of Finance estimated that this would increase state revenues from US$4.9 billion to US$9 billion in just two years. However, only one month later, the Indonesian government already issued two law amendments that watered down the obligations for mining companies. The minimum threshold of mineral concentration for export was decreased (e.g. in the case of iron ore from 90% to 58%) and the obligation to build mineral processing capacities was postponed.

Foreign mining companies threatening to sue Indonesia

These amendments were issued following intense lobbying by two mining companies: Free-port Indonesia and Newmont Mining Corporation*. The first operates in Indonesia's east-ernmost province Papua and is a subsidiary of the US-based Freeport-McMoRan Inc. The second produces approximately 300,000 tonnes of copper concentrate annually in Indonesia. However, for these international heavy-weights, the amendments were not good enough.

In 2014, Newmont filed a case against Indonesia at the International Centre for the Settlement of Investment Disputes. Newmont claimed that the government's plans violated the BIT between Indonesia and the Netherlands. The Netherlands came into the picture because Newmont had set up a so-called 'letterbox company' in the country, which enabled the company to use ISDS against countries with which the Netherlands have a BIT. Dutch BITs have a reputation for being among the most investor-friendly treaties in the world and are therefore often abused by foreign companies and rich individuals who own such letterbox companies.

On 25 August 2014, Newmont withdrew its case but only after it had reached an agreement with the Indonesian government that gave the company special exemptions from the 2009 mining law. Although the terms of the agreement were not disclosed, it has been reported that the export tax that Newmont is required to pay was decreased from 25% to 7.5% . In 2017, instead of sticking to the intention of the 2009 law to ban all export of raw and only partly processed minerals, the Indonesian government issued a regulation that up to today allows the export of partly processed minerals – all to the benefit of the mining giants.

*In 2016, Newmont was acquired by the Indonesian oil and gas company PT Medco Energi Internasional.

This case was highlighted as part of the 

'Rights for People, Rules for Corporations – Stop ISDS' campaign week of 14-18 October 2019

Background on the 'Rights for People, Rules for Corporations - Stop ISDS' campaign

More information:

Indonesia for Global Justice (IGJ) published the following report in collaboration with Transnational Institute, Both ENDS en SOMO in Octber 2019:

Also see the case of Paraguay

Read more about this subject