Expropriation and Compensation

Article 21 of the 1967 Foreign Capital Investment Law stipulates that the government shall not initiate nationalization of foreign investments except by law and when such action is necessary in the interest of the state. The new 2007 investment law, which replaces both foreign and domestic investment laws, in broad terms opens up a major part of the economy with the guarantee that the government will not enforce nationalization. Foreign firms will be protected against nationalization by the government, except where corporate crime is involved.

According to BKPM, Indonesia respects a company’s right to compensation if expropriated; however, the government has not expropriated any foreign investment since the passage of the 1967 law. In 1999, however, the Overseas Private Investment Corporation (OPIC) paid a claim by a U.S. investor after the government failed to honor an arbitration award. Indonesia subsequently agreed to repay OPIC. The government also paid $15 million compensation to the Multilateral Investment Guarantee Agency (MIGA) for its insurance payment to a power project.

The requirement of gradual divestment has been mitigated. Investment assurances such as the right to appoint foreign management and the prohibition to effect nationalization without indemnification (now against market value) have been retained. The same goes for repatriation rights. However, repatriation may now be suspended by a court for as long as the investor has not fulfilled its responsibilities under the Law.

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