Revealed: Australian miner used arbitration threat to upend Indonesian environmental law

A BuzzFeed News investigation has shined new light on the extent to which a secretive international legal system has enabled global mining companies to muscle their way into Indonesia’s last remaining rainforests.

A former Newcrest Mining executive told BuzzFeed News he had threatened to use the system, known as investor-state dispute settlement (ISDS), to sue Indonesia over a 1999 environmental law banning open-pit mining in protected forests. Prior to the legislation’s passage, the Australian company had won the right to explore for gold on a heavily forested island in the Malukus, an east Indonesian archipelago. But Newcrest had obtained the license during the 32-year rule of strongman President Suharto, who was finally driven from power in 1998.

Newcrest was one of 13 miners to be granted an exemption from the prohibition, in 2004, allowing them to open vast pits in some of the Southeast Asian country’s most pristine ecosystems. Soetisna Prawira, the mining ministry’s chief lawyer at the time, told Buzzfeed News that the threat of “arbitration is the only reason” the government caved in to the companies’ demands.

ISDS is an instrument of international law that empowers foreign companies to sue host states in secretive arbitral tribunals presided over by corporate lawyers. The system is written into thousands of trade and investment treaties, including the Trans-Pacific Partnership now being pushed by the administration of U.S. President Barack Obama.

Introduced in the years following World War II, ISDS was originally intended as a means to protect foreign companies from having their assets seized by a rogue regime or from being discriminated against in favor of a domestic firm. “But over the last two decades,” BuzzFeed News reporter Chris Hamby wrote in the four-part series, “ISDS has morphed from a rarely used last resort, designed for egregious cases of state theft or blatant discrimination, into a powerful tool that corporations brandish ever more frequently, often against broad public policies that they claim crimp profits.”

Had Newcrest sued Indonesia over the 1999 Forestry Law, it likely would have sought hundreds of millions of dollars from the newly democratized country. Former Indonesian environment minister M.S. Kaban told BuzzFeed News that other companies had made similar threats, which influenced the government’s decision making. Officials had done the math and calculated that if other miners also sued, the state stood to lose up to $22.7 billion, about half of its entire 2003 budget.

Indonesia had already lost a case against a U.S.-owned geothermal company, Karaha Bodas, whose project in the archipelagic country was put on hold following the 1997 Asian financial crisis. An arbitral tribunal awarded the firm $261 million, mainly over the loss of potential future profits.

“Because of this bitter experience, we tend to find solutions,” Kaban told Buzzfeed News.

One of the BuzzFeed News articles portrays a debate in the Indonesian parliament over whether to sign off on the presidential decree that exempted the 13 miners from the 1999 Forestry Law. Hamby writes:

Environmental groups, scientists, and academics urged legislators not to approve the decree, warning that open-pit mining in protected forests not only would destroy a precious resource but would also contaminate people’s water and expose them to landslides and floods. One politician implored his colleagues to stand firm, saying, “We do not need to be haunted by arbitration.”

But, in meetings and hearings, legislators fretted over the possibility that the nation would lose another financially devastating case.

During a hearing, the forestry minister called international arbitration a “real threat” that “compelled” Indonesia to grant the mining companies’ wishes. Then another minister invoked the Karaha Bodas debacle and said that if Indonesia did not satisfy their demands, the country would “face a similar situation.”

Newcrest’s Syahrir and officials from four other mining companies spoke at the hearings, and one warned lawmakers that if they didn’t sign off on the decree, they should “prepare for a depleted state budget.”

On July 15, 2004, parliament gave Newcrest and the other mining companies what they wanted, voting to approve the decree and allow the companies to carve up protected forests.

BuzzFeed News quotes corporate lawyer and frequent ISDS arbitrator Jan Paulsson as arguing in favor of ISDS on the grounds that a deal’s a deal, even if it was made with a military dictator like Indonesia’s Suharto, whom Forbes magazine recently named the “world’s all-time most corrupt leader”:

“The people already have suffered from having had the authoritarian regime,” said Paulsson, the ISDS lawyer and arbitrator. The effects of whatever contracts that regime handed out “will be one more thing that they suffer as a result of it. The people who were killed by that dictator remain dead. The poor deals that were made under his offices are there. They have created debts. So let’s not pretend that they’re not debts because, if we do, we do that at the cost of destroying commercial certainty.”

The Newcrest case was recently featured in the Indonesian National Human Rights Commission’s (Komnas HAM) national inquiry into land conflicts affecting indigenous peoples. The Newcrest subsidiary in question, PT Nusa Halmahera Minerals, is alleged to have encroached on lands held sacred by the indigenous Pagu people.

Newcrest has operated in Chile, Ivory Coast and Papua New Guinea as well as in Indonesia and Australia. The Melbourne-headquartered firm is listed on the Australian Stock Exchange.

Indonesia has recently canceled more than 20 investment treaties featuring ISDS. South Africa and some South American countries are making similar efforts.