The Washington DC-based International Centre for Settlement of Investment Disputes (ICSID) has rejected the Indonesian government's argument that the body has no jurisdiction to hear a claim by a British firm, Churchill Mining, which says that its licences to mine coal in East Kalimantan were unfairly revoked by the local administration.

Following ICSID's latest ruling, the case now proceeds to an arbitration panel within ICSID, at which Churchill and its Australian subsidiary, Planet Mining, will seek US$1bn in damages. The lawsuit stems from a decision by a local district head to reallocate four mining licences that were held by Churchill's 75%-owned subsidiary, Ridlatama, to their previous owner, Nusantara Group, which is controlled by a presidential hopeful and businessman, Prabowo Subianto. Nusantara had let the licences expire in 2006 and 2007, according to Churchill. In 2008, two months before the district head handed the licences back to Nusantara, Churchill increased its estimates of the coal deposits that were contained within the area of the licences to 2.8bn tonnes, from 150m tonnes previously. The next district head revoked Churchill's licences altogether in 2010.

The case was one of several during the heady days of the global commodity boom that highlighted the risks foreign investors face in Indonesia if they run afoul with established interests. It also tests the extent to which the central government is liable for any misdeeds of regional administrations. The 1976 bilateral investment treaty between Indonesia and the UK that forms the basis of the complaint makes no distinction between the central government in the capital, Jakarta, and the 530 or so provincial, district and municipal governments across the country. Given that 45 governors, mayors and district heads have been jailed for graft in the 12 years since Indonesia's Anti-Corruption Commission (KPK) was formed, local governments have been exposed frequently as hotbeds of corruption and incompetent bureaucracy. A ruling in favour of Churchill would be likely to prompt the government to be more judicious with the US$50bn it doles out annually to support regional authorities. Efforts to amend the 1999 regional autonomy law that determines control of local administrations to natural resources could follow in the longer term.

We will review our forecasts for foreign direct investment once the ICSID panel has made its decision.

(source: Economist Inteligence Unit)