http://blogs.ft.com/beyond-brics/2014/10/16/investment-treaties-ems-have-a-rethink/
Investment treaties: EMs have a rethink
Oct 16, 2014 5:48am
by Alan Beattie
As if to add substance to complaints from emerging market policymakers about being ignored, a matter mainly affecting middle-income countries became the subject of close global attention only when it emerged as a bone of contention between the US and Europe.
The snappily-titled “investor-state dispute settlement” (ISDS) process, where companies have the right to sue governments for disadvantaging their businesses, has been the subject of deep controversy for years. But since the most vocal discontents were nations like Argentina and Venezuela that complain about more or less everything, it took
well-organised campaigning and
official German opposition to an ISDS chapter in the US-EU Transatlantic Trade and Investment Partnership (TTIP) to make it a central concern.
Various emerging markets, and not just those with a history of eccentric policymaking, are now reviewing investor-state rules, whether embedded in trade deals or in separate “bilateral investment treaties”, on the belief that they constrain domestic policymaking. Yet with middle-income countries still desperate to attract foreign direct investment (FDI), they face the inevitable question of whether removing foreign companies’ ability to sue the government in an international tribunal will drive them away altogether.
Investor-state litigation is a
peculiar creature. Essentially it is an extension of international company-to-company commercial arbitration that awards financial compensation rather than requiring a change of behaviour. The nature of the tribunals, which stand in sharp contrast to most national courts, encourages jurisprudential and judicial adventurism. In general, they comprise panels of three arbiters drawn from a small pool of public international lawyers meeting in secret with no obligation to respect precedent and no right of appeal.
Emerging markets are by far the
most common targets of investment litigation, and the number of cases has been rising rapidly. Grounds for action include violating “national treatment” (treating foreign and domestic investors differently), failing to provide “fair and equitable treatment”, and undertaking “expropriation”, either by direct means such as nationalisation or indirect such as laws or regulations that affect the value of a business.
A particular problem comes in the definition of the last two, which are elastic concepts liable to creative interpretation. Argentina, for example, signed a great stack of BITs just as it privatised large chunks of its economy in the 1990s, attempting to regain its long-lost place in the first rank of advanced economies. When the more familiar calamity of devaluation and debt default arrived in 2001, Buenos Aires was surprised to find itself hit with literally dozens of investor-state actions (41 at the last count) arising from its actions in freezing bank accounts, forcibly converting dollar claims into devalued pesos and generally rewriting contracts.
A panel in 2011 broke new ground on the edge of a minefield by ruling that sovereign bonds constituted an investment, and therefore
allowed a class action by 60,000 Italian bondholders to proceed who say they lost more than a total $1bn in the Argentine default. Bringing the already fiendishly complex issue of sovereign debt restructuring under investment arbitration would be an extraordinary upheaval.
Once a panel has decided, there is
little that can be done. This year the US Supreme Court, hearing its first case on investor-state,
showed judicial deference in granting jurisdiction to a panel hearing a claim against Argentina from BG, a British gas company operating in Buenos Aires. In 2007, a “review committee” under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID), a tribunal housed at the World Bank, said that while an arbitration panel had made “manifest errors of law” in yet another case against Argentina, this one from a US energy company, it did not have the power to overturn the decision.
It is not just emerging market policymaking aberrants like Argentina that are complaining about judicial overreach. Philip Morris International reincorporated its regional HQ in Hong Kong so it could sue the Australian government for introducing plain packaging on cigarettes, claiming, among other things, expropriation.
This should strike any reasonable layperson as peculiar. The Australian government is not stealing Philip Morris’s intellectual property to produce its own knock-off Marlboros, nor indeed promoting its own competing brand of cigarettes (which would no doubt be a terrible seller in any case). The panel has yet to rule, so all of this may be for nothing, but an investment arbitration process that essentially starts taking its own views on the efficacy of public policy is over-reaching its powers. Few countries will want to sign BITs if they expose their policy-making processes to continual pressure from ambulance-chasing public international lawyers.
Emerging markets have been reviewing their use of investment treaties and some have begun to retreat. South Africa was shaken when investors from Italy and Luxembourg sued the government under the politically sensitive “black economic empowerment” laws giving preferences to black-owned companies. It undertook a
review of its BITs – many of them signed in the immediate aftermath of the end of apartheid in 1994 – and
decided not to renew them when they expired.
Indonesia, which had a high-profile case with British and Australian mining groups suing over the revocation of exploration licences, has widely been reported as also allowing its BITs to expire. But other reports suggest that Jakarta may be
reviewing its treaties rather than abandoning them altogether.
Indeed, for emerging markets concerned about the overreach of investment tribunals, there are essentially three strategies. The first, which is politically the easiest abroad but the riskiest at home, is to leave things as they are and hope for the best. The second is to rewrite BITs and investment chapters in trade deals to remove some of the more arbitrary elements. The EU has tried to
show the way by promulgating an investment chapter – most recently in its proposed
bilateral deal with Canada - which explicitly excludes action to preserve public health and safety from litigation, increases transparency and has measures to address potential conflicts of interest in members of panels. The third option is to have nothing to do with BITs at all.
This latter approach has a high-profile adherent: Brazil has never ratified a BIT and says it never will. It also notes that it has no difficulty attracting foreign investment. China also has relatively few and weak BITs, and yet is legendary for its receipt of FDI. However, empirical research is
unhelpfully inconclusive on the question of whether investment treaties actually attract FDI.
For one, it is difficult to disentangle the direct effect of signing an investment treaty from other investor-friendly actions, such as deregulation, which are likely to be implemented by the kind of government that likes BITs. Given the size of China’s and Brazil’s domestic market, it is difficult for many companies with global pretensions not to invest there. It might be foolhardy for smaller and less pivotal emerging economies to draw the conclusion from the experiences of Brazil and China that BITs are unnecessary.
A quick-fix alternative to promote FDI is to shower foreign investors with gifts – tax breaks, special economic zones and the like – though such inducements are expensive and their efficacy is questioned. The slower but perhaps more enduring route is for emerging markets to promote themselves as having national institutions – legal, financial, human resourceful and infrastructural – to make FDI worthwhile.
South Africa and Bolivia – which was the first country to withdraw from the ICSID tribunal system – have followed up their retreat with
new national laws and frameworks designed to reassure investors that their companies will be protected. Georgia (which also has
more than 30 BITs) set its ranking in the
World Bank’s “Doing Business” report on the functioning of economies, which includes a measure of investor protection, as a policy target. It then took out commercials on international TV, aimed at investors, boasting that its rating in the report had risen sharply, though whether that had any effect is unclear.
In reality, in the absence of concrete legal commitments like BITs, there are few reliable ways to prove that investments will be safe except by accumulating a track record of treating investors well, which is likely to be a slow and laborious process. Yet investment treaties are very far from perfect and the process of reforming them has a long way to go.
Ultimately, emerging markets wanting to attract FDI need to show that investors will be protected. BITs are an obvious and easy tool for doing so. Yet they are neither a sufficient nor a necessary one. Governments should be aware they may end up doing more harm than good.
