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THIRD WORLD ECONOMICS

Why did Ecuador terminate all its bilateral investment treaties?

In May, the Ecuadoran government took the bold step of terminating all its bilateral investment treaties, acting on the recommendations of the CAITISA commission established to audit the country’s investment regime. The president of CAITISA, Cecilia Olivet, who is a researcher with the Transnational Institute, shares her perspective on the commission’s work and its wider implications in the following interview, which was originally published on the Institute’s website.

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How did the Ecuador investment treaties audit commission (CAITISA) come about?

On 5 October 2012, an investment arbitration tribunal ordered the government of Ecuador to pay $2.3 billion to US oil company Occidental. It was the largest amount a state had been ordered to pay by an investor-state tribunal up to that point. For Ecuador, that sum represented 59% of the country’s 2012 annual budget for education and 135% of the country’s annual healthcare budget.

The decision taken by three private lawyers under the auspices of the World’s Bank arbitration centre shocked the world and the Ecuadoran government. The government’s move that prompted Occidental’s litigation had hardly been extreme. Ecuador terminated the oil concession with Occidental when it found out that the company sold 40% of its production rights to another investor without government approval. The contract signed by Occidental with the government in 1999 explicitly stated that sale of Occidental’s production rights without government pre-approval would terminate the contract. The arbitrators in the case justified their decision by calling Ecuador’s cancellation of the contract a disproportionate response.

On 6 May 2013, seven months later, [then Ecuadoran] President [Rafael] Correa created the investment treaties audit commission (CAITISA). Its purpose was to audit the whole Ecuadoran investment regime in a comprehensive way. The Commission was to determine the legality and legitimacy of Ecuador’s bilateral investment treaties (BITs) and the investment cases filed against the country. The Commission was also expected to assess whether the BITs have helped to attract foreign direct investment (FDI) to Ecuador and/or contributed to the quality of investment in terms of national development. Finally, the Commission would propose legal and policy alternatives to BITs and the international arbitration system.

Creating this Commission was not just a reaction to the tribunal decision in the Occidental case. By that time investors had sued the government based on international investment treaties 24 times. So, the government saw the need to assess the costs vis-a-vis the benefits of the 26 international treaties in force which it inherited when President Correa took office.

How did you get involved?

A few months before the Commission was created, I co-authored a report focusing on the role of arbitrators and law firms as drivers of an investment arbitration boom. This report had exposed some key flaws of the investment arbitration system. Government officials in Ecuador who read the report asked me to join the Commission.

What was unique about the Commission?

This Commission sets an incredible precedent. It contributed towards the ongoing international assessment of the necessity for and impact of the international investment regime on the development of countries in the Global South. It also contributed to a public debate about the legitimacy and “benefits” of the current investment protection framework.

The Commission is unique in two ways. First, it is the first time a government decided to organize a review of its investment protection system in the form of an auditing process carried out by a citizens auditing commission. It was inspired by the experience of the debt auditing commission. [That commission was established by the Ecuadoran government in 2008 to examine the country’s debts contracted in the period 1976-2006. Based on its findings, the government refused to repay some $30 million in debt on the grounds that this debt was illegitimate.]

CAITISA was formed by a mix of investment lawyers, civil society representatives and government officials. It included a majority (8 out of 12) of people from outside the government, most of whom are not from Ecuador. The inclusion of non-governmental experts and civil society representatives among those carrying out the review has ensured a higher level of transparency and has allowed for broader public participation. Besides the Commissioners, the auditing task was supported by a large group of other experts (including several members of a group of social activists in Latin America focusing on investment protection), who helped to develop the terms of reference and also assisted with the audit itself.

Secondly, the scope of the audit was comprehensive. Other review efforts have been more constrained in their content. CAITISA, on the other hand, was given a mandate to audit not only the bilateral investment treaties of Ecuador (including the conditions under which these treaties were signed, their clauses and the compatibility of BITs with national and international law), but also the investment arbitration system and cases against Ecuador (including how BITs have been used by foreign investors, the role of the arbitrators that decided on Ecuador’s cases, and the costs of cases), and the relationship between bilateral investment treaties, foreign investment and Ecuador’s development plan (including the correlation between signing BITs and attracting FDI).

What were its main findings?

The findings of the Commission that audited Ecuador’s investment regime were conclusive. The BITs have not brought benefits to the country, they only brought risks and costs.

In particular, the Commission found that the BITs signed by Ecuador failed to deliver promised foreign direct investment. Also, Ecuador’s BITs contradict and undermine the development objectives laid out in the country’s constitution and its National Plan for Living Well (Buen Vivir). It was also established that the companies that sued the government at international investment tribunals left behind enormous social and environmental liabilities/debt.

Investors have disproportionately benefited when suing Ecuador using BITs. In particular, the financial costs for Ecuador have been immense. The total amount disbursed so far by the state has been $1.498 billion, equivalent to 62% of health spending. The government has also spent $156 million in payments to international law firms for its defence.

The Commission also established that officials who signed Ecuadoran BITs did not try to negotiate terms that would preserve the state’s regulatory capacity. None of the BITs signed by Ecuador underwent a negotiation process. Also, legislators who ratified these treaties did not consider the risk for the country. Congress ratified most treaties without a legislative debate.

Finally, the Commission found that the majority of the arbitrators nominated to decide cases against Ecuador cannot be considered fully impartial.

What was the most shocking or surprising thing for you in terms of Ecuador’s experience with BITs/ISDS (investor-state dispute settlement)?

Once the audit was complete and all the findings were put together, it was shocking to see how government officials have signed on to these powerful instruments without any consideration of risks. It was shocking how investors could launch lawsuit after lawsuit attacking legitimate government measures. It was shocking to see how arbitration tribunals sided with investors, making investor-friendly interpretations of the clauses in these biased treaties. It was shocking to see a rigged system in action.

Why do you think so many countries like Ecuador signed BITs?

Most countries signed BITs during the 1990s when there was little awareness of the risks. At the time, all governments would hear about from the “international community” was the importance of protecting investment for development. International organizations, governments from capital-exporting countries and academics were pushing the idea that signing BITs was the only way countries would be able to attract foreign investment and that it was a condition for development. In an orchestrated effort, organizations like the WTO, UNCTAD, OECD, the World Bank and others encouraged governments from the Global South to sign as many investment treaties as possible.

Lauge Poulsen, in his thesis “Sacrificing sovereignty by chance”, probably explained it better than anyone: “By overestimating the benefits of BITs and ignoring the risks, developing country governments often saw the treaties as merely ‘tokens of goodwill’. Many thereby sacrificed their sovereignty more by chance than by design, and it was typically not until they were hit by their first claim, that officials realized that the treaties were enforceable in both principle and fact.”

What were the main recommendations of CAITISA?

The Commission gave detailed recommendations that covered 11 pages. But, the key one was the termination of all BITs.

We also recommended excluding the investor-state dispute settlement mechanism from any future treaty, and providing legal security to investors in national courts.

The Commission also advised the government to only sign new investment treaties based on an alternative investment model. This new model would highly restrict the rights of investors, it would protect the rights of the government to regulate and to direct investment by applying performance requirements, and it would impose binding obligations on investors to ensure they respect national and international human, social and environmental rights.

How did the Ecuadoran government respond to your

recommendations?

The recommendations of the Commission were non-binding. However, on 17 May (nine days after CAITISA publicly presented the final report), the government announced that it had proceeded to terminate the remaining 16 BITs that were still in force.

The government also announced that it is planning to renegotiate investment treaties with several countries under a different model. CAITISA made some very specific recommendations as to how that new model treaty should look. Ecuador’s new model BIT has not yet been made public so we don’t know if the recommendations have been followed in that regard. Hopefully, Ecuador will consider an investment treaty model that restricts investment protection while enlarging the capacity of government to regulate and direct investment, in particular including investor obligations to safeguard the public interest.

How have investors and the governments that signed BITs with Ecuador responded to the government’s announcement?

Similarly to the situation when South Africa or Indonesia or India terminated investment treaties, the European Commission was quick to “warn” Ecuador (and in the past, the others) about the risk of losing European investment. The scaremongering game is aimed at deterring governments from completing the termination process. It did not work in the past, and it has not worked with Ecuador either.

What do you say to those who will argue that this will

discourage foreign investment?

In the same way that the need to sign investment treaties to attract foreign investment was discredited as a myth, the idea that investors will leave when countries terminate their treaties is unsubstantiated.

Foreign investors will remain in the country as long as they can make profit, even after governments terminate investment protection agreements. So far, governments like South Africa, Indonesia, Bolivia, Ecuador and Venezuela, which terminated many of their BITs, did not experience a mass exodus of foreign investors, as predicted by politicians and investment lawyers.

For example, one year after the termination of the Germany-South Africa BIT in 2013, research led by Germany’s KfW Development Bank found that South Africa was still “a favoured destination for German direct investment”, with more than €600 million flowing into the country in the fourth quarter of 2014. Similar to the case of South Africa, in March 2014, the government of Indonesia discontinued 17 out of 64 international investment agreements (IIAs), including agreements with the Netherlands, Italy, France, Spain and China. 2014 was the year in which FDI to Indonesia hit a record high of $78.7 trillion, according to the latest data by the Indonesian Investment Coordinating Board. Also, in 2015, Dutch FDI to Indonesia increased by 19.2% in relation to 2014 and the Netherlands remained the fourth leading investor.

What alternatives are there to the ISDS approach?

Investors have numerous options to protect their investment. However, only investment arbitration gives them the opportunity to challenge government public interest measures.

There is a wide array of options, beyond investment arbitration, available to foreign investors who feel that they have been mistreated by the state’s arbitrary and discriminatory actions.

First and foremost, foreign companies are entitled to seek compensation for wrongdoings in national courts, as with national companies and citizens in the countries in which they operate. Using domestic legal remedies should be the norm. The lack of judicial independence in a few countries cannot be the excuse to promote investment arbitration worldwide. It is important to note that most ISDS lawsuits are brought against democratic countries with a strong rule of law.

If investors want to have further ‘insurance’, they can resort to private political risk insurance, insurance from the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, or insurance offered by the investor’s home country.

Finally, if none of these reassurances are enough for investors, they can always negotiate access to investor-state arbitration in specific contracts. Then the government can assess if offering that possibility is justified for the specific investment instead of giving a blank cheque to all investors from a certain country.

What are your recommendations to other governments?

Twenty years after most of these treaties were signed, it would be advisable that governments around the world carry out a review or audit process of the treaties that already exist. It is also imperative that governments undertake a cost-benefit analysis before signing new treaties.

For the review to be meaningful, it should include: an analysis of the economic benefits to assess whether signing of investment treaties has helped to increase the volume of FDI flows into the country; an analysis of the exposure of the government to costly investor-state arbitration disputes; and finally an analysis of political costs to assess the constraints on the government regulating in the public interest without the risk of being sued.

The main benefit of carrying out a review process is that a government can take an evidence-based and informed decision on what to do with its current international investment agreements and with future IIA negotiations.                      

The above is reproduced from the website of the Transnational Institute (www.tni.org). The Amsterdam-based TNI is an international research and advocacy institute committed to building a just, democratic and sustainable planet.

Third World Economics, Issue No. 640, 1-15 May 2017, pp14-16


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