The damaging effects of investment agreements

The damaging effects of bilateral investment treaties (BITs) and the investment chapters of North-South free trade agreements (FTAs) were highlighted at a World Trade Organisation (WTO) Public Forum discussion in September.

Meena Raman

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THE 25 September panel session on 'Investment Provisions and Agreements: What Is the Right 21st Century Approach?' was organised by the Our World Is Not for Sale network, the International Trade Union Confederation and Public Citizen. It was held as part of the WTO Public Forum which took place in Geneva on 24-26 September.

Members of the panel were Sanya Reid Smith from the Third World Network (TWN); Melinda St Louis of Public Citizen's Global Trade Watch from the US; South Africa's Deputy Director-General from the Department of Trade and Industry, Xavier Carim; Roberto Bissio from Social Watch in Uruguay; and James Zhan, Head of the Investment Policies and Capacity Building Branch at the United Nations Conference on Trade and Development (UNCTAD). The session was moderated by Kinda Mohamadieh, from the Arab NGO Network on Development based in Lebanon.

Problematic provisions

Sanya Reid Smith from TWN highlighted the problematic provisions that commonly arise in BITs and the investment chapters of North-South FTAs. She said that the purpose of the BITs is to protect the rights of foreign investors and these agreements traditionally have no protection for the rights of government and do not contain obligations of the foreign investors.

Smith explained that the BITs and the investment chapters of the FTAs, especially those based on the US model, generally have a very broad definition of investment which also includes stocks, shares, futures, options, derivatives, expected or future profits, market share of the investor, intellectual property, etc. The provisions usually define an investor loosely, where even companies from other countries (not just those countries involved in the BIT or FTA) can seek protection, merely by buying shares in a company in one of the BIT/FTA signatory countries or by opening a letter-box or setting up a subsidiary in one of the signatories.

Another provision, said Smith, relates to 'fair and equitable treatment' (FET), which sounds good but actually has been interpreted by some tribunals to mean that there is a standstill on regulations and that the government is prevented from amending or passing new laws so as to ensure a 'constant regulatory environment'. Even in cases where words were put into an agreement to limit the scope of this provision, tribunals have decided otherwise.

Citing a recent study by the NGO Public Citizen of US FTAs and BITs, Smith said that in instances where investors have raised a violation of the FET provision in tribunals, 81% of the time they have won, which indicates that the provision is very powerful in striking down government actions.

As regards the clause on 'expropriation' in these treaties, she said that 'expropriation' is widely defined to cover any government action which reduces the value of the investment.

Where disputes arise between an investor and a government under a BIT, arbitral tribunals are used to enforce the BITs and some of these tribunals do not have sufficient conflict-of-interest rules for judges, said Smith. This allows judges who have an interest in the company bringing the dispute to hear the case, she added, citing an example where one of the judges in a dispute was on the board of a parent company which brought the case and the investor won.

In investor-state disputes, she said, the claims are often huge, with one of the largest being for billions of dollars (in the case of Philip Morris vs. Government of Australia).

[Tobacco company Philip Morris Asia, an enterprise registered in Hong Kong (with whom Australia has a BIT), launched a suit under the BIT against Australia's plain packaging rules for tobacco products. However, according to a post on the International Economic Law and Policy Blog, citing a Lawyers Weekly (Australia) article which interviewed international law experts Andrew Mitchell and Don Anton, Philip Morris Asia acquired shares in Philip Morris Australia on 23 February 2011 - 14 months after the Australian government announced its intention to introduce plain packs. Hence, said Anton, Philip Morris Asia 'faces hurdles' trying to prove that investors' legitimate expectations have been violated.]

The largest known payout was almost $1 billion but in two-thirds of the cases, the disputes are a secret, with no information on which government was sued, for what violation and for how much and what was paid out, Smith explained further.

On the type of cases that have arisen, Smith explained that investors have successfully challenged health and environmental measures taken by governments. There have also been cases of investors challenging government measures related to government procurement, state-owned enterprises, taxation, financial regulation, industrial policy, sovereign borrowing, agriculture, etc.

She gave examples of several cases where governments have been sued by investors and lost even if the measures concerned were legitimate and taken for environmental or health reasons. Many cases involve the mining sector; where an investor breaks a law in a country it invests in and the host government revokes the company's mining permit (as it is permitted to do under its domestic law), the investor sues under the treaty and wins, with the host government having to pay monetary compensation to the wrongdoer.

Smith gave examples of developed-country governments which have been thus sued, such as Germany, Canada and Australia. She said that in the case of Germany, Swedish energy company Vattenfall sued the German government twice when the latter took measures to address climate change in one case and the other in relation to the German government's decision to phase out nuclear power following the Fukushima disaster. In the first case, the German government settled the case for an undisclosed sum (Vattenfall had claimed 1.4 billion euros plus interest), while the second case is pending, with a claim from the company for nearly $1 billion.

The Australian government's current position is to say no to investor-state dispute settlement in trade policy in relation to the Trans-Pacific Partnership Agreement (TPPA), Smith said.

Investor-state disputes in US pacts

   

Melinda St Louis from Public Citizen spoke on investor-state disputes brought under US FTAs and BITs. She said that BITs have existed since the 1950s but it has been in the last 10 years that most investor-state disputes have occurred. She said that in 1999, only 69 cases were launched in the International Centre for Settlement of Investment Disputes (ICSID) but today, there are 370-plus cases - a 436% increase in the total stock of investor-state cases just in this body alone.

(ICSID, a member of the World Bank Group, is an international arbitration institution which facilitates arbitration and conciliation of legal disputes between international investors.)

In the US FTA investment chapter model on investor-state dispute resolution, individual foreign firms which are investors obtain equal status with sovereign national signatories to privately enforce a public treaty, St Louis explained. She said that there are expansive and substantive investor rights which extend beyond domestic property rights defined by US laws and courts. An 'investment' is defined to cover permits, government approvals, intellectual property, contracts, etc.

St Louis said that private investor-state dispute enforcement skirts the normal court system, and foreign corporations get special privileges and greater rights. Investors can demand compensation for 'loss of expected future profits related to non-discriminatory environmental, health, safety, land-use, and zoning policies'. The concept of 'sovereign immunity' is waived, she elaborated further.

St Louis said that cases are decided by private tribunals (under the World Bank or United Nations) where three corporate lawyers rotate between suing governments on behalf of corporations and being 'judges'. Clearly, there is a conflict of interest and the pay structure incentivises lengthy proceedings and governments share the costs of the case even if the case is dismissed, she added.

The tribunal has discretion to set damages and compound interest and allocate costs and there is no outside appeal, and annulment can be sought for limited errors, she said further.

St Louis said that under the North American Free Trade Agreement (NAFTA) - whose signatory countries are Canada, Mexico and the US - $365 million has already been paid out to corporations, with $13 billion in pending claims under US NAFTA-style deals alone relating to land use, timber, water rights, public health, environment, mining, energy and transportation.

She highlighted several cases of investor-state disputes under US FTAs or US BITs. In the case of Exxon Mobil/Murphy Oil vs. Canada, a non-discriminatory requirement for a fee to be paid for research and development in two of Canada's provinces, which applied to all firms, both domestic and foreign, was the subject of dispute, where the investor claimed that this was a performance requirement and therefore not allowed under NAFTA. Exxon claimed $60 million.

In Metalclad vs. Mexico, the California-based company successfully challenged the denial of a construction permit by a Mexican municipality for the building of a toxic waste facility. The government move was viewed as an ‘indirect expropriation’ and Mexico was asked to pay $15.6 million.

St Louis also gave examples of cases where the investor-state dispute resolution is used as a threat and coercion against governments to obtain a result.

One example was an investor-state case brought against Peru under the US-Peru FTA by Renco Group, 'a company owned by one of the richest men in the US. The dispute relates to Renco’s investment in a metal smelter in Peru which has been designated as in the top 10 most polluted sites in the world. Peru’s Health Ministry found that about 99% of the children at this site had lead poisoning and 20% of these needed urgent medical attention. Renco’s Peruvian affiliate promised to install sulphur plants to help remediate the environment by 2007 as part of an environmental remediation programme. Although it is out of compliance with this contractual obligation, the company sought (and Peru granted) two extensions to complete the project. In 2010, Renco sent Peru a Notice of Intent that it was launching investor-state proceedings, alleging (among other claims) that Peru's failure to grant a third extension of the environmental remediation obligations constitutes a violation of the firm’s FTA rights as a foreign investor. The company is demanding $800 million in compensation from Peruvian taxpayers for alleged FTA breaches.’

In the case of Chevron vs. Ecuador, after having lost on the merits in Ecuador and US courts, Chevron has turned to an arbitration tribunal for investor-state dispute resolution under a BIT to help the company avoid paying to clean up horrific contamination in the Amazonian rainforest, said St Louis. Chevron is trying to get the tribunal to suspend enforcement of or alter an $18 billion judgment against Chevron rendered by a sovereign country's court system, she added.

   

The South African experience

   

Xavier Carim, Deputy Director-General of the South African Department of Trade and Industry, said that his government's experience demonstrated that there was no clear relationship between signing BITs and increased inflows of foreign direct investment (FDI), which had been a motivating factor in signing BITs in the 1990s.

‘We do not receive significant inflows of FDI from many partners with whom we have BITs, and at the same time, we continue to receive investment from jurisdictions with which we have no BITs. In short, BITs are not decisive in attracting investment,’ Carim said.

‘In addition, over the last decade, South Africa had to confront several challenges, and threats of challenge, brought under various BITs. This focused our minds! Most of the threats of challenge can only be described as spurious or frivolous but they all underscored the fact that BITs do not adequately take into account the particular conditions found in South Africa, the complexities of our socio-economic challenges and the broad objectives of government policy,’ he added.

Referring to South Africa's post-apartheid Constitution, which embedded 'a transformation agenda that seeks to overcome deeply rooted inequities inherited from apartheid's exclusionary policies', Carim said that the Constitution 'also provides for non-discrimination between foreign and domestic investors and all investors need to undertake their activities in this context of the transformation agenda set out in the Constitution.'

'However, as we assessed the bilateral investment treaties that we had entered into, we began to identify a range of inconsistencies with the Constitution', and this 'prompted South Africa to review the BITs in 2008.'

After the reviews, Carim said, the South African Cabinet concluded that South Africa should 'refrain from entering into BITs in future, except in cases of compelling economic and political circumstances'.

Giving a short background of South Africa's experience, Carim said: 'In the immediate post-apartheid era (1994-98), South Africa concluded around 15 BITs mainly with European countries. At the time, this was a good faith attempt to assure investors that their investments would be secure under the new democratically elected government. Signing these BITs was also seen as an important diplomatic signal confirming South Africa's re-entry to the international community after the years of isolation under apartheid.

'However, we soon became aware of challenges posed by international investment treaties. We observed the fractious debate in the OECD when its members were seeking to negotiate a multilateral investment agreement in the late 1990s. We were participants in the discussions in the WTO that sought to include - as one of the Singapore issues - trade and investment in the Doha Round negotiations, where many developmental concerns emerged in the engagements.'

'Perhaps most seriously, the spike in international investment arbitrations that followed the financial crisis in 2008 laid bare that bilateral investment agreements can pose profound and serious risks to government policy,' he said.

    Carim referred to the intervention by South Africa's Minister of Trade and Industry Rob Davies on 26 September at the UNCTAD Trade and Development Board discussion on Investment Policy Framework for Sustainable Development, saying his own presentation at the WTO forum complemented Davies' statement.

   

BIT review

   

The South African government, Carim said, had held 'extensive and intensive consultations in South Africa over a three-year period. We invited international experts to contribute to the discussion. The review identified a range of concerns associated with expansive interpretations of the provisions usually found in BITs: definitions of investment, investor, national treatment, fair and equitable treatment, most favoured nation clause, expropriation, compensation, transfer of funds, etc.'

'The review also identified difficulties with respect to international arbitration. It observed fragmentation in the system; the lack of common standards of protection; inconsistent interpretations by arbitration panels even on similar matters; as well as the growing complexity of the international system through an evolving jurisprudence. All this exacerbates uncertainty and risk,' he added further.

'In particular, we were concerned with investor-state dispute provisions in our BITs. This, in our view, opens the door to narrow commercial interests on subject matters of vital national interest and to unpredictable international arbitration outcomes, and is a direct challenge to constitutional and democratic policymaking,' said Carim.

'Against this background, in April 2010 the South African Cabinet concluded that South Africa should: First, refrain from entering into BITs in future, except in cases of compelling economic and political circumstances. Second, the Cabinet instructed that all "first generation" BITs which South Africa signed shortly after the democratic transition in 1994, many of which have now reached their termination date, should be reviewed with a view to termination, and possible renegotiation on the basis of a new Model BIT to be developed.

'Third, the Cabinet decided that South Africa should strengthen its domestic legislation in respect of the protection offered to foreign investors. In this regard, key considerations would be to codify BIT-type protection into South African law and clarify their meaning in line with the South African Constitution. We would also seek to incorporate legitimate exceptions to investor protection where warranted by public policy considerations such as, for example, for national security, health, environmental reasons or for measures to address historical injustice and/or promote development.

'Fourth, the Cabinet elevated all decision-making in respect of BITs to an Inter-Ministerial Committee tasked with oversight of investment, international relations and economic development matters.'

Carim added: 'This is the work we are undertaking now. The process of interdepartmental consultations is underway; there will be an extensive set of intergovernmental consultations as well as consultations with stakeholders and with Parliament - a social and economic dialogue.

'We are working to terminate existing BITs; develop a new Model; and develop an Investment Act. This is complex technical and legal work and is unfinished. Nevertheless, our broad policy approach is clear. We aim to update and strengthen South Africa's investment regime to ensure that South Africa remains open to foreign investment, provides adequate security and protection to all investors, while preserving the sovereign right of the South African Government to pursue its developmental public policy objectives. We also aim to reduce exposure to the unpredictable risks we see and have had to confront in our bilateral investment treaties.

'The new approach does not introduce any new obstacles to investment but will establish a framework for more equitable relationships between investors and government based on respect for human rights, the rule of law and due process, sustainable development, and security of tenure and property rights within the framework created by the South African Constitution.

'As we do this nationally, we are acutely aware of the unfolding debate at the international level. In broad terms, a broad distinction can be discerned between a Freedom of Investment model, on the one hand, and an Investment for Sustainable Development model, on the other.

'The Freedom of Investment model tends to assume that all investment is good, and that all investment promotes development. The derived policy implications are that governments should continue to liberalise  their investment regimes, reduce or limit regulations and conditions on investors and, in so doing, realise the benefits of FDI. "First generation" BITs tend to reflect this approach.

'The Investment for Sustainable Development model approach recognises that while FDI can make a positive contribution to sustainable development, the benefits to host countries are not automatic. It posits that regulations are needed to balance the economic requirements of investors with the need to ensure that investments make a positive contribution to sustainable development in the host state.

'The associated benefits of investment as they relate to technology transfer, skills development, research, establishing local economic linkages, etc. need to be purposefully built into the investment regime, and not taken for granted. New thinking and practice in international economic policymaking, notably with respect to the role of state in economic development, finance and industry, are also finding expression in international investment policymaking.

'The debate on international investment treaty and policy is yet to be settled, and there are numerous efforts underway to fashion a common understanding to international investment policy. UNCTAD plays a vital role in this process given its longstanding work and expertise on investment policy from a development perspective. Indeed, the Investment Policy Framework for Sustainable Development developed by UNCTAD gives us a strong point of departure for such dialogue and cooperation. South Africa will participate in this dialogue, and we will also participate in other forums, as we search for a common understanding on what could constitute an appropriate model and framework for investment protection and promotion at the international level.'

Roberto Bissio from Social Watch in Uruguay highlighted the case of Philip Morris, the transnational tobacco company which has brought an investor-state claim against the Uruguayan government for imposing restrictions on cigarette packaging. The government wanted 80% of the cigarette package to have anti-tobacco messages and that there can only be the use of one brand with no variations. According to Bissio, the company considers this a violation of its intellectual property.

   

Policy challenges

   

James Zhan of UNCTAD said that the investment treaties had not been functioning for sustainable development and no government was happy with this. The issue was how to ensure the move away from agreements for freedom for investors to enabling investment for development, and there was a need for policymakers to have policy toolkits and know-how.

Zhan said the challenge was how to ensure investment rules serve economic growth and jobs and also mainstream environmental, social and governance issues.

He said there were systemic challenges with the proliferation of investment treaties in the era of liberalisation, while now was the era of regulation and sustainable development. Zhan said there was incoherence at three levels: between treaties signed with countries at different times and at different levels of development; national and international incoherence; and investment policies vis-a-vis other policies including trade, competition and industrial policy.

He underlined the need for new policy frameworks with a new generation of investment policies with guiding principles; national investment guidelines; and international policy guidance. On investment treaties, the option for governments was whether to have them or not, he said.

Zhan said that there was no 'one size fits all' option but a range of options for countries to pick and choose from. There was a need to analyse the development implications and a set of indicators for assessing effectiveness.

On what is the right approach, he pointed to the need for a balanced approach with investment for sustainable development with policy coherence, the right to regulate and to balance the rights and obligations of corporate governance.                            

Meena Raman is a legal adviser and senior researcher with the Third World Network. The above first appeared over two separate articles in the South-North Development Monitor (SUNS, Nos. 7446 and 7449, 27 September and 2 October 2012) published by TWN.         

*Third World Resurgence No. 266/267, October/November 2012, pp 9-13