South Centre | 23 May 2017

Ecuador withdraws from its remaining investment treaties

By Daniel Uribe

Ecuador has unilaterally withdrawn from its remaining 16 bilateral investment treaties (BITs). With this decision, Ecuador has concluded the termination of 26 BITs signed by the country since 1968.

The 16 BITS which Ecuador is withdrawing from had been signed with the Netherlands, Germany, Great Britain, France, Spain, Italy, Sweden, Switzerland, Canada, the United States, China, Argentina, Bolivia, Peru, Venezuela, and Chile.

The Ecuadorian move is part of similar measures taken in recent years by a growing number of developing countries to withdraw from their bilateral investment treaties. These include South Africa, Bolivia, Indonesia and India.

The President of Ecuador, Mr. Rafael Correa Delgado, stated that the decision to withdraw from these BITs is not sudden, but that it responded to a governmental process aimed at complying with the Constitution of Ecuador adopted in 2008, which recognises the human being and human rights above the power of economic capital.

The withdrawal of Ecuador from these BITs responds to the final stage of a review process that started in 2008, and which had led to the establishment of a joint government-civil society audit commission (known as CAITISA by its Spanish acronym) established by the government in 2013.

CAITISA was composed of government officials, academics and researchers, lawyers and civil society groups. Its objective was to verify the legality, legitimacy and lawfulness of investment treaties and other investment agreements signed by Ecuador, as well as to audit the validity and appropriateness of the awards, procedures, actions and decisions issued by Investor-State dispute settlement (ISDS) bodies and arbitral tribunals.

This Citizen Commission has been the first of its nature, and the methodology and composition followed to review and reform the current international investment treaties regime could serve as an “inspiration and model for other countries in the region and world”, according to Ms. Cecilia Olivet, President of the Commission.

During the official presentation of CAITISA’s 668-page Executive Report (in Spanish), Ms. Cecilia Olivet explained the key findings of the report as follows:

1. Concerning the effects of BITs as a tool to attract foreign direct investment (FDI) and development into the country, the report found that such correlation is non-existent as the signing of BITs is not decisive for attracting FDI.
a) According to the report, Ecuador only received 0.79% of global FDI that flowed to Latin America and the Caribbean;
b) The principal sources of FDI that flow into Ecuador are from Brazil, Mexico and Panama, none of which have a BIT with Ecuador;
c) Of the 7 largest foreign investors in Ecuador, only 23% come from a country which has a BIT signed with Ecuador.

2. According to the report, the BITs signed by Ecuador contradict and undermine the development objectives laid down in the Constitution of Ecuador.
– Even though the Constitution mandates the State to regulate foreign investment to ensure it plays a positive role in achieving the national development plan, the BITs signed by Ecuador include clauses that erode the role of the State.

3. The report found that the costs of signing these BITs for Ecuador have been greater than the alleged promises of investment and development that have failed to materialise.
a) Ecuador has faced 26 cases in international tribunals based on the BITs;
b) From those 26 cases, 15 cases have ended in awards. From those 15 cases, the State has been favoured only twice, while the investor has been favoured in the remaining 13 cases (87%).
c) A total of $21.2 billion dollars has been claimed as compensation from Ecuador by corporations for alleged violation of BITs;
d) The total amount disbursed so far by the State amounts to $1.498 billion dollars, equivalent to 31% of education spending, or 62% of health spending;
e) From the total of cases still open against Ecuador, the State runs the risk to be obliged to disburse USD 13.4 billion, which is equivalent to 52% of the General State Budget for 2017.

The report of the Commission recommended to the State to terminate all BITs. It proposed negotiating new investment instruments, such as investment contracts providing restricted investor rights and investor obligations, or new international investment agreements based on alternative model BITs.

Such instruments should restrict the definition of investments, and strengthen the right of the State to regulate for the common good and sustainable development, including by recognising the right of the State to impose obligations to foreign investors, apply performance requirements, secure the fiscal competence of the State, secure technology transfer, and force investors to respect international standards and human rights and the environment, among others.

The Commission also recommended the State not to include investor-state dispute settlement (ISDS) mechanisms in new BITs, and to strengthen the domestic jurisdiction in order to provide judicial guarantees for investors in national courts. These efforts should include the development of a comprehensive national policy on and specific rules for foreign investment, and the creation of one central agency to be in charge of the institutional governance of foreign investment.

President Rafael Correa Delgado stated that in different international forums the country has led discussions on the legitimacy of BITs. He emphasized the leading role of Ecuador in different international processes concerning these issues, particularly the process for the adoption of a binding treaty on business and human rights in the United Nations Human Rights Council. Ecuador was elected Chair of the Open Ended Intergovernmental Working Group that is negotiating the treaty.

The President of Ecuador also highlighted the need to join forces with others to achieve an integral reform of the ISDS system. He noted the need (in a reformed system) for permanent and professional judges, with renowned knowledge and experience in public international law, in order to avoid the strong commercial orientation that characterized the current system.

The experience of Ecuador has also led to discussion on the creation of a Regional Centre for Dispute Resolution in UNASUR, with the objective of providing more transparent proceedings and appeal mechanisms in the ISDS system; this also includes the adoption of a code of conduct for judges.

Finally the efforts of Ecuador are part of a growing global movement to reform the international investment treaties regime. Many countries in almost all regions have started to review their investment treaty regimes. They are seeking a more balanced approach, one that provides rights of investors, but also recognises the right of the State to regulate investments and investors for national interests, development objectives and the rights of their peoples.

For example, South Africa initiated the termination of its existing BITs (when they expire) in recent years, with the objective of safeguarding its right to regulate investments and the right to establish development policies while at the same time protecting investor rights. Bolivia has also withdrawn from its BITs. India recently announced it would withdraw from 57 investment treaties with the objective of re-negotiating them based on its new model BIT. The newly announced measure by Ecuador to withdraw from its remaining BITS is in line with the measures of these other countries. According to the current Trade Minister of Ecuador, Mr. Juan Carlos Cassinelli, Ecuador is thinking of the re-negotiation of its BITs, on the basis of a new text that contains reforms to the ISDS system [1].

Daniel Uribe is a Visiting Researcher at the South Centre.