Investment deal? Just watch it
Vodafone had sought to leverage the Netherlands-India BIT.

The Hindu Business Line | January 1, 2014

Investment deal? Just watch it


Bilateral investment treaties could come in the way of governments’ public policy objectives.

Bilateral investment treaties, a widespread form of investor protection agreement signed between nations, have been controversial for some time now.

BIT proponents argue that they offer businesses and financial investors the protection and confidence they require to invest in markets perceived as high risk. But critics have pointed to countless instances where they have had a far more malign streak, enabling large multinational companies to exercise inordinate influence over domestic policy in markets that they enter. They mandate international three-person tribunals through which companies are able to contest government decisions without having to resort to the local judicial system.

They’ve been used, for instance, when countries have tried to introduce restrictions on cigarette branding (Australia), environmental regulations (the US state of California), and against South Africa’s black empowerment legislation. They’ve also been used when countries have been in dire economic conditions — such as Argentina after the 2002 devaluation of the peso or Greece following its EU-IMF bailout.

The number of BITs signed across the world has been soaring for decades (since 1959 around 3,000 have been signed globally), particularly in emerging markets, but now a growing number of countries are questioning their utility. The question of why companies — with comprehensive judicial systems to avail in the countries they invest in — need the added tool, or weapon, of an opaque private tribunal system at their disposal, giving them protection beyond that afforded to domestic companies, is becoming increasingly hard to answer.

Anti-BITs movement

“The fundamental issue with BITs [and other investment protection agreements] is that you have all sectors of investment — well beyond FDI — subject to international arbitration, which means three persons can decide over national policies in an enormous and wide range of areas,” says Nathalie Bernasconi, an international lawyer and head of the investment programme at the International Institute on Sustainable Development.

In the last couple of years, South Africa has become the unlikely champion of the anti-BIT movement, scrapping its treaties with several European nations, including Germany, Switzerland and Belgium (once they were up for renewal) and with plans to revisit the remainder, including with countries outside Europe. In its place it is planning to bring in legislation that offers domestic and foreign investors equal protection. According to a draft of the Bill published in November, there is no opportunity for international arbitration, and, unlike most BITs, it does allow for circumstances in which assets could be expropriated for national interest, notes Sean Woolfrey, a researcher at South Africa’s Trade Law Center in a recent paper. Also gone is the “fair and equitable treatment” clause ensconced in most BITs, which because of its ambiguity has been widely used by MNCs seeking redress.

While South Africa’s is the most comprehensive — and most sustainable — overhaul of the BIT system, other emerging markets have been revisiting their BITs too: in 2013, Ecuador announced plans to review its investment treaties after several arbitration proceedings were launched against it, largely by US oil companies. It had already cancelled several. Several other South American nations have cancelled BITs on an ad hoc basis.

Interestingly, it’s not just in emerging markets that a debate has begun to take place on BITs. Two years ago, Australia announced it would no longer allow for international arbitration proceedings in any BITs signed or renewed. The investment chapter of the proposed EU-US Free Trade Agreement has come under great scrutiny in Europe. Research carried out on behalf of the UK government published in 2013 concluded that an agreement that included international arbitration provisions would have “few or no benefits to the UK,” while having meaningful economic and political costs” and that the treaty risked giving US investors the chance to bring “long shot” claims against the UK.

In November a debate on BITs and investment chapters took place in the Dutch Parliament — significant as the Netherlands has become a major gateway for western multinational corporations to pursue arbitration against developing nations (for example, when Vodafone warned it would launch international arbitration proceedings against India over the $2 billion tax dispute related to its takeover of Hutchison’s Indian assets, it invoked the India-Netherlands BIT). “There is a broad coalition of political parties [in the Netherlands] who have questioned the necessity and usefulness of these treaties,” says Roos Van Of, a researcher at SOMO, a Dutch non-profit. In Belgium the debate has been even more heated, after Chinese insurer Ping An filed international arbitration against Belgium last year over the nationalisation of the financial services group Fortis.

Even EU Trade Commissioner Karel De Gucht acknowledged that investment chapters and BITs could be abused to “defeat legitimate public policy objectives of governments,” and lacked transparency. “I am the first to admit that the system needs to be improved,” he told the International Trade Committee of the European Parliament in November.

Despite acknowledging the flaws, the European Commission has made clear it plans to go ahead with investor protection measures — including on arbitration proceedings — in the upcoming Free Trade Agreements, including with Canada, China, the US — and India.

“I think they are afraid that if they do not include investor-state arbitration in the treaties, they would give countries such as South Africa that have been challenging BITs more strength to their argument,” says Bernasconi.

India’s options

Facing the prospect of multiple arbitration proceedings from the cancellation of telecom licences, India too launched a review of its investment treaties. However, worryingly, the process has so far been carried out in marked contrast to the open and transparent consultation process followed by South Africa. “Despite being the world’s largest democracy there is no public participation, there have been no efforts to consult domain experts with decades of experience in this area,” says Kavaljit Singh, director of the policy research institute Madhyam. “This is a great opportunity to review the BIT system and see what benefits we’ve got from BITs, as well as the potential negative aspects.” He notes that with the review ongoing, a BIT was signed with the UAE in December.

India has several options when it comes to BITs: creating a new investment protection platform for companies, local and foreign, as South Africa has, or standing firm on the need to adjust existing ones as they come up for review to remove the more unpalatable clauses. While concern that eliminating BITs could hurt foreign investors is understandable it must also be put in context.

A lack of a BIT has rarely stood in the way of investors ploughing into a market they deem attractive. Brazil, for example, is not party to any BITs. The current review of BITs is therefore an opportunity not to be squandered.

(This article was published on January 1, 2014)