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The battleground of Bilateral Investment Treaties

Added 23 Jan 2015

Just read a great new FT blog from Kavaljit Singh on India’s radical redesign of its investment treaty model. The main points are below [the FT article is entombed in a paywall], but first, here’s a quote from a report I co-wrote last year, which helps explain why bilateral investment treaties (or BITs) are becoming a battleground in developing countries:

In 2012 there were 3,196 investment treaties globally, many of them affecting developing countries. There are also important investment chapters in free trade agreements. While these treaties and agreements are supposed to both protect foreign investors and benefit recipient countries, the growing number of investment disputes and ‘persistent concerns about the [investment arbitration] regime’s systemic deficiencies’ indicate that the balance may be tilted against developing countries. 2012 saw the highest number of international claims filed against states by foreign companies, with 66 % filed against developing countries.

Despite this plethora of treaties, as Kavaljit notes:

There is no conclusive evidence to show that BITs result in greater [Foreign Direct Investment] inflows. Since 1994, India has signed BITs with countries such as Mongolia, Serbia, Macedonia and Iceland but the two-way investment flows between India and these countries remain negligible. On the other hand, India receives substantial foreign investments from the US and Canada without any BIT.

For any foreign investor, there are other determinants – especially market size, infrastructure, tax policy, labour laws and the business environment – that influence the investment decision more than a BIT between the home and host countries.

There is a plenty to learn from the other Brics countries. Brazil is not a party to any BITs but still receives substantial amounts of foreign investment.

So, the serious drawbacks, and inconclusive evidence of any development benefit, meant that:

New Delhi launched a review of its investment treaties in mid-2012 in the wake of public outcry over arbitration notices served by 17 foreign companies (including Vodafone and Sistema) challenging various policy measures and demanding billions of dollars in compensation for the alleged violation of India’s BITs.

Here are the main changes envisaged by the new ‘model investment treaty’ that India has drafted as it prepares to resume negotiations with the USA [Kavaljit in italics, me without]. The new model:

  • adopts an “enterprise” based definition of investment, thereby narrowing it to foreign direct investment (FDI) [so money lying in a bank account wouldn’t count any more.]
  • defines both persons and enterprises “conducting real and substantial business operations in the home state” as investors. This qualification is intended to deny investment protection to so-called “mailbox companies” which have a minimal commercial presence in the home country.
  • Drops the most favoured nation (MFN) treatment provision. By virtue of the MFN clause in a BIT, a foreign investor can “import” more favourable protection provisions contained in other BITs and use them to bring claims before arbitration tribunals. In 2011, India lost a case to an Australian company which successfully used the MFN clause contained in India-Australia BIT to import an “effective means of asserting claims and enforcing rights” clause from the India-Kuwait BIT.
  • Provides national treatment (treating foreign and local investors equally) but the qualifying term “in like circumstances” has been inserted to narrow the scope.
  • Contains binding obligations on investors on matters related to corruption, disclosures and taxation.
  • Retains the investor-state dispute settlement system (ISDS) but it requires an investor to exhaust all local remedies (judicial and administrative) before initiating international arbitration. In other words, an investor will have to first submit its claim before the domestic courts in the host country. Further, an arbitration tribunal is not given powers to re-examine any judicial decisions.It also contains expansive provisions to make the ISDS more transparent and accountable.
  • Includes a long list of measures that will be completely exempted under the Treaty. These include measures related to taxation (à la Vodafone case), intellectual property rights (compulsory licensing), state subsidies, government procurement, public health and safety, environmental protection and financial stability.

Trade and investment treaties have exploded back on the agenda in Europe, thanks to a mass campaign against the proposed Transatlantic Trade and Investment Partnership (TTIP), but the public outcry against BITs has exploded in India and other developing countries too. As Kavaljit notes, however, it’s not easy for developing countries to insist on the provisions they want when negotiating with powerful rich countries. Perhaps a better approach is to follow the lead of South Africa, which has terminated all its BITS, replacing them with domestic legislation