Bretton Woods Project | 28 September 2015
Corporate bias at the World Bank Group
In late 2014, the Economist magazine wrote:
“If you wanted to convince the public that international trade agreements are a way to let multinational companies get rich at the expense of ordinary people, this is what you would do: give foreign firms a special right to apply to a secretive tribunal of highly paid corporate lawyers for compensation whenever a government passes a law to, say, discourage smoking, protect the environment or prevent a nuclear catastrophe. Yet that is precisely what thousands of trade and investment treaties over the past half century have done, through a process known as ‘investor-state dispute settlement’, or ISDS.”
The main venue for investor-state dispute settlement, when foreign investors claim they are owed compensation from countries in which they have invested, is the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID). ICSID is one of the least well-known of the five entities that make up the World Bank Group, but it is getting much more attention as it is central to the negotiations for both the Trans-Atlantic (TTIP) and Trans-Pacific (TPP) trade and investment agreements.
There is growing discomfort, even amongst insiders, about ICSID’s corporate bias.
ICSID: Controversial at inception, but quickly centre-stage
ICSID was created by the World Bank in a sea of controversy. At the 1964 Tokyo World Bank and IMF annual meetings, 21 developing-country governments voted “no” to the convention to set up this new part of the World Bank Group in which foreign corporations could sue governments and bypass domestic courts, thus dramatically eroding local democratic control over important political and economic decisions. The 21 included all of the 19 Latin American countries attending* as well as the Philippines and Iraq. The historic vote was dubbed the “Tokyo No.” It could well be the largest collective vote against a World Bank initiative ever. And perhaps the one time that all Latin American representatives voted “no.”
Speaking on behalf of the Latin American countries Félix Ruiz, then representative of Chile, said:
“The new system … would give the foreign investor, by virtue of the fact that he is a foreigner, the right to sue a sovereign state outside its national territory, dispensing with the courts of law. This provision … would confer a privilege on the foreign investor, placing the nationals of the country concerned in a position of inferiority.”
They believed that the new investor-state dispute settlement system was both unnecessary and unfair.
Those who follow the World Trade Organization (WTO) and its dispute resolution mechanism might note the irony: a fundamental rule of today’s neoliberal push towards ‘ultra-globalisation’, as embedded in the WTO, is that a country’s rules must treat foreign and domestic investors equally. The irony is, of course, that ICSID’s existence seems to suggest that such ultra-globalisation proponents do not find it problematic to have foreign investors privileged over domestic investors.
The ICSID treaty went forward, despite the “no” votes. Initially it was small and largely irrelevant. Its first case was filed in 1972, with just over two dozen cases by 1988. However, by the mid-1990s, ICSID moved center-stage, thanks to the ISDS clauses inserted in bilateral and multilateral trade and investment agreements, starting in the 1980s and exploding in the 1990s. In 2012 alone, 48 new cases were added to ICSID’s docket. All of the 48 cases were filed against governments of developing countries, more than one-third (17 or over 35 per cent) relating to extractive industries.
As the number of cases brought by corporations before ICSID has ballooned, so too have the criticisms – mainly by sovereign states, but increasingly by trade lawyers and others. The arguments are that ICSID rulings are: 1) increasingly biased in favour of corporate investors over governments and therefore highly anti-democratic as presaged by the Tokyo No’s concerns; and 2) too narrow in their focus on ‘commercial’ rights (that is, of the private foreign investor) over broader social and environmental issues.
Heads we win, tails you lose: ICSID’s corporate bias against El Salvador
A long-time subject of my research is the 2009 case of Pac Rim Cayman LLC, a global gold-mining firm, which sued the government of El Salvador for not granting it a mining concession. In El Salvador, there has been growing concern about the long-term environmental and social impacts of gold mining, versus its very limited short-term economic benefits. Starting in 2005, local communities in northern El Salvador, along with the Catholic church, development groups, human rights organisations and international allies (including civil society groups, such as MiningWatch Canada, the Institute for Policy Studies and Oxfam America) spoke out against industrial mining in the country, and then later against the Pac Rim suit at ICSID. Their broader argument, which was supported by the national government, was that over half of El Salvador’s drinking water comes from the Rio Lempa watershed, a vast area that encompasses much of El Salvador’s gold deposits and that therefore mining would threaten this already compromised watershed.
Pac Rim, now owned by the Canadian/Australian firm OceanaGold, never actually received a mining concession given that it never fulfilled all the legal requirements to do so. However, the company cleverly ignored this key point in bringing a case to ICSID in which it argued that it was being unfairly denied a concession for other reasons. The fact that the Pac Rim case against El Salvador was allowed to proceed at ICSID is in itself startling, since Pac Rim never met all of the conditions necessary to be granted that mining concession. Beyond this narrower, more technical purview, this case demonstrates how ICSID ignores broader questions, such as: Should not the government of El Salvador have the right, or indeed the responsibility, to protect its key watershed from the environmental ravages of gold mining that will use cyanide and release arsenic embedded with gold in the rock? Moreover, why should an investor have the right to sue the government, while other key non-state actors, such as the affected communities, are not allowed to participate equally and are often, as in the Pac Rim case, not even allowed to listen to the substantive hearing on the case’s merits? In the Pac Rim case, communities were allowed to submit two amicus briefs (“friends of the court” briefs) – having been fortunate enough to find a lawyer willing to write these on their behalf. But there is not even any assurance that the briefs were read by the three ICSID-certified tribunalists who preside over this case.
This case is currently awaiting the ICSID tribunal’s decision on the ‘merits’ or substance of the case. But if El Salvador ‘loses’, it could be required to pay not only the approximate $300 million Pac Rim is asking for in compensation and profits foregone, but also Pac Rim’s approximately $12.6 million costs in legal and ICSID fees. Moreover, such a decision could open the door to mining at this concession or elsewhere. And if El Salvador ‘wins’, it would likely still have to pay its own estimated $12.6 million in legal and ICSID fees, and it will have spent years of its own human resources (which are, of course, public resources) fighting this case. Whatever the decision, the ‘loser’ will likely proceed into ICSID’s ‘annulment’ stage – which is not the same as an actual appeals process. Unlike courts and most judicial systems, ICSID tribunals are not based on legal precedent, so there is no appeal on judicial grounds.
In other words, there is no real victory possible for El Salvador or its people at ICSID.
Worsening systemic bias at ICSID?
This case – while egregious – is not unique. ICSID’s bias in favour of corporations demonstrates the validity of the concerns raised by the 21 “Tokyo No” countries fifty-one years ago. If anything, as ICSID’s workload has skyrocketed and as corporations’ global reach has expanded, ICSID appears to have become increasingly biased towards private corporate investors.
There is growing discomfort, even amongst insiders, about ICSID’s corporate bias. In 2014 prominent trade lawyer George Kahale III publicly declared that ICSID tribunals, before which he has argued cases, were increasingly biased in favour of foreign investors. Kahale and other critics have pointed out that since ICSID does not build its cases on legal precedents nor allow for appeals based on judicial reviews, there are no mechanisms to correct flawed rulings. Stating that “the system is broken”, Kahale also denounced the trade agreements for empowering hundreds of corporations to pursue these ICSID cases as “weapons of legal destruction” that are “susceptible to abuse”.
It is therefore understandable why Bolivia, Ecuador, and Venezuela have left ICSID. South Africa is establishing a new investment law that allows foreign corporations to bring such claims only to domestic courts. India is conducting a review of its treaties in the face of several corporate lawsuits, and Indonesia has announced its intent not to renew its bilateral investment treaties. Australia declined to include these corporate rights in the 2005 Australia-US Free Trade Agreement. Brazil has never accepted investor-state dispute settlement in any venue.
A related set of biases reflects a concern that ICSID’s scope is too narrow. As seen in the El Salvador case, this includes questions of whose voices are heard and whose are effectively silenced – and notably the lack of meaningful voice for affected communities and civil society. This is hardly consistent with the principle of ensuring free, prior and informed consent of affected communities.
The narrowness is also evident in how environmental, human rights and other social issues are dealt with at ICSID. At the time of ICSID’s founding, there were few universal human rights instruments, only a couple of environmental treaties, and no key international instruments on the rights of indigenous peoples. But much has changed since ICSID’s birth, including widespread acceptance of the centrality of environmental issues. Our instruments of global governance should be structured to reward a government such as El Salvador for taking steps to protect ecosystems, rather than punish it by being sued at ICSID. It is the duty of governments to prioritise their responsibility to protect people and their ecosystems. In its current structure, ISDS clauses and rulings by ICSID do the exact opposite – discouraging national environmental and social regulations, for fear of being sued.
After 51 years: time to say “no” to ICSID
There is increasing urgency to say “no” to ICSID. If the two main trade and investment agreements under negotiation today, TPP and TTIP, are approved, ICSID’s case-load will grow further, thanks to the investor-state dispute settlement clauses currently in both drafts. The TPP would include 12 nations that account for about 40 per cent of world GDP, and TTIP would include 29 of the world’s largest economies (the US and the 28 member states of the European Union), so each would cover vast portions of the world economy where foreign investment plays a major role. If either of these agreements comes into effect, we can expect even more action in terms of investors’ propensity to sue governments not just for ‘direct taking’ via expropriation (the original purpose of ICSID), but also for ‘indirect taking’ via environmental, social and other regulations that might just impinge on a foreign investor’s future ability to make profits.
Fortunately, there is escalating opposition to these agreements. France and Germany have voiced concerns about investor-state provisions. Indeed, in June 2015, France’s minister of state for foreign trade, Matthias Fekl, recommended a Europe-based alternative investor-state system that would address many of the biases in ICSID for the TTIP negotiations, and he stated that many European countries supported this. Even in the US, economists and politicians, such as Nobel-prize winner Paul Krugman and senator Elizabeth Warren, are speaking out.
Proponents of these agreements often warn that the global economy will fall apart without such investor rights and its key venue ICSID, and that foreign investment will dry up. But this is not so. Brazil, which has never accepted investor-state dispute settlement in any venue, is nevertheless a leading recipient of foreign investment. More generally, foreign investors that believe they are making a risky investment could simply rely on foreign risk insurance; they also have recourse to the relevant domestic courts in a given country. That is another example of the bias created by ISDS’ reliance on global forums such ICSID: since domestic firms have to go through domestic courts, so should foreign firms.
Let us celebrate the 51st anniversary of ICSID by urging current member governments to withdraw from this World Bank Group’s forum that undermines democracy, fairness, the environment, and the broader common good. And let us make sure that ICSID is not further strengthened by unwise trade and investment agreements.
* The 19 Latin American countries that voted "no" are: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela.