Dawn | 13 June 2018
International arbitration treaty may be a trap for Pakistan
by Khaleeq Kiani
ISLAMABAD: Pakistan may be at the risk of new investment arbitration lawsuits if it formally signs an international Energy Charter Treaty (ECT) under which powerful investors have already sued other states for $35 billion at various global tribunals.
The warning has come from two leading European non-profit research and advocacy groups – Corporate Europe Observatory (CEO) and the Transnational Institute (TNI) – in their first in-depth study of the impacts of ECT and made exclusively available to Dawn in Pakistan.
Pakistan is an observer to the ECT since 2006 and has been showing interest to become full member citing access to higher investments and energy funding. So far around 88 countries, mostly from Europe, have become its members.
The ECT has become “a powerful tool in the hands of big oil, gas, and coal companies enabling them to discourage governments from transitioning to clean energy,” the report warns and wonders why Pakistan was readying to full treaty membership despite the fact that investment arbitration was controversial in Pakistan, and that the government had produced a new Bilateral Investment Treaty model that aimed to restrict the rights of investors, a move that could be undermined by the signing of the ECT.
Among other things, the report presents evidence of how energy companies were currently using this little-known international investment agreement to sue governments for $35bn at international tribunals where the ECT had given corporations and private lawyers enormous influence over future energy systems, tying countriesto corporate-friendly energy policies.
It said Pakistan was currently trying to annul a $800 million arbitration award in favour of a Turkish investor in the Karkey Rental Power case, it was strange that Turkey and Poland were hosting Islamabad as outreach embassies for the ECT secretariat to “give ‘political support’ to the ECT Secretariat’s outreach drive and do their own promotion.
The report recalled that when Pakistan was hit by its first investor-state lawsuit in 2001, based on a 1995 bilateral treaty with Switzerland, no one in the government could find the text and they had to ask Switzerland for a copy.
It also pointed out that in Thar’s desert, Chinese and Pakistani investors were digging up dirty lignite coal to fuel new power plants and the local community was fighting to prevent the acquisition of its ancestral land, fearing that the mines will pollute the air, deplete groundwater in the drought-ravaged region, and destroy livelihoods.
“The plants will spew billions of tonnes of carbon dioxide into the atmosphere exacerbating climate change,” the report said warning that if Pakistan and China join the ECT, Chinese investors could claim billions if a future Pakistani government decided to fulfil its climate commitments and keep coal in the ground.
While China and Pakistan already have a bilateral investment treaty, it is limited in its reach as only the amount of compensation for an expropriation can be the subject of an investment arbitration.
The report said the potential new member states to the ECT, energy ministries seemed to be directing the accession process while officials from ministries with experience in negotiating investment treaties and defending investor-state arbitrations, on the other hand, appeared largely absent.
While many of them have disastrous experience with investor lawsuits under other investment agreements, reports written by their seconded national experts, for example, were full of unproven claims about how the ECT “can positively impact” a country or region “with regard to attracting the needed energy investments” – but say nothing on the risks of the ECT’s vast investor privileges.
Among its many provisions, those regarding foreign investments in the energy sector – also known under the infamous acronym ISDS or investor-state dispute settlement – are the ECT’s cornerstone, which give foreign investors in the energy sector sweeping rights to directly sue states in international tribunals of three private lawyers, the arbitrators.
Companies can be awarded dizzying sums in compensation for government actions that have allegedly damaged their investments, either directly through ‘expropriation’ or indirectly through regulations of virtually any kind. Energy giant Vattenfall, for example, has sued Germany over environmental restrictions on a coal-fired power plant and for phasing out nuclear power.
Oil and gas company Rockhopper is suing Italy over a ban on offshore oil drilling. Several utility companies are pursuing the EU’s poorest member state, Bulgaria, after the government reduced soaring electricity costs for consumers. Yet the ECT and its profiteers have largely escaped public attention, the report said.
The study held that no trade and investment agreement anywhere in the world has triggered more investor-state lawsuits than the ECT which has so far listed a total of 114 corporate claims filed under the treaty. Given the opacity of the system, the actual number of ECT claims could be much higher.
It said the number of ECT investor lawsuits has exploded. While just 19 cases were registered during the first 10 years of the agreement (1998-2008), 75 investor lawsuits were filed in the last five years alone (2013-2017). This trend is likely to continue.
The study said more and more money was at stake for states and taxpayers. There are 16 ECT suits in which investors – mostly large corporations or very wealthy individuals – sued for $1bn or more in damages.
Some of the most expensive claims in the history of ISDS include ECT cases such as Vattenfall’s challenge to Germany over its exit from nuclear power (over $5.1 billion), and the largest ISDS award ever, a $50 billion order against Russia in the Yukos cases. Total legal costs average $11m in ISDS disputes, but can be much higher.
Governments have been ordered or agreed to pay more than $51.2bn in damages from the public purse – roughly equalling the annual investment needed to provide access to energy for all those people in the world who currently lack it.
Also, the ECT was prone to abuse by letterbox companies, which mainly exist on paper and are often used for tax evasion and money laundering. For example 23 of the 24 “Dutch” investors who have filed ECT-lawsuits were letterbox companies.
It said the ECT was increasingly being used by speculative financial investors such as portfolio investors and holding companies. It has become a tool for big oil, gas, and coal companies to discourage governments from transitioning to clean energy and challenged oil drilling bans, the rejection of pipelines, taxes on fossil fuels, and moratoria on and phase-outs of controversial types of energy.
The study found that small number of arbitrators were dominating ECT decision- making, adding 25 arbitrators have captured the decision- making in 44 per cent of the ECT cases while two-thirds of these super-arbitrators have also acted as legal counsel in other investment treaty disputes, raising concerns over conflicts of interest, particularly because this small group of lawyers have secured extremely corporate- friendly interpretations of the ECT, paving the way for even more expensive claims against states in the future.
Five elite law firms have been involved in nearly half of all known ECT investor lawsuits who were key drivers of the surge in ECT cases, relentlessly advertising the treaty’s vast litigation options to their corporate clients, encouraging them to sue countries.