Bilateral investment pacts haven’t worked
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Hindu Business Line | 24 Aug 2016

Bilateral investment pacts haven’t worked

PRADEEP S MEHTA

They operate at cross-purposes. It would appear that governments have been unable to enforce investor obligations

Globally, the international investment agreement (IIA) regime is undergoing a change and the developments in India are no exception. India has decided to terminate about 57 bilateral investment treaties (BITs) whose initial duration has expired, or is soon to expire, and issue joint statements for the ones in force.

The reform of the IIA system has swept many countries, including Australia, South Africa, Indonesia, and changes are likely in the European Union (EU) as well. What are the reasons for the growing scepticism? What lies ahead for India and the world?

White case fallout

In the 1990s, following the economic reforms, India signed a number of BITs and like most countries did not fully understand the consequences. In 2012, India lost an investor-state arbitration dispute to White Industries. White Industries started the proceedings under the India-Australia BIT and through the ‘most favoured nation’ (MFN) clause took advantage of the more favourable investor protections in the India-Kuwait BIT.

The tribunal held that the court delays in India breached the “effective means” standard in the India-Kuwait BIT and as such India was liable to pay damages plus costs and interest to White Industries. This was perhaps the turning point in India’s approach to BITs. Consequently, India’s new model BIT of 2015 excludes the MFN clause, taxation, compulsory licences and intellectual property rights from its purview. More importantly, on the controversial provision of investor-state dispute settlement (ISDS), it requires investors to pursue domestic courts for at least five years before resorting to international fora.

India, however, is not alone in changing its approach to IIAs. At a recent meeting of UNCTAD’s World Investment Forum in Nairobi, both the developed and developing countries, including Australia, Canada, China, South Africa, EU, called for the IIA regime to be more balanced between investor protection and host states’ right to regulate, and enforce rights and obligations.

Countries in Europe are exploring the possibility of a permanent multilateral investment court. There is a growing voice for greater transparency, tightened definitions and reforms in the ISDS system.

Specifically, South Africa has found no co-relation between the inflow of foreign direct investment and BITs, which is a no-brainer. After all, there are a large number of determinants for FDI flows. For example India and US have not had a BIT, yet the US is the largest source of FDI in India. It’s another matter that a BIT with US would be strategically advantageous.

Endless confusion

Host countries increasingly feel that BITs lean in favour of protection for corporations and compromise the regulatory space of the governments.

A need has thus been felt to include investor obligations and responsibilities, and to narrowly define the rights in the text of such agreements. There has been an exponential increase in investor-state arbitrations. As evident from the cases against Argentina in the wake of its economic and political meltdowns, the tribunals tend to come out with conflicting opinions.

Countries have also been sued for the same underlying dispute under more than one BIT. In the absence of an established mechanism for appeal, the confusion has been endless. Furthermore, the tribunals have given remedies based on potentially more favourable clauses in BITs, other than the one invoked, by incorporating the standard under the MFN clause.

All of these factors have alarmed governments across the world and has led many countries to rethink their strategies. The G20 Guiding Principles for Global Investment Policymaking also reflects the change in approach. While it affirms a non-discriminatory and predictable investment climate, it also asserts the right of host governments to regulate investments for legitimate public purpose and supports a robust ISDS system, with safeguards to prevent abuse.

In the context of ISDS, is it worth mooting whether a permanent investment court may be feasible. Such a permanent court may have a system of appeals within its framework or it may only be an appellate tribunal. This will bring some certainty in the system and prevent divergent or conflicting opinions on the same legal provision. However, since there are about 3,000 different BITs in force with differing provisions, there may be a problem of coherence and cross-application of arbitral awards.

For a balanced system

A parallel approach could be that countries undertake specific commitments to provide speedy adjudication of disputes in domestic courts before invoking international arbitration. This too has been met with resistance thus far. Countries may also negotiate for compulsory alternate dispute settlement mechanisms like mediation in the BITs.

While the discussion is ripe on reforming the IIA regime, it is worth reaffirming the need for research for finding the best possible approaches to BITs. Such an approach must balance investor rights and countries’ regulatory space. At the same time, the new age BITs should be mindful of the sustainable development goals and find ways to encourage responsible investment.

With the blurring distinctions between strictly capital-importing and capital-exporting states, all countries must proactively seek a more balanced IIA system. This requires greater cooperation and open-mindedness on part of the global community. India has indeed taken the first step in reforming its IIA regime and it should be the starting point of a larger debate.

Time will tell how successful it is in setting the tone for the second phase of BITs across the world. This is notwithstanding any discussions on a plurilateral investment agreement at the WTO, as is anticipated by many. The future of international investment policy discourse will be quite interesting.

The writer is Secretary General, CUTS International. Smriti Bahety of CUTS contributed to this article