Bilateral investment: A drag on the developing world

Many agreements have "investor-state" dispute systems under which a private company or investor can directly sue governments in an international tribunal by claiming that its property or profits have been "expropriated" or "adversely affected by a violation of contracts or by recent policy measures", writes T S Vishwanath
The ongoing dispute between the GMR group and the Maldives government over the investment for an airport in Male brings focus on a recent discussion at the World Trade Organisation public forum, and which was followed by an article by Martin Khor, executive director of Geneva-based South Centre.

The WTO public forum session, which was reported by the Third World Network, was on "Investment Provisions and Agreements: What is the right 21st century approach?", and was organised by Our World Is Not for Sale Network, the International Trade Union Confederation and Public Citizen.

"This report and Khor's article emphasised a viewpoint that investment treaties could prove to be a drag on the developing world and might adversely impact policy space for governments.

The TWN report quoted the comments made in the WTO forum by South Africa's senior trade official, Xavier Carim, on the recent changes made by Pretoria in its investment policy.

This followed a review that found that the country's bilateral investment treaties were inconsistent with South Africa's constitution, the TWN report said.

After the review, Carim said, the South African Cabinet concluded that Pretoria "should refrain from entering into BITs in future, except in cases of compelling economic and political circumstances".

"The review also identified difficulties with respect to international arbitration.

"It observed fragmentation in the system; the lack of common standards of protection; inconsistent interpretations by arbitration panels even on similar matters; as well the growing complexity of the international system through an evolving jurisprudence.

"All this exacerbates uncertainty and risk."

Carim then said, "In particular, we were concerned with investor-state dispute provisions in our BITs.

"This, in our view, opens the door to narrow commercial interests on subject matters of vital national interest and to unpredictable international arbitration outcomes, and is a direct challenge to constitutional and democratic policy-making."

The view against investor-state provisions in agreements was also supported by Khor in his article

where he noted "the epidemic of cases and the high losses that governments have suffered or will potentially suffer is giving rise to grave concerns and calls by several governments as well as public interest groups and legal experts to review and amend the agreements that have led to the legal suits".

The agreements are of two types -- BITs signed between pairs of governments (of which there are now around 3,000) and the investment chapter contained in bilateral or regional free trade agreements (especially those involving the US).

Many agreements have "investor-state" dispute systems under which a private company or investor can directly sue governments in an international tribunal by claiming that its property or profits have been "expropriated" or "adversely affected by a violation of contracts or by recent policy measures".

Interestingly, the Indian government is reportedly looking to review its bilateral agreements after foreign telecom companies decided to use BITs, following the Supreme Court's decision to cancel their 2G licences in April 2012.

Sistema invoked the treaty between India and Russia, while Telenor invoked the agreement with Singapore. As is evident from the TWN report and Khor's article, there is a view in the developing world that countries need policy space when it comes to accepting obligations in investor-state disputes in trade agreements.

This holds true if the investor-state tiff over an investment does not have a political hue, but is purely based on commercial issues.

What emerges from the Indian company's problem with Male points to a need for a possible fresh view of the position taken by the panel at the WTO public forum.

While taking a genuinely important case of protecting developing countries from unwanted legal processes, it is also important to understand that investment decisions need to be backed by strong safeguard provisions.

Political decisions can sometimes be shrouded in policy moves, which can be detrimental to both the investor and the state itself, which is receiving that investment.

The decision taken by Male could, for instance, impact Maldives in attracting genuine private investors into the country. State enterprises in some countries, which may back the current leadership in Maldives, may be willing to invest, but authentic private sector investors may lose faith in the regime.

It would be interesting to have a perspective on this issue from Khor and the other speakers at the WTO public forum.

The writer is Principal Adviser at APJ-SLG Law Offices