Bilateral
investment treaties (BITs) are among the better kept
secrets of the internal economic regime in the recent
past. Increasingly, other international agreements
signed by governments are subject to much discussion
and public debate both at the negotiation stage and
during implementation. In India, for example, we are
now much more concerned about the positions taken
by government negotiators at the WTO, and there is
active debate about the various clauses in the agreements.
Yet
BITs, which have been expanding dramatically both
in number and in coverage and protection provided
to investors, remain largely outside the domain of
public discussion. The Indian government has signed
more than fifty such treaties, yet these are hardly
known, and the precise contents of such treaties are
not disseminated or discussed at all, even though
they can have all sorts of implications and also carry
a number of dangers which are only now becoming obvious
in several countries.
BITs are agreements between two countries for the
reciprocal encouragement, promotion and protection
of investments in each other's territories by companies
based in either country. In addition to providing
for basic rights of admission and establishment, such
treaties typically cover issues which are various
forms of protection to foreign investors, such as
compensation in the event of expropriation, war and
civil unrest or other damage to the investment and
guarantees of free transfers of funds and the recuperation
of capital gains.
In addition, there are usually specified dispute settlement
mechanisms, both for state vs. state and investor
vs. state. In fact, the experience so far is mainly
with investor-state disputes, since multinational
companies have been more than willing to use the provisions
of such treaties to extract concessions or compensation
for public actions.
Thus, the main provisions of such treaties tend to
be broadly similar to those in the abandoned OECD
Multilateral Agreement on Investment (MAI), and sometimes
they are even more stringent. This is of special significance
given the previous failure to impose investment rules
in the WTO, and the persistence of hopes for the renewal
of this issue. There is no doubt that once a substantial
number of countries have signed or accepted even more
sweeping provisions with respect to investment in
bilateral or regional deals, they will find it much
harder to resist MAI-type agreements at the WTO, and
may even prefer a situation in which they are all
in the same adverse situation together, rather than
being individually ''picked out''.
Earlier, NAFTA was widely believed to be the most
stringent application of such investment rules. Chapter
11, NAFTA's powerful investment chapter, provides
foreign corporations with rights to sue governments
for enacting public policies or laws which they claim
to affect their profitability. There is no provision
for exception even for such goals as safeguarding
the environment, protecting the health and safety
of citizens, supporting small businesses or maintaining
and increasing employment.
Under the investor rights guaranteed in the agreement,
investors are allowed to demand compensation for ''indirect
expropriation''. This has been interpreted to include
any government act, including those directed at public
health and the environment, which can diminish the
value of a foreign investment. These cases are adjudicated
by special tribunals, bypassing the legal system of
all three member countries. Already, suits with claims
amounting to more than $13 billion have been filed
by large companies. In a typical case in 2000, the
Mexican government was ordered to pay nearly $17 million
to a California firm that was denied a permit from
a Mexican municipality to operate a hazardous waste
treatment facility in an environmentally sensitive
location.
However, while the regional agreements such as NAFTA
have received some amount of adverse publicity, the
numerous BITs that have been signed have been subject
to very little public scrutiny, even though they can
go much further. The first BIT was signed between
Germany and Pakistan in 1959, but they did not really
become important until the 1990s. Over 400 wide-ranging
bilateral treaties were signed before 1995, but thereafter
there has been an upsurge of such treaties.
The number of BITs increased by five times in the
1990s from 385 in 1989 to 1,857 at the end of 1999.
By 2004 there were estimated to be 2,365 BITs in operation.
(UNCTAD) They cover 176 countries, mostly in the developing
world and Eastern and Central Europe, and cover around
one-fourth of the stock of FDI in developing countries.
Chart
1 >> Click
to Enlarge
The
purpose of BITs is usually to provide amore stable
and secure environment for foreign investors, and
thereby to ensure ''investor confidence''. The security
and guarantees provided by a BIT are seen as essential
to encourage the inflow of supposedly much-needed
foreign investment to developing countries. Most developing
country governments are constantly told that foreign
investors need such assurances before they can be
persuaded to enter into potentially unknown or risky
markets.
However, there is little evidence that signing a BIT
actually does contribute to more FDI in developing
countries. Even the World Bank admits that ''empirical
studies have not found a strong link between the conclusion
of a BIT and subsequent investment inflows''. (World
Development Report 2005) In fact, countries without
too many BITs (such as China) have been far more successful
in attracting FDI from home countries that have signed
BITs with other developing countries.
Table
1: Number of Bilateral Investment Treaties in
2002 |
Region |
Number
of BITs
|
Countries |
Average
BITs per country |
|
|
|
|
Developed
countries |
1170
|
26 |
45 |
Developing
countries |
1745
|
150 |
12 |
Africa
|
533
|
53 |
10 |
Latin
America and the Caribbean |
413
|
40 |
10 |
Asia
and the Pacific |
1003
|
57 |
18 |
Central
and Eastern Europe |
716
|
19 |
38 |
Table
1 >> Click
to Enlarge
Chart
2 >> Click
to Enlarge
Instead, BITs have far-reaching and typically negative
implications for host country governments and citizens,
because of the sweeping protections afforded to investors
at the cost of domestic socio-economic rights and
environmental standards. A common concern about investment
agreements is that they subject countries to the risk
of litigation by corporations from or based in another
country which is a signatory to the same agreement.
This might be based on a company's objections to the
host government's environmental, health, social or
economic policies, if these are seen to interfere
with the company's ''right'' to profit.
These adverse effects are already becoming evident
in the increasing litigation which is facing developing
country governments who seek to safeguard citizens'
rights. For example, the multinational infrastructure
company Bechtel (which also deals in water supply
services) successfully currently sued the Bolivian
government under a 1992 Holland-Bolivia BIT for loss
of profits after the government's reversal of a disastrous
water privatisation in Cochabamba municipality following
a popular uprising in the area.
A number of other developing or formerly socialist
countries are facing such disputes brought by multinational
companies, ranging from Pakistan to the Czech Republic.
The most striking recent examples of the adverse effects
of BITs for the host country come from post-crisis
Argentina.
The World Investment Report 2005 describes how the
privatisation of public utilities in the early 1990s,
combined with the 54 BITs that the Argentine government
signed over the 1990s, had unforeseen adverse consequences
after the sharp devaluation of the peso during the
2002 financial crisis. The trebling of the value of
the dollar in local currency forced the government
to transform all dollar-denominated contracts into
peso-denominated contracts, including those signed
with the utility forms that were now owned and controlled
by multinational companies. In addition, the periodic
adjustment of tariffs based on foreign inflation indices
were also eliminated.
This has led to a spate of disputes instigated by
foreign investors - as many as 37 such cases have
been filed with World Bank's private arbitration body
for investment disputes, the International Centre
for Settlement of Investment Disputes (ICSID) since
2002. The first award of the ICSID tribunal, on 12
May 2005, ordered Argentina to pay $133.5 million
plus interest in compensation to the US-based multinational
CMS on grounds of violation of the BIT between Argentina
and the US. ICSID rejected the Argentine government's
plea that these were emergency measures based on the
necessity created by the dire financial, economic
and social crisis in the country.
It should be noted that the resolution of such conflicts
is not subject to the standard juridical systems of
the member countries - rather it is governed by tribunals
or similar bodies specified in the treaty. This amounts
to the privatisation of commercial justice, with no
democratic accountability of the decision makers in
this regard. In many bilateral agreements, the provisions
state that where a dispute cannot be settled amicably
and procedures for settlement have not been agreed
within a specified period, the dispute can be referred
to another body.
The two most important such bodies are the World Bank's
private arbitration body for investment disputes,
the International Centre for Settlement of Investment
Disputes (ICSID) or the UN Commission on International
Trade Law (UNCITRAL). Under NAFTA, complainants (usually
the dissatisfied investors) are allowed to choose
between these two bodies.
Domestic courts and national legal systems are completely
marginalised by investors' recourse to these international
arbitration panels. ICSID and UNCITRAL only allow
for the investor and government parties to the dispute
to have legal standing. The public has no right to
listen to proceedings or to view evidence and submissions.
Both bodies require only minimal disclosure of the
names of the parties and a brief indication of the
subject matter, which prevents public scrutiny or
popular opposition. These bodies are thus given the
responsibility to adjudicate virtually all investment
disputes without democratic structures or transparency,
despite the fact that they are not serving private
goals but an international judicial function governed
by treaty and international law.
These two arbitration bodies have developed rules
for both conciliation and arbitration that are based
completely on legal systems of the north, especially
the US, and ignore much of the world's wealth of experience
in settling disputes, such as Asian rules of arbitration.
The record of these bodies thus far has been very
investor-friendly, in awarding substantial damages
and compensation to multinational corporations for
''transgressions'' of developing country governments.
Under these conditions, there is clearly little incentive
or need for international investors to settle disputes
amicably, given the highly favourable outcomes for
corporations which have initiated proceedings under
such agreements. So BITs have become potent weapons
of multinational companies against not only governments
but also the societies of countries that have signed
these treaties.
Clearly, in this context, it is critical for civil
society across the developing world to demand that
the signing of BITs be subject to public scrutiny,
and that the proceedings disputes arising from BITs
be open and publicly accessible for the common good.
