Investment protection agreements being disputed

Replicas of US symbols in Mexico City. Mexico is among the few developping countries that see more advantages than disadvantages in its trade and investment partnerships.
Article as analysis
Ever more countries are denouncing their investment protection agreements. South Africa has stopped renewing them as they expire, including the one with Switzerland.

"Times are changing. When we concluded our investment protection agreements, we were the pariah of the world community. Today, as even Europeans admit that these agreements are problem-ridden, we are hoping that other countries will follow our example," said Mustaqim De Gama of the South African Department for International Trade and Investment at the investment forum hosted by the UN Conference on Trade and Development (UNCTAD) in mid-October in Geneva. Pretoria has decided to renegotiate its 49 investment agreements when they expire.

"Trade and investments must serve to industrialize the country and create value locally. It is not acceptable for foreign investors to pull out at the first strike. They must respect national laws and courts. We want no more arbitration tribunals," Joanmarie Fubbs, ANC member and Chairperson of the Inter-Parliamentary Trade and Industry Committee told Alliance Sud.

In 2007, investors filed a US$340 million lawsuit against South Africa because of an anti-discrimination law. The case was in fact settled amicably, but was like a cold shower to the rainbow nation. "Since we have let our investment agreements expire, not a single investor has turned away from South Africa – on the contrary, investments are increasing. There is no causal link here," says De Gama. At the same time he admits that getting out of these agreements is not simple, as they contain clauses that guarantee investors protection for years into the future.

Indonesia, India and Ecuador belong to the movement

There was broad consensus at the UNCTAD investment forum on the need for these agreements to be more balanced. Indonesia is reviewing its 67 agreements. Some of the crucial questions are the extent to which investments serve development, who should arbitrate between investors and the State in the event of a dispute, and whether clauses on most-favoured-nation and indirect expropriation are fair. These clauses drastically limit in the leeway of States to take regulatory action on social and environmental standards. Jakarta has allowed its agreement with the Netherlands to run out and is considering doing the same with other countries.

In the wake of its first negative ruling in 2009, India too has been reviewing its 90 agreements. For India too, the aim is for its own courts to handle arbitration.

Ecuador is the country that has had the third largest number of lawsuits brought against it –amounting to US$19 billion in compensation payments. Despite 30 agreements, Ecuador receives the least investments in all of Latin America, and currently existing investments are concentrated in the petroleum sector, where enormous environmental damage is taking place. To date, Ecuador has terminated 10 agreements and is about to do so with 16 others. In 2009 Ecuador denounced the ICSID, the World Bank's arbitral tribunal, and set up a Citizens Commission tasked with observing and reviewing investments.

Brazil and Germany are sceptical

Brazil is the leading recipient of investments in Latin America, yet it does not have a single investment protection agreement. The 14 agreements that were signed in the 1990s – including one with Switzerland – were never ratified by the Parliament as they were deemed unconstitutional. The Government recently proposed a new type of agreement, one that rules out indirect appropriation and makes the investing country and the recipient country responsible for arbitration.

The German Government too wants to overhaul the system of arbitration. Germany is facing a US$4.7 billion lawsuit filed by the Swedish energy multinational Vattenfall after the country's decision to give up nuclear energy. The proposal is that arbitration should involve an appeal mechanism and greater transparency, that judges should follow a code of conduct and that their fees should be limited. There is opposition in the Federal Parliament to the idea that arbitration should become part of the Transatlantic Trade and Investment Partnership (TTIP).

Mexico and the private sector in the other camp

Despite the critical attitude of many developing countries, others continue to set great store by investment protection agreements. As a capital exporter since 2012, Mexico maintains some 40 of them. Over the past three years it has received an average of US$20 billion in investment per year. Mexico has in fact been sued 15 times for a total of US$266 million, but nonetheless regards the final balance as positive. Not surprisingly, the private sector fiercely defends such agreements as well as dispute settlement. The OECD's Business and Industry Advisory Committee states that of the 586 known cases, 274 (43%) were decided in favour of governments and 90 (31%) in favour of complaining enterprises. The remaining 26% of cases were settled amicably. To this NGOs reply that governments prefer not to regulate, for fear of lawsuits (“chilling effect”). Besides, in the cases that have been settled, governments have for the most part made extensive concessions. Also, many disputes were never made public.

Greater transparency in dispute settlement, but other problems remain - The lack of transparency of the investor-State dispute settlement procedure could be remedied by new rules governing investment agreements that take effect after 1 April 2014. They have been drawn up by the United Nations Commission on International Trade Law (UNCITRAL). The roughly 3,000 agreements concluded earlier will automatically fall under the new rules if States accede to the new UN Convention on Transparency in Dispute Settlement. It will be open for signature as of March 2016.

Switzerland is moving (too slowly) - The agreement between Switzerland and South Africa expired on 31 October 2014. Protective clauses remain in force for another 20 years, however. To date, no other investment protection agreement with Switzerland had been terminated. Bern plans to sign the new UN Convention on Transparency in Dispute Settlement. Alliance Sud welcomes this and insists that no reservations be entered. The best thing would be for arbitration to be left to the countries of origin and recipient countries or the courts of the recipient country. In future, Switzerland should forego any clauses that run beyond the expiry of an agreement (survival clause). Clauses on indirect expropriation and fair and equitable treatment should also be foregone or significantly weakened.