Alternatives to current IIA/BIT frameworks – an overview

1. Alternatives to current IIA/BIT frameworks – an overview RoelineKnottnerus SOMO January 2011

2. Bilateral investment treaties • More than 2,500 BITs worldwide constitute first and foremost the legal framework of international investment law. • The number of BITs has grown exponentially in recent years. • The EU’s member states currently have some 1200 BITs in operation.

3. Attracting FDI in the interest of development? • International investment is seen as a key instrument to promote (economic) development of countries. • Governments conclude IIAs/BITs to provide a stable and predictable environment to attract international investment. • In order to attract FDI, developing countries in particular make concessions to transnational enterprises, allowing them to skirt labour and environmental regulations. But literature indicates: • Beneficial effects of FDI on development are not self-evident. • FDI does not per se promote (economic) development. • Impact of BITs on FDI is rather small and results are mixed.

4. Growing consensus that current IIA/BIT framework is flawed: • IIAs/BITS are biased in their extensive protection of investor rights; lack of counterbalance: investor obligations are rarely mentioned. • IIAs/BITs severely limit governments’ scope for national policy-making. • Typically BITs do not refer to international human rights obligations (including labour and environmental obligations) of the contracting parties. • Arbitral tribunals tend not to take human rights and social and environmental protection into consideration.

5. Brazil has always remained sceptical of the need for BITs to attract foreign investment and has so far refrained from signing an IIA/BIT. • In 2009, South Africa initiated a review of its BIT framework because of concerns about the risks BITs pose to sustainable development objectives and the government’s capacity to regulate.

6. Concerns over biased dispute settlement have been voiced by a number of countries, including Australia, South Africa, Venezuela, Ecuador and Argentina, which was hit by more than 40 investor claims in recent years - many of them in retaliation for actions taken to alleviate the pain of the financial crisis of the late 1990s/early 2000s on average citizens.

7. BITS generally provide regulations concerning: • Admission • Absolute standards of treatment: e.g. protection and security, fair and equitable treatment • National treatment: similar treatment of foreign investors to nationals of the host state • Most-favoured-nation treatment: similar treatment of foreign investors to the best treatment accorded any third nation • Expropriation; (US-Chile FTA allows modification of a country’s tax system to be challenged as an indirect expropriation measure; companies have even sued for loss of expected future profits). • Dispute settlement; arbitrations are supervised by the International Centre for the Settlement of Investment Disputes (ICSID), the International Chamber of Commerce, and the Stockholm Chamber of Commerce • Liberalisation of capital flows to guarantee repatriation of profits

8. Key concerns regarding IIAs/BITs: • Use of overly broad definitions of investment • Failure to distinguish between legitimate regulatory action on the part of government and ‘indirect expropriation’ • Investor-to-state dispute resolution • Absence of commensurate and enforceable responsibilities for investors with respect to the public interest, workers’ rights and the environment. • Potential impact of investment liberalisation on needed future national and global financial regulation efforts

9. Alternatives • Search for alternatives is a work in progress. • Views on form and direction of reforms differ widely. • Proposals range from a radical overhaul to amending the current investment framework, and include both formal and informal as well as partial and comprehensive alternative models.

10. Formal (state-led) alternative investment models

11. Norwegian alternative BIT  • In 2008, Norway drafted a new model for agreements on promotion and protection of investments. The draft was submitted to stakeholders from commerce and industry for comments. • The draft sought to combine protection for Norwegian investors with the promotion of economic development in developing countries. • Norway’s model agreement was expressly drafted ‘with a view to negotiations with developing countries and countries with economies in transition’. • Norway’s progressive draft Model BIT was withdrawn in 2009 when it failed to gain parliamentary approval.

12. Norwegian BIT - key distinguishing points: • Emphasis on the state’s right to regulate • Allows states to deviate from MFN and national treatment; allows for discrimination of foreign investors and their investments. Investors/investment are entitled to MFN and NT only in like circumstances. • Investment agreements must not be allowed to impinge on freedom to regulate in the interest of the environment

13. Norwegian BIT - key points (continued): • Social safeguards: • clause to ensure that investors comply with the OECD guidelines for multilateral companies and that they become members of the UN Global Compact • Prohibition to lower social standards to attract investments • Requirement that foreign investors comply with national legislation • Formation of a Joint Committee with the authority to consider questions associated with the social responsibility of investors, etc.

14. However, Norwegian revised model BIT still contained: • Market access provisions (national treatment on establishment; protection against expropriation without compensation); these market access provisions go beyond traditional BITs which only deal with the post-establishment phase. • Dispute settlement: • State-to-state • Investor-to-state

15. Bolivarian Alternative for Latin America and the Caribbean (ALBA) Developed by the Venezuelan government as an alternative to the proposed Free Trade Area of the Americas: • Allow governments to put performance requirements on foreign investment • Prevent corporations from undermining public interest regulations.

16. Bolivian proposals for fair trade and investment agreements (Peoples Trade Agreement, based on ALBA) • Reserve the right to require foreign investors to transfer technologies and use local inputs and labour. • Rejection of investor-state dispute settlement; require foreign investors to resolve disputes through national mechanisms. • In 2007, Bolivia made history as the first country in the world to withdraw from the International Centre for the Settlement of Investment Disputes (ICSID).

17. Ecuador: re-instatement of the Calvo doctrine • In 2008, Ecuador adopted a new constitution that provides that the country will not enter into international agreements under which it would have to cede jurisdiction to international arbitral tribunals in contractual or commercial matters between the State and individuals or corporations. • Ecuador also proposed an alternative dispute settlement mechanism for the Union of South American Nations (UNASUR).

18. UNASUR alternative investment dispute settlement mechanism (DSM) Proposed by Ecuador and embraced by a working group set up by the UNASUR member states consisting of representatives of Bolivia, Brazil, Chile, Ecuador, Paraguay, Peru, Uruguay and Venezuela in 2008.

19. UNASUR alternative DSM to be based on: • consensus; • respect for human rights; • narrow definition of investment that includes the right to development; • establishment of a permanent tribunal accompanied by: • a proper appeals mechanism • admission of third party evidence (amicus curiae) • re-instatement of the Calvo doctrine/exhaustion of domestic legal systems • transparencyof procedures • reduced litigation costs through the creation of a centre for legal assistance for developing countries

20. Civil society critiques

21. IISD“Model International Agreement on Investment for Sustainable Development” (2005) • Designed to provide the basis for investment treaty negotiations at bilateral, regional or international level. • Explicitly aims to link promotion of foreign investment to pursuit of sustainable development.

22. IISD alternative investment model - key elements: • Investors must abide by various internationally recognized labour, environmental and human rights standards • Investors must perform environmental and social impact assessments of their potential investments. • Anti-corruption provisions applying to investors as well as home and host states. • Foreign investors must exhaust domestic remedies before taking disputes to international tribunals; this stipulation is waived when domestic judicial or administrative processes are found to lack independence or timeliness. • Violations of any of the agreement’s obligations can result in the investor losing the right to use the dispute settlement mechanism. • Home states (which tend to be richer nations) are encouraged to provide assistance to developing countries to facilitate foreign investment, including help with technology transfer, insurance programs, and capacity building

23. CSOs submissions to US BIT review • In 2009, the US initiated a review of their BIT model, following a campaign pledge by president Barack Obama to review investor privileges in US trade and investment agreements.  • Civil society organisations Earthjustice, Friends of the Earth, the Institute for Policy Studies, Public Citizen/Global Trade Watch and the Sierra Club submitted a ten-point programme of specific changes needed to ensure that investment rules in trade agreements are pro-labour, pro-community and pro-environment.

24. Summary of recommendations of Earthjustice et al. • Avoid overly broad and open-ended definitions (minimum standard of treatment; fair and equitable treatment) and use more precise legal language to put a halt to investor-state claims over a wide range of legitimate government measures. • Prevent abuse of non-discrimination, most-favoured nation and national treatment clauses to challenge regulations in the public interest that impact transnational corporations more than domestic firms.

25. Earthjustice recommendations (continued): • Limit claims over ‘indirect expropriation’ by which investors can challenge regulations/government actions that may reduce the value of a foreign investment. • Clarify that regulatory measures that do not transfer ownership of the investment do not constitute acts of indirect expropriation. • Include a general exception in investment rules for measures related to the protection of health, safety and the environment; natural resource conservation; and international human and labour rights.

26. Earthjustice recommendations (continued): • Do not allow corporations to bypass domestic courts. • Replace the investor-state dispute settlement mechanism with a state-to-state mechanism to guarantee the crucial role of governments in protecting the public interest. • Second-best solution: require investors to exhaust domestic remedies before proceeding to international tribunals. • Establish a diplomatic screen to prevent frivolous claims or claims which otherwise may cause serious public harm. • Allow legitimate policy tools to prevent and mitigate financial crises; allow capital controls; allow transaction taxes to curb speculation.

27. Other CSO recommendations for an alternative investment framework (various sources): • Allow developing country governments and businesses to prioritise the domestic market in the interest of development. • Stop international arbitration tribunals from using broad interpretations of IIA/BIT clauses and definitions to grant transnational investors greater rights than domestic industry. • Disallow the prohibition of performance requirements* in IIAs. * performance requirements consist of requiring of the investor, in order for the investment to be authorized, specific actions aimed at protecting the national economy; for example use, as much as possible, of national raw materials, hire local staff, etc.

28. CSO recommendations (continued) - on public interest protection: • Do not include social and environmental clauses in the non-binding preambles of trade and investment treaties; integrate them into the legally binding provisions. • Stop investors from filing suits over government decisions regarding natural resource issues. • Do not allow broad interpretations of non-discrimination, MFN and NT clauses by international tribunals to undermine appropriate environmental, health and safety, and other public interest protections when these unintentionally result in ‘de facto’ discrimination of foreign investors.

29. CSO recommendations (continued) - on financial regulation: • Allow governments the use of legitimate measures designed to restrict the flow of capital in order to protect themselves from financial instability, particularly in developing countries. • Allow setting of percentages to be reinvested in the domestic market to reduce financial volatility and secure sources of domestic capital. • Ensure that prudential financial measures are not open to opportunistic claims for investor compensation. • Allow investor compensation only for expropriation of tangible property; do not allow claims for expected loss of future profits.

30. CSO recommendations (continued) - on legal remedies: • Revive the Calvo doctrine, which subjects foreign investors to the same laws and courts as domestic investors: this would help engage foreign investors in building good domestic rule of law institutions. • Give private citizens the same rights for enforcement and remedies as corporations

31. CSO recommendations (continued) - on dispute settlement: • Address investment disputes on a government-to-government basis • Increase transparency and participation in arbitration processes • Include a government screen for investor-to-state disputes to weed out investor compensation claims that are inappropriate, without merit, or would cause serious public harm; sensitive areas should include health and safety, environmental protection, consumer protection, and human and labour rights measures • Provide coherence to the interpretations of investment provisions in trade and investment agreements by installing a meaningful, effective, independent appellate mechanism, capable of handling not only ICSID, but also awards by UNCITRAL and other international arbitration tribunals • Re-establish ICSID as an independent body delinked from the World Bank

32. Possible avenues for opting out of IIAs/BITs: • Renounce the treaties; withdraw from them once they have expired to avoid automatic extension. • Invoke the Universal Declaration of Human Rights, the International Covenants on Civil, and Political Rights and on Economic, Social and Cultural Rights and other treaties and international conventions on human rights and the environment as higher norms of general international law that cannot be breached by other treaties, such as IIAs. • Reinstate territorial jurisdiction of domestic courts (Calvo doctrine); revoke the nullification clause of national jurisdiction in favour of arbitration tribunals to settle disputes between a given investor and the country that receives the investment that many IIAs now contain • Have national tribunals establish whether IIAs are in accordance with the constitution as regards rights and guarantees and more particularly with international human rights law and with jus cogens (imperative norms of international law). • Seek nullification for reasons of factual defects; ratifying a treaty in breach of fundamental rights and guarantees set up in the country's constitution as well as in breach of major international human rights norms, such as the right to health, to food, to adequate housing, to education etc. would cause the nullification of such a treaty

33. Civil society has proposed: • Governments that share strong criticism of the current investment rules could: • negotiate new investment agreements with each other that serve as positive models • give notice of intent to withdraw from investment treaties • form country blocs to demand renegotiation of existing deals

34. Note: Virtually all BITs contain termination clauses that provide for continuing protection for an additional 20 years after termination and grant investors extended legal certainty.

35. EU/Lisbon Treaty: Shift in competence on investment The Lisbon Treaty has shifted the competence for the regulation and protection of FDI from the member states to the European Union. • EU must draft framework for a common investment policy, taking into account wider EU values as enshrined in EU treaties. • Common investment policy must be integrated into the EU’s common commercial policy. • Transitional framework for the 1200 existing member state BITs is being drawn up. • Under the Lisbon Treaty, the EU is legally bound to promote the general principles of the EU Treaties in all its policies, including its new common investment policy. These principles refer, inter alia, to human rights, equality, sustainable development, free and fair trade and the eradication of poverty.

36. Stipulations of the EU treaties mean the EU must now review existing member state BITs to strike a better balance between investor rights and investor obligations.

37. Principles for EU common investment policy • Future European policy will likely be based on ‘best practice’, i.e. highest investment protection. Looking for the highest common denominator will likely be the only way to rally all the Member States behind a common approach to investment. • Other principles will include investment liberalisation, market access and reciprocity.

38. Scope for lobby and advocacy • Lisbon Treaty has provided the European Parliament with extended powers in relation to the common commercial policy. The EP has already begun carving out a role for itself and is working on draft reports on the EU’s future investment policy. • Offers room to lobby for alternative approaches to BITs.

39. Recommendations EP’s INTA committee MEP Kader Arif (S&D), INTA rapporteur on EU’s future investment policy, issued a working document on 18-11-2010. Recommendations (inter alia): • Ensure protection of the public domain • Use more precise legal language • Enshrine states’ right to regulate • Rule out investor-to-state litigation

40. Kader Arif/INTA recommendations (continued): • Exclude strategically important and sensitive sectors from investment liberalisation • Include binding social and environmental standards in all free-trade and investment agreements • Include a CSR clause for enterprises, including a transparency and monitoring obligation and the opportunity for victims of a failure to comply with these provisions to take the matter to court

41. Kader Arif/INTA recommendations (continued): • Change present dispute settlement regime • Enhance transparency • Include opportunities for appeal • Include obligation to exhaust local judicial remedies before initiating international arbitration • opportunity to use amicus briefs • obligation to select one single place of arbitration and thus avoid ‘forum shopping’

42. Way forward…Hotchpotch of civil society recommendations underlines the need for clear ideological positioning. • Analysis: • Need to determine where we stand ideologically and which proposals we’d like to put forward at the European and national levels as part of a concerted European civil society campaign; • Objectives: • Define desired outcome, impact and attainable intermediate goals (both in national and European contexts); • Can we combine calling attention to a wide range of alternative models with developing concrete proposals for the ongoing policy processes?

43. Way forward (continued): • Opportunities for intervention: • What are the options for influencing policy-making (timeframe/calendar; European level, national level; etc)? • Strategy: • Define actions/activities needed to achieve our objectives; what is feasible given limited resources? • How do we compromise in moving from the wider critique to practical ways forward and effective lobby interventions? • How do we generate synergies between the European level and our individual interventions at the national level? • Communications strategy: • How do we ensure mutual reinforcement (concerted messaging; sharing interventions and responses)?