Venezuela left the ICSID: a wise decision

Umberto Mazzei

03/08/2012

Opinión

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A few days ago Venezuela decided to leave ICSID and it is something to celebrate. The International Centre for Settlement of Investment Disputes (ICSID) is one of five entities that make up the World Bank Group. The others are the International Bank for Reconstruction and Development, the International Finance Corporation, the International Development Association and the Multilateral Investment Guarantee Agency. Among them the most effective one in helping to establish the control of Transnational Corporations over Governments is the ICSID. It is the only international body whose specific purpose is to adjudicate disputesrelated to bilateral or multilateral investment.

There are three other bodies related to arbitration on this issue but which are not specific: a) UNCITRAL, the UN body that develops standards and procedures that can be used for arbitration; b) the Stockholm Chamber of Commerce whose rules apply in some bilateral agreements on investment and on energy; c) the International Chamber of Commerce, in Paris, widely used in commercial arbitrations and now also in investment arbitration.

The problem with the ICSID is its arbitration rules. The system for choosing arbitrators may sound fair, one for each party and a third agreed by consensus with the ICSID. The devil is in the rules that say who can accuse and how the investment agreements must be interpreted.

One may say Investment Agreements are bilateral or multilateral, but they should be called unilateral: only the investor can complain to the ICSID and request arbitration of their claims of noncompliance by Governments. A breach of a duty by the investor, for example, to invest, can not be taken to arbitration by the investment host country.

Another oddity is that the rules of the investment agreement must be interpreted in the abstract, regardless of the legal complementary field such as constitutional or international standards, codes or regulations or national horizontal economic policies. The use of ICSID previous judiciary decisions, ICSID jurisprudence, cannot be used as a guide to read or interpret the norms. It is obviously intended to avoid that what was convenient doesn’t become inconvenient tomorrow. Such interpretative regulations are contrary to all basic principles of law, both in the European Systems or the Anglo-Saxon one.

The importance of investments

With the global reach of communications and transport, economic interdependence increases, and in theory it should improve and match the general standard of living. The old ideal of equitable distribution of resources, production and labor is a valid reason to open the door to those investments that support development. At this point we should distinguish between investments that provide new facilities, new jobs and better technological level from those intended for speculation by buying, exploiting and seeking rent from an existing domestic company. It is even used to take over a competitor and dismantle it, as General Motors did with Saab. The second type is worthless as foreign investment because it adds nothing to the national infrastructure or can be undesirable when it happens in strategic areas, as was the case with YPF in Argentina, or with Guatemala’s Railways.

The financial crisis has made investing (speculating) in natural resources, real estate or public services a way to anchor in the real world the "keyboard money" that now circulates only in the stock markets and will otherwise evaporate again. As this tendency affects national economies and entire communities, governments should be very vigilant to avoid investment that is purely speculative, or that includes protection clauses that reduce the government’s policy space and favors private profit over any ethical, legal, social or economic consideration.

The issue of Foreign Investment has created an international legal network that extends from the TRIMS (Agreement on Trade Related Investment Measures) of the WTO, passes through bilateral agreements and reaches the highs of FTAs, which always have an investment chapter. At the WTO, the TRIMS still respects states’ sovereignty, which goes on eroding until it reaches FTA level, where countries are subordinates of foreign investors, including minority shareholders. The bias in Investment Agreements in favor of the foreign investor is clear: none carry international sanctions if the investor fails to comply with obligations or violates the rights of communities or infringes local law; such cases are left to national courts whose sanction applies only to the interests the offender has in the country. Moreover, such local sanctions can be considered, under ICSID’s isolated interpretation of the investment agreement, as foreign investor harassment and fined as such. To make matters worse, ICSID decisions are final and have the force of international judgment.

A long list of abuses

Many abuses committed by foreign investors have been rewarded by ICSID. Because of space limitations we will mention only a standard few.

Argentina
Argentina is World Champion on ICSID cases, an inheritance of investment agreements signed by the duo Cavallo Duo / Menem. One classic case is that of Transportadora Gas del Norte-TGN, which in 1992 won a public contract for gas transportation. In 1995, a U.S. based company, CMS, bought 29% of TGN. During Argentina's year 2000 crisis, while people looted supermarkets for food, the government suspended a curious arrangement that set the price of gas in Argentina according to the index of producer prices in the U.S., although it was Argentine gas. In July 2001, CMS claimed before ICSID that Argentina, by depriving it of its "legitimate right" to indexed rates in the U.S. infringed the clause that protected it against expropriation in the investment agreement between U.S. and Argentina, because it brought down the value of their shares (29% of TGN). Argentina argued public necessity because, as the peso collapsed, gas prices indexed on US dollars became unaffordable. These facts were well-known; yet in 2005, ICSID arbiters sentenced Argentina to pay U.S. $ 133 million to CMS for damages and to buy its 29% share in TGN for US$ 2.5 million.

Guatemala
CAFTA has already brought several foreign investment cases. The latest case is the one of the Railroad Development Corporation - RDC- against Guatemala. In 1997 the RDC was granted a 50 year concession to restore and put back into use Ferrovias de Guatemala, a national company that operated the railroad net since the 20's. RDC is a very modest company in Pittsburgh, United States, but operates in other countries and has a precedent of an ICSID claim against Estonia, which was settled. In Guatemala RDC failed to make the network operative, but accused Guatemala before ICSID of indirect expropriation. This was alleged to have occurred when President Berger said, in 2005, that the use by RDC of 12 old and original locomotives was "harmful" to the historic heritage of Guatemala. On June 29, 2012, Guatemala was notified by ICSID that the country owed RDC U.S. $ 14 million, plus about the same amount for damages and interest, plus US$ 200 million to ICSID for administrative costs[1] of the arbitration. RDC was ordered to hand over the railroad that it failed to put it in working conditions, precisely because it invested little or nothing.

Mexico
Under NAFTA’s investment rules and ICSID arbitration there have been outrageous rulings that reward criminal activities, such as Metalclad’s case in Mexico. Mexican authorities wanted to prevent Metalclad toxic waste from accumulating over the aquifer that supplies an aqueduct in San Luis Potosi. Metalclad sued Mexico under Chapter 11 of NAFTA, because the aquifer protection violated their property rights. The referees deliberated in secret and ordered Mexico to pay Metalclad $ 16 million in damages.

Uruguay
Philip Morris’s case against Uruguay is a resounding one. It was presented before the ICSID in February 2010. The tobacco company sued Uruguay for U.S. $ 2000 million, by using clauses of the investment agreement between Switzerland and Uruguay. It is well known that Philip Morris is American but it has a marketing subsidiary (FTR Holdings) registered in Lausanne. The demand is due to the implementation by Uruguay of World Health Organization recommended standards under the framework agreement for the control of smoking. The tobacco company claims that the rules on the space (80%) covered by warnings against smoking are against their intellectual property rights and would also depress sales. The case is under discussion and President Tabare Vazquez may be right when he warned that Philip Morris had chosen Uruguay for an exemplary punishment to warn those who want to protect people’s health from smoking.

The denunciation of the agreements

To avoid arbitrary ICSID arbitration, it is very helpful to walk out from the agency, but it may still have a residual role in the agreements that mention it as arbiter. To avoid this, it is necessary to renegotiate or terminate the investment agreements that designate it as arbitrator. Those agreements include clauses over the procedure to withdraw or to renegotiate. Another possibility is to wait for the expiration and deny renewal. The duration of the investment agreements varies between 10 and 20 years.

In case of termination, the agreements generally provide a continuity of their warrants for 10 or 15 years, posing the question of the role of ICSID during that posthumous period. As for fear that it may scare investors, it should be considered that Venezuela is a country whose controls already discourage speculative investment, but its solvency attracts those that come for mutual convenience. Another important fact is that right now there are large investors, like China, that do not impose the ICSID as arbitrator. Therefore, the most transparent solution for Venezuela to sweep away any ICSID residual, it is to renegotiate the agreements, choosing another type of dispute settlement.Venezuela will not be alone, it will be in the company of several other countries, like Brazil, Cuba, India, Russia, South Africa who have never been part of ICSID and also Bolivia and Ecuador, who have left ICSID before.

(Translation: Jordan Bishop and the author).

Geneva, 07/29/2012

[1] Prensa Libre 09/07/2012, Economía ; Guatemala debe pagar más de Q111 millones por el caso Ferrovías.

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