Investor Treaties in Trouble

Martin Khor

12/04/2014

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The tide is turning against investment treaties and free trade agreements that contain the controversial investor-state dispute system, as countries like Indonesia and Germany take action on this.

The tide is turning against investment treaties that allow foreign investors to take up cases against host governments and claim compensation of up to billions of dollars.

Indonesia has given notice it will terminate its bilateral investment treaty (BIT) with the Netherlands, according to a statement issued by the Dutch Embassy in Jakarta last week.

“The Indonesian Government has also mentioned it intends to terminate all of its 67 bilateral investment treaties”, according to the same statement.

The Dutch statement has not been confirmed by Indonesia. But if this is correct, Indonesia joins South Africa, which last year announced it is ending all its BITS.

Several other countries are also reviewing their investment treaties. This is prompted by increasing numbers of cases being brought against governments by foreign companies who claim that changes in government policies or contracts affect their future profits.

Many countries have been asked to pay large compensations to companies under the treaties. The biggest claim was against Ecuador, which has to compensate an American oil company US$ 2.3 billion for cancelling a contract.

The system empowering investors to sue governments in an international tribunal, thus bypassing national laws and courts, is a subject of controversy in Malaysia because it is part of the Trans-Pacific Partnership Agreement (TPPA) which the country is negotiating with 11 other countries.

The investor-state dispute settlement (ISDS) system is contained in free trade agreements (especially those involving the United States) and also in BITS which countries sign among themselves to protect foreign investors’ rights.

When these treaties containing ISDS were signed, many countries did not know they were opening themselves to legal cases that foreign investors can take up under loosely worded provisions that allow them to win cases where they claim they have not been treated fairly or that their expected revenues have been expropriated.

Indonesia and South Africa are among many countries that faced such cases. The Indonesian government has been taken to the ICSID tribunal based in Washington by a British company, Churchill Mining, which claimed the government violated the UK-Indonesia BIT when its contract with a local government in East Kalimantan was cancelled.

Reports indicate the company is claiming compensation of US$ 1 billion to US$ 2 billion in losses.

This and other cases taken against Indonesia prompted the government to review whether it should retain its many BITS.

South Africa had also been sued by a British mining company which claimed losses after the government introduced policies to boost the economic capacity of the blacks to redress apartheid policies.

India is also reviewing its BITS, after many companies filed cases after the Supreme Court cancelled their 2G mobile communications licenses in the wake of a high-profile corruption scandal linked to the granting of the licenses.

But it is not only developing countries that are getting disillusioned by the ISDS. Europe is getting cold feet over the investor-state dispute mechanism in the Transatlantic Trade and Investment Partnership (TTIP) it is negotiating with the US, similar to the mechanism in the TPPA.

Several weeks ago, Germany told the European Commission that the TTIP must not have the investor-state dispute mechanism.

Brigitte Zypries, an economy minister, told the German parliament that Berlin was determined to exclude arbitration rights from the TTIP deal, according to the Financial Times.

“From the perspective of the [German] federal government, US investors in the EU have sufficient legal protection in the national courts,” she said.

The French trade minister had earlier voiced opposition to ISDS, while a report commissioned by the United Kingdom government also pointed out problems with the mechanism.

The European disillusionment has two causes. ISDS cases are also affecting the countries.

Germany has been taken to ICSID by a Swedish company Vattenfall which claimed it suffered over a billion euros in losses resulting from the government’s decision to phase out nuclear power after the Fukushima disaster.

And the European public is getting upset over the investment system. Two European organisations last year published a report showing how the international investment arbitration system is monopolised by a few big law firms, how the tribunals are riddled with conflicts of interest and the arbitrary nature of tribunal decisions.

That report caused shockwaves not only in the civil society but also among European policy makers.

In January, the European Commission suspended negotiations with the US on the ISDS provisions in the TTIP, and announced it would hold 90 days of consultations with the public over the issue.

In Australia, the previous government decided it would not have an ISDS clause in its future FTAs and BITS, following a case taken against it by Philip Morris International which claimed loss of profits because of laws requiring only plain packaging on cigarette boxes.

In Malaysia, the ISDS is one of the major controversial issues relating to the TPPA. Many business, professional and public-interest groups want the government to exclude the ISDS as a “red line” in the TPPA negotiations.

Prime Minister Dato’ Sri Najib Tun Razak had also mentioned investment policy and ISDS as one of the issues (the others being government procurement and state owned enterprises) in the TTPA that may impinge on national sovereignty, when he was at the APEC Summit and TPPA Summit in Indonesia last year.

So far the United States has stuck to its position that ISDS has to be part of the TPPA and TTIP. However if the emerging European opposition affects the TTIP negotiations, it could affect the TPPA as this would strengthen the position of those opposed to ISDS.

Meanwhile, we can also expect more countries to review their BITS. Developing countries seeking to end their bilateral agreements with European countries can point to the fact that more and more European countries are themselves having second thoughts about the ISDS embedded in these agreements.

- Martin Khor is the Executive Director of the South Centre. Contact: director@southcentre.int.

Source: Southnews, No. 52, 10 April 2014

South Centre: www.southcentre.int.

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