What’s the value of investment treaties?

by Dr. Dominic Beckers-Schwarz, Lawyer, Paris

 

On 7 March 2017, one day after the OECD Global Forum on International Investment, over one hundred stakeholders from businesses, trade unions, academics and OECD member states gathered for the one-day “3rd OECD Annual Conference on Investment Treaties”. The conference addressed issues concerning “evaluating and enhancing outcomes of investment treaties”.

How to measure the societal costs and benefits of investment treaties?

Following the previous day’s call for a new globalization narrative, the OECD opened the first conference panel by addressing the need to measure the societal costs and benefits of investment treaties.

Academics first explained the challenges of measuring the effects of investment treaties. While it may be easy to measure the economic exchange between two states, such a quantification is limited to bilateral interactions and does not necessarily address the global cross-fertilization of today’s investment treaties. The panel expressed doubt regarding the possibility of measuring in figures the societal costs and benefits of, for example, investor-state dispute settlements (ISDS) and the political benefits of depoliticizing international investment disputes.

The panel turned to the, sometimes unwritten, fundamental goal of international investment treaties—depoliticizing investment disputes and enhancing international investment flows through clear, stable and enforceable investor rights—a sort of rule of law codification.

But international investments occur frequently, even where no international investment treaties exist. International investment agreements often are not part of national investment promotion programs. However, smaller states especially see the need to conclude investment treaties to enhance cross-border investment.

When an NGO representative asked whether ISDS could cause populist resistance, due to misuse of the system, panelists denied the possibility of potential abuse of ISDS through cherry-picking. Costs of investment arbitration procedures and anti-treaty-shopping clauses in international investment treaties would prevent misuse of the system.

In sum, academics and government officials from OECD and non-OECD countries agreed that the connection between international investment treaties and economic dynamics needs continuing assessment. Further work includes defining more standardized approaches to measuring the effects of investment treaties. The OECD could be an optimal organization to conduct a cost-benefit analysis.

In my view, that governments are seeking out careful analysis of the costs and benefits of the investment treaty approach together is a positive sign to continue and enhance global cooperation in responsible investment policy.

Joint government interpretation of investment treaties—achievements and obstacles

The second panel addressed the topic of governments jointly interpreting international investment treaties in situations where no treaty clause permits the governments to do so (unlike NAFTA).

In general, the panel viewed earlier interpretations as better and more authoritative, since the later an interpretation, the more it may look like a hidden amendment.

Some state representatives explained that joint interpretations are a good way to avoid costly, lasting and complicated renegotiations. Participants mentioned fair and equitable treatment (FET) as a good joint interpretation example. Joint interpretations within the boundaries of the Vienna Convention of the Law of the Treaties might, for example, clarify or adjust an international investment treaty’s broad standards. Evolving views on what international investment treaties should address and how they should function lead to the need for such interpretations.

Another approach to enhancing the certainty and predictability of international investment treaties is a joint interpretation of certain investment treaty standards at the time of the treaty’s conclusion. For example, several provisions of CETA are subject to a joint interpretative instrument in CETA’s annex, which the parties agreed on at the time of signature. Such an expression of the parties’ intent might ensure greater clarity. However, conference participants cautioned that such joint interpretations must be clearly worded, because bad drafting could inspire further confusion rather than clarifying treaty standards.

Discussion participants further agreed that the non-disputing party of a treaty should always be informed about interpretations made by the disputing parties. Some provisions, namely Art. 5 of the UNCITRAL Rules on Transparency in Treaty-based Investor State Arbitration, even enable the non-disputing party to intervene in interpretations, such as by attending the hearings.

Panel members also expressed their interest in working on a plurilateral basis when interpreting standard investment treaty clauses. They saw this as the only way to maintain a common understanding of what an investment treaty covers.

Two participant questions especially showed the need for further work on the topic: (1) How far can a joint interpretation go, and when does it turn into an amendment? (2) As of when is a joint interpretation valid: the moment of the conclusion of the treaty or the moment of the formation of the joint interpretation?

In my view, joint interpretation can be a useful method of clarifying the contracting parties’ intent. However, retrospective joint interpretations might lead to back-door amendments, exceeding the reasonable bounds of the treaty. Further work in this area might seek to establish a clearer understanding of the barrier between legitimate interpretation and unwanted amendment and the impact of such a delineation in the field of international investment law.

Enhancing investment treaty outcomes and addressing globalization concerns

Though shorter in time, the closing panel drew on the Global Forum’s emphasis on “better” globalization from the day before and linked it to the discussions of this conference. Among international organizations—represented in this panel by UNCTAD and OECD—government representatives and NGOs, there is broad consensus on the necessity of further international cooperation and the global exchange of goods and investments. But ideas of whether the system is sufficiently inclusive, or how to make it more inclusive, still differ. The question, how to access the exact societal costs and benefits of these treaties showed the need for further work.

The panel showed, that OECD and UNCTAD both do substantive work on the topic and continue to do so by especially by reviews, reports, analysis and statistics. Governments endorse that work, since it is an important basis for their politics. NGOs use it to point out what may be improved in their view. This OECD conference gave governments as well as NGOs an opportunity to exchange their views on what the problems are and how to tackle them.

In my view, the OECD’s work—especially on topics like inclusive growth and responsible investment—can help promoting a form of broadly beneficial globalization in the investment context and in general. Let’s not ask whether globalization is crumbling away; let’s work on a globalization which fits everyone’s needs.

In search of a “better” globalization

by Nikos Lavranos, Secretary-General of EFILA

The backlash against globalization

At the OECD, Global Forum on International Investment (6 March) more than hundred stakeholders from businesses, trade unions, academics and OECD member states gathered together for a one-day meeting considering ways towards a “better” globalization, which is more “inclusive”, i.e., which benefits all.

The OECD set the scene by describing the current backlash against globalization, trade, investment and investor-state dispute settlement (ISDS) as an urgent matter that must be addressed now to reverse the trend of protectionism and populism, which is increasingly visible in the US and Europe.

While it was stressed from the outset that foreign direct investments (FDI) have created many jobs and hugely benefitted many countries around the world over the past decades, it was also concluded that this was not an “inclusive” development. In other words, the benefits of globalization were distributed unevenly and there have been many more losers – not only low-skilled workers but also domestic businesses – than has generally been acknowledged so far.

At the backdrop of this, it was argued that nowadays FDI must not only be perceived to be more inclusive but that they must be more inclusive by making a positive, lasting and substantial contribution to the economy and benefit all citizens of the host state.

The responsibility of multinationals

In this context, many speakers from emerging economies and representatives of trade unions put the responsibility to achieve this on multinationals.

In the first place, many speakers stressed the need that the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct must be systematically adhered to by all investors. Moreover, it was argued that multinationals must take the lead towards a low carbon economy and “green investments”.

In the second place, it was stressed that multinationals must pay their fair share of taxes. The current tax system which allows multinationals to avoid paying the full amount of taxes was criticized. The OECD’s efforts against Base Erosion and Profit Shifting (BEPS), the increasing transparency regarding international tax rules and the implementation of country-to-country reporting were considered essential in countering the backlash against globalization.

In the third place, multinationals were called upon to invest in the “social infrastructure” of societies by supporting the losers of globalization in building a new future.

Towards “quality” investments?

The discussion then turned towards a new econometric study which aims at analyzing how “good” or “quality” investments, which are “inclusive”, could be fostered.

To achieve that it is first all necessary to decide the factors which should be taken into account in order to determine whether, and if so, to what extent an investment is “inclusive”.

The researchers of the study made a distinction between (i) FDI policy and framework composition, (ii) different FDI types, and (iii) FDI outcomes.

The first results show that all of these factors have an important impact on the outcome, which means that a much more nuanced view of FDI must be developed for this new narrative. It also was admitted by the researchers that there is still a lack of sufficient data regarding the various FDI types and FDI outcomes. Obviously, the vast differences in the economies of various is another complicated factor, which makes it difficult to provide easy answers.

As a one of the speakers pointedly concluded:

“it is not the same if an investor invests in producing microchips or potato chips”.

Preliminary results were also shown which indicate that foreign investors compared to their domestic counterparts generally pay higher wages, tend to have a higher productivity, create more and better jobs, and employ more female workers. In other words, foreign investors are in many cases already now providing relatively more inclusive investments than domestic investors.

A new positive globalization narrative

While this study has just been started and much more work needs to be done, the discussion raised several additional issues.

The first issue is the seemingly complete absence of required state action. Instead, many participants expect that multinationals will take on this responsibility, while states do not need to act. However, one may question whether this is not a too easy solution for the states. After all, the domestic Rule of law and governance situation in each state can significantly impact the level of “inclusiveness” of an investment. For example, if a state is run by practically one family clan, any FDI will naturally benefit mainly or exclusively that family clan and thus can never be considered “inclusive”. However, does this fact make every investment – even in for example renewable energy – automatically a “bad” investment? And is the investor solely responsible for the fact that the country is run by a family clan?

The second issue concerns the almost exclusive focus on multinationals in this narrative, whereas it is well-known that SMEs play a very important role in most, if not all, economies of the world. It therefore would seem necessary and appropriate to consider how these additional obligations – if they were to be imposed on investors – would affect SMEs. More generally, it would seem important to make a clear distinction between the needs and obligations of multinationals and SMEs. In other words, the narrative must also be “inclusive” vis-à-vis all types of investors and investments.

The third and probably most complex and contentious issue relates to the question of how states could make a distinction between “bad” and “good” FDI without discriminating against certain foreign investors. Arguably, a state could always invent and apply certain criteria, which would enable it to decide one way or the other as it sees fit, while the investor would be rather helpless against this kind of potential arbitrariness.

This in turn raises the fundamental question of whether this new narrative of “quality” FDI and “inclusiveness” can actually be effectively applied in practice? For now, it is too early to give a definite answer.

Nonetheless, the efforts of the OECD and most of its member states to continue to push for a multilateral framework, which promotes and supports FDI as an essential and important element for an open economy must be applauded. This is a rarely heard sound in these days.

The development of a new, positive narrative in support of FDI is any case a welcome tool to help fight the backlash against globalization.

 

Updated OECD Policy Framework for Investment Supports Green Investment Arbitration

by Orçun Çetinkaya, Moroğlu Arseven

In June 2015, the OECD shared an updated Policy Framework for Investment (“PFI”) with the international community. The OECD aims to continue contributing to the international investment landscape by guiding investors and governments, while supporting dialogue between these parties and promoting sustainable development. The PFI’s main objective is to establish cooperation and balance between the expectations and requests of investors, compared to government investment policies.

The update PFI addresses 12 aspects of international investment:

  • Investment policy,
  • Investment promotion and facilitation,
  • Competition,
  • Trade,
  • Taxation,
  • Corporate governance,
  • Finance,
  • Infrastructure,
  • Developing human resources,
  • Responsible business conduct,
  • Public governance,
  • Support of green growth.

The updated PFI introduces major reforms with regard to environment aspects. Within the investor-state arbitration system, the arbitral tribunal can potentially rule that public measures imposed by governments through environmental policies and regulations are actually contrary to the country’s international investment obligations and liabilities.

Accordingly, the updated PFI regime will play a significant role in setting governments’ environmental policies and ensuring compliance with international investment law. Governments can use the new PFI to determine whether current or prospective environmental policies or applications respect essential investment law principles. Thus, environmental policies and international investment treaties can be better designed from the outset, assisting the parties to avoid becoming involved in later disputes.

To predict the new PFI’s effect on green growth and environmental-related disputes, it is important to first consider the current status of environment-related clauses under international investment treaties and jurisprudence.

Current Status of International Investment Treaties and Jurisprudence

Public awareness has increased in recent years about the importance of sustainable development. Accordingly, governments’ environmental actions have rapidly increased. Environmental policies and relevant regulations have undergone fundamental changes since the 2000’s. However, environmental actions by governments can lead to sudden and unexpected adverse impacts on expensive and well-planned investments. The number of environment-related disputes has risen and taken on a new significance. International investment undertakings and customs require governments to promote and facilitate international investment. However, running contrary to this are governments’ obligation to protect public and environmental health. These competing obligations inevitably lead to conflicts between governments and investors.

International investment treaty jurisprudence shows that arbitral tribunals tend to consider environment-related disputes based on facts, rather than strict legal provisions. During arbitral proceedings, governments generally refer to police powers when discussing the importance of environmental measures in public health. The state party will generally claim that its regulation and measures imposed are non-discriminatory, non-arbitrary and in line with reasonableness and proportionality.

Most investment treaties only include a general clause about protection of the environment, rather than specific environment-related provisions or exceptions. Therefore, most treaties do not specifically refer to the environment and do not adopt a systematic approach to environmental issues.

Having said that, environmental protection and public health and safety are not the primary objectives of international investment treaties. Therefore, investment treaties simply state that governments can regulate environmental matters, as well as promote or impose environmental protection measures, when necessary and to the extent required. The effect of these widely-drafted clauses is that governments have a considerable margin of interpretation. Therefore, arbitrators may decide that government measures or actions are arbitrary or discriminatory. To date, arbitral tribunals have generally adopted approaches and interpretations of environment-related clauses which weigh in favor of investors.

It is normal for governments to seek to protect public and environmental health by suspending or removing certain investor rights and privileges, or by forcing investors to comply with new provisions. However, due to the lack of well-designed environment-related provisions in international investment treaties, governments generally bear the burden of proof. During disputes, the state party must submit relevant scientific evidence, as well as demonstrate compliance with international principles and requirements.

International investment treaties are drafted as one sided undertakings; most do not regulate investor obligations and liabilities. Therefore, since investors are not parties to the investment treaties, arbitral tribunals generally tend to prevent governments filing counterclaims against investors.

Arbitrators’ assessments and evaluations were mainly based on material facts, rather than legal instruments. The limits of government police powers and underlying motives should be clear, predictable and understandable for parties to international investment treaties, as well as to arbitral tribunals. Therefore, international investment treaties should include specific clauses and clear environmental policy goals. Accordingly, a new policy or a guide was necessary, to determine appropriate standards for current and future government environmental activities, as well as allow environment-related arbitral proceedings to be based on clear legal provisions, as well as material facts.

The Updated PFI

To support investment for green growth, the OECD determined key issues for policy makers when planning, negotiating and executing international investment treaties:

  • Ensure strong government commitment to support the green growth and catalyze private green investment, at national as well as international levels;
  • Improve the coherence of investment promotion and facilitation measures to support green growth as a means to sustainable development, including aligning the broad system of investment incentives and disincentives, as well as phasing out inefficient fossil-fuel subsidies;
  • Reform policies to enable green investment, including applying essential investment policy principles such as non-discrimination, transparency and property protection in areas which tend to attract green investment. For example, renewable energy, water resource management, or multi-modal, climate-resilient transport infrastructure systems;
  • Address market and regulatory rigidities that favor incumbent fossil-fuel and resource intensive technologies and practices, for instance in the transport, electricity or water sectors
  • Provide public financial tools, instruments and funds to facilitate access to financing and attract co-financing for green projects (including attracting long-term institutional investment), while ensuring value for public money;
  • Enhance co-ordination and improve public governance across and within levels of government, especially among environment and natural resource management, energy and investment authorities;
  • Establish policies to encourage environmentally responsible business conduct and broad stakeholder participation in green growth, including green investment strategies; and

Address other cross-cutting issues, such as:

  • Establishing policies to support effective private sector participation (international or domestic) in green infrastructure projects, including through joint ventures or public-private partnerships;
  • Addressing outstanding barriers to international trade and investment in environmental goods, services and projects.

Arbitral proceedings initiated against governments regarding environmental issues have increased and seem likely to continue increasing. The updated PFI recommends governments ask themselves either:

“Is the government addressing green protectionist measures (such as local content requirements) that are increasingly being challenged in investor-state dispute settlement (ISDS) and international treaty claims? At the same time, is the government monitoring whether investment treaties are interfering with environmental policies?”

 Or alternatively:

“Does the government respect core investment principles such as investor protection, intellectual property rights protection and non-discrimination in areas susceptible to attract green investment?”

Conclusion

To maintain sustainable development, governments should revise their existing investment treaties and environment-related policies to bring these in line with the OECD’s updated PFI. However, regulations issued or amended in response to the updated PFI could give rise to disputes if the changes have retrospective effects over investments.

For now, it seems difficult for governments to recognize and prioritize environmental protection above promotion of international investment and foreign direct investment. However, governments must adopt sustainable efforts to regulate precise exception clauses for environmentally sensitive sectors. Such clauses will allow investors to predict possible government measures or actions, then invest accordingly. Increased certainty will allow investors to avoid and resolve disputes more easily, without taking recourse to courts or arbitral tribunals. Well considered and clearly drafted exception clauses ensure more protection for governments, compared to general clauses related to public health and safety. Such an approach enables governments to clearly identify environmental areas which are exempt from investment claims.

Current treaties are drafted exclusively from the point of view of governments, with governments unilaterally undertaking to promote and respect foreign investment. Therefore, while it is investors which seek relief in nearly 100% of environmental-related disputes before arbitral tribunals, governments generally do not bring counterclaims against investors. If treaties contained explicit consent from investors in relation to governments’ rights to file counterclaims, the arbitral tribunal would not need to consider whether it is qualified to hear such a claim and the state party may be more eager to file counterclaims.

Within this context, the updated PFI recommends that investors engage in responsible business conduct. Investment treaties can be modified to include a right for governments to file counterclaims before an arbitral tribunal if investors fail to fulfill obligations and responsibilities related to environmental and public health and safety matters.

Governments can include clauses in investment treaties stating that environment-related disputes arising from investor or government actions will be subject to the Optional Rules for Arbitration of Disputes Relating to the Environment and/or Natural Resources.

The Optional Rules were prepared by the Permanent Court of Arbitration and are based on the United Nations Commission on International Trade Law Arbitration Rules. Since environment-related disputes require scientific and technical analysis, the Optional Rules assist the parties and arbitrator to review and evaluate scientific matters.

Governments should regularly and carefully monitor their international investment treaties in light of their own environmental policies. International investment treaties should be clearly drafted, specifically considering environmental matters and be a reflection of national environmental policies. Such an approach allows arbitral tribunals to effectively address, analyze, review and conclude environment-related disputes, as well as ensure scientific evidence is assessed against consistent minimum standards.