8 OCTOBER , 2013I IUM

FAUWAZ ABDUL AZ IZTH IRD WORLD NETWORK

THE INVESTMENT CHAPTER OF THE PROPOSED TPPA AND ITS INVESTOR-STATE DISPUTE

SETTLEMENT PROVISIONS

TOPICS

• North American Free Trade Agreement (NAFTA) • Definition of ‘Investment’• Investor, Investor Rights• Capital Control• National Treatment, Performance Requirements• Minimum Standard of Treatment

• Definition of ‘state measure’• Investor-State Dispute Settlement• Ethyl vs Canada• Metalclad vs Mexico• SD Myers vs Canada• Occidental vs Ecuador• South Africa

• Conclusion

THE NAFTA TEMPLATE

• The Investment Chapter that has been proposed by the US for the TPPA is based primarily on the template of US free trade agreements (FTAs), particularly, provisions in the North American Free Trade Agreement (NAFTA) and its ‘Chapter 11’ investment chapter.

• Significance: UN Conference on Trade and Development: Most investor-state dispute settlement (ISDS) claims that were filed in 2012 were filed under • NAFTA (49 cases)• Energy Charter Treaty (29) • Argentina-United States Bilateral Investment Treaty

(17)

DEFINITION OF INVESTMENT I

• Overreaching definition of “investment” that governments are obliged to protect and promote that goes far beyond “real property”.• The danger of such an overreaching

definition is that it may commit a host country to permitting, promoting or protecting forms of investment that it did not contemplate at the time it entered into an agreement and would not have agreed to include within the scope of the agreement had the issue been raised explicitly.

DEFINITION OF INVESTMENT II

• US-Ecuador Bilateral Investment Treaty (BIT) defines ‘investment’ as extending beyond tangible assets to include any INTANGIBLES and ASSETS such as market share, goodwill and intellectual property rights.

• TPPA: “every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include… an enterprise; shares, stock, and other forms of equity participation in an enterprise … and loans…futures, options and other derivatives… turnkey, construction, management, production, concession, revenue-sharing and other similar contracts… intellectual property rights… licenses, authorizations, permits and similar rights conferred pursuant to domestic law… other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens and pledges..”

OBLIGATIONS OF GOVERNMENT TO AN ‘INVESTMENT’ WILL:

• apply to virtually any governmental measure carried out at any branch or level of government

• expose a wide range of domestic laws, regulations and policies to foreign investor challenge and claims for compensation: • health, environmental protection and water conservation• affirmative action policies• regulation of the oil sector, measures taken to reduce budget

deficits during financial crisis• investor’s permits being revoked because it violated the law• value-added taxes• rezoning of land• measures on hazardous waste facilities• regulation of water companies• declaration of the area as a nature reserve to preserve the

unique wildlife of the region• treatment at the hands of media regulators.

INVESTORS, INVESTOR RIGHTS: FORUM-SHOPPING

• Article 12.2 (draft Investment Chapter) defines “investor” as: “an investor of a TPPA Party, a national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of another Party…”

• fails to require investors to have “actual business activities or make a significant commitment of capital in the host country,”

• In the past firms “that have made no real investment in a country dragging governments through costly foreign tribunal proceedings” merely on the basis of “having a staff person or two and a minor paper trail in the claimed home country” and thereby passing off as having “substantial business activities”

AQUAS DEL TUNARI VS BOLIVIA

The U.S. firm Bechtel – after appraising that public opposition had arisen against its privatized water utility in Cochabamba – reorganised its corporate structure, incorporated 3 Dutch holding companies into Cochabamba water concessionaire Aguas. Actual majority shareholder of Aguas was Bechtel, but it had no access to a U.S.-Bolivia BIT (because none was in force at the time). Broad definition of ‘investor’ in the Netherlands-Bolivia BIT allowed Bechtel to re-create itself as a Dutch investor, by way of Dutch holding companies, and to bring a claim against Bolivia under the Netherlands-Bolivia BIT.

CAPITAL CONTROLS

• Article 12.11 requires TPPA governments to “permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory,” thereby precluding the use of capital controls or financial transaction taxes.

‘NATIONAL TREATMENT’

• Examples of ‘discrimination’ • infant and export-oriented industries• small-medium enterprises• defence capabilities• promote/preserve employment• regulate a monopoly in the public interest• technology transfer• cultural considerations• to preserve the environment, natural wealth

• UN Conference on Trade and Development: Prudent for governments to maintain discretion to impose conditions on foreign investments seeking to enter/operate in host countries.

NATIONAL TREATMENT

• Article 12.4 stipulates ‘National Treatment’ as according to investors of TPPA parties “treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.”

• Article 12.5: Each TPPA Party shall also “accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.” , expansion, management, conduct, operation, and sale or other disposition of investments.”

PERFORMANCE REQUIREMENTS

• Promote a wider policy of export-oriented development, employment, and enhanced linkages between foreign investments and the domestic economy, and many states achieved success by the use of these tools for these purposes.

• Asian states have used performance requirements on foreign investments as a component, alongside market mechanisms, of their industrial development strategies

• Examples of performance requirements on foreign investors: • That the investor export a minimum proportion of its

production • Use a minimum proportion of local employees/inputs in its

domestic operations.

BAN ON PERFORMANCE REQUIREMENTS

• National Treatment would prohibit countries from restricting foreign investment within their territories

• Article 12.7 prohibits performance requirements such as requirements “to export a given level or percentage of goods, to achieve a given level or percentage of domestic content… to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory… to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment… (or) to restrict sales of goods in its territory that such investment produces by relating such sales in any way to the volume or value of its exports or foreign exchange earnings or to supply exclusively from the territory of the Party the goods that such investment procedures to a specific regional market or to the world market.”

MINIMUM STANDARD OF TREATMENT & FAIR AND EQUITABLE TREATMENT

- Previously-held assumptions and definitions of property: real, physical property. Courts used to award compensation only when the government has actually acquired an asset

- Foreign investors can now claim damages : for government measures that• reduce their expected future profits (Article 12.12

on indirect expropriation)• differ from the expected regulatory environment

that an they might have had before the introduction of the new measure (Article 12.6 (minimum standard of treatment)

‘FAIR AND EQUITABLE TREATMENT’

- Governments now must not only ensure a transparent and predictable framework for foreign investors’ business planning and investment’ but must also ‘act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor’.

- A government can leave a foreign investor’s ownership title unaffected, but if it causes that investor “economic harm (even incidental harm, potentially)” can be sued.

EXPROPRIATION: LOSS OF EXPECTED PROFIT

Expropriation includes:

“not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.”

SO WHAT IF THE GOVERNMENT BREAKS THE TPPA RULES?

THE INVESTOR-STATE DISPUTE SETTLEMENT INTERNATIONAL ARBITRATION MODEL

• Governments give up the jurisdiction of their own courts to attract potential foreign investors and thus grow incoming capital• They agree to international arbitration tribunals

to judge in case of disputes between investors and states that is separate from the states’ domestic judicial and administrative procedures

CRITICISMS OF THE ISDS SYSTEM

• Investors directly challenge – and claim compensation for – government measures without ‘exhaustion requirement’ of seeking legal remedies within the host state

• Structural bias against states/public measures• Judges/arbitrators serve as counsel for corporations• Investors can bring government to ISDS (not vice-versa)• Arbitrators decide interpret and discipline governments

for public/policy measures vis-a-vis private interests (environment, health, etc)

• Chilling effect of investors’ suits (Ethyl vs Canada)• Awards cannot be reviewed (except for

procedural/jurisdictional errors)• Secrecy, lack of transparency

ETHYL VS CANADA

• Canada effectively banned methylcyclopentadienyl manganese tricarbonyl (MMT) because Canadian officials were concerned about it contributing to air pollution and global warming. The investor who made MMT sued the Canadian government at an international tribunal under the expropriation provision in the NAFTA for Canada’s attempt to protect the environment and health. The Canadian government settled (presumably it thought it would lose and/or could not afford to keep defending the case), reversed its ban on MMT, paid US$13 million in legal fees and damages to the Ethyl Corporation, and issued a statement for Ethyl’s use in advertising, declaring that “current scientific information” did not demonstrate MMT’s toxicity;

METALCLAD V MEXICO

• Mexico refused to allow a toxic waste facility a construction permit in a specially declared ecological zone that had unique biodiversity, rare plants and geology, and which could have exposed water sources to contamination. The company, Metalclad, challenged the Mexican municipality’s refusal to grant the construction permit for the toxic waste dump and the governor’s declaration of the site as an ecological preserve. Metalclad claimed the Mexican government had committed “expropriation” and failed to provide “fair and equitable treatment”. The international tribunal eventually did find that the Mexican government had violated both these requirements. Metalclad won and USD 15.6 million was paid in compensation;

SD MYERS V CANADA

• A Canadian temporary ban on hazardous PCB exports was challenged by US waste treatment company, S.D. Myers. The temporary ban was put in place while Canada was considering its obligations under the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal. S.D. Myers sued for USD 20 million, won the case and was paid USD$4.8 million;

OCCIDENTAL VS ECUADOR

• The government of Ecuador had annulled a contract with US-based Occidental Petroleum (Oxy) because it violated a clause that the company would not sell its rights to another firm without permission. Oxy sued Ecuador at an international arbitration tribunal for violating its obligation in the US-Ecuador Bilateral Investment Treaty. The International Centre for Settlement of Investment Disputes in October, 2012, decided in favour of Oxy and ordered Ecuador to pay the company US$1.8 billion, its largest ever award. In addition, Ecuador has to pay US$589 million in back-dated compound interest and half of the costs of the tribunal, making its total penalty around US$2.4 billion. The tribunal conceded that the violation of a contract provision took place, but judged that the annulment of the contract as a whole violated Ecuador’s obligation to accord “Fair and Equitable Treatment” to foreign investors;

SOUTH AFRICA I

• Following the end of its apartheid policy in the early 1990s, South Africa put in place a Black Economic Empowerment (BEE) policy similar to Malaysia’s New Economic Policy (NEP). Like the NEP, the BEE programme is at the heart of policies to redress inequalities in South Africa. • The South African government became embroiled

in an ISDS international arbitration case over the BEE with a group of European companies, who accused South Africa of violating protections contained in investment protection treaties with Italy, Belgium and Luxembourg.

SOUTH AFRICA II

• In 2007, the group of Italian/Luxembourg investors in South Africa’s mining industry filed a claim for International Centre for Settlement of Investment Disputes (ICSID) arbitration, arguing that the South African BEE programme violated the BITs signed with South Africa. Under the Mineral and Petroleum Resources Development Act (the MPRD Act), which came into effect in 2004, South Africa required a re-licensing of all mining companies. The new licences came with conditions relating to the transfer of a greater proportion of shares into the hands of black investors and efforts to increase the percentage of ‘historically disadvantaged’ South Africans in management positions. The investors argued that the re-licensing conditions ran counter to South Africa’s obligation to guarantee them ‘fair and equitable’ treatment ‘no less favourable’ (discussed in the section below on) than that awarded to domestic investors, as stipulated by the BITs.

• The case was settled in 2010, with South Africa granting significant concessions regarding the investors’ BEE obligations.

RECENT DEVELOPMENTS IN ISDS (UNCTAD, 2013)• Total number of known treaty-based ISDS cases: 518 by the end of 2012 • 2012 saw 62 new ISDS cases initiated: the highest number of known treaty-based cases

ever filed in one year under international investment agreements• 68% (42 out of 62) of the new cases involved governments of developing- and transition

economies as respondents. • 63% (39) of the new cases were brought on by developed country investors• 70% (17 cases) of the public decisions addressing the merits of the dispute saw investors'

claims being accepted, at least in part, reflecting the highest percentage of rulings against the State.

• 2012 also saw US$1.77 billion being awarded to Occidental in its case against Ecuador, the highest award in the history of ISDS

• Almost US$380 million has already been paid out as compensation to firms in successful challenges of state measures

• 70% of decisions in favour of investors as claimants were in relation to actions over the environment and other natural resources.

• ISDS arbitrations had been initiated most frequently by claimants from• the US (123 cases, or 24% of all known disputes)• the Netherlands (50 cases)• the UK (30) and • Germany (27)

• The three investment instruments most frequently used as a basis for ISDS claims being NAFTA (49 cases), the Energy Charter Treaty (29) and the Argentina-United States BIT (17).

CONCLUSION• The above discussion has touched upon a number

of cross-cutting issues and concerns that have been brought to light on account of the developments relating to ISDS• transparency and confidentiality of ISDS• Investor claims, or threats, against governments over

measures introduced on environmental, health, financial crisis-related or other public interest measures.

• Issues not discussed: • Divergent, contradictory interpretations by arbitration

tribunals of the same or similar investment provisions• Specialised firms to finance international arbitration

claims against states in exchange for a share in a possible future award or settlement in favour of the claimant

CONCLUSION• A complete relook needs to be taken by policy-makers

at the ISDS system currently gaining ‘popularity’ among governments

• But we must also not lose sight of the larger, context of issues surrounding ISDS: • the agreement by governments to surrender their executive,

legislative and adjudicatory responsibilities in the race and scramble for foreign investments

• more - and higher standards of – protection, liberties and privileges for foreign investors

• Scope and overreach of definitions of ‘investor’, ‘investment’ and state ‘measures’, and the interpretations of Minimum Standard of Treatment, Fair and Equitable Treatment, National Treatment and 'expropriations' need to be overhauled, if not reviewed.