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Investment treaties: the risks of jeopardising economic development, the Bolivarian revolution and participatory democracy

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CADTM | 25 de mayo del 2005

Freely translated by Anoosha Boralessa in 2015 for bilaterals.org

Investment- treaties: the risks of jeopardising economic development, the Bolivarian revolution and participatory democracy

Hugo Ruiz Diaz, CADTM

On account of these treaties, we are faced with a conflict of global dimensions between two contradictory forms of logic that flow from conflicting interests. One the one hand are the interests of public powers and of citizens and the social movements of the countries of the South; on the other, are those of the public and private powers of the dominant North (including privileged groups of the South). The latter’s objective is to appropriate natural resources by privatising them and imposing new commercial rules at the multilateral, bilateral and regional level. We can side with Robert Charvin that the field of investments in the current context is intimately linked “to the phenomenon of imperial domination, and [that] its governing rules cannot be said to be neutral, still less an expression of a general interest.” [1]

These agreements, though some exist between Latin American countries, are chiefly promoted by developed countries and form part of a global strategy in pursuit exclusively of the economic interests of its industries and its investors. This is an undisguised process of economic and political neo-colonization that in Latin America cannot be disentangled from the growing and threatening military presence of the US nor from its efforts to destabilise the government of Hugo Chavez or to obstruct any alternative process.

These agreements, as is almost always the case with any free trade agreement, have an extremely broad field of application. For example, they include explicit obligations to protect intellectual property rights (IPRs), now considered a type of investment. IPRs apply thus to biological materials or to resources of biodiversity collected by permit and accordingly can be considered as being the property of the collector. So, if a broad definition of investment is adopted, the collector can demand protection on the basis that what he has collected is an an investment relating to these resources. We can also include water among these natural resources, which is the target of exploitation and distribution by powerful transnational companies. The cases of Bolivia, Peru and Argentina are sufficiently well known.

It must be pointed out that these treaties contain provisions that go further than international legal norms because they extend intellectual property rights beyond what is encompassed by the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) of the World Trade Organisation. They also incorporate the principles of “national treatment and non-discrimination.” Similarly, among other provisions, it is common for investment treaties to provide a prohibition on expropriation or nationalization or an obligation on governments to safeguard the profits of transnational corporate investors and to follow up by adopting domestic laws that are able to achieve this end.

This article analyses some of the potential direct consequences of investment treaties on economic policies implemented by the Venezuelan public authorities such as the margin of the discretion governments enjoy when implementing a public policy of social and economic development, as well as the effects of such treaties on participatory democracy.

1. The Bolivarian process: the first alarm in the ICSID claims. A danger for the democratic process, for public authority and for social movements

Formally these treaties are entered into by the Venezuelan state but in practice it is understood that specific transnational companies benefit from a regime of special law. To ensure that the law applicable to private investments is effective and efficient, arbitration, such as that administered under the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), is used when a dispute arises between state parties or between a state party and a private party. The domestic system, i.e., its judicial system and domestic public law, is bypassed. This is how a host state that fails to perform or violates any of the obligations undertaken in a BIT can be brought directly before this international arbitral tribunal. The International Centre for the Settlement of Investment Disputes (ICSID) is the arbitral organ entrusted with ruling on international responsibility of a state, which can then be ordered to stop conduct that violates the BIT and pay compensation for damages caused directly or indirectly to the private investor.

There is nothing better than examining ICSID’s specific interpretation and application and boundaries of this type of treaty by ICSID, bearing in mind that this arbitral tribunal is a member of the World Bank Group.

The Bolivarian Republic of Venezuela is party to ICSID. It filed its instrument of ratification on 2 May 1995 and its membership took effect on July 1 of that same year. For example, under the BIT between Canada and Venezuela, a dispute that arises between a private investor and a state must be submitted to ICSID arbitration by the investor concerned. Art. 25 (1) of the ICSID Convention provides that ICSID shall have jurisdiction over any “legal dispute that directly arises from an investment.”

Under art. 54 (1) of the ICSID Convention, every Contracting State shall recognise an award rendered under this Convention as binding and shall execute within its territories the pecuniary obligations imposed by the award as if it were a judgment rendered by a court in that State. In other words, in practice, ICSID replaces the national courts. Furthermore, its decisions have the privileged status of being on par with a judgment delivered by a national court.

This tribunal has already delivered a ruling against Venezuela by an award rendered on 23 September 2003 concerning the claim by the Autopista Concesionada de Venezuela (AUCOVEN) against the Bolivarian Republic of Venezuela, case no. ARB/00/5. In this specific case, the Bolivarian Republic was ordered to pay astronomical sums to a private firm that brought an ICSID action directly against it on the basis of losses recorded following social protests and the refusal of the government in power prior to Hugo Chavez to increase the tolls. The concession granted to the company was a typical governmental measure taken in the context of the privatisation of public services implemented by the government of Caldera with a contract signed by the company on 23 December 1996.

Following the elections held in November and December 1998, Hugo Chavez was elected the President of Venezuela and he formed a new government that assumed power in February 1999. On 25 October 1999, the recently established Ministry of Infrastructure began an administrative process to review the concession award and contract. On 31 July 2000, the Minister of Infrastructure resolved that both the resolution that awarded the concession and the contract suffered from defects rendering them null. Therefore, the Minister asked the Attorney-General and the Tax Attorney to commence actions in the Supreme Court of Venezuela to declare the award and the concession contract null and void.

Facing this legal action, on 1 June 2000, AUCOVEN decided to commence international arbitration proceedings. Reacting against the position of the private company that was continuing to collect the toll, truckers protested anew in August 2002 and refused to pay it. The tribunal deemed this to be a “violent” demonstration, even though it was outside its sphere of competence to make such a pronouncement. But this demonstrates that the tribunal is clearly partial and very hostile to any type of obstacle to private enterprise making profit.

It was of scant relevance to ICSID whether a social protest movement was legitimate or justified or that social mobilisation held valid claims against a private business that used the common strategy of making users pay for needed investments by introducing unreasonable rate hikes. ICSID made no ruling on the appropriateness or the legitimacy of the measure to increase the toll: it took a hostile position to the social movement. It is beyond doubt that this tribunal plants itself exclusively on the turf and in the mindset of commercial companies or transnational companies, this making plain its ideological dimension. This hostility to social movements is not new. In the case of TECMED [2], which involved a NAFTA claim against Mexico, this same ICSID made a ruling that patently manifested its contempt for a social movement that was opposed to the discharge of wastes dangerous to human health and to the environment generally. The World Bank tribunal stated that this social opposition was “widespread and aggressive” (sic) in its public demonstrations. It also observed in November 1997 that an association called the Alianza Civica of Hermosillo requested the cancelation of the authorisation to operate the waste dump and not to grant the extension. [3] As a consequence of social mobilisations, the authorities were obliged to annul the permits granted to the North American firm TECMED. On this point, ICSID noted that the competent authorities “were actually strongly influenced by social pressures and their political consequences [sic!]” [4]. This, being a regulatory act of a public power, constituted an indirect expropriation, as we shall see further on. ICSID paid little concern to the fact that public health was at stake, or that the environment was threatened: what concerned it most was ensuring a state always and under all circumstances guarantees to a foreign investor profit according to the terms of an international treaty.

The French-Venezuelan BIT contains the following provision:

Art 3 (2). “Investments made by nationals and companies of one of the Parties shall enjoy in the territory and the maritime areas of the other Party, full protection and security.” Art 3 (1) establishes that each Party “undertakes to guarantee in its territory to investors and companies that are nationals of the other Party … a just and equitable treatment, according to the rules and principles of international law, and to ensure that there is no legal or factual impediment to them exercising their treaty rights.”

Let us consider the ICSID rulings. For example, a social mobilisation in Venezuela that opposed a transnational corporation increasing tariffs on water, electricity and that rejected its activities representing as they did a danger to the ecosystem, to the environment or to public health, would constitute a breach of a treaty. The reason is simple: this mobilisation constitutes “a factual obstacle” to the activities of a business investor. This provision places a legal obligation on the Venezuelan government to safeguard the full exercise of rights bestowed upon a foreign investor, even when the exercise of a such a right is compromised by a protest or a social mobilisation. The case previously mentioned that was brought against the Bolivarian Republic of Venezuela is in this sense a lesson. In practice, this type of provision confirms the supremacy of private interest over public interest and appears a fundamental obstacle to citizens getting involved in managing public affairs. In the case of the treaty with Canada, if an investor or a business owned by an investor or controlled directly or indirectly by it, has suffered loss or damage due to non-performance or [as a result of the same], the dispute must be submitted to ICSID arbitration by the investor concerned. [5]

In the final analysis it is ICSID, a World Bank tribunal, which will decide whether the investment treaty has been violated or not. The result is almost guaranteed, as ICSID is partial and governed by liberal thinking. The social movements would be compelled to inaction and to accept rules imposed by transnational companies under penalty of contributing to breaching an international treaty. Meanwhile, the Venezuelan government would be prevented from adopting rules that protect the environment or that provide social protection (see TECMED) because these have the potential to be an obstacle to the profitmaking activities of private investors. Similarly the government has to take all “the measures” necessary to ensure an investor can exercise its rights under the Venezuela-Canada BIT; the word “measure” includes any law, regulation, procedure or practice. [6] The whole agreement is constructed in such a way as to make private interests prevail over public interests, undermining democracy and eliminating the public authorities from their role of seeing to the welfare of citizens.

2. The prohibition on expropriation, nationalisation, confiscation and other similar measures is a decisive obstacle to any independent development plan.

According to art. 5 of the BIT between the Bolivarian Republic of Venezuela and France entitled Expropriation and Compensation, the parties undertake not to apply measures of expropriation or nationalization or others which would have the effect of dispossessing directly or indirectly nationals or companies from the other party in the territory and the maritime areas. Similarly, article VII (1) of the Venezuela-Canada BIT establishes that neither investments nor the profits of one of the Contracting Parties shall be nationalised, expropriated or subject to measures with an equivalent effect to nationalisation or expropriation in the territory of the other Contracting Party.

The Venezuelan state will not be able to adopt these measures except in exceptional circumstances and only coupled with the condition that such measures shall not be “discriminatory nor contrary to a particular obligation.” In practice, the government has very little leeway given that the state, in the case of direct or indirect expropriation, must also pay prompt and adequate compensation that is in accordance with the market value. It has been established by ICSID that the amount of compensation for losses and for damage suffered includes loss of profits. ICSID, as we have already noted, is the tribunal of the World Bank and therefore both judge of the dispute and party to the dispute! Private property, the private interest clearly trump the actions of public powers that, with this treaty in force, will invariably have their hands tied. The most serious implication of these these provisions is that that they do not only cover direct confiscations but also indirect expropriations and those measures that are “equivalent to expropriations” that potentially encompass a variety of governmental regulatory activities (decrees, laws, decree-laws, administrative regulatory acts) that can significantly “interfere” with the property rights of an investor.

What do we mean by direct and indirect expropriation? The ICSID rulings on the interpretation and application of such clauses is startling. ICSID, with surreal legal reasoning, considers there is a taking of property under international law even when there is a deprivation of the use or enjoyment of its profits or an interference with such use or enjoyment of equivalent size, even when legal or juridical title is not affected, provided the taking is not transitory. The government’s intention is given less weight than the impact of the measures on the person who holds title to the goods and who is affected by the measure or of the profits derived from them; and the form in which the measure is introduced is less important that the real effects of its impact. [7] Always, according to this tribunal of the World Bank, “regulations can, without doubt, be characterised as constituting a creeping expropriation …. In fact, many creeping expropriations are executed through regulations. To create a global exception for regulatory measures would create an enormous vacuum in the international protection against expropriations.” [8]

Let us take the case of a government that wants to take regulatory measures in accordance with its domestic law to protect its environment and its public health, in order to force a foreign investor to comply with the law. In such a case, ICSID considers even that “it does not follow that administrative acts of a regulatory nature are excluded per se from the scope of application [of the treaty] even if they can be justified on public policy grounds– such as environmental protection – at the very least if the economic loss caused by such acts on the investor’s portfolio is of such a size that the value or the economic/commercial utility of its investment its totally neutralized.

Moreover, “measures of environmental protection can be considered expropriatory just like all other expropriatory measures by which a state implements its policies: where property is expropriated, even where it occurs through environmental measures, the State is under a duty to pay the compensation due” [9] No comment!!!!

Let us also carefully consider ICSID’s statement on expropriation in the case of Metalclad v. Mexico. Art. 1110 NAFTA establishes that “No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except
;…
(b) on a non-discriminatory basis;
(c) in accordance with due process of law and Article 1105(1); and
(d) on payment of compensation….”

“A measure” is defined in article 201(1) as including “any law, regulation, procedure, requirement or practice”…

Interpreting this provision in the case of Metalclad v. Mexico, the World Bank tribunal declared:

“The Tribunal need not decide or consider the motivation or intent of the adoption of the Ecological Decree. Indeed, a finding of expropriation on the basis of the Ecological Decree is not essential to the Tribunal’s finding of a violation of NAFTA Article 1110. However, the Tribunal considers that the implementation of the Ecological Decree would, in and of itself, constitute an act tantamount to expropriation.… Mexico has violated Article 1110 of NAFTA.” In conclusion, the Tribunal holds that “Mexico has indirectly expropriated Metalclad’s investment” [10] since, for ICSID, “These measures, taken together with the representations of the Mexican federal government, on which Metalclad relied … amount to an indirect expropriation.” [11]

It is of little weight that the regulatory act of the State or one of its organs, even a judgment of one of its domestic courts, complies with domestic law. For ICSID, “something that under Mexican legislation would constitute a series of breaches of contract expressed as non-payment of certain invoices, violation of exclusivity clauses in a concession agreement, etc., could, under the NAFTA, be interpreted as a lack of fair and equitable treatment of a foreign investment by a government (Article 1105 of NAFTA) or as measures constituting ‘expropriation’ under Article 1110 of the NAFTA. [12]. Clearly, the international law enshrined in the BIT is taking primacy over national law and the national courts.

But the concept of expropriation, whether direct or indirect, is not confined simply to regulatory measures. It also includes tax measures that according to ICSID are “[b]y their very nature … even if … designed to and have the effect of an expropriation … indirect, with an effect that may be tantamount to expropriation. If the measures are implemented over a period of time, they could also be characterized as ‘creeping,’ which the Tribunal also believes is not distinct in nature from, and is subsumed by, the terms ‘indirect’ expropriation or ‘tantamount to expropriation’ in Article 1110(1).” [13]

Seen in this light, the interpretation of what is a direct or indirect expropriation includes, according to ICSID, not only confiscating property openly, deliberately and with knowledge of the cause such as a direct confiscation or the formal or mandatory transfer of title to 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.” [14] And the taxes and the ecological costs, social costs or of whatever other kind on the activities or profits of the foreign investors also are included in this concept. A government action of this type, considered legal or constitutional under the internal law of Venezuela, can be held to constitute a violation of international law and consequently an internationally unlawful act. No further comment necessary.

The possible consequences are enormous: the Venezuelan government could find itself deprived of the right to meet the requests or demands of its citizens to not only protect the environment but also to protect labour rights and to protect genetic resources etc. because even these measures can constitute direct or indirect expropriation.

In conclusion, this type of treaty is one of the instruments used by developed countries on the one hand to provide legal safeguards for the appropriation of natural resources and on the other hand to prevent any economic development or alternative agenda, as it is through these rules that the private interest prevails even over the exercise of democratic freedoms guarantees by the Constitution. We are not saying that we do not need to receive foreign investment. On the contrary, we need it and it is evident that the Bolivarian Republic of Venezuela must welcome it, but not at any price. The risk with this type of treaty is enormous: when the demands of developed countries are cemented in mandatory rules such as in this case, the capacity of democratic political processes to amend or to reform them is severely curtailed.

Going forward, it is important that during the negotiation process and prior to every ratification, there is open and transparent debate and that the competent political authorities and the citizenry have control over the process. Similarly, the treaties must include a clause that the ICSID rulings can be reviewed before national competent courts. The field of investment must also be limited so that it does not necessarily cover all natural resources. What is at stake is nothing less than the entire democratic process running in the Bolivarian Republic just like its socio-economic development.

By Hugo Ruiz Diaz, Doctor of International law, Legal Counsel of CADTM.