The Bilateral Investment Treaty: Investment facilitator or host country albatross?

Stabroek News, Guyana

The Bilateral Investment Treaty: Investment facilitator or host country albatross?
Part 1

17 April 2003

By Cecilia McAlmont

Introduction

It was with a sense of extreme relief I’m sure that Guyanese read in the Stabroek News of March 19, 2003 that the U.K. Supermar-ket chain had abandoned its 12M pounds sterling claim against Guyana. The article stated that the Big Food Group which owns the Iceland Chain of food stores, had abandoned its more that 12M pound sterling chain against Guyana for the nationalisation in 1976 of the sugar industry then owned by Bookers. Guyana had already paid about half of the original nationalisation debt but had defaulted in payment in 1989 mere months after we had embarked on the Economic Recovery Programme (ERP) which signalled the Hoyte administration’s intention to put Guyana on the path to a market oriented economy. Credit for the success of the abandonment of the claim belonged to the Jubilee Debt Campaign. The group waged a relentless public campaign which shamed the Big Food Group by virtually accusing it of wanting to get a share of the debt relief granted to Guyana regarded as one of the world’s poorest countries. They pointed out that 12M would make virtually no difference to their bottom line but would impact significantly on Guyana’s debt situation.

What however was of greatest interest was the basis for the claim. It was the Bilateral Investment Treaty (BIT) concluded between Guyana and the United Kingdom thirteen years after the nationalisation of Bookers holdings on the ground that Guyana by having recourse to legal action, had not adhered to the terms of the agreement in respect of the settlement of dispute. The claim was due to be heard on March 31, 2003. This seemed an opportune time to revisit a subject which I had looked at 4 years ago on the 40th anniversary of the signing of the first BIT between Germany and Pakistan in November 1949. The focus of the next few articles will be to examine the evolution of the BIT and its effectiveness as a facilitator of investments for developing countries like Guyana. This first article will focus on BITs signed prior to 1974.

Background

Since the first BIT was signed between the Federal Republic of Germany and Pakistan for the “Reciprocal Promotion and Protection” of Investments their numbers have increased to 1,857 by the end of 1999. In the pre 1974 period, most of the BITs were concluded between capital-exporting developed and developing countries and capital-importing developing countries and after the 1980’s among developing countries themselves. Their ostensible purpose was, to facilitate the flow of direct investments to developing countries. This was to be achieved through the provision by the host country of guarantees, based on the traditional norms of international law for the protection of alien property (investments) abroad. In the decade of the 1950’s, 60’s and early 70’s, many developing countries desperate for foreign direct investments (FDI) to carry out their programmes of industrialization which, then current development paradigms asserted would ensure growth and with it development, concluded BITS which more or less enshrined traditional norms.

However, as they achieved their independence and took their places as sovereign states in the United Nations General Assembly (UNGA) they challenged those traditional norms of international law which they claimed had evolved during the period of Colonialism to lend legitimacy to the naked exploitation of their natural resources. This questioning eventually led to the adoption by UNGA, in 1962, of the resolution on Permanent Sovereignty Over Natural Resources (PSNR), secondly, in 1974, the Charter of Economic Rights and Duties of States (CERDS) and thirdly, the resolution on the declaration of a New Interna-tional Economic Order (NIEO). Most developed countries startled by the nature of the last two resolutions which they felt ran counter to the accepted norms of international law as they pertained to foreign investments, voted against them. Moreover, they firmly reiterated the fact the United Nations resolutions had no binding force. Consequently, the BITS they concluded after 1974 were not only supposed to encourage the flow of more investments to developing counties, but more specifically to halt what was seen as the erosion of international law as it pertained to investment protection.

Features of pre 1974 BITS

The year 1974 had tremendous significance for developing countries with the adoption by UNGA of the two resolutions earlier mentioned. They complemented the 1962 resolution on PSNR. These declarations contained provisions which it was hoped at least on the part of developing countries, would influence, to their advantage the formulation of BITs in the fundamental areas of expropriation, applicable law and the submission of investment disputes to arbitration. BITs were concluded mainly with developing countries. The capital-exporting developed country wanted to combine in a single instrument the kinds of guarantees which would ease their investors’ mistrust through provisions which minimized the risk of loss from nationalisation and expropriation. They also wanted to ensure the basic legal condition which would influence the degree to which potential investors would be willing to venture their capital in a foreign country. They also wanted to establish and confirm in the potential host country, a governmental policy of equity and hospitality to be the foreign investor.

The pre 1974 BITS saw the elaboration of definitions of key terms like “investments”, “nationals” and “companies.” A series of disputes and arbitral awards caused the notions of property in international law to be redefined to include intangible property and also intellectual property rights, all in favour of the capital exporting country. There was also the elaboration and changes of clauses governing the admission of investments, the repatriation of profits, expropriation and arbitration. The last two are of particular importance for this discussion.

The most contentious issue to be dealt with in the BITs was the matter of expropriation of foreign-owned property, its valuation and the quantum of compensation to be paid for it. The provisions on this issue emphasised the subordinate position of the host country, invariably a capital importing country. For example, while the host country’s right to expropriate was acknowledged, it was circumscribed by certain definite conditions which evolved from 19th century Western European presumptions of private ownership. Most of the treaties set out the basic conditions for expropriation as having to be for a public purpose or in the public interest, should be non-discriminatory, against compensation and under due process of law. International law gives no precise definition for the terms “public purpose” but recognises the right of national government to decide on this. However, all capital exporting countries attach a great deal of importance to these definitions, as a matter of principle and as a possible safeguard against arbitrary measures by host governments. The non-discrimination condition was sometimes hedged by the provision of most-favoured-nation treatment for expropriation and/or compensation.

Generally on the question of the conditions for compensation, capital importing developing countries have accepted various permutations of the controversial Hull formula of “prompt, adequate and effective compensation” with significant implications for the evolution of the norms of international law. This point will be elaborated upon in another article. In fact, while many developing countries have accepted these permutations of the Hull formula in the BITs signed they have assumed contrary stances in international fora. This has led to the charge of ambivalence and duplicity by writers on the subject. However, in response, one writer stated that “what a country may be willing to undertake on a selective bilateral basis may be considerably different to the engagements it is prepared to undertake vis-à-vis all the world.”

All the pre 1974 BITs provided assured methods for the resolution of disputes between the Contracting Parties as a very effective way of reducing mistrust and creating an atmosphere of confidence. The two settlement procedures contemplated were diplomatic negotiations and compensations and ad hoc tribunals. Only after adequate time was allowed to obtain a settlement through diplomatic means and to exhaust local remedies could one of the parties call upon the other to submit the dispute to an arbitral tribunal. Many of the BITs concluded before 1970 did not deal directly with the settlement of disputes between the host state and the foreign investors regarding the investments themselves. However, after the conclusion of the Wash-ington Convention in 1965 the use of the International Centre for the Settlement of Investment Disputes (ICSID) began to appear in newly concluded Treaties.

Developing countries, especially those of Latin America adhered to the Calvo Doctrine. Among other things, it insisted that investment disputes lay within the exclusive purview of domestic legislation. Additionally, this doctrine struck at the core of the international minimum standard by repudiating the claim to most-favoured-nation status. It was therefore not surprising that in the period under discussion, not a single Latin American country had signed a Bilateral Investment Treaty. However, it in no way impaired the flow of FDI to those countries. Moreover, the ICSID convention by setting up a system for the settlement by arbitration of “any legal dispute arising directly out of an investment between a contracting state and a national of another contracting state allowed a private investor, without the aid or intervention of his home state to litigate with a host state on a footing of procedural equality.” It was a blow for developing countries which had objected very strongly to companies which are not subjects of international Law being treated as equals before an international tribunal.

This is what Guyana agreed to when it signed the Bilateral Investment Treaty with the United Kingdom in 1989. After almost 14 years of significant aid but no significant flows of FDI from Great Britain, (except if one wishes to characterise CDC/Globeleq’s involvement in the power sector as a significant investment) the Big Food Group has used the article on arbitration to reopen the claim for compensation for the nationalisation of sugar industry. An industry which had been built, in the first instance, by the wholesale dehumanisation, blood sweat and tears of our ancestors - thousands of African slaves and indentured immigrants.

Introduction

In the previous article, an examination of the evolution of the Bilateral Investment Treaty (BIT) from the developing country perspective was begun with the focus on BITS signed before the adoption of the UN resolution CERDS in 1974.

The focus of this article is on the impact of those BITS on the flow of investments to developing countries; BITS vis-a-vis UN resolutions and an examination of BITS signed until the late 1980’s and their impacts.

Impacts of pre 1974 BITS

An examination of investment trends during the period under discussion showed that being a party to a BIT had very little if any weight as to the volume of FDI made in any country or continent. FDI flows to capital importing developing countries showed a continuously decreasing trend by about 50% from US$2229m in 1959 when the first BIT was signed to US$1124m in 1974. However, there was an average FDI flow of US$3987m between 1970 and 1973. But these FDI flows did not represent new flows but mainly reinvested earnings.

The FDI flows between 1970 and 1974 were illustrative of the extent to which the world economic climate determined the level of investment.

In 1974, following the OPEC oil crisis, investments were less than 25% of the previous year and one third less than at the beginning of the decade. Of importance however, is the fact that the bulk of the FDI went to Latin American countries which had concluded no BITS by 1974.

Interestingly also, the FRG which had signed the most BITS by 1974 trebled its FDI flows to developing countries from US$1942m in 1970 to US$5970m in 1976. Of this sum, 31% went to Latin American countries with whom except for Colombia and Ecuador (1965), the FRG had refused to sign BITS because of their adherence to the previously discussed Calvo Doctrine. 28.8% of its FDI flows went to Africa with whom most of the BITS had been signed and 30.4% to Asia. Moreover, FDI flows from Japan and the USA to developing countries increased significantly although they had concluded no BITS by 1974.

Clearly, it was the industrialising developing country with no BITS but with large and rapidly expanding markets and with highly productive labour forces as in Asia and Latin America which attracted FDI.

It was not the small developing countries of Africa with several BITS but limited market potential, less educated and therefore less productive labour forces and relatively inefficient administrations that did so. As such, it was the potential investors’ perception of a secure and profitable venture and the country’s overall economic policy which influenced the investment decision. The fact of a BIT was simply icing on the cake.

Unfortunately, FDI was often made in those sectors of the host country’s economy which ensured significant profit to the investor but conferred little if any benefit on the mass of the country’s population. Consequently, after 25 years of FDI and large amounts of concessional loans and grants, the GNP per capita of developing countries grew on average by 3.4% per annum during 1950 - 1975 but the reality was that large numbers of their population continued to live in absolute poverty. For most of the developing countries the conclusion of a BIT proved to be little more than another trapping acquired with political independence.

UN resolutions and post 1974 BITS

Capital exporting developed countries had protested vigorously when UNGA adopted the resolution on CERDS (1974). Article 2 (2) (a) of that resolution suggested that no state should be compelled to grant preferential treatment to foreign investment. More specifically, they had objected to article 2 (2) (c) which dealt with expropriation, compensation and international law.

The main objection was that the article only provided that "appropriate compensation should be paid by the state adopting such measures taking into account its relevant laws and regulations and all circumstances that the State considers pertinent." This clause in particular struck at the heart of the Hull formula of "prompt, adequate and effective compensation." Additionally, the objectors claimed that there was no insistence that the taking needed to be for a public purpose. Consequently, the 1962 UN resolution on PSNR which developed countries had objected to on its adoption now used it as the yardstick to measure adherence to international law.

The PSNR resolution made provision albeit only for "appropriate compensation." By so doing, it had confirmed the principle of international law which made provision for just compensation for expropriation.

In light of the clauses of CERDS, the resolution on PSNR was now a triumph for capital exporting developed rather than capital importing developing countries. Despite their strong objection to CERDS, over 250 of the 385 BITS concluded by the end of 1989 were done after 1974. The United Kingdom signed its first BIT in 1975, Japan in 1975 and the USA in 1982.

Primarily because of the large number of BITS signed by developed countries after 1974, the promise of CERDS remained unfulfilled. A comparison of BITS signed pre and post 1974 showed that on the whole, there were few if any changes in the protective clauses of the post 1974 BITS. For example, the principles of national and most favoured nation treatment continued to be enshrined in the BITS. However, there were several exceptions. Additionally, some Latin American countries that had previously adhered to the Calvo Doctrine on this matter concluded BITS which included a most favoured nation clause.

Clauses on nationalisation/expropriation and the quantum of compensation to be paid therefore continued to be permutations of the Hull formula. The United Kingdom with whom Guyana concluded its first BIT in 1989 has been the most consistent in its use of the Hull formula. Other countries, including the FRG with whom Guyana concluded its second BIT, also in 1989, showed a lack of consistency in the wording of their protective clauses. The relevant clause of Guyana’s BIT with the FRG included the Hull formula.

The strength of the permutation of the Hull formula was dependent on the bargaining positions and relative negotiating strengths of the two Contracting Parties. For example, the BIT concluded between the United Kingdom and China in 1989 did not include the Hull formula. CERDS provided that on the question of Arbitration, especially with respect to disputes over compensation, domestic law should be applicable unless otherwise agreed to by the states concerned.

However, CERDS did not prevent the reference of investment disputes to international arbitration. Referring investment disputes to the ICSID for arbitration became standard practice after 1974 even those signed by the FRG which had pre 1974 refrained from doing so. Latin American countries also now signed BITS which included this provision - the exact opposite to what the Calvo Doctrine espoused.

The impact of BITS signed 1974-1989

At the end of 1973, a net transfer of resources from developing to developed countries began. This outflow of scarce resources was halted towards the end of the 1970’s by "The Dance of the Millions" when, in their desire to recycle petro-dollars, Western banks persuaded developing countries to borrow funds on terms, the overwhelming majority of whom found impossible to refuse. Hence, between the boom periods of 1979 - 1981 and 1987 - 1990 the outflow of scarce resources from developing countries became a haemorrhage. By the end of 1982, developing countries were transferring 5% of their annual GNP to the developed world. This also included human capital on which development is based.

Despite the increasing number of BITS signed by developing countries that included terms which should have stabilized the investment climate, the flow of FDI to developing countries continued to decline. Investments from the US which reached US$25b in 1979 and was US$19b in 1980 showed a sharper decline from 1981. By 1983, US investments were a little over US$5b followed by US$4.5b in 1984 and 1985. Total FDI from the OECD countries also showed a gradual decline from US$9.56b in 1980 to US$6.3b in 1983.

The main beneficiaries were Latin American countries like Brazil which between 1970 - 1975 received 29.9% of FDI flows from DAC countries but had signed no BIT. The marginal recipients were African countries like Zaire which had signed 5 BITS with DAC countries but had received only one percent of FDI. The above again demonstrated that the existence of a BIT is a minor factor among several that influenced the investment decision.

In the next article, the focus will be on the evolution of the BIT in the post debt crisis, post cold war environment of the 1990’s.

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