The underground legal system that allows companies to sue entire countries
(Republished with translation from: The Guardian, “The obscure legal system that lets corporations sue countries”, Claire Provost and Matt Kennard, Wednesday 10 June 2015 06.00 BST, Illustration by Giacomo Gambineri)
Fifty years ago, an international legal system was created to protect the rights of foreign investors. Today, as companies reap billions in losses, insiders say it has gotten dangerously out of control
Luis Parada’s office is just four blocks from the White House, in the heart of K Street, Washington’s lobbying hub—a stretch of steel and glass that was once called the “road to riches” when influence-peddling became a booming American industry. Parada, a soft-spoken 55-year-old from El Salvador, is one of a handful of lawyers in the world who specialize in defending sovereign states in lawsuits brought against them by multinational corporations. He is a defense attorney in an obscure but increasingly powerful field of international law—where foreign investors can sue governments in a network of arbitration tribunals for billions of dollars in damages.
Fifteen years ago, Parada’s work had a small place even within the legal profession. But since 2000, hundreds of foreign investors have sued more than half the world’s countries , seeking damages, saying their profits have been threatened or lost by a wide range of government actions. In 2006, Ecuador (Ecuador) canceled an oil exploration contract with Houston-based Occidental Petroleum . In 2012, after Occidental filed a lawsuit before an international investment court (case: Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador, ICSID Case No. ARB/06/11 ), Ecuador was ordered to pay a record $1.8 billion in damages—an amount roughly equal to the country’s health budget for a year. (Ecuador filed a petition to annul/overturn this decision.)
The first case Parada was called upon to defend was for Argentina in the late 1990s against the French group Vivendi, which sued Argentina when the province of Tucumán intervened to limit the prices it charged people for water and sewage services (case: Compañiá de Aguas del Aconquija SA and Vivendi Universal SA v. Argentine Republic, ICSID Case No. ARB/97/3 (formerly Compañía de Aguas del Aconquija, SA and Compagnie Générale des Eaux v. Argentine Republic)). Argentina ultimately lost and was ordered to pay the company more than $100 million in damages. Today, in his most important case, Parada is part of a defense team for El Salvador, as it tries to fend off a multimillion-dollar lawsuit filed by a multinational mining company when the small Central American country refused to allow it to mine gold on its territory.
The lawsuit was filed in 2009 by a Canadian company, Pacific Rim (case: Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12) – later bought by an Australian mining company, OceanaGold– which said it had been encouraged by the El Salvadoran government to spend “tens of millions of dollars to undertake mineral exploration activities”. But the company claimed that when the valuable gold and silver deposits were discovered, the government, for political reasons, withheld the permits needed to begin mining. The company’s claims, which at one time exceeded $300 million, have now been reduced to $284 million – still more than the total amount of foreign aid El Salvador received last year. El Salvador countered that the company not only had not obtained the necessary environmental permits, but also failed to prove that it had acquired property rights to a large part of the land that covered its claim: many farmers in the northern Cabañas region, where the company wanted to dig, refused to sell their land.
Every year on September 15, thousands of El Salvadorans celebrate the day when much of Central America gained independence from Spain. Fireworks and parades are held in towns and cities across the country. But last year, in the town of San Isidro, Cabañas, the festivities took on a significantly different tone. Hundreds gathered to protest against mining. Gold mines often use cyanide to separate gold from ore, and widespread concern about El Salvador’s already severe water pollution has helped fuel a powerful movement determined to keep the country’s minerals in the ground. In the main square, colorful banners were hung, calling on OceanaGold to drop its lawsuit against the country and leave the area. Many chanted the slogan “No a la Mineria, Si a la vida” (No to mining, yes to life).
That same day, in Washington, Parada gathered his notes and went to an off-site meeting in one of the conference rooms in the World Bank’s J Building, across from its headquarters on Pennsylvania Avenue. This is the International Centre for the Settlement of Investment Disputes (ICSID), and it is the primary body for handling cases where companies file lawsuits against sovereign states. (ICSID is not the only venue for such cases. There are similar forums in London, Paris, Hong Kong and The Hague, among others.) The date of the hearing was not accidental or coincidental, Parada says. The case has been framed in El Salvador as a test of the country’s sovereignty in the 21st century, and he suggested that there should be a hearing on Independence Day. “The most important question in this case,” he said, “is whether a foreign investor can force a government to change its laws to please the investor as opposed to the investor complying with the laws that exist in the country(?).”
The most important question is whether a foreign investor can force a government to change its laws to please the investor as opposed to the investor complying with the laws of the country
– Luis Parada
Most international investment and free trade agreements grant foreign investors the right to invoke this system, known as Investor-State Dispute Settlement (ISDS ), when they want to challenge a government’s decisions affecting their investments. In Europe, this system has become a sticking point in negotiations for the controversial Transatlantic Trade and Investment Partnership (TTIP) agreement between the European Union and the United States, because it would massively expand the scope and power of this mechanism and make it much harder to challenge in the future. Both France and Germany have said they want the provisions on access to the investor-state dispute settlement mechanism removed from the TTIP Treaty, and the whole issue is currently under discussion. See (adding editor): Part Five ( PART FIVE: INVESTMENT, SERVICES AND RELATED MATTERS ), Chapter Eleven ( Chapter Eleven: Investment ), Section A ( Section A – Investment ), from Article 1101 ( Article 1101: Scope and Coverage ) to Article 1139 ( Article 1139: Definitions ) in the North American Free Trade Agreement, NAFTA , which has been in force since January 1994, between the United States, Canada and Mexico, is a good “example to avoid”.
This chapter has been the subject of many arbitration cases to date, 77 of which are known. There is a recent report, “NAFTA Chapter 11 Investor-State Disputes to January 1, 2015” on the implementation of the two-decade-old agreement and the cases that have arisen based on the ISDS mechanism. On page 30 of this report [PDF file, 41 pages in English] there is the concluding article entitled “Democracy Under Challenge, Canada and Two Decades of NAFTA's Investor-StateDispute Settlement Mechanism” by Scott Sinclair, of the Canadian Centre for Policy Alternatives, which shows the impact that the trade agreement has had on Canada and, in particular, the consequences that the state has suffered from the cases based on Chapter 11 of this agreement.
Investors have used this systemnot only to sue for compensation for alleged expropriations of land and factories, but also against a huge range of government measures, including environmental and social regulations, which they claim violate their rights. Multinationals have sued not only to recover money they have already invested, but also for alleged lost profits and “anticipated future profits.” The number of cases against countries in ICSID now stands at around 500—and this number is growing at an average rate of one case per week. The amounts awarded in compensation are so large that investment funds have caught wind of it and are now seeing corporate claims against states as assets that can be invested in or used as collateral to secure multi-million dollar loans. Increasingly, companies are using the threat of ICSID litigation to pressure governments not to challenge investor actions.
See (edition added) a) Statistics on ICSID cases with a focus on the EU, “THE ICSID CASELOAD–STATISTICS (SPECIAL FOCUS–EUROPEAN UNION)”, for cases filed as of March 1, 2014, at the World Bank’s ICSID.
And
b) Statistics on ICSID cases for 2014, “The ICSID Caseload – Statistics 2014”, at the ISDS BLOG.
All of these cases are already there without the “help” of the TTIP agreement under negotiation. Imagine what will happen once the two largest economies in the world, the EU and the US, sign an agreement that includes provisions for a dispute settlement mechanism.
“I had no idea this was coming”Parada said. Sitting in a glass-walled conference room in his offices at the Foley Hoag law firm, he paused, searching for the right word to describe what had happened in his field. “Rotten,” he finally decided. “I think the investor-state dispute settlement mechanism was created with good intentions, but in practice it has completely gone out of business, it is rotten now.”
* * *
The quiet village of Moorburg in Germany lies just across the river from Hamburg. Past the 16th-century church and meadows rich in wildflowers, two huge chimneys steadily belch a huge cloud of thick, gray smoke into the sky. This is Kraftwerk Moorburg, a new coal-fired power plant, a thermal power plant – the village’s controversial neighbor. In 2009, it was the subject of a €1.4 billion investor-state case (case: Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG v. Federal Republic of Germany, ICSID Case No. ARB/09/6 (formerly Vattenfall AB, Vattenfall Europe AG, Vattenfall Europe Generation AG & Co. KG v. The Federal Republic of Germany)) filed by Vattenfall, the Swedish energy giant, against the Federal Republic of Germany. It is an excellent example of how this powerful international legal system, built to protect foreign investors in developing countries (from rogue governments and dictators), is now also being used to challenge the actions of European democratic governments.
Since the 1980s, German investors have sued dozens of countries, including Ghana, Ukraine and the Philippines, at the World Bank Center in Washington. But with the Vattenfall case, Germany itself has found itself in the dock for the first time. And what an irony, for those who consider Germany the grandfather of investor-state arbitration: it was a group of German businessmen, in the late 1950s, who first thought of a way to protect their investments abroad as a wave of developing countries gained independence from European colonial powers. Led by Deutsche Bank president Hermann Abs, they called their proposal an “carta” for private investors.
The investor-state arbitration system was created with good intentions, but in practice it has completely gone out of control, it has become rotten
– Luis Parada
In the 1960s, the idea was adopted by the World Bank, which said that such a system could help the world’s poorest countries attract foreign capital. “I am convinced,” said World Bank President George Woods at the time, “that those… who adopt as their national policy a welcoming [environment] for international investment—and that means, they don’t mince their words about it, giving foreign investors a fair chance to make attractive profits—will achieve their development goals more quickly than those who don’t.”
In 1964, at the World Bank’s annual meeting in Tokyo, a resolution was adopted to create a mechanism for handling investor-state cases. The first line of the preamble to the ICSID Convention defines its objective as “international cooperation for economic development.” There has been fierce opposition to the system since its inception, with a bloc of developing countries warning that it would undermine their sovereignty. A group of 21 countries—almost all of Latin America, as well as Iraq and the Philippines—voted against the proposal in Tokyo. However, the World Bank decided to proceed regardless of these objections. Andreas Lowenfeld, an American legal academic who was involved in some of these early discussions, later remarked: “I believe this was the first time that a major World Bank resolution was pushed through despite so much opposition.”
Global development remains the stated goal of ICSID. “The idea,” said the institution’s current secretary-general, Meg Kinnear, “is that if an investor believes that there is a fair, impartial mechanism that they can turn to if a dispute arises, then they will have a lot more confidence and that will help promote investment… and when they invest in a country, they will obviously create jobs, income, technology and all the things that go with an investment.”
But now, governments are slowly discovering the true cost of this “trust.” The Kraftwerk Moorburg plant was already a controversial affair long before the lawsuit was filed. For years, local residents and environmental groups had opposed its construction, amid growing concerns about climate change and the impact the project would have on the banks of the Elbe River. In 2008, Vattenfall was granted a water use permit for the Moorburg project, but, in response to pressure from locals, local authorities imposed strict environmental conditions to limit water use and the impact of that use on fish.
Vattenfall sued Hamburg in local courts. But, as a foreign investor, it could also take the case to ICSID. These environmental measures, it said, were so severe as to constitute a violation of our rights as enshrined in the Energy Charter Treaty,a multilateral investment agreement signed by more than 50 countries, including Sweden and Germany [see PDF file, 32 pages in English, International Energy Charter, Agreed text for adoption in The Hague at the Ministerial Conference on the International Energy Charter on 20 May 2015]. The company argued that the environmental conditions attached to its permit were so severe and restrictive that they made the operation of the plant uneconomic and thus constituted acts of indirect expropriation.
“It was a complete surprise to us,” the local Green Party leader, Jens Kerstan, told us in a meeting in his sunny Hamburg office last year. “As far as I knew, there were some agreements to protect German companies in the [developing] world or from dictatorships, but that a European company would sue Germany, that was a complete surprise to me.”
The Vattenfall vs Germany case was settled in 2011 after the company won the case in a local court and received a new water use permit for the Moorburg plant - which significantly lowered the environmental standards originally imposed, according to legal experts, allowing the plant to use more water from the river and weakening the measures it had to take to protect fish. The European Commission has now taken its turn and intervened by taking Germany to the EU Court of Justice (see European Commission Takes Germany to Court for Coal-fired), saying that the permit for the coal-fired power plant in Moorburg violates EU environmental law (specifically COUNCIL DIRECTIVE 92/43/EEC of 21 May 1992 on the conservation of natural habitats and of wild fauna and flora), by not doing more to reduce the risk to protected fish species, such as salmon, which pass near the plant while migrating from the North Sea!!!
A year after the Moorburg case was closed, Vattenfall filed another claim (case: Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, Notice of Arbitration (not public, see IAReporter story) against Germany, this time over the federal government’s decision to phase out nuclear power for electricity generation. This second lawsuit – about which very little information is publicly available, despite reports that the company is seeking €4.7bn from German taxpayers– is still ongoing. Around a third of all cases concluded and filed with ICSID are recorded with a “settlement” ending, and this – as the Moorburg case shows – can be a very lucrative business for investors, although their terms are rarely fully disclosed.
There are now thousands of international investment agreements and free trade agreements signed by states that contain provisions that give foreign companies access to the investor-state dispute settlement system if the companies decide to challenge the decisions of a government. These disputes are usually heard before panels of three arbitrators, one chosen by each side and the third chosen by agreement between the two parties. Decisions are made by majority vote and are final and binding. There is no appeal procedure - only an option of filing an application for annulment that can be used on very limited grounds. If states do not pay the compensation awarded by the decision, their assets are subject to seizure in almost every country in the world (the company can ask the local courts for an order of execution). While a court cannot force a country to change its laws or grant a company a license, the threat of massive damages may in some cases be enough to persuade a government to reconsider its actions. The existence and threat of the arbitration process can be used to encourage states to engage in meaningful settlement negotiations.
If states do not pay after the judgment, their assets are subject to seizure in almost every country in the world
In Guatemala, internal government documents obtained through the country’s Freedom of Information Act show that the risk from such cases weighs heavily on a state’s decision not to challenge a controversial gold mine, despite protests from its citizens and following a recommendation by the Inter-American Commission on Humanthat it should be closed. Such a move, the documents warn, could prompt the company, which is owned by Canadian mining giant Goldcorp, to trigger ICSID or invoke clauses in the Central American Free Trade Agreement (CAFTA) to gain “access to international arbitration and subsequent claims for compensation from the state.” The mine, which had been temporarily closed by the government in 2010, has reopened.
See (editor's note): A recent list of such cases: “TABLE OF FOREIGN INVESTOR-STATE CASES AND CLAIMS UNDER NAFTA AND OTHER US“TRADE” DEALS, April 2015[pdf file, 43 pages in English]
As business demands grow, it seems increasingly likely that the enormous financial risks associated with the arbitration mechanism for resolving investor-state disputes will effectively grant foreign investors a virtual veto over any government decision.
* * *
When companies fail in their claims against states, there may be other benefits that accrue. In 2004, South Africa’s new post-apartheid law, the Mineral and Petroleum Resources Development Act, MPRDA,came into effect. Along with a new mining charter, the law sought to redress historical inequalities in mining, in part by requiring companies to work with citizens who suffered under the apartheid regime. The new system terminated all previously held mining rights and required companies to reapply for a permit to continue their operations. It also recommended a mandatory 26% shareholding in the country’s mining companies by black South Africans. Two years later, a group of Italian investors, who control most of the granite industry in South Africa, filed a landmark investor-state claim (case: Piero Foresti, Laura de Carli & Others v. The Republic of South Africa, ICSID Case No. ARB(AF)/07/01), against the South African state. The country’s new mining regime, they claimed, had illegally expropriated their investments and treated them unfairly. They sought $350 million in compensation.
The case was brought by members of the Foresti and Conti families, prominent Tuscan industrialists, and a Luxembourg-based holding company, Finstone. The plaintiffs cited two bilateral investment treaties signed in the late 1990s, during Nelson Mandela’s presidency. Jason Brickhill, a lawyer with the Johannesburg-based Legal Resources Centre, said the new, post-apartheid government appeared to have viewed the agreements “more as diplomatic acts of goodwill than as serious legal commitments with potentially far-reaching economic consequences.”
At the time, our government officials were invited to meetings in Europe, he said, “and there was all sorts of talk about what the economic and trade direction of South Africa was going to be and part of that was the expectation that there would be investment treaties – but they had no real understanding of what they were legally committing themselves to by signing up.” Peter Draper, a former official at the South African Department of Trade and Industry, put it a little more bluntly: “We were basically signing everything without asking too many questions or paying too much attention.”
The companies’ case against South Africa dragged on for four years before ending abruptly when the Italian group withdrew its claims and the court ordered it to pay €400,000 in South Africa’s legal costs. At the time, a press release celebrated the “successful conclusion” of the case—despite the fact that South Africa had already spent €5 million on non-refundable legal fees. But the investors claimed a more significant victory: under pressure from the case, they said, they managed to secure an unprecedented and significantly improved deal with the South African government, one that allows their companies to transfer only 5% of their ownership to black South Africans—down from the 26% originally required by law. “No other mining company in South Africa has been treated so generously since the new mining regime came into effect,” boasted one of the investors’ lawyers, Peter Leon, at the time.
The government appears to have agreed to the deal, which goes against the spirit of post-apartheid reparations in South Africa, to prevent a flood of other claims against it. “If the arbitration had ruled against the government, that would have been where the big damage would have been done, because everyone would have come together against it, so this settlement is much better,” Jonathan Veeran, another of the firm’s lawyers, said in an interview at his Johannesburg office. His clients, he said, “were very happy with the outcome.”
* * *
A small number of countries are now trying to escape the shackles of the investor-state dispute settlement system. One such example is Bolivia, where thousands of people took to the streets of the country’s third largest city, Cochabamba, in 2000 to protest a dramatic increase in water charges by a private company owned by Bechtel, an American construction company. During the protests, the Bolivian government intervened and terminated the concession contract with the company. The company then filed a $50 million lawsuit against Bolivia at ICSID (case: Aguas del Tunari, SA v. Republic of Bolivia, ICSID Case No. ARB/02/3). In 2006, after a campaign calling for the case to be dismissed, the company agreed to accept a symbolic price of less than $1.
After this exact case, Bolivia annulled the international agreements it had signed with other states that offered investors access to such courts. But to do this and change the system is not something easy to do. Most of these international agreements have sunset clauses, according to which their provisions remain in force for 10 or even 20 years, even if the Treaties themselves are annulled!
In 2010, Bolivian President Evo Morales nationalized the country’s largest electricity provider, Empresa Eléctrica Guaracachi. The UK-based electricity investor Rurelec, which indirectly owns 50.001% of the company, took Bolivia to the Permanent Court of Arbitration in The Hague, seeking $100 million in damages (case: Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2011-17). Last year, Bolivia was ordered to pay Rurelec $35 million; after months of negotiations, the two sides reached a settlement for a compensation payment of just over $31 million in May 2014. Rurelec, which declined to comment for this article, celebrated its victory in a series of press releases on its website. “The only thing that saddens me is that it took so long to reach a settlement,” its chief executive said in a statement. “All we wanted was a friendly negotiation and a handshake with President Morales.”
Even those states that initially objected to the introduction of the investor-state dispute settlement system at the World Bank meeting in 1964 have since signed dozens of agreements, thus expanding the scope of this mechanism. With the rapid growth of such treaties – there are now more than 3,000 in force – a specialist sector has developed in advising companies on how to best take advantage of the treaties that give investors access to the dispute settlement system, as well as how to structure their businesses to benefit from the various protections offered by the mechanism. It’s a lucrative field: legal fees alone average $8 million per case, but have exceeded $30 million in some cases, and arbitrators’ fees start at $3,000 per day, plus expenses. While there is no equivalent of legal aid for states trying to defend themselves against these lawsuits, companies have access to a growing pool of third-party funders who are willing to fund companies’ cases against states, usually in exchange for a hefty cut of any potential damages.
Increasingly, these lawsuits are becoming increasingly valuable, even before any potential insurance settlements. After Rurelec filed a lawsuit against Bolivia, it took its case to the market and secured a multi-million dollar business loan, using its dispute with Bolivia as collateral, to enable it to expand its operations. Over the past 10 years, and particularly since the global financial crisis, a growing number of specialized investment funds have moved to raise money through these cases, treating the multi-million dollar claims by companies against states as a new “asset class.”
One of the largest funds specializing in supporting corporate lawsuits against governments, Burford Capital, is based just a few blocks from East Croydon train station, on the fifth floor of a quaint brown brick building. Companies rarely disclose that their cases are funded by one of these third-party investors, but in the Rurelec v. Bolivia case, Burford issued a triumphant press release celebrating its “groundbreaking” involvement. Typically, funders like these will agree to support corporate claims against states in return for a cut of any potential compensation the companies might receive. In this case, Burford gave Rurelec a $15 million “loan,” using its lawsuit against Bolivia as collateral.
See (adding ed.): Database with cases according to the ISDS mechanism, at UNCTAD (United Nations Conference on Trade and Development), in the last column the outcome of the case is indicated, very many are either in favor of the investor or there was a compromise between the 2 parties. Cases in favor of the State are the fewest.
“Rurelec did not need the funds to pay its lawyers. Instead, it needs the funds to continue growing its business,” Burford said in a statement. “This is good evidence that the benefits of litigation go far beyond simply helping to pay legal fees,” its CEO added, “and in many cases can provide an effective alternative financing method to help companies achieve their strategic goals.” The “funding” was highly satisfying for Burford, too: it announced a net gain of $11 million from the litigation.
A Burford spokesperson further explained: “Burford did not fund Rurelec’s claim, which had been in place for two years, prior to our involvement in the company. Instead, we funded it under a corporate loan facility to enable Rurelec to expand its operations in South America, but we also looked to its pursuit of the arbitration case (as contingent assets) to assist it in repaying its loan.”
From the beginning, part of the rationale for the existence of the international investor-state dispute settlement system was to create a “neutral forum” for conflicts to be resolved, to give investors the right to seek diplomatic support from their home countries when making claims in similar cases. But documents we received in response to a Freedom of Information Act request reveal that Rurelec was also able to rely on the British government, which could have actively intervened to support its case.
The 44-page response documents include dozens of emails and internal memos from May 2010 to June 2014, many of which explicitly mention British lobbying on behalf of the company. One email, to the UK ambassador to Bolivia, Ross Denny, where the sender has gone into hiding, includes the line “lobbying for Rurelec, yes.” Another, from Denny, states: “Our regular high-level lobbying on behalf of Rurelec has helped demonstrate the seriousness with which we take protecting our business interests.” Another simply says: “Rurelec needs our help.”
It appears that the British embassy was aware that the arbitration system was supposed to be impartial. One email, which appeared to be about how to respond to an inquiry from a member of parliament, said: “All things being equal, our line was that HMG would not be involved in legal proceedings arising from the investment agreements we have signed.” The message, whose sender and recipients have been deleted, continues: “If the FCO [Foreign and Commonwealth Office] had an ongoing dialogue with the company on this matter, it would perhaps be more appropriate for you to respond with some general guidance from us on the benefits of the investment conditions.”
* * *
El Salvador has already spent more than $12 million defending itself against Pacific Rim, but even if it succeeds in dismissing the company’s $284 million in damages, it will not be able to recoup those costs. For years, protest groups in El Salvador have been calling on the World Bank to launch an open and public evaluation of ICSID. To date, no such study has been conducted. In recent years, a number of ideas have been proposed for reforming the international investor-state dispute settlement system—adopting a “loser pays” approach, for example, or increasing transparency. The solution may lie in creating an appeals system so that controversial decisions can be reviewed.
Last year, David Morales, El Salvador’s Ombudsman for Human Rights (a position created as part of the peace process following the country’s 1979-1992 civil war), took out a full-page ad in the newspaper La Prensa Gráfica calling on the government to review all of the international investment treaties it has signed, with a view to renegotiating or canceling them. Luis Parada, who is representing El Salvador in its dispute with Pacific Rim, agrees that this would be a wise move: “I personally don’t think that countries gain enough from these treaties to be worth the risks that arise from potential international arbitration cases.”
El Salvador has already spent more than $12 million defending itself against Pacific Rim. It will never be able to recoup those costs
Other countries have already decided to cut their losses and are trying to get out of these trade conditions. Shortly after settling a lawsuit with foreign mining companies over new post-apartheid mining rules, South Africa began terminating many of its own investment agreements.
“What concerns us is that we could be in an international arbitration—with a decision being made by three people—on what is essentially a South African legislative program, which has been made through democratic processes, and that somehow this arbitration panel could potentially put that whole program in jeopardy,” Xavier Carim, a former deputy director-general at South Africa’s Department of Trade and Industry, told us. “It was very, very clear that these conditions are open to such broad interpretations by panels or by investors who want to challenge any government measure, with the potential for a significant compensation payment at the end of the day,” said Carim, who is now South Africa’s representative to the World Trade Organization in Geneva. “The simple fact is that these conditions ultimately give you very little benefit because they simply involve a lot of risk.”
Before moving to terminate and terminate its agreements, the South African government commissioned an internal study to determine whether such agreements actually help boost foreign investment. “There was no connection between signing the agreements and new investment,” Carim explains. “We had huge investments from the US and Japan and India and some other countries, with which we don’t have investment agreements. Whether or not companies come to invest in a country has nothing to do with whether or not there is a bilateral investment treaty. They invest if there is an expectation of profits and a return on their investment.”
Brazil has not signed up to this system to date - it has not entered into any treaty that has provisions for resolving disputes between investor and state - and yet it has had no problem attracting foreign investment.
Parada said it would take “a broad consensus of determined countries” to truly rein in this system. “The states that created the system are the only ones who can fix it,” he said. “But I haven’t yet seen a critical mass of states with the political will [to do this]… much less a broad consensus. But I still hope it will happen.”
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• Claire Provost and Matt Kennard are fellows at the Centre for Investigative Journalism. This article is published with support from the Investigative Fund at The Nation Institute. Matt Kennard’s book, “The Racket,” is published by Zed Books.
• Follow Long Read on Twitter: @gdnlongread
