Global Trends: Investor treaties in trouble
Online Publication Date: 27 March 2014
Global Trends: Investor
treaties in trouble
Monday March 24, 2014
The tide is turning
against investment treaties that allow foreign investors to take up cases
against host governments and claim compensation of up to billions of dollars.
Indonesia has given
notice it will terminate its bilateral investment treaty (BIT) with the
Netherlands, according to a statement issued by the Dutch embassy in Jakarta
Government has also mentioned it intends to terminate all of its 67 bilateral
investment treaties,” according to the statement.
It has not been
confirmed by Indonesia. But if this is correct, Indonesia joins South Africa,
which last year announced it is ending all its BITS.
Several other countries
are also reviewing their investment treaties.
This is prompted by
increasing numbers of cases being brought against governments by foreign
companies who claim that changes in government policies or contracts affect
their future profits.
Many countries have
been asked to pay large compensations to companies under the treaties.
The biggest claim was
against Ecuador, which has to compensate an American oil company US$2.3bil
(RM7.6bil) for cancelling a contract.
The system empowering
investors to sue governments in an international tribunal, thus bypassing
national laws and courts, is a subject of controversy in Malaysia because it is
part of the Trans-Pacific Partnership Agreement (TPPA) which the country is
negotiating with 11 other countries.
dispute settlement (ISDS) system is contained in free trade agreements
(especially those involving the United States) and also in BITS which countries
sign among themselves to protect foreign investors’ rights.
When these treaties
containing ISDS were signed, many countries did not know they were opening
themselves to legal cases that foreign investors can take up under loosely
worded provisions that allow them to win cases where they claim they have not
been treated fairly or that their expected revenues have been expropriated.
Indonesia and South
Africa are among many countries that faced such cases.
government has been taken to the International Centre for Settlement of
Investment Disputes (ICSID) tribunal based in Washington by a British company,
Churchill Mining, which claimed the government violated the United
Kingdom-Indonesia BIT when its contract with a local government in East
Kalimantan was cancelled.
Reports indicate the
company is claiming compensation of US$1bil to US$2bil (RM3.3bil to RM6.6bil)
This and other cases
taken against Indonesia prompted the government to review whether it should
retain its many BITS.
South Africa had also
been sued by a British mining company which claimed losses after the government
introduced policies to boost the economic capacity of the blacks to redress
India is also reviewing
its BITS, after many companies filed cases after the Supreme Court cancelled
their 2G mobile communications licences in the wake of a high-profile
corruption scandal linked to the granting of the licences.
But it is not only
developing countries that are getting disillusioned by the ISDS. Europe is
getting cold feet over the investor-state dispute mechanism in the
Trans-Atlantic trade agreement (TTIP) it is negotiating with the United States,
similar to the mechanism in the TPPA.
Two weeks ago, Germany
told the European Commission that the TTIP must not have the investor-state
Brigitte Zypries, a
junior economy minister, told the German parliament that Berlin was determined
to exclude arbitration rights from the Transatlantic Trade and Investment
Partnership (TTIP) deal, according to the Financial Times.
“From the perspective
of the [German] federal government, US investors in the European Union have
sufficient legal protection in the national courts,” she said.
The French trade
minister had earlier voiced opposition to ISDS, while a report commissioned by
the UK government also pointed out problems with the mechanism.
disillusionment has two causes.
ISDS cases are also
affecting the countries. Germany has been taken to ICSID by a Swedish company
Vattenfall which claimed it suffered over a billion euros in losses resulting
from the government’s decision to phase out nuclear power after the Fukushima
And the European public
is getting upset over the investment system. Two European organisations last
year published a report showing how the international investment arbitration
system is monopolised by a few big law firms, how the tribunals are riddled
with conflicts of interest and the arbitrary nature of tribunal decisions.
That report caused
shock waves not only in the civil society but also among European policy
In January, the
European Commission suspended negotiations with the United States on the ISDS
provisions in the TTIP, and announced it would hold 90 days of consultations
with the public over the issue.
In Australia, the
previous government decided it would not have an ISDS clause in its future FTAs
and BITS, following a case taken against it by Philip Morris International
which claimed loss of profits because of laws requiring only plain packaging on
In Malaysia, the ISDS
is one of the major controversial issues relating to the TPPA. Many business, professional
and public-interest groups want the government to exclude the ISDS as a “red
line” in the TPPA negotiations.
Prime Minister Datuk
Seri Najib Tun Razak had also mentioned investment policy and ISDS as one of
the issues (the others being government procurement and state-owned
enterprises) in the TTPA that may impinge on national sovereignty, when he was
at the Asia-Pacific Economic Cooperation Summit and TPPA Summit in Indonesia
So far, the United
States has stuck to its position that ISDS has to be part of the TPPA and TTIP.
However, if the emerging European opposition affects the TTIP negotiations, it
could affect the TPPA as this would strengthen the position of those opposed to
Meanwhile, we can also
expect more countries to review their BITS. Developing countries seeking to end
their bilateral agreements with European countries can point to the fact that
more and more European countries are themselves having second thoughts about
- This article was first published on 24 March, 2014, in the Malaysian daily newspaper The Star. Martin Khor is the executive director of the South Centre.