A Changing Image of International Investment Law by Asel SOORBEKOVA

15 May

Introduction

International Investment Law is the branch of International Law that governs relationships between sovereign States and foreign investors, whether the latter are natural or juridical persons. To put it in other words, think of multi-national enterprises (MNEs), opening their presence and creating businesses and job opportunities in foreign countries. It is a well-known fact that International Investment Law (IIL) is one of a kind and the only branch of International Law, whereas host States are ready to give up a part of their sovereignty - enactment of laws and protection of their populations, in favour of foreign direct investment flows (FDIs). Sometimes, States see in foreign investors as the last salvation for their economies by compromising human rights, environmental protection and labour rights.

One may not deny the fact that the modern International Investment Law was largely shaped and developed by the Washington-based institutions – the World Bank and the International Monetary Fund (IMF) through their policies, also known as the “Washington Consensus” policies. Developed as a solution to criticism on governmental interventions into economy during the time of old existing state structuralism policies, the “Washington Consensus” policies were presented as to be the best solution for sinking economies of those times .

The World Bank also exercised extensive powers on the post-communist countries which in these countries has resulted in massive privatisation programs and concentration of wealth in the hands of fewer people and creation of informal markets until today. As a result, this led to Governments not being able to control labour markets .

One of the examples of countries where these policies were actively adopted are the newly independent States of the former USSR - the Commonwealth of Independent States (CIS). For economies to grow under the “Washington-Consensus” economic regimes, a balanced inclusive economic environment, consisting of both state and private-owned economies needed to co-exist for advancing the future of industrial developments.

Moreover, “the Washington Consensus” led to the creation in 1966 of the International Centre for Settlement of Investment Disputes (ICSID) and the conclusion of bilateral investment treaties (BITs) which gained their momentum in 1960, 1990s as well as in 2000s, and as a result, these BITs produced numerous arbitration awards that made International Investment Law evolve as we know it today . Born at the time when public awareness of environmental protection, human rights and sustainable development was very limited, those BITs multiplied .

On top of that, from the very beginning of delivery of the first investment arbitrational awards, investment arbitrators under the ICSID regime gave a very expansive interpretation of the principle of investor protection, leaving aside the relationship between IIL and matters of public interest which led to fragmentation of International Investment Law” .

As a result, “the Washington Consensus”-generated BITs contributed to poor social, environmental and labour regimes and left a huge leeway for foreign companies to avoid responsibility for violation of human rights and labour rights and pollution of the environment and ecology. As an example, one should not forget the Rana Plaza deadliest garment industry incident of all times…

However, as the world is actively embracing the Sustainable Development Agenda 2030 (SDG 2030) and States are reconsidering their long-existing investment practices and policies, IIL is also undergoing some important changes. In light of these developments, the present article will discuss the changing image of International Investment Law by looking at some of the recent developments in both developing States and developed States and the trend to include labour protection provisions in the new generation of IIAs.

New Developments Affecting International Investment Law

1. BRICS and NDB

If some thought that the “Washington Consensus” policies would last forever, as these policies contributed to blossoming of institutions like the World Bank, the IMF and the ICSID, which are still most powerful institutions that run the world’s economic growth and wealth distribution, States realised that they no longer want to be “advised” by those institutions on how to lead investment and economy policies through imposition of identical “one size fits all” investment and economic policies.

As a result, the ICSID is starting to receive more and more backlash and some States are discontinuing their membership with the ICSID and other States are ending their ambiguous BITs. Distrustful of the ICSID and international arbitrations, States are leaning towards looking at other modes of regulation of potential investment disputes. They are starting to think of alternative ways to conduct FDIs and manage their economic growth.

However, some authors, such as S.P. Subedi, have still been rooting for the integrity of investor-state dispute settlement mechanisms (ISDS), such as notably the ICSID, provided that these mechanisms face a reform, meeting the demands of the public along with the private interests of foreign investors .

In the realm of the abovementioned developments, the emergence of new actors in the international investment arena – powerful developing States, is becoming a threat to developed States. These powerful developing States’ cooperation have resulted in coalitions, for example, BRICS. Speaking of BRICS, if all goes well with the coalition, and one of its priority policies - expansion of trade and investment will be well implemented, this will have a significant influence on foreign direct investments in other countries and contribute to reshaping the image and the future course of International Investment Law.

In addition, its New Development Bank (NDB), which is a counter-response to the whole “Washington Consensus” system, the World Bank and the IMF , will be certainly bringing “some fresh air”, following the tension between the developing world and the developed world. Furthermore, according to the NDB’s General Strategy for the period of 2017-2021, the bank’s approaches and policies will be country-tailored and have “country-specific approaches” , unlike the policies of the Washington-based financial institutions.

2. The European Union

Speaking of another actor - the European Union, since recently, Art. 207 of the Treaty on the Functioning of the European Union (TFEU) has granted the EU with an exclusive right to conclude treaties on FDIs on behalf of its current Member States and the future ones.

This circumstance might possibly bring all BITs, concluded by its Members States under one umbrella and lead to new implications and challenges for the whole International Investment Law not just in the European context , considering how active foreign investors from the EU are. Another problem with the new EU competence to conclude BITs is how difficult it might become for foreign investors, especially from developing countries, to confront an economic and political giant as the EU.

Although the European Commission has allowed its Member States to participate in investment arbitrations as respondents if they so wish, the EU can request them to step back in favour of the EU, acting as a respondent on behalf of its Member State .

This novelty in International Investment Law might as well replace BITs of the EU Member States and give rise to an EU Model investment treaty . From the point of justice and law talk, the abovementioned TFEU modification positions foreign investors from developing States in an unequal standing, in comparison with the initial legal investment regime which existed between foreign investors and EU Member States prior to the entry into force of Article 207 of the TFEU.

Already, the fact of having an investor-state dispute makes foreign investors vulnerable which is why the concept of investor protection was developed. However, replacing a Member State with a giant like the European Union or allowing its Member State to be represented by the EU itself seems a little far-off and a big departure from the founding rules that International Investment Law had originally prescribed to States.

Another challenge that could potentially play a role in the further development of International Investment Law is the European framework for screening foreign direct investments . On September 2017 the European Commission proposed a framework for the purposes of screening potential foreign direct investments in the EU territory.

As a result, the new EU framework for the screening of foreign direct investments was adopted and it officially entered into force on 10 April 2019. The main objective of the Framework is to put an end to foreign investors from seeking:
“to acquire strategic assets that allow them to control or influence European firms whose activities are critical for (the EU) security and public order. This includes activities related to the operation or provision of critical technologies, infrastructure, inputs or sensitive information.

Acquisitions by foreign state-owned or controlled companies in these strategic areas may allow third countries to use these assets not only to the detriment of the EU’s technological edge, but also to put (the EU) security or public order at risk” .

The framework can mean that foreign investors, for example, Qatari investors in Paris, would have to pass a double scrutiny – both from the host State France and the European Union, in order to be considered as posing or not posing a threat to European public security or interest. The current Qatari investments are various projects on diverse industries, including, in service, hospitality, sport, etc. .

3. Switzerland

Another similar fate has come to existence regarding FDIs into Switzerland. Having concluded its first BIT already in 1961, Switzerland became the second State after Germany to conclude a BIT.

Since then and currently, Switzerland is considered as having produced the world’s third largest network of investment treaties after China and Germany.

According to the newspaper “Neue Zürcher Zeitung”, about 50 Swiss companies have been passed on to Chinese companies over the past five years . Suspicious of Chinese investors’ interest to invest in hydroelectric power systems of Switzerland, the federal parliament deputies in their capacity of members of two Parliamentary Committees on Industries, Energy, Transport and Communications, approved an initiative to prohibit sale of strategically important objects of the federal importance that also includes hydroelectric power stations .

The abovementioned parliamentary decision could likely endanger the flow of FDIs into Switzerland in the abovementioned fields, as well as other potential FDI flows in other areas which could be also potentially considered by the Federal Swiss Parliament and the Federal Council, as representing national priorities and prerogatives .

Furthermore, on 3 March 2020 the Swiss Parliament (the House of Representatives) voted in favour of a motion to make investments by foreign companies in Swiss firms subject to official approval, despite opposition by the government and most members of centre-right parties, especially, following the acquisition of the Swiss enterprise “Syngenta” by the company “ChinaChem” in 2016 .

The Government has now to draft a law, reflecting this significant decision. Having cited the EU Framework for screening the flow of FDIs, it seems apparent that Switzerland was in need of reflecting the abovementioned EU policy on FDIs in its own FDI policy, as both Swiss and EU decisions to limit FDIs in their respective territories were made practically at the same time, with the Swiss decisions, catching up with the EU one.

4. Qatar

Another point to consider is how some developing States do not respect the principle of investor protection and get away with it. This is the case of some countries like Qatar: some foreign investors, for example, from France, and other nationals in Qatar, had been detained in prison or forced to remain in the country for a dispute or unresolved issues with the local Government and sponsors - local Qatari affluent citizens, due to the existing obligation for foreign workers in Qatar to request Qatar an exit visa (keafala) .

This is in part related to the power of some developing States, such as Qatar, and their influence, as the world’s leading countries. Although, as the Human Rights Watch (HRW) writes, “Qatar announced on January 16, 2020 that most migrant workers previously prevented from leaving the country without their employer’s permission, including domestic workers, will no longer need an exit permit” which is in itself an important positive decision in the field of International Investment Law and human rights in general, this decision applies only to a fraction of foreigners on a case-by-case basis and thus, the exit visa and sponsorship system is still valid.

In the realm of the biggest Middle-Eastern diplomatic and political crisis, involving countries in the Gulf and Africa, notably, Saudi Arabia, UAE and Qatar, leading to economic sanctions and cut of diplomatic ties, Qatar’s share participation in “Credit Suisse” by August 2017 was reduced significantly .

In January 2018 in efforts to improve the political and economic situation and bring some revenues into the country, Qatar passed a new foreign investment law which allows foreign investors full ownership and accords a better protection for foreign and local investors, preceded by a new law on protection for domestic workers . The draft investment law says that with the exception of labour disputes, a foreign investor may give a consent on any investment dispute between him or her and third parties through arbitration or any other ISDS .

The draft law also contains sustainable development, environmental provisions, as well as obligation to comply with laws, regulations and instructions concerning security and public health . It would likely mean that future IIAs with Qatar would need mirroring this new domestic investment law which would be a positive development. It appears also, as mentioned regarding the treatment of foreign investors in Qatar, that BITs in Qatar have long been simply political, since, as noted earlier, this State is well known for restricting foreign investors’ activities and rights by making sponsorships legal which every foreign investor wanting to come to invest in Qatar is obligated to agree to.

Through the described abovementioned examples we can observe an ongoing transformation of International Investment Law – that some developing States are getting away with violating the customary international law on investor protection and discriminating foreign investors.

In addition, a particularity with FDIs in Qatar is that concerned developed home States stay away from issues, involving their nationals, coming to invest in Qatar, and are not protecting them through diplomatic channels. Unquestionably, examples of how States religiously follow the principle of investor protection to the detriment of the ecology, health and life of their populations outnumber examples of a total violation of investor protection principle, left without legal consequences for host States, as in the case of Qatar. Nevertheless, this is another evidence of how International Investment Law is changing, in part, through practice of gas and oil rich developing States.

Sustainable Development and Labour Rights

There is a current tendency in International Investment Law to adopt a new generation of IIAs that contain labour rights protection provisions. These provisions are far from being ideal, but they are a good start to negotiating better investment treaties in the perspective, based on lessons learnt and practices gained from previous disputes under ISDS mechanisms.

International Investment Law is indeed distancing itself from the classical school of International Investment Law by protecting human rights, environment, as well as labour rights through inclusion of specific norms in recent IIAs.

Y. Radi explains that the development of human rights and labour rights, as well as environmental protection, is happening thanks to two reasons: 1.) the emergence of the sustainable development; and 2.) rights of States in Public International Law to regulate for the purposes of establishing their public interests through IIAs .

Other authors point out more underlying reasons, responsible for this change. According to S.P. Subedi, the following four factors have prompted these developments: 1.) foreign investors have extensively sued host States, by turning to investment tribunals; 2.) the foundations of the classical IIL have started to shatter, as they have faced a backlash against BITs or IIAs in general; 3.) some leading States seem to depart from the traditional IIL to accommodate the critique and concerns of the scholars, academia, and civil society; and 4.) a clash is occurring between two groups: scholars, lawyers and other reformists, wanting to reform IIAs and ISDS systems and those that remain steady behind the idea of the traditional IIL.

It is thanks to these developments that more and more recently concluded IIAs currently contain labour, human rights or environmental protection articles , let alone entire sustainable development chapters.

However, the inclusion of labour protection provisions in IIAs is a new phenomenon and the labour protection in these treaties lacks efficiency, as these IIAs largely concentrate on host States’ obligation to adopt or maintain labour laws; not to relax their existing labour legislations or the level of protection or protection, guaranteed by those labour laws. Therefore, even new IIAs are still protective of FDIs. Consequently, better versions of labour provisions need to be negotiated to solidify foreign investors’ duties and responsibilities, because in law, with rights come responsibilities.

Today, we have still been witnessing only rights that MNEs have in the context of FDIs, also brightly demonstrated by their ability to sue host States in ISDS mechanisms without giving the same right to States or members of their populations.

At the same time, deficiencies in new labour protection provisions are understandable, because States are trying to “test the waters”. An ideal protection of labour rights in IIL is not here yet, but a legal practice in the field of protection of labour rights in the context of FDI is likely to be developed in the future thanks to potential claims that may arise, let alone disputes before ISDS mechanisms even under lightly drafted labour protection articles in newly concluded IIAs.

Decentralisation of International Investment Law

An additional aspect that may have a significant impact on the future and development of IIL is its decentralization. Developed by the academia, scholars and international arbitrations, International Investment Law lacks a structure, coherence and balance. While IIL is trade and economics-driven, it still remains a fruit of Public International Law and not Private International Law. It is its decentralized character that contributed largely to making it the fastest ever-growing International Law branch, unlike International Labour Law.

However, what made IIL grow (its decentralized character) might as well make it crack. It would not be perhaps wrong to think of centralizing this branch of International Law through a statute, establishing, for example, an international foreign direct investment organisation (IFDIO).

Conclusion

That being said, I will conclude that International Investment Law’s transformation era has just begun. International Human Rights Law has undergone transformations for years, whereas the International Trade Law or WTO Law has still been resisting labour protection provisions at the multi-lateral level.

Nevertheless, unlike the abovementioned branches of International Law, this may not take that long for International Investment Law to have its make-over and become a better version of itself, considering how, only within a little over a decade, States have managed to negotiate IIAs that can provide a better level of protection of labour rights.

Asel SOORBEKOVA
E-mail: a.soorbekova@gmail.com

Geneva, Switzerland
11.05.2020

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[34] Disclaimer: the abbreviation was invented by the author of the present article.