Jettison ISDS from the RCEP!
The controversial investor-state dispute settlement (ISDS) mechanism in the TPP provoked a huge outcry as it conferred on foreign investors the exorbitant privilege of suing host governments in arbitral tribunals for any alleged loss caused by any regulatory or policy changes. There is no justification for its inclusion in the RCEP.
THE Regional Comprehensive Economic Partnership (RCEP) is currently being negotiated between 16 countries in the Asian region. It includes China, members of the Association of South-East Asian Nations (ASEAN) and other key trading nations such as Australia, South Korea, Japan and India. Over 50% of the world's population live in the negotiating countries, which account for over a quarter of global exports and almost 30% of the world's GDP. Like with other trade agreements, such as the Trans-Pacific Partnership (TPP), these negotiations include a focus on trade liberalisation, address varying regulatory disciplines and are largely secret.
The RCEP also includes the controversial investor-state dispute settlement (ISDS) mechanism, which is facing increasing public criticism and scrutiny worldwide. ISDS is a one-way mechanism that empowers foreign investors to sue the state at international arbitration tribunals; it cannot be used by states. Foreign investors can circumvent domestic court systems and claim financial compensation from host governments in secret business-friendly international tribunals, if they deem their investments (including their potential future profits) are adversely affected by the introduction of regulatory and/or policy changes in the host state. These private tribunals are comprised of three for-profit arbitrators, who issue their decisions behind closed doors. Arbitrators often have serious conflicts of interest, as many have financial incentives to rule in favour of the investor and keep the system alive. Arbitrators also often switch sides and go on to work as counsels, representing and defending the companies filing investment treaty cases.
Negotiating new treaties that include ISDS runs counter to the decision by some governments in the region to reform or terminate these agreements in order to protect their right to regulate. Among RCEP countries, India, Indonesia and Australia have undergone review processes of the international investment framework. In the case of India and Indonesia, the outcomes of the reviews have led to the termination of several treaties as well as the development of new model bilateral investment treaties (BITs) that highly restrict the rights of investors.
This article highlights the current and potential costs of ISDS to countries negotiating the RCEP agreement. The North American Free Trade Agreement (NAFTA) shows that mega-regional trade deals are much harder to reform or change after ratification than bilateral agreements. The only way to roll back the rights granted to investors in free trade agreements is by terminating the entire treaties, not just their respective investment protection chapters. The dangerous impacts of investment treaties are likely to increase if governments in the region agree to grant far-reaching protection rights to investors in the RCEP and other ongoing free trade negotiations. Furthermore it can reasonably be expected that the RCEP would lock in the dangerous ISDS provision in the region for the foreseeable future. This would undermine governments' efforts to safeguard their right to regulate in the public interest.
Claims for compensation can - and do - amount to billions of dollars. However, ISDS cases are not fully disclosed to the public even when cases may relate to matters of public interest, such as the environment. When the state loses an ISDS case or settles a dispute with an investor, governments can be forced to foot the bill with public money. In other words, ISDS effectively allows foreign investors to pass their investment risks on to citizens and public budgets. Even when cases have been discontinued or when the outcome is said to be 'in favour of the state', the state will usually have to bear the exorbitant cost of legal defence and arbitrators' fees. According to Organisation for Economic Cooperation and Development (OECD) estimates, expenses for a single ISDS case amount to $8 million on average for legal and arbitration fees alone, half of which will be footed by the state.
This article compiles available data on ISDS cases taken against countries party to the RCEP negotiations. It highlights the ongoing corporate attack on Asian governments' right to regulate, including actions following the introduction of measures to protect the environment. It also underlines the costs that this system has already had to democracy in the region.
The impacts of ISDS in Asia
There are currently 50 known investment treaty lawsuits against 11 RCEP countries. Five countries (Brunei, Cambodia, Singapore, Japan and New Zealand) have so far been spared. India alone has been the target of 40% of the cases filed against RCEP countries. Indonesia, the Philippines and Vietnam are the next three most sued among RCEP countries.
Fifteen of the cases filed against India were based on only four bilateral investment treaties: the India-United Kingdom BIT (five cases), the India-Mauritius BIT (four cases), the India-France BIT (three cases) and the India-Netherlands BIT (three cases).
The exponential growth in the number of cases filed
Following the international trend, investment treaty disputes against RCEP countries have surged over the last decade. Only six cases were filed against RCEP countries between 1994 and 2003. The explosion of lawsuits started in 2004; at least 27 disputes were initiated between 2004 and 2013. From 2014 up until now, 17 ISDS lawsuits have already been registered, so it is likely that the decade 2014-23 will supersede the previous one.
Who are the investors suing?
Investors from 19 different nations have initiated lawsuits against RCEP countries. The most frequent home countries of investors initiating the cases are the Netherlands (9 cases), the United Kingdom (8 cases), France (5 cases), Belgium (4 cases) and Germany (4 cases). In fact, 68% of investors suing RCEP countries are based in Europe.
What are the targeted sectors?
Thirty-one out of the 50 lawsuits are related to just four sectors: electricity and gas, mining, information and communication, and manufacturing.
What are investors' favourite arbitration rules?
Against the international trend, investors suing RCEP countries have chosen the rules of the UN Commission on International Trade Law (UNCITRAL) in 60% of the cases, rather than those of the International Centre for Settlement of Investment Disputes (ICSID). This is probably due to the fact that a few RCEP countries have not signed the ICSID convention: India, Thailand, Vietnam, Myanmar and Laos.
Status of the ISDS cases against RCEP countries
Resolutions are still pending in a big portion of the cases (20). Among those that have been resolved (30 cases), the majority have favoured the investor either with a favourable award by the tribunal (3) or by a settlement with the state (17). The terms of most settlements are not disclosed, but largely involve a payment by the state, a decision to grant exemptions, or rolling back the piece of legislation that affected the investor in the first place.
Who is winning the cases against RCEP countries?
When looking at the 30 cases in which the outcome is known, we found that 57% have been settled and 10% were decided in favour of the investor. That makes a total of 67% of cases in which the investor won something out of the case. The tribunal dismissed the case and ruled that the state did not have to pay compensation to the investor in just 30% of the cases.
It is important to keep in mind that, regardless of the final outcome (whether in favour of the state, settled, etc.), the government would most likely have to pay its legal fees and part of the arbitration costs. On average, that amounts to $4.5 million, but the cost can also be much higher.
The financial costs of these lawsuits
Claims for financial compensation and the burden they create for public budgets in the host countries are a major problem in investment arbitration. While limited information is available in the public domain, we found that so far at least $31 billion has been claimed from RCEP countries. Given the secrecy surrounding ISDS proceedings, and the fact that for many cases the amount claimed by investors is not known, this could be much higher.
In terms of distribution of the financial claims across countries, India tops the ranking, with at least $12.3 billion claimed by investors since 1994. South Korea, Australia and Vietnam are next on the list.
By way of comparison, $31 billion is more than India's health budget for the year 2015 ($24 billion) or the amount of foreign direct investment inflows into Indonesia in 2014 ($26.2 billion).
Data about the amounts claimed by investors is available for 40 cases. Out of these, the amount was more than $100 million in 21 cases (that is, more than 50% of the cases). Most of the claims for financial compensation over $1 billion were filed after 2010, which is in line with international trends and proves that investors keep asking for ever-higher financial compensation as the years pass.
While many of the cases do not result in states being ordered to pay such exorbitant amounts, the mere threat of having to pay these costs is likely to act as a deterrent to advancing legislation in the public interest, for fear of being subjected to a lawsuit by a foreign investor in the future.
Since most cases in RCEP countries have been settled and there is almost no information on what the state agreed to give the investor as a condition for an early termination of the case, the exact financial impact of ISDS cases on RCEP governments is difficult to estimate. However, the available information shows that at least one settlement resulted in compensation of $337 million. This is the amount paid by Indonesia to the world's third largest cement manufacturer Cemex after they settled their ICSID dispute. The company received almost all of the $400 million that was initially claimed as compensation in the lawsuit. Other governments that have paid investors as a result of settlements include Thailand (a tribunal ordered the state to pay $41 million to German company Walter Bau) and India (which compensated US company Bechtel $160 million as part of a settlement).
Many of the ISDS cases in the region are recent and still pending. Therefore further research will be needed to determine their full impact. The sheer quantity of cases currently in process however guarantees a significant cost to countries in the future. India, for instance, has nine claims still pending, totalling $5.8 billion. Indonesia and South Korea have three pending claims each, totalling $1.9 billion and $4.9 billion respectively.
RCEP investors' usage of ISDS system
While governments of RCEP countries are clearly being impacted by these costly lawsuits, Asian investors have only modestly made use of international investment agreements. These are mostly Chinese, Australian, Indian, Korean, Malaysian, Singaporean and Japanese investors.
The investment protection regime of RCEP countries
RCEP countries have signed a total of 831 international investment agreements (IIAs), out of which 676 are in force.
The three countries that have signed the most IIAs are China, South Korea and India. New Zealand, Myanmar and Brunei are the three countries that have signed the fewest IIAs. Most RCEP countries' treaties were signed between 1990 and 2009.
RCEP countries have terminated 53 BITs, but only 24 of those were not replaced by any other investment protection treaty. Indonesia has led the process of letting its BITs expire without replacement and has so far terminated 22 BITs.
On average, treaties can be unilaterally terminated once the initial 10-year period after signing comes to an end. When looking at RCEP countries, this means that 87% of the BITs currently in force are likely to have passed the initial period and could be terminated.
All the BITs signed by RCEP countries include a survival clause. This is a clause that extends the effects of the BIT for existing investments for a certain period of years after it is terminated. For BITs ratified by RCEP countries, the average is 10 years (although in some cases it goes up to 15 or 20 years).
A big difference between BITs and free trade agreements (that include an investment protection chapter) is that the latter do not include a termination clause. Under FTAs, governments will find it much more difficult to withdraw their commitment to the rights granted to foreign investors. To terminate the clauses protecting foreign investors in FTAs, governments have to put an end to the whole agreement, rather than the investment protection chapter only.
IIAs under negotiation
Besides the 676 treaties in force, there are some ongoing negotiations for new international investment treaties. These include, besides the RCEP, several free trade agreements with the EU, in particular the EU-Thailand FTA (on hold), EU-Malaysia FTA (on hold), EU-India FTA (on hold), EU-Indonesia CEPA, EU-Philippines FTA, and EU-Myanmar BIT, all of which include an investment protection chapter and grant investors the right to sue governments at international investment tribunals.
ISDS is undemocratic, discriminatory, investor-biased and unnecessary. It has already been used to threaten countries currently involved in the RCEP negotiations, with citizens and public budgets footing bills of millions of dollars for the risks taken by foreign investors. These lawsuits should provide a warning of the potential high costs of the proposed RCEP trade deal.
Including the harmful ISDS clause in the RCEP agreement under negotiation contributes to cementing investors' rights and expanding the scope of private arbitrators' power. The RCEP will lock in place this system of privatised justice. Governments will find it much more difficult to withdraw their commitments to the rights accorded to foreign investors in the RCEP than in bilateral investment treaties, because they would need to put an end to the whole agreement and not just the sections on investors' rights.
This will likely result in a surge of new cases that will weigh heavily on governments' budgets. This will jeopardise the ability of national and local authorities from RCEP countries to regulate in the public interest, diverting public money from essential policies such as on health, education and environmental protection. This constitutes an unacceptable and unnecessary attack on democracy.
The evidence is compelling in showing that the risks of ISDS are higher than its proclaimed benefits. We call on all governments involved in the RCEP negotiations to exclude ISDS from this negotiation, and any other trade deal in the future.
RCEP governments have a golden opportunity to work together to build a new trade and investment regime that helps to develop sustainable societies, by supporting local economies, workers' rights, a clean environment and food sovereignty.
The above is extracted from 'The Hidden Costs of RCEP and Corporate Trade Deals in Asia', a report published by Friends of the Earth International, Transnational Institute, Indonesia for Global Justice, Focus on the Global South, and Paung Ku (December 2016). The report was written by Cecilia Olivet, Kat Moore, Sam Cossar-Gilbert and Natacha Cingotti.
*Third World Resurgence No. 314/315, October/November 2016, pp 36-38