Index

Expert Opinion: Investment Law as if Development Mattered

By Marcos A. Orellana

Why was it that we needed international rules to govern international investment? Collective memory seems to be fading. Did it have anything to do with sustainable development, or was international law an instrument co-opted by the rich and powerful to re-discipline and exploit the decolonized nations of the world? Not the latter, many would argue. But certainly not the former either.

The search for investment law has been motivated by the desire to provide some measure of security to creative and imaginative investors who ventured into territories riddled with conflict or otherwise controlled by rudimentary governments and inadequate legal systems. Of course, these territories were rich with timber, minerals, oil and other commodities that could be extracted utilizing cheap labour, without worries of environmental regulation, typically at a huge profit. So, first with canons and gunboat diplomacy, and later with coups d’états and the promise of ready cash for debt-stricken countries or their leaders, international investment law jumped onto the scene.

Somehow the developmental dimension of investment law was thrown out with the bath water. A narrow mention of development did, however, find its way into the opening line of the International Centre for Settlement of Investment Disputes (ICSID) Convention’s preamble, which refers to the role of international investment in international cooperation for economic development. Development concerns have since raised their head as an element in the definition of “investment” in international arbitral jurisprudence, for example, Salini v. Morocco (Juris), thus influencing the scope of arbitral jurisdiction. It is here that a fork in the road becomes apparent. One of the two diverging paths is the so-called “ideological” route; where arbitral panels have simply assumed that investment automatically benefits the host state with technology, capital and know-how. The other is the “reality” route, where panels ask for indicators that can empirically measure the development impacts of investment.

The ideological approach is obviously attractive to operators used to dealing with formal representation, sanitized rates of return and no questions asked. This route, however, is not contextualized within sustainable development goals and can ignore impacts related to social inequity, environmental damage, and even the economic priorities of the host country. A few examples illustrate the problem: open-pit mining that affected sacred indigenous lands in California (Glamis case); water delivery services that excluded poor people from coverage in Bolivia (Bechtel case); a cigarette export business that could only be profitable if it violated Mexican tax laws (Feldman case). These cases illustrate investments that failed to deliver on their promised contribution to development, but nevertheless entangled the host state in international litigation.

The reality route to investment law can also be problematic. This is partly because development is not a black and white, fill-in-thebox, or go-down-the-list exercise. It involves highly contextual value judgments and evaluations. Clearly, arbitral tribunals are illequipped to determine what constitutes development because there are no precise indicators to assist them. Additionally, particularly in constitutional democracies, ad hoc arbitral tribunals lack the legitimacy to balance the fundamental developmental issues at stake. In the face of such practical and theoretical obstacles, the search for minimum developmental standards and screening mechanisms is underway.

The Clean Development Mechanism (CDM) of the Kyoto Protocol, for example, embodies an attempt to screen and recognize projects that contribute to global sustainability and the reduction of greenhouse gas emissions. Other screening mechanisms relating to investments have been criticized by capital exporting countries on the grounds that they can be open to corruption unless transparency is ensured at every turn, including in administrative agencies and dispute settlement.

International financial institutions that have a development and poverty eradication mandate seem to be making some progress. If their traditional approach was to measure development by counting royalties, income generation, transfer of funds, etc., the International Finance Corporation (IFC) and the World Bank are reinventing themselves and elaborating a set of indicators that would enable these institutions to screen project sponsors, determine their development impact, and exclude those with a proven negative track record. Major private banks have also announced their decision to apply IFC environmental and social standards. Export Credit Agencies from OECD countries also have agreed to benchmark their projects against the standards applied by the IFC or regional development banks. This diversity of standards and benchmarks speaks to the increasing importance of development concerns in investment financing.

While it is long past time for investment law to recognize these developments, it actually seems to be moving in the opposite direction. Recent bilateral investment treaties (BITs) grant broad rights and enforcement powers to investors, and restrict the ability of national and local governments to regulate the activities of foreign investors to meet local developmental, environmental and social priorities. In addition, the promise of good governance through investment disciplines is frustrated by unacceptable discrimination that provides foreign investors with greater rights than locals. Moreover, the huge transaction costs and potential liability associated with threats of litigation can stifle the development of necessary domestic laws and regulations in the public interest.

Recent analysis on state contracts, such as the Baku-Tbilisi-Ceyhan Pipeline project agreements, reveals an extreme model of investment protection that deprives host states of their regulatory powers and vitiates their laws. These types of contracts force developing countries to capitulate to investor demands and are triggering in a new era of international corporate rule: where foreign investors are insulated from the reach of local laws and subject to their own self-regulation. Undoubtedly, a corporate dream come true— if only in the short term.

Environmental, health, and safety regulation is essential to safeguard fundamental rights of local communities and workers. Any project that cannot guarantee these minimum and necessary prerequisites cannot contribute to sustainable development, and must not receive international protection. If development really matters, then investment law needs to come to terms with this simple reality.

Marcos A. Orellana, from Chile, is Senior Attorney with the Center for International Environmental Law (CIEL) in Washington D.C. and Adjunct Professor at American University Washington College of Law.