INTERNATIONAL INVESTMENT AGREEMENTS AND INVESTOR-STATE ARBITRATION

LECTURE 1. IIAs: types, features and trends

Sergey Ripinsky

International Investment Agreements Section

Division on Investment and Enterprise

Geneva, 4 May 2012

Plan for the course

I. IIAs – notion, types, features and trendsII. Investor-State dispute settlement (ISDS)III. IIAs and sustainable developments

Background: recent FDI statistics

• 2011: global FDI inflows rose by 17% to US$1.5 trillion.• Developing and transition economies accounted for half of

global FDI in 2011 (US$755 billion).

1 472

1 969 1 744

1 180 1 290 1 509

0

740

1 480

pre-crisisaverage

2005-2007

2007 2008 2009 2010* 2011**

32

FDI inflows, global and by group of economies, 1980–2010(Billions of dollars)

Figure I.3, WIR11, p. 3.

FDI flows over time

Investors and governments: examples of problems

1. 40-year oil concession with a stabilization clause. After 10 years, new government proposes to renegotiate the contract. Investor refuses. Government terminates the concession.

2. Pesticide-producing business. New scientific evidence – government bans production and marketing of that pesticide.

3. Tax authority imposes multiple fines and sanctions for tax avoidance. Investor says that this is a revenge for its refusal to pay bribes to tax officials.

4. New requirement that all enterprises employ 90% of locals and that they source 90% of their inputs locally. Foreign investors complain that this makes their products less competitive.

IIA – an international treaty that promotes and protects investments from one Contracting Party in the territory of another • Preamble• Definitions of terms (esp. investment / investor)• Admission and establishment of investments• Core standards of protection:

– Non-discrimination (National Treatment / MFN)– Fair and equitable treatment– Full protection and security– Expropriation– Compensation for losses due to armed conflict / civil riots– Free transfer of funds– “Umbrella clause” (obligation to observe specific

undertakings)• Dispute settlement (investor-State arbitration)

Why do countries conclude IIAs?

• Home countries – to protect their investors abroad.

• Host countries – to attract FDI.

• Complicating factor: Many countries are now both importers and exporters of capital.

Main FDI determinants

• Market size • Availability of natural resources• Quality of infrastructure• Qualification and productivity of the workforce• Flexibility of labour legislation and exchange

laws• Transparency and stability of the legal and

political systems, security of property and contract rights

• Tax incentives

Sources of investment risk (political risk)

• nationalization / expropriation• contract repudiation• crime, terrorism and kidnapping• civil unrest• constraints on repatriation of dividends/profits• ineffective legal and regulatory systems• red tape, bureaucracy and weak institutions• corruption/bribery

Types of IIAs

1) BITs, and2) “other IIAs”, which include:

– Free trade agreements / economic partnership agreements with investment provisions (FTAs/EPAs)

– Regional integration agreements (EU, CARICOM, MERCOSUR, COMESA, Arab investment agreement, ASEAN)

– Multilateral agreements focusing on a specific sector (Energy Charter Treaty)

– Multilateral agreements touching upon investment issues (GATS, TRIMs)

11

Trends of BITs and other IIAs 1980–2011

0

50

100

150

200

250

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Annu

al n

umbe

r of I

IAs

0

500

1000

1500

2000

2500

3000

3500

Cum

ulat

ive

num

ber o

f IIA

s

Other IIAs BITs All IIAs cumulative

The IIA regime

Top ten signatories of BITs

0 20 40 60 80 100 120 140 160

Korea, Republic of

Italy

Belgium and Luxembourg

Netherlands

Egypt

France

United Kingdom

Switzerland

China

Germany

Number of BITs

14

Protection offered by the IIA regime

15

IIA content trends• Pre- and post-establishment IIAs• Different formulations of the same “core”

disciplines - different interpretation by arbitral tribunals.

• Treaty text is paramount – need to understand its implications and possible future interpretation.

• Increased sophistication and level of detail – learning lessons from ISDS proceedings.

• New types of disciplines included (performance requirements, transparency, etc.).