*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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"China Moves the G20 toward an International Investment Framework and
Investment Facilitation", "China Moves the G20 on Investment", "The Rise of
Self-judging Essential Security Interest Clauses in IIAs", "Can Host
Countries have Legitimate Expectations?", "The Next Step in Governance: The
Need for Global Micro-regulatory Frameworks", "How International Investment
Agreements can Protect Free Media", "The Evolving International Investment
Law and Policy Regime: Ways Forward", "China's Outward FDI and
International Investment Law", and  "Policy Options for Promoting FDI in
the LDCs" *are* available at and

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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 200  May 22, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
The next phase of IIA reforms
* <#m_6953463570324802505__edn1>
Saurabh Garg** <#m_6953463570324802505__edn2>

Many countries are revisiting their international investment agreements
(IIA). India drafted a revised model bilateral investment treaty (BIT) in
December 2015 that attempts to strike a balance between investor protection
and sovereign rights. The Model is based on the proposition that there are
no magic wands, as updating the IIA regime is a gradual process that must
be done step-by-step, taking each treaty and action into account. The
Indian Model is merely one step in the overhaul of the entire system.

This *Perspective* is based partly on the author's experience with the
Indian Model BIT reform process, but it addresses the need for reform of
the entire IIA system from a broader angle.

Investment issues are far more deep-rooted within domestic economies and
more complex in comparison to trade matters that often can be controlled by
using border-related measures. This complexity has prevented investment
issues from being brought under a multilateral umbrella. Thus, the
investment regime, including the dispute-resolution mechanism, must not be
viewed in the same way as the trade regime.

Yet, investor-state dispute settlement (ISDS) lies at the core of IIAs. It
has proven to be a powerful tool for protecting foreign investors; but it
also has raised extensive and diverse policy concerns. The current ISDS
mechanism, which is ad-hoc, unpredictable and often arbitrary, needs urgent
review. Concerns have already led to a shift toward reforming the existing
mechanism, in the form of various proposals; for example, the EU has
proposed an investment court system, Brazil has proposed an ombudsman and a
country-to-country dispute-settlement approach and South Africa has passed
the Protection of Investment Act.

The current ISDS regime can be quite costly for host countries. Per a UN
Conference on Trade and Development report, as of end-2016, some 767
arbitration cases were publicly known to have been filed against host
countries under IIAs.[i] <#m_6953463570324802505__edn3> A record high of 74
cases were filed in 2015, followed by 62 in 2016. Despite the obvious costs
of the current ISDS mechanism, there is little empirical evidence
establishing a link between the existence of BITs and FDI flows. This is
one area that requires substantial work to reinforce countries’ trust in
the legitimacy of IIAs.

Another factor that needs to be considered is the pro-investor bias of
IIAs, due to the focus on the protection of capital and the return on
capital. No such protection has been extended to labor, indigenous people,
migrants, or consumers, all of whom have linkages with investment.

There are a number of principles that the future IIA regime should

   - The system must be capable of taking into account the different
   socio-economic conditions of host countries. The regulatory freedom of
   governments to pursue measures for welfare or legitimate public policy
   purposes must not be compromised. Some countries have specifically
   recognized the government’s “right to regulate” in their treaties, which
   needs to be developed further. Addressing these concerns requires
   sensitivity to the differing socio-economic conditions of participating
   countries throughout any negotiations.
   - Future systemic reforms should specifically examine the costs and
   benefits of the current and any proposed ISDS mechanism. An indicative
   schedule of fees for the different processes and participants of the ISDS
   mechanism would help clarify the costs for the parties in a dispute, which
   would be particularly relevant for governments. A schedule of fees should
   also help mitigate costs.
   - There should be a greater focus on other alternative modes of dispute
   settlement, including domestic remedies or compulsory negotiation and
   mediation, wherever possible. Direct access to international mechanisms
   should be allowed only when there are no local remedies.
   - A large number of ISDS disputes are being brought under the
   arbitration rules of the UN Commission on International Trade Law. Since
   these were mainly meant for private commercial dispute settlement, separate
   rules on investor-state arbitration should be developed.

Some specific features that should be included in the reformed system are:

   - A protocol for arbitrators regarding impartiality, standards of
   disqualification, conflict-of-interest, and competence.
   - The diversity of arbitrators needs to be enhanced, which can be
   accomplished by creating a pool and/or panel of arbitrators from diverse
   backgrounds and regions.
   - Provisions for annulment and appeal.
   - Incorporation of clauses to prevent multiplicity of proceedings and
   forum shopping.
   - Incorporation of a mechanism for preliminary review of claims at the
   stage of filing, and rejection of claims manifestly lacking merits, with
   the potential awarding of costs in favor of governments for frivolous
   - Provisions on transparency, balanced with the right to non-disclosure
   of secret/protected/confidential information.
   - Provisions regarding the reasonableness of arbitration awards and
   costs. Tribunals should also take into account counter-claims and other
   mitigating factors when calculating awards.
   - A balance needs to be maintained between host country responsibilities
   and investor obligations, as well as between the defensive and offensive
   investment interests of countries.

Accordingly, the next phase of reform of the international investment
regime will need to go beyond the limited improvements made in some recent
treaties: it needs to correct fully the shortcomings and ambiguities of the
current regime, in a step-by-step approach that builds on the concepts and
issues stated above.

* <#m_6953463570324802505__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. **Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_6953463570324802505__ednref2> Saurabh Garg ([log in to unmask]) is the
Joint Secretary (Investments) in the Department of Economic Affairs in the
Indian Ministry of Finance. The author is grateful to Xavier Carim, Julien
Chaisse and Stephan Schill for their helpful peer reviews. The views
expressed are personal to the author and do not purport to represent the
views of his department or the Indian government.
[i] <#m_6953463570324802505__ednref3> *See* UNCTAD,

*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Saurabh Garg, ‘The next phase of IIA
reforms,’* Columbia
FDI Perspectives, No. 200, May 22, 2017. Reprinted with permission from the
Columbia Center on Sustainable Investment (**
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*. *
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Matthew Schroth, [log in to unmask]

   - No. 199, Miguel Pérez Ludeña, “United States corporate tax reform and
   global FDI flows,” May 8, 2017.
   - No. 198, Terutomo Ozawa, “How to handle the job-offshoring backlash?”,
   April 24, 2017.
   - No. 197, Ana Arias Urones and Ashraf Ali Mahate, “FDI sectorial
   diversification: the trade-transport-tourism nexus,” April 10, 2017.

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *On May 16, 2017*, *The New Frontiers of Sovereign Investment
*was published
   by Columbia University Press. Edited by CCSI Fellow Malan Rietveld and CCSI
   Head of Extractive Industries Perrine Toledano, the volume combines the
   insights and experience of academic economists and practitioners from
   several sovereign wealth funds (SWF) to survey a diverse financial
   landscape and to establish the challenging topical questions facing a broad
   range of SWFs today: Should they serve both economic development and
   financial returns—and how? Will responsible investment will enhance
   long-term returns? How can fiscal rules for SWFs be improved to meet
   emerging economic challenges? The book considers these questions as they
   apply to both long-established and newer SWFs. Featuring contributions from
   sovereign wealth practitioners from Alberta’s AIMCo, the Nigerian Sovereign
   Investment Authority and the New Zealand Superannuation Fund, as well as
   analysis by scholars at the forefront of sovereign investment, this volume
   provides timely and much-needed information on these rapidly evolving
   - *In April 2017*, CCSI launched a series of short videos from the
   authors of Rethinking Investment Incentives: Trends and Policy Options
   (published by Columbia University Press in July 2016), summarizing the
   important messages from each chapter. New videos are posted weekly
   use of incentives to attract investment is connected to and impacts the
   most pressing challenges facing us today, including climate change,
   corruption, conditions/availability of employment, harmful competition, and
   inefficient public spending. How, when, where, and why governments use
   incentives to attract, keep and influence investment is therefore
   critically important to whether and how society benefits from investments
   and to other public policy decisions and trade-offs. It is increasingly
   apparent, however, that the use of incentives is not well
   understood—including by the policy makers who use them—which necessitates a
   closer look and, in many cases, a policy response.
   - CCSI, in partnership with the Danish Institute for Human Rights and
   the Sciences Po Law School Clinic recently published a discussion paper on
   a Collaborative Approach to Human Rights Impact Assessments
   of private sector investment projects. This discussion paper
   out a robust model for a collaborative approach to HRIAs that involves
   project-affected people and the company, and potentially other
   stakeholders, in jointly undertaking an HRIA that is considered credible by
   all sides and can help to address the power imbalances that often exist
   between companies and communities. The paper is the result of a two-year
   long project
   supported by The Tiffany & Co. Foundation, and is based on extensive
   desktop research, interviews with 49 people with relevant experience, as
   well as a roundtable that brought together over a dozen stakeholders and
   HRIA experts to provide feedback on the research findings and
   recommendations. The discussion paper is also summarized in this briefing

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