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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wwww.ccsi.columbia.edu | t: @CCSI_Columbia

"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 https://papers.ssrn.com/sol3/results.cfm?RequestTimeout=50000000 and http://www.works.bepress.com/karl_sauvant/.

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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])
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] 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 incorporate:
  • 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 claims.
  • 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.
* 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 series.
** 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.

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 (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [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 http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/

Other relevant CCSI news and announcements
  • On May 16, 2017The 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 institutions.
  • 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. The 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 (HRIAs) of private sector investment projects. This discussion paper sets 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 note.
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