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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])

*The Columbia FDI Perspectives are a forum for public debate. The views
expressed by the authors do not reflect the opinions of CCSI or our
partners and supporters.*

No. 314   September 20, 2021
*It’s quantum!*
by
George Kahale, III* <#m_-2377083506599242450_m_5636195468880731466__edn1>

Remember James Carville’s famous “It’s the economy, stupid” from Bill
Clinton’s 1992 campaign? Well, in today’s ISDS, “it’s quantum”.

Over the past 10 years, there has been much criticism of the investor-state
dispute settlement (ISDS) mechanism. In general, the focus has been on the
substantive provisions of investment treaties, who interprets them and the
entire process through which they are interpreted. Equally important,
though perhaps not as well appreciated, are the problems associated with
quantum, i.e., the monetary amount of an award. It is there that ISDS has
become most dangerous. It is one thing to have bad decisions on questions
of jurisdiction or liability, and quite another to have those decisions
lead to surreal awards that respondents could not afford to satisfy even if
they were inclined to do so.

Many factors contribute to the proliferation of mega-claims in ISDS,
including the following:

   - There are few rules to curb the natural tendency to engage in
   strategic claim exaggeration, a practice that has been taken to a new level
   in ISDS.
   - The economic expert profession has flourished, consisting of expert
   witnesses who provide complex, voluminous reports followed by testimony
   justifying the mega-claims, giving them a veneer of credibility.
   - Lawyers, both counsel and arbitrators, are usually not as comfortable
   with issues of quantum as they are with purely legal issues, making them
   less equipped to recognize, expose and address claim exaggeration.
   - Arbitrators and counsel alike are often called upon to deal with
   thousands of pages of analysis and exhibits relating to quantum in a few
   hours at the tail end of a one or two-week hearing devoted mainly to
   jurisdiction and liability—not the best way to explore and digest technical
   issues foreign to most lawyers.
   - And last, but not least, the structural bias in the system in favor of
   claimants and the system’s lack of adequate checks and balances (factors
   that plague the entire arbitral process) too often result in adventurous
   tribunals pushing the envelope on quantum, just as on issues of
   jurisdiction and liability.

While these problems permeate all aspects of quantum, it can be difficult
to identify issues that are not case-specific. One recurring issue that
deserves special attention is the use, or abuse, of the discounted cash
flow methodology of valuation (DCF).

In 1992, the following warning appeared in the World Bank’s Report on the
Legal Framework for the Treatment of Foreign Direct Investment
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“[P]articular caution should be observed in applying this method as
experience shows that investors tend to greatly exaggerate their claims of
compensation for lost future profits.” The Guidelines accompanying the
Report also warned that DCF should not be used to value a project that does
not have a track record of profitability. That is because DCF analyses are
inherently speculative, as they are based on long-term projections of cash
flows that are virtually certain to turn out wrong, the only question being
by how much. After constructing these cash flows, a discount rate is
applied to derive a present value, requiring tribunals not only to delve
into the assumptions underlying the cash flows, but also to assess the
intricate analyses that the warring experts present on discount rate. The
discount rate factor alone can make a difference of hundreds of millions,
if not billions, of dollars.

Two relatively recent examples of the dramatic impact of such analyses
are *P&ID
v. Nigeria*
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and *Tethyan v. Pakistan*
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=f465e15a1f&e=763bcf158c>.
In each of those cases, the project at issue had not even begun commercial
operation, meaning that there was no track record at all. Yet, the
tribunals not only proceeded to use DCF, but they also adopted a virtually
risk-free discount rate that resulted in gargantuan awards: around US$6.6
billion in *P&ID* and US$4 billion in *Tethyan*, excluding interest. Had
anything like a traditional discount rate analysis been applied in either
case, the discount rate would have been many times higher and the value
much lower, or non-existent. Of course, the result would also have been
very different if the World Bank Guidelines’ admonition about using DCF for
a project that never got off the ground had been heeded.

With cases like these, the question has to be asked, only half in jest,
whether executives will be motivated to promote expropriation of their own
projects because of the distinct possibility that the fortunes that await
them in arbitration would far exceed what they could hope to obtain
carrying out their conventional business plans. To say the least, that is
not what the architects of ISDS had in mind in creating the system.

------------------------------
* <#m_-2377083506599242450_m_5636195468880731466__ednref1> George Kahale,
III ([log in to unmask]) is Chair, Curtis, Mallet-Prevost, Colt & Mosle
LLP. The author wishes to thank Charlie Garnjana-Goonchorn, Louis T. Wells
and an anonymous peer reviewer for their helpful peer reviews.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “George Kahale, III, ‘It’s quantum!,’ Columbia
FDI Perspectives No. 314, September 20, 2021. Reprinted with permission
from the Columbia Center on Sustainable Investment (*
*http://ccsi.columbia.edu*
<https://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=bed2757b9c&e=763bcf158c>*).”
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,
Riccardo Loschi, [log in to unmask]

*Most recent Columbia FDI Perspectives*
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   - No. 313, Shradha Mani, “FDI and CSR to promote social entrepreneurship
   and sustainable FDI: Lessons from India,” Columbia FDI Perspectives,
   September 6, 2021
   - No. 312, Tomoko Ishikawa, “Materializing corporate social
   responsibility in investor-state dispute settlement,” Columbia FDI
   Perspectives, August 23, 2021
   - No. 311, Matthew Stephenson, “The OFDI policy path and the product
   space,” Columbia FDI Perspectives, August 9, 2021

*All previous FDI Perspectives are available at
https://ccsi.columbia.edu/content/columbia-fdi-perspectives
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*Other relevant CCSI news and announcements*

   - *Paid short-term consultancy available!* CCSI is seeking a Legal and
   Policy Researcher to work on our International Investment Law and Policy
   portfolio of projects and provide research services on the laws, policies,
   and practices that shape international investment and its alignment with
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   The work may be completed remotely, and may include travel when
   circumstances allow. *For more information on the position, and to
   apply, please visit our website
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   - *CCSI is hiring a Legal or Policy Researcher* to work on our Land,
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   portfolio of projects. This position will collaborate with CCSI’s Director
   and Research Staff to execute the Center’s applied research agenda on the
   laws, policies, and practices that shape international investment and its
   alignment with sustainable development and human rights. *For more
   information on the position, and to apply, please visit our website
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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Fax: (212) 854-7946
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*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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<https://twitter.com/CCSI_Columbia>

"Increasing Transparency in Investment Facilitation: Focussed Support is
Needed", "A Multilateral Investment Facilitation Agreement can Help
Advancing Development", *Investment Facilitation for Development: A Toolkit
for Policymakers*, "More Attention to Policies! Improving the Distribution
of FDI Benefits. The Need for Policy-oriented Research, Advice and
Advocacy", "More and Better Investment Now!", "Facilitating Sustainable FDI
in a WTO Investment Facilitation Framework: Four Concrete Proposals",
"Multinational
Enterprises and the Global Investment Regime: Toward Balancing Rights and
Responsibilities”, “The *WIR* at 30: Contributions to National and
International Policymaking", "An Inventory of Concrete Measures to
Facilitate the Flow of Sustainable FDI: What? Why? How?", "Insulating a WTO
Investment Facilitation Framework from ISDS", "The Case for an Advisory
Centre on International Investment Law", "The Potential Value-added of a
Multilateral Framework on Investment Facilitation for Development" are
available
at https://ssrn.com/author=2461782 .

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