The system of International Investment Agreements (IIA) — including the Investor-State Dispute Settlement (ISDS) mechanism — needs to be urgently reviewed and reformed, according to a senior Indian government official.
This is because the IIA system currently has a pro-investor bias — with an aim to protect only capital and not labour, indigenous people, migrants, or consumers, all of whom have linkages with investment, said Saurabh Garg, the Joint Secretary (Investments) in the Finance Ministry’s Department of Economic Affairs.
Mr. Garg has experience in handling, among other things, India’s Model Bilateral Investment Treaty (BIT) reform process.
Mr. Garg’s comments were made in an article titled ‘The next phase of IIA reforms’ — written for ‘Columbia FDI Perspectives’, a series of perspectives on important and topical Foreign Direct Investment issues, and published on May 22 by Columbia University’s ‘Columbia Center on Sustainable Investment.’
Mr. Garg said: “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.”
Ad hoc, arbitary
Pointing out that ISDS lies at the core of IIAs, he said: “The current ISDS mechanism, which is ad hoc, unpredictable and often arbitrary, needs urgent review… 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.”
He said in the future IIA regime, “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, he added.
The senior official’s pitch for reforming the IIA system assumes significance as India, along with countries including South Africa, had recently opposed efforts by nations including China, Brazil, Australia and South Korea to begin discussions on a proposal for an investment facilitation agreement at the World Trade Organisation (WTO)-level that reportedly seeks to incorporate provisions including the controversial ISDS mechanism.
The ISDS mechanism is contentious as it enables companies to drag governments to international arbitration without exhausting the local remedies and seek massive amounts as compensation citing losses due to reasons, including policy changes.
Following many companies suing the Indian government using the ISDS mechanism in the BITs that India had inked with various countries, the Indian government had revised its Model BIT Text and unilaterally terminated the BITs.
The revised text of December 2015 is being used for re-negotiation of India’s existing BITs and negotiation of future BITs as well as investment chapters in its Free Trade Agreements.
In his article, Mr Garg said: “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 labour, indigenous people, migrants, or consumers, all of whom have linkages with investment.”
Making a case for reform of the entire IIA system from a broader angle, he said principles that the future IIA regime should incorporate 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,” Mr. Garg added.
