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Treacherous treaties

Print edition : Dec 03, 2010 T+T-

A FILE PHOTOGRAPH of the power plant of the defunct Dabhol Power Corporation, a subsidiary of the failed U.S. energy giant Enron. An unfair and dysfunctional contract with the company led to a huge compensation being paid from Indian taxpayers' money because of the Bilateral Investment Treaty.-SHERWIN CRASTO/AP

Bilateral Investment Treaties offer sweeping protections to foreign investors at the cost of domestic socio-economic rights and environmental standards.

SUDDENLY there is a renewed interest in India about signing bilateral free trade agreements (FTA) with major economies. A trade treaty is currently being negotiated (in much secrecy) by the Indian government with the European Union (E.U.). Since these bilateral treaties do not have to go through Parliament or indeed any democratic process at all, the likelihood of the Indian people being presented with a fait accompli in the form of a signed treaty soon is great. A major component of such a treaty could be an investment chapter, which would provide far-reaching protection to investors from the E.U. in the Indian economy.

And now there is enthusiasm in official circles for a United States-India FTA as well. So enthused was Commerce and Industry Minister Anand Sharma by the visit of President Barack Obama that he declared in the presence of his U.S. counterpart Gary Locke at a function organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) in New Delhi: Now after the successful visit of President Obama, we should seriously consider to engage in negotiations for a comprehensive economic partnership agreement, which encompasses trade, investment and services.

Of course, business interests have been lobbying for this for some time although officials have been slightly more reticent. For example, an advocacy group for American businesses operating in India (the U.S.-India Business Council) released a report in early November calling for greater cooperation not just in defence but also in education, agriculture, infrastructure and, of course, trade. In particular, the council made the demand for an updated investment treaty to spur bilateral investment, strong protection for intellectual property rights (IPR) to spur innovation, and a more open legal sector in India.

In fact, there are signs that even if a full-fledged FTA is not signed in the near future between the U.S. and India, a Bilateral Investment Treaty (BIT) may still be on the cards. And this too is a concern, which is similar to the concerns about any E.U.-India FTA that contains an investment chapter, since they are likely to have identical provisions.

BITs are extensions of the attempt in the late 1990s by rich nations to impose a Multilateral Agreement on Investment (MAI) that would permit multinational firms to roam the globe virtually free of governmental regulation in the nations where they landed. That effort failed, but the U.S. and the E.U. tried to include it in the World Trade Organisation in 2003. India played a key role in blocking that effort.

Since then, the major economies have intensified the effort to sign mini-MAIs on a bilateral level. BITs have proliferated since then there are now over 2,000 BITs that have been signed. These are mostly North-South treaties though some have also been signed by developing countries. The main provisions of such treaties tend to be broadly similar to those in the abandoned MAI, and sometimes they are even more stringent. They usually cover aspects such as the scope and definition of foreign investment; admission of investments; national and most-favoured nation status; fair and equitable treatment clauses; compensation guarantees for expropriation, war and civil unrest; guarantees of fund transfers and the recuperation of capital gains; subrogation of insurance claims; and dispute settlement provisions.

There are many reasons for viewing such investment treaties with serious reservation. These have far-reaching and typically negative implications for host country governments and citizens because of the sweeping protections afforded to investors at the cost of domestic socio-economic rights and environmental standards.

One of the biggest problems with such treaties or investment chapters in most FTAs is that they allow private companies to file cases against governments instead of confining matters to governments. So they subject a country to the risk of litigation by a corporation established or based in another country, which is a signatory to the agreement. This might be based on a company's objections to the host government's environmental, health, social or economic policies if these are seen to interfere with the company's right to profit.

A major issue relates to provisions for compensation for expropriation, which can be direct (as in cases of nationalisation) or indirect (including policies or actions that impinge on the profitability of the company concerned).


Resolution of such conflicts is not subject to the standard juridical systems of the parties to the treaties rather it is governed by tribunals or similar bodies specified in the treaty. This amounts to privatisation of commercial justice, with no democratic accountability of the decision-makers in this regard. In many bilateral agreements, the provisions state that where a dispute cannot be settled amicably and procedures for settlement have not been agreed on within a specified period, the dispute can be referred to another body. The two most important such bodies are the World Bank's private arbitration body for investment disputes, the International Centre for Settlement of Investment Disputes (ICSID), and the United Nations Commission on International Trade Law (UNCITRAL). There are also private arbitration bodies run by private industry organisations, which are, of course, even more favoured by private investors.

Domestic courts and national legal systems are completely marginalised by investors' recourse to these international arbitration panels. The ICSID and the UNCITRAL only allow for the investor and government parties to the dispute to have legal standing. The arbitration process is marked by complete lack of transparency in most cases, with no public accountability even in cases involving legitimate public interest and having significant public impact.

The public has no right to listen to proceedings or to view evidence and submissions. Both bodies require only minimal disclosure of the names of the parties and a brief indication of the subject matter, which prevents public scrutiny or popular opposition. The record of these bodies thus far has been investor-friendly, in awarding substantial damages and compensation to multinational corporations for the transgressions of developing country governments.

These adverse effects are evident in the increasing number of litigations involving developing country governments that seek to safeguard citizens' rights. For example, in November 2000 the multinational water infrastructure company AdT filed for arbitration at the ICSID under a 1992 Holland-Bolivia BIT. It sought $25 million from Bolivia as compensation for its lost investment, including expected profits, after the government was forced to reverse a disastrous water privatisation attempt in Cochabamba. This attempt led to a popular uprising in the area after the company demanded a fourfold increase in water rates and deprived many citizens of water supply for non-payment. AdT was originally registered in the Cayman Islands. However, it took advantage of the fact that International Waters, AdT's majority shareholder, was registered in the Netherlands. The case was finally settled only in 2006.

But in India we have an even more appalling case involving the multinational power company Enron and the government of Maharashtra (and thereby the Government of India). The Power Purchase Agreement (PPA) signed by the Maharashtra State Electricity Board (MSEB) with the Dabhol Power Company (mostly owned by a consortium led by Enron and including GE and Bechtel) is generally acknowledged to be possibly one of the most controversial and one-sided documents in recent Indian history. It provided a high profit guarantee in U.S. dollar terms to the investors and allowed for massive cost escalations without adequate safeguards. This in turn necessitated a massive increase in electricity charges.

Effectively all the risks of the project were underwritten by the State and Central governments even though Enron brought in only about 10 per cent of the total costs (the rest being largely borrowed from Indian public sector financial institutions) and had hardly any liability. It became evident that the MSEB would have to pay the Dabhol Power Company a minimum of Rs.1,200 crore from the very first year of operation and that the payments would keep rising substantially every year because of capital servicing, foreign exchange rate variation and increased fuel costs. Clearly, implementing the PPA would lead to the financial ruin of the State government of Maharashtra and greatly damage the finances of the Central government, which had stood as guarantor to the project. So it simply could not be sustained. When the PPA was finally repudiated, the Dabhol Power Company and the international sponsors of the project instituted arbitration proceedings against the government in London despite a ruling by the Supreme Court in India that such arbitrations should be stayed pending its own judgment in the matter. Further, taking advantage of an India-Mauritius BIT, both GE and Bechtel filed cases against the Government of India through their affiliates in Mauritius.

Ultimately, after a prolonged set of proceedings, the various cases were settled out of court. The exact amount of compensation paid by the Government of India is not known, but it is estimated to be around $1 billion. In other words, because of the BIT, a completely unfair and dysfunctional contract led to a huge compensation having to be paid by Indian taxpayers. Compare this with the pathetic amount (less than half of the compensation received by Enron et al) paid as compensation by Union Carbide and its successor Dow Chemical and too with so much delay to all the victims of the Bhopal disaster.

It is not just citizens of host countries who should be concerned about the adverse implication of such investment treaties. Everywhere, citizens are increasingly concerned about the power of large corporations, and such power is dramatically increased by treaties that create possibilities for them to invoke legal provisions to interpret any attempt to rein them in as implicit expropriation.

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