EU investment policies

The Lisbon Treaty

has moved the competence for foreign investments from the 27 European member states to the European Union level. The European Commission, Council and Parliament are at present discussing the content and directions of the future EU investment policy. Social movements, human rights, development and environmental organisations as well as trade unions must speak out and push for a balanced investment policy that promotes and protects public interests.

BITs allow

multinational corporations the right to challenge governments'

social, environmental and economic regula

tions

if they look like they might harm the profitability

of their investment. The investment dispute settlement

mechanisms that are typically an integral part of BITs

allow foreign investors to by-pass domestic courts and

sue sovereign states before international arbitration

panels. BITs have cost taxpayers millions in legal expenses

and compensations and are eroding the ability

of governments to act in the best interests of their

citizens.

Bilateral investment treaties are a threat to

public policy, democratic governance and the public

interest and should alert anybody concerned with

environmental and social policies.

There is now

a window of opportunity to break away

from the current investment policies

and to put public

interest before corporate profits. The Lisbon Treaty

has moved the competence for foreign investments

from the 27 European member states to the European

Union level. The European Commission, Council and

Parliament are at present discussing the content and

directions of the future EU investment policy.

Social

movements, human rights, development and environmental

organisations as well as trade unions

must speak out

and push for a balanced investment

policy that is not merely concerned with investor rights,

but holds investors accountable and promotes and

protects public interests, human rights and environmental

sustainability.

Why should EU citizens be concerned with

investment treaties?

BITs are agreements between two countries that establish

the terms and conditions for private investment

in each other's territories. They typically contain

clauses on non-discrimination, general treatment,

compensation in the event of expropriation or damage

to the investment and guarantees for the free transfer

of capital. The terms in which these clauses are formulated

tend to be legally very imprecise, which has enabled

investors to greatly extend their privileges while

making it very difficult for host states to predict the

limits of their rights and obligations with any certainty

whatsoever.

Public interest, social and environmental policies under threat

Change EU investment policy –

now is the time!

Janua ry 2011

Environmental regulation and democracy under attack - the case of Vattenfall v. Germany

Investment treaties have typically had the hardest impact in the developing world, but a recent controver

sial

case in the EU has revealed the potential financial and environmental cost for European taxpayers.

In 2009, Vattenfall brought the German government to arbitration before an ICSID tribunal for allegedly

violating the terms of the Energy Charter Treaty _ a multilateral agreement governing investments in the

energy sector. Vattenfall was demanding compensation over the introduction of environmental measures

restricting the use and discharge of cooling water for the coal-fired power plant the company was construct

ing

on the banks of the Elbe river. Vattenfall maintained the new regulations ran counter to earlier assurances

given by the public authorities of the city of Hamburg and would hamper the economic viability of

the project. However, the public authorities say the restrictions of Vattenfall’s water permit are a result of

an EU directive on water quality that affects all industries along Germany’s rivers.

In August 2010, a settlement was reached between the contesting parties. The exact terms have not been

made public, but Vattenfall’s original arbitration request shows the company was seeking some 1.4 billion

Euros in compensations for damages to their 2.6 billion Euro investment. German and international media

reports have alluded to a possible dilution of local water-use restrictions which would otherwise have prevented

the completed plant from operating at full capacity.

‘Parties announce settlement of dispute over German power plant 28.8.2010’, Investment Treat News, Issue 1, Volume 1, September 2010.

oping countries, with disputes centring on public services,

including water, electricity, telecoms and waste

management and natural resources (oil, gas and

mining).

3 These arbitration cases pose serious challenges

to states' responsibility to promote social and

environmental well-being. The costs involved can drain

government budgets for social spending, health and

education. A fear of being dragged into lawsuits and

compensation obligations can even lead to a ‘regulatory

chill’, where states abandon proposed social or

environmental regulation.

As a ‘market leader’ in outward investment, the EU has

thus far rarely been on the receiving end of such arbitration

cases. But that may change rapidly, given the

shifting global balance of economic power. Emerging

This legal uncertainty is aggravated by the fact that

most BITs include mechanisms for dispute settlement

that allow investors to bypass national legal systems

and bring host states before international arbitration

tribunals when they consider that their rights under

the BIT have been violated.

BITs are mainly concerned with the protection of investors’

rights. Investor obligations are largely excluded.

BITs typically do not contain standards to protect the

environment, labour rights, social provisions or natural

resources. As a result these are rarely taken into consideration

by arbitration tribunals, whose decisions

are final and binding, even though cases are gener

ally

conducted behind closed doors, away from public

scrutiny.

page 2

Foreign investors undermine South Africa’s policies to redress apartheid

In 2007, a group of Italian/Luxembourg investors in South Africa’s mining industry filed a claim for ICSID

arbitration, arguing that the South African Black Economic Empowerment (BEE) programme violated the

BITs signed with South Africa by both Luxembourg and Italy. The BEE programme is at the heart of policies

to redress inequalities in South Africa. Under the Mineral and Petroleum Resources Development Act (the

MPRD Act), which came into effect in 2004, South Africa required a re-licensing of all mining companies.

The new licences came with conditions relating to the transfer of a greater proportion of shares into the

hands of black investors and efforts to increase the percentage of ‘historically disadvantaged’ South Africans

in management positions. The investors argued that the re-licensing conditions ran counter to South

Africa’s obligation to guarantee them ‘fair and equitable’ treatment ‘no less favourable’ than that awarded

to domestic investors, as stipulated by the BITs. The case was settled in 2010, with South Africa granting

significant concessions regarding the investors’ BEE obligations.

Questioning the human right to water

A group of European investors operating a 30-year concession to provide water and waste water services in

and around Buenos Aires challenged various actions taken by Argentina to counter the financial crisis that

hit the country in the late 1990s. These measures, they alleged, destroyed the value of their investment

and thus violated Argentina’s obligations to protect their interests as foreign investors under its BITs with

Spain, the UK and France.

In its final ruling (30 July 2010), the ICSID Tribunal accepted that Argentina had experienced a severe eco

nomic

crisis that could justify its defensive measures. However, it went on to rule that Argentina could have

taken other measures to respond to the crisis that would not have violated the investors’ rights.

Argentina had urged the Tribunal to take into account the fact that the concession dealt with water and impacted

the human right to that resource. However, the Tribunal rejected the notion that a government’s human

rights obligations trump its obligations to investors under BITs. According to the Tribunal, states must

respect both its human rights and treaty obligations equally. The amount of damages is yet to be decided.

Arbitration cases have so far challenged a wide range

of environmental regulations, including the bans of

various chemicals for environmental reasons, a permit

refusal for a hazardous waste landfill, an export ban on

PCB waste and measures requiring open-pit metallic

mines to backfill.

2 Social policies have been another

target area.

Since the first cases in the 1990s, more than 300 ar

bitrations

have been launched, mostly against develeconomies

like China and India are increasingly engaged

in outward investment.

Soon the measures we take to combat the effects of

the current economic crisis and regulate banking, to

stop climate change, ensure public service provision

and protect the environment could all become subject

to litigation – with public authorities, and thus the ordinary

tax payer, having to cough up millions of Euros in

damages.

Nathalie Bernasconi, Background paper on Vattenfall v. Germany arbitration, International Institute for Sustainable Development, July 2009.

ITUC Briefing note on Bilateral Investment Treaties, at: http://gurn.info/en/topics/bilateral-and-regional-trade-agreements/bilateral-investment-treaties/

background/tils-briefing-note-on-bilateral-investment-treaties (accessed 22-11-2010).

For more on this case, see: ITUC Briefing note on Bilateral Investment Treaties, at: http://gurn.info/en/topics/bilateral-and-regional-trade-agreements/

bilaterl-investment-treaties/background/tils-briefing-note-on-bilateral-investment-treaties (accessed 22-11-2010). And: ‘ICSID Tribunal awards South African

Government 7.5 per cent of its Euro 5.33m costs claim’, at: http://www.webberwentzel.com/wwb/view/wwb/en/page1873?oid=27715&sn=detail&pid=18

73 (accessed 22-11-2010).

‘Argentina on the hook for breach of Fair and Equitable Treatment’, Investment Treaty News, Issue 1, Volume 1, September 2010.

Scope for

change

The European

policy context now

offers a window

of opportunity to

redress the glaring

imbalance between

public and

private interests

within investment

agreements.

The transfer of

competence by

the Lisbon Treaty

requires both the

development of an

overarching EU investment policy and a way to deal

with the 1200 existing Bilateral Investment Treaties of

the member states. This offers a unique opportunity

for an open and broad discussion on the substance of

European international investment policy.

In July 2010, the Commission initiated the policy development

process by publishing a Communication

‘Towards a Comprehensive European Investment Policy’,

as well as a draft regulation on how to deal with

existing BITs. These are now up for consideration by

the Council and the European Parliament. Meanwhile,

the European Commission is drafting mandates to

add investment protection provisions to the free trade

agreements it is negotiating with Canada, India, Singapore

and the South American regional block Mercosur.

Mandates for self-standing investment treaties with

Russia and China may soon follow.

BITs under fire from the global South

For many developing countries, foreign direct investment is an important source of capital needed for

economic growth. However, it is clear that the EU’s current BITs have not been designed to further sustainable

development. Countries around the world are becoming increasingly aware of the possible negative

consequences of BITs. Realising that BITs are only one of the many factors that impact on companies’

decisions where to invest,

6 various countries have begun to evaluate and revise their investment policies.

The South African government is currently critically reviewing all its BITs to better align them with development

considerations,

7 putting forward the argument that: ’One of the most fundamental elements of

state sovereignty is both the right and the duty of governments to regulate economic activities and actors

in the broader public interest... Investment promotion and protection must not be pursued at the expense

of other key policy objectives.’

8 As one of the largest receivers of FDI in Latin America, Brazil continues to

hold off ratification of its BITs. And in 2007, Bolivia made the decision to withdraw from ICSID. The fact that

ICSID allows multinationals to file charges against governments – including for the ‘loss’ of

future earnings

- , but does not permit governments to take action against multinationals is a key objection for Bolivia.

Bolivia’s president Evo Morales motivated his decision by saying: “(We) emphatically reject the legal, media

and diplomatic pressure of some multinationals that ... resist the sovereign rulings of countries, making

threats and initiating suits in international arbitration."

The Commission has

indicated that under

the Lisbon Treaty the

EU’s common investment

policy needs to

be guided by broader

EU objectives such

as human rights and

sustainable development.

It has also suggested

to seek more

transparency in the

investor-to-state dispute

settlement and

to ensure a better

balance between

public and private interests

with regard to

expropriation.

But at the same time, the Commission will be looking

to build on the ‘best practices’ of the Member

States’ existing BITs. It will likely hold on to the broadly

phrased and open-ended investor protection provisions

that have in practice led to corporations suing

against all forms of regulation. The EU member states

in any case are determined to make the EU policy re

flect

their own practice and to maintain their own BITs

and investment policies for as long as possible.

Now is the time for civil society to voice its concerns

and push for a radically new approach to foreign investments.

The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries, UNCTAD Series on International Investment,

2009. At: http://www.unctad.org/en/docs/diaeia20095_en.pdf

http://www.thedti.gov.za/ads/bi-lateral.htm

http://www.dti.gov.za/ads/bi-lateral_policy.doc

http://www.allbusiness.com/legal/labor-employment-law-alternative-dispute-resolution/8906068-1.html

page 3