A flurry of lobbying led by international law firms has shored up the future of more than 1000 international treaties protecting FDI flows.
For decades, individual EU countries have negotiated bilateral FDI protection agreements to protect investments going into Asia, Africa, Latin America and even parts of eastern Europe.
However, in late 2009, the Brussels-based European Commission was tapped to develop a single EU policy on FDI protection. As we have reported previously (see fDi August/September 2010, page 6), the fate of more than 1000 treaties negotiated by individual member-states with non-EU countries suddenly became a major source of controversy in Brussels.
Some in the commission worried that the old generation of investment treaties was too skewed in favour of protecting FDI and might handcuff the ability of governments, including EU countries, to regulate FDI in the public interest. While it is one thing to protect investors against outright expropriation or nationalisation, it is quite another to give them legal sticks that can be brandished against new taxes or health and environmental regulations introduced by host countries.
Initially, Brussels announced that it would agree to ‘grandfather’ older FDI treaties, meaning they would not be applicable in certain circumstances. However, this would occur only after a rigorous review of each treaty, so as to make sure it did not clash with EU law or pose obstacles to the EU’s foreign policy goals including, perhaps, broader goals such as the promotion of sustainable development.
However, the prospect of a mass cull of these existing treaties was loudly denounced by large law firms, many of which have lucrative practices advising investors and governments on the nuances of these FDI pacts. The legal community rapidly linked arms with several western European governments that also feared a dilution of legal protection for their own investors doing business in risky markets.
After much wrangling between Brussels and the 27 EU member states, a compromise was unveiled late last year. Under this deal, existing treaties will remain in force without any need for a rigorous risk assessment of their provisions. Moreover, the old pacts will not be torn up until the EU has time to negotiate replacement agreements with the relevant countries
For the time being, Brussels has its hands full negotiating with countries such as Canada, Singapore and China. It could take years, or even a decade, before the EU is ready to negotiate new FDI agreements with lower priority countries. This means that older bilateral investment treaties will be around for some time to come.
What remains to be seen is whether some European governments will come to regret leaving these old treaties in place. Yes, such agreements are handy when outward investors are threatened with nationalisation in Venezuela or Zimbabwe. However, in recent years, western European countries are playing host to ever-increasing volumes of investment from formerly ‘developing’ economies. Just ask Belgium, which has been hit with a $2bn claim by Chinese insurer, Ping An, in a dispute over Belgium’s alleged mishandling of a bank bail-out in 2008.
Potentially costly investor lawsuits could still be brought by foreign investors against Germany, the Netherlands and the UK. If that happens, do not be surprised if there is renewed political debate about the appropriateness of a generation of treaties that offered high levels of legal protection for foreign investors on the (misplaced) assumption that western European nations would never find themselves cast as the ‘host’ countries charged with delivering on such promises.
Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com an online news service tracking and analysing legal disputes between foreign investors and host governments.