Seventh Columbia International Investment Conference: “Reframing the Investor-State Relationship: From Criticism to Constructive Engagement”
Governments seek to attract foreign direct investment (FDI) because it can contribute significantly to sustainable development through the transfer of capital and technology, job creation, linkages with local industries, infrastructure development and capacity building. Firms undertake FDI because it improves their access to markets and resources and increases their international competitiveness. These ostensibly different objectives can give rise to tensions in investor-state relations, especially in the context of allocating risks, responsibilities, and rights. Indeed, centuries ago international law already had norms that sought to minimize such tensions by governing states’ treatment of foreign merchants and traders. Over time, those norms have developed into a rich body of customary international law on the treatment of aliens, treaties governing foreign trade and investment, investment contracts allocating risks and benefits between the parties, and even human rights principles on non- discrimination and protection of property; moreover, these formal norms are supplemented by informal mechanisms and institutions (e.g., cultural norms, administrative procedures, networks).
Yet despite the long-running evolution of the investor-state relationship, the increasingly well-recognized importance of FDI for global sustainable development, and the extensive legal framework that has been constructed, tensions in the relationship remain. Moreover, the question of how to improve the investor-state relationship is still hotly debated. A key component of the question is whether the current ‘regime,’ encompassing all of the norms, laws and institutions, is exceedingly favorable to investors or to host governments. Indeed, during the late 1960s and the 1970s, the dominant approach to improving investor-state relationship was to control MNEs, whereas during the 1990s, a ‘rebalancing’ of sorts swung the trend toward liberalization and investor protection. At various points of time over the past several decades, the legal framework governing the investor-state relationship has been perceived by different stakeholders to be imbalanced and exclusionary of key stakeholders. Attempting to move from such criticism to constructive engagement is crucial for improving the investor-state relationship; and that, in turn, is key to maximizing investment for sustainable development.
This conference started with a debate and discussion about the current state of investor-state relations and why finding a mutually beneficial framework has been such a challenge. What forces are pushing a re-evaluation of the investor-state relationship? Do governments feel that their interests are not adequately reflected in the existing regime? What challenges are investors facing under the current regime in terms of protecting their rights and interests? What roles are state-owned companies playing in the investor-state relationship? The debate opened the floor to explore the dominant forces pushing for a reformation of the existing regime and considered how to rebalance the relationship to better protect the rights, interests and obligations of investors and states. The second panel delved more deeply into one of the fundamental tensions in the investor-state relationship – namely, the tension between the predictability that investors require for long-term investments and the flexibility that host governments require to address issues of public interest and public policy. This panel included a discussion of potential mechanisms to maintain an equilibrium between predictability and flexibility; in fact, both are in the shared interest of all stakeholders at different times, and finding mechanisms that allow for and anticipate fluctuations in the relationship over its duration would be mutually beneficial.
The third panel took a closer look at options for mitigating and managing disputes between investors and states that can more efficiently and fairly protect the rights of foreign investors, host governments, and other stakeholders. This panel explored the desirability and feasibility of adjustments to existing mechanisms, as well as the need for (and reality of) establishing alternatives or new mechanisms, if the current mechanisms are insufficient. Finally, the last panel took a broader view toward reframing the investor-state relationship, in order to account for the important roles of other relevant stakeholders as well as to maximize the outcomes of this relationship for sustainable development.
This conference brought together a wide range of stakeholders in a “Davos-style” discussion without formal presentations, in order to foster a productive and dynamic conversation among all participants. The aim was to use the conference to advance practical solutions and strategies for improving the investor-state relationship and maximize the impact of investment for sustainable development.
Some of the main points discussed and advanced at the conference are summarized in a conference report.
November 14, 2012, Wednesday
Breakfast and registration
Opening remarks: Lisa Sachs, Director, Vale Columbia Center on Sustainable International Investment
Session I: Is there a need to rebalance the investor-state relationship?
The investor-state relationship and the mechanisms defining it are key to determining the balance of risks and benefits associated with an investment, as well as the rights and obligations of the investor and the state. A number of developments have sparked an increased focus on the relationships between MNEs and the countries in which they invest. These include the rise of investors from emerging markets; increased attention of legislators, regulators and civil society on the conduct of MNEs; increased recognition of the role that FDI can play in promoting sustainable development; an increase in the number and scope of investor-state arbitrations; and an apparent emerging backlash against strong investor protections in investment treaties, among others. These developments bring to the fore the question of the appropriate balance of rights and interests between investors and the state, and how that balance can be achieved. Some would argue for the pendulum to swing further in the direction of stronger protection for countries and citizens, while others would have it swing back toward stronger protections for foreign investors.
The debate was set.
While exploring this issue, the debate addressed the following questions:
- What forces are pushing a re-evaluation of the investor-state relationship?
- (Why) do governments feel that their interests are not adequately reflected in the existing regime? Is the existing regime indeed lopsided against states? Is the balance more fairly or unfairly tilted against some states than others?
- What challenges are investors facing under the current regime in terms of protecting their rights and interests? What challenges have the existing regime solved and what challenges remain?
- What roles are state-owned companies playing in the investor-state relationship? Do these state-owned or –controlled investors alter the nature of the investor-state relationship?
- What about countries that do not abide by the Western concept of rule of law? How do we take into account these differences in legal frameworks?
Moderator: Karl P. Sauvant, Resident Senior Fellow, Vale Columbia Center on Sustainable International Investment
- Howard Mann, Senior International Law Advisor, International Institute for Sustainable Development
- W. Michael Reisman,Myres S. McDougal Professor of International Law, Yale Law School
- Sarah Anderson, Director, Global Economy Project, Institute for Policy Studies
- Daniel Bahar, Deputy Assistant U.S. Trade Representative for Investment, Office of the U.S. Trade Representative
- Laurent Coche, Senior Vice President Sustainability, AngloGold Ashanti
- Kwadwo Owusu-Agyeman, Deputy Minister of Lands and Natural Resources, Ghana
- M. Sornarajah, CJ Koh Professor of Law, National University of Singapore
Keynote speaker: Jeffrey Sachs, Director, The Earth Institute at Columbia University
Session II: Predictability and flexibility in the investor-state relationship: striking the right balance
A well-informed and fair arrangement at the outset of an investment may create the basis for a mutually beneficial, and therefore stable, relationship between the company and the country. However, there are more ‘unknowns’ than ‘knowns’ in long-term investments and a number of variables can subsequently affect the balance of risks and rewards agreed to at the outset. The ‘unknowns’ are often greater in developing countries, with a high degree of perceived ‘political risk,’ with incomplete legal frameworks, and without a track-record as a stable investment destination. In such countries, many investors and their home countries have sought investment protection and stability by restricting the governments’ rights to regulate, policy space and flexibility in general through legal mechanisms such as stability clauses in contracts and umbrella clauses in treaties. While the predictability of an investment is in the mutual interest of both parties, freezing the legal framework – either in contract or by treaties – is an unrealistic and often unsuccessful means of achieving predictability and comes at great cost to the flexibility needed by governments. This panel delved into the solutions and mechanisms for establishing equilibrium between the predictability important for long-term investments and the flexibility that is necessary for host-governments.
This panel addressed:
- What are the uncertainties faced by investors and governments and what is the current trade-off between flexibility and predictability? Who is better suited to bear certain risks and what should be the balance? Can the need for flexibility and stability ever be reconciled or are they at fundamental odds with one another?
- Why have investors and their home countries been so reluctant to accept terms that build in adjustments to changed circumstances? Do they believe that they will be better off trying to freeze the terms under which they operate, knowing that they can always demand renegotiation if conditions turn against them?
- How can the legal framework evolve to achieve the aims of both stability and flexibility? Is it useful to integrate in the legal framework such mechanisms as periodic review, progressive fiscal regimes, equilibrium clauses, and interpretive statements? Are there other tools for both preserving policy space and predictability of fiscal and legal regimes for both parties?
- What about institutional overhaul through, for example, giving the supremacy to domestic law, promoting mechanisms to regulate rather than simply protect investors, and amending the investor-state arbitration philosophy and establishment accordingly? Are there countries for which this is not feasible?
Louis Wells, Herbert F. Johnson Professor Emeritus, Harvard Business School
- Peter Cameron, Director, Centre for Energy, Petroleum and Mineral Law and Policy; Professor of International Energy Law and Policy, University of Dundee
- Marcio Senne, Corporate Affairs Head, Europe and North America, Vale
- Melvin Sheriff, Head of the Inter-Ministerial Concession Committee, the National Investment Commission, Liberia
Brigitte Stern, Professor of International Law Emeritus, University of Paris I Panthéon-Sorbonne
Drinks followed by a networking dinner
November 15, 2012, Thursday
Session III: Mitigating and Managing Disputes: Are new mechanisms needed?
A fundamental element of managing the investor-state relationship is to have means for both avoiding and resolving disputes that arise out of foreign investments, and to ensure those means satisfy necessary criteria of effectiveness, fairness, and legitimacy for all relevant stakeholders. The primary mechanisms available to resolve disputes between investors and host states have included litigation in the host state’s administrative and judicial systems, action taken by the foreign investor’s home state against the host state on behalf of the foreign investor, and arbitration between the investor and host state, which may be provided for under contract and/or treaty.
Over roughly the past 15 years, this last form of dispute resolution – investor-state arbitration (ISA) – has gained increasing ground as a means for resolving disputes between investors and states. While it was intended to improve foreign investors’ abilities to protect themselves against harm by host states, and to protect host states against action by investors’ home states, both foreign investors and host states (and other stakeholders) are raising complaints about the mechanism in practice. On the one hand, investors are facing challenges in terms of costs of the proceedings and enforceability of awards; on the other hand, many have argued that the ISA approach to investor-state dispute settlement (ISDS) is not structured to be sufficiently responsive to the interests, rights and needs of host governments to regulate in the public interest, that key stakeholders are excluded from the process, and that it is not having the desired impact on state-state relations.
These and other issues have led some countries such as Australia, India, Bolivia and Venezuela to push back against if not abandon ISA, and are prompting other governments, investors and stakeholders to rethink their approaches to ISDS. Against that background, and in order to further the discussion on ways forward, this panel delved into options for both dispute avoidance and dispute settlement that can potentially more efficiently and fairly protect the rights of all stakeholders, including investors, states, communities, and other citizens.
Some of the questions it addressed were:
- To what extent are perceived problems due to the vagueness and lack of certainty in the treaty obligations and/or the broad powers of tribunals to interpret those obligations? What are workable strategies for adding clarity?
- What are possible tweaks to the existing ISA “system” and the way it operates to address concerns regarding transparency, accountability, and legitimacy?
- What are the options for greater or even sole reliance on other existing institutions? Should there be an increased role for national courts? An expanded role for state-state mechanisms? Greater reliance on insurance or other mechanisms for addressing risk?
- What role is there for a new body or bodies – e.g., a world court and/or appellate body for investor-state disputes, state-state disputes, and/or claims by other stakeholders, such as impacted communities, relating to impacts of FDI?
- Should dispute avoidance and early resolution be given more attention? What are the opportunities and challenges for enhanced conciliation, mediation, negotiation, and settlement?
Anthea Roberts, Visiting Professor, Columbia Law School; Lecturer, London School of Economics
- Amar Inamdar, Program Manager, Operations Risk Management, World Bank
- George Kahale III, Chair, Curtis, Mallet-Prevost, Colt & Mosle LLP
- Jonathan Kaufman, Staff Attorney, EarthRights International
- Jeswald Salacuse, Henry J. Braker Professor of Law, The Fletcher School of Law and Diplomacy, Tufts University
- Ignacio Torterola, Of Counsel, International Arbitration and Litigation Department, Foley Hoag LLP
Session IV: Taking a broader view: Maximizing the outcomes of the investor-state relationship for sustainable development
Developing and fostering a mutually beneficial investor-state relationship is not the end goal but, rather, is a crucial factor for meeting other fundamental aims. Achieving the broader objectives of sustainable development and investment risk mitigation requires reframing the investor-state relationship to reflect and account for these broader goals. In this context, governments and investors can benefit from comprehensive policy frameworks on sustainable development, including fiscal, environmental, health, safety and other matters at the sub-national, national, and international levels, while investors can usefully develop policies and practices that take a similarly extended view of the investment, facilitate coordination with other stakeholders in the public and private sector, and promote innovation and progressive action in achieving sustainable development outcomes.
Moreover, the goals of sustainable development and stable investments rely on the involvement and roles of other stakeholders, including citizens and communities in the host country, civil society, shareholders, home country governments, and multilateral and bilateral organizations and institutions, among others. These other stakeholders both impact and are impacted by the underlying investor-state relationship. This means that ‘reframing’ the investor-state relationship should account for the important perspectives of and participation by these stakeholders at all stages of the investment process; the question is how.
This panel thus seeked to explore how the investor-state relationship should be reframed or resituated within the broader context of policy frameworks and corporate strategies that can both promote the broader goals of sustainable development and long-term investments, and account for the important roles of other relevant stakeholders.
Questions this panel covered include:
- Where are stakeholder interests aligned and where are they at odds? How are these interests reflected in the current investor-state relationship? Which stakeholders should have rights under law but do not? Which interests can be the subject of collaboration and which must be protected in law?
- What aspects of sustainable development are currently marginalized in the investment framework? Have investors’ obligations towards sustainable development changed over time to integrate principles of sustainable development? Should they change again?
- What is and should be the role of the home country and international institutions regarding governing or influencing the conduct of MNEs so as to further sustainable development?
- What is the role of global soft-law norms and standards such as the Ruggie Framework, Principles for Responsible Agricultural Investment, the Natural Resource Charter, and the Guidelines for Multinational Enterprises? What is the actual and potential role of treaties binding on host and home states such as the Convention Against Corruption and human rights instruments?
Karl P. Sauvant, Resident Senior Fellow, Vale Columbia Center on Sustainable International Investment
- Richard Bolwijn, Senior Economist, UNCTAD
- Paul Jourdan, Mineral Policy Advisor
- Daniel Kaufmann, President, Revenue Watch Institute
- José Luis Silva Martinot, Minister of Foreign Trade and Tourism, Peru
- Petter Nore, Director, Department for Economic Development, Energy, Gender and Governance, NORAD
- Jeffrey Sachs, Director, The Earth Institute at Columbia University
Closing remarks: Lisa Sachs, Director, Vale Columbia Center on Sustainable International Investment