BITS

1
BITS Policy Space in SAARC, ASEAN Countries A
Critique

• Biplove Choudhary, Prabhash Ranjan,
• K.M. Gopakumar and Nirmalya Syam

2
Outline

• Origin, Evolution and Trends
• BITs and FDI linkages
• Key Provisions and Development Linkages
• Definition of Investment
• MFN
• National Treatment
• Expropriation and Dispute Settlement
• Policy recommendations

3
Definition

• Bilateral Investment Treaties (BITs) are
  agreements between two countries for the
  reciprocal encouragement, promotion and
  protection of investments in each others
  territories by companies based in either country.
  

4
Origin, Evolution and Trends

• Early BITs variants were the Friendship, Commerce
  and Navigation Treaties signed by the US
• Expropriation of US holdings in Mexico and
  promulgation of the Hull doctrine
• Although the first BIT was signed by Pakistan
  with Germany in 1959 with other European
  countries joining in the trend since 1960s US,
  Japan joined in later in the 1980s
• The late entry of developed countries in signing
  up BITs should be seen in the context of the
  positions taken by the newly independent Asian
  and African countries within the United Nations
  in the 1960s 1970s with respect to
• New International Economic Order
• Charter of Economic Rights and Duties of States
• Declaration on the Permanent Sovereignty of
  States over their Natural Resources

5
Origin, Evolution and Trends

• Need felt for foreign investments especially in
  the light of the shortfall in ODA to meet needs
  of development
• BITs gradually became the preferred mode for
  attracting foreign capital except Maldives,
  Bhutan, the SAARC countries have signed a total
  of 156 BITs whereas ASEAN countries have signed
  312 BITs with the trend for most countries
  peaking in the 1990s

6
BITs FDI flows linkages Select Evidences

• There is little evidence of BITS stimulating
  additional investment in host countries. Rather,
  BITs act more of a complement than a substitute
  for domestic institutions (Driemeier, 2003)
• BITs cannot be judged in isolation and their
  impacts on host country FDI flows must be studied
  within the context of the political, economic and
  institutional features of the host country (Tobin
  Ackerman, 2006)
• BITs do not have any significant independent
  impact in determining FDI flows, and have to be
  complemented by economic determinants that
  attract FDI (World Investment Report, 2003,
  UNCTAD)

7
Known investment treaty arbitrations (cumulative
and newly instituted cases, by year)
8
Definition of investment

• Defines the subject matter for the application of
  the BIT.
• Countries follow broad asset based definition
  of investment which includes both FDI and FII and
  also IPR.
• Reinvestment also falls under definition of
  foreign investment.
• Developmental implications of broad asset based
  definition.

9
Most Favoured Nation

• The basic rationale of MFN to ensure equality
  of competitive conditions amongst foreign
  investors of different nationalities.
• Absolute MFN rule in BIT may reduce regulatory
  autonomy of the countries and hence may have
  developmental implications.
• Significance of building in safeguards in the
  definition of MFN.
• Recent case law suggests that MFN rule has been
  used by countries for treaty shopping. In some
  cases however, treaty shopping was not allowed.

10
National Treatment

• To ensure equality of competitive conditions
  between foreign and domestic investors.
• National Treatment in a BIT may also curtail
  regulatory autonomy of the host country with
  attendant developmental implications.
• The broad impact of the national treatment clause
  could be limited by building safeguards in the
  definition.
• Is every case of different treatment a violation
  of national treatment or should some
  disproportionate disadvantage occur to the
  investor for the violation of national treatment?
  

11
Expropriation

• Actions that impair the rights of the investor to
  enjoy their investments.
• Expropriation includes both direct and indirect
  takings also known as creeping expropriation.
• Indirect takings have a direct linkage with the
  regulatory ability of the countries.
• Effect approach v. effect and intent approach.

12
Points for discussions

• Ensuring policy space to pursue developmental
  objectives in BITS by adopting different
  methodologies such as
• Enunciating the developmental provisions in the
  Preamble
• Emphasizing on the special and differential
  treatment.
• Learning from experience and disputes involving
  countries in the region as well as those that
  have arisen in NAFTA tribunals
• Incorporate the General Exceptions clause
• Need to revisit some of the existing BITS