Investment chapters in Trade Agreements

Results of an audit to treaties mutual investment protection and arbitration system on investment

13 September by Piedad Mancero

Submitted at the World Social Forum by invitation of Friedrich-Ebert-Stiftung, - Berlin, Germany

I. Background.

Since the beginning of the millennium, public awareness of the costs and subjugation several countries in the region were suffering gradually emerged in Latin America. Those countries admitted recurring pressures for foreign investment as an essential resource for growth and modernization of the economy.

One of those countries was Ecuador that in the early 90’s, during the great neoliberal onslaught, had modified and established laws to ensure attractive profits to foreign companies. Additionally, Ecuador subscribed 21 bilateral investment treaties (BIT) out of a total of 30 signed treaties between 1985 and 2003.

Foreign Direct Investment (FDI) did increase during this decade, however only in the areas of natural resource exploitation. This was due to an amendment to the Hydrocarbons Law in 1994, which allowed that most of revenues from oil exports benefit foreign companies in percentages ranging from 70% to 100% profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. .

Many circumstances changed by the mid-2000s. The country started implementing measures to reclaim part of the oil profits. At the same time, the first multimillion-dollar lawsuits were filed against Ecuador at international courts, as allowed by the signed treaties.

This situation, not exclusive to Ecuador, led the government and citizens to decide to audit the negotiations and how BITs were signed. Also its content and compatibility with national laws, awards and decisions issued in international arbitration processes against country, and the economic, social and environmental impact on the State and the Ecuadorian people.

The audit was officially assigned to the Commission of Integral Citizen Audit - CAITISA – additionally established in response to the Mandate of the Peoples, Nationalities and Social Organizations Assembly of Ecuador. This Assembly presented their non-conformity with the huge compensation payments to foreign companies imposed by foreign arbitration courts, as they were considered unfair and illegitimate.


II. Main findings and conclusions of the audit

Studies implemented by the audit commissioners, comprehensive case analysis of ongoing lawsuits in international courts, and work in situ (fieldwork) led to evidence thant confirmed anomalies and abuses described as follows:

1. Irregularities in the subscription of BITs and adherence to the Center for Settlement of Investment Disputes (ICSID ICSID The International Centre for the Settlement of Investment Disputes (ICSID) is a World Bank arbitration mechanism for resolving disputes that may arise between States and foreign investors. It was established in 1965 when the Washington Convention of that year entered into force.

Contrary to some opinions defending the fact that ICSID mechanism has been widely accepted in the American hemisphere, many States in the region continue to keep their distance: Canada, Cuba, Mexico and Dominican Republic are not party to the Convention. In the case of Mexico, this attitude is rated by specialists as “wise and rebellious”. We must also recall that the following Caribbean States remain outside the ICSID jurisdiction: Antigua and Barbuda, Belize, Dominica (Commonwealth of) and Suriname. In South America, Brazil has not ratified (or even signed) the ICSID convention and the 6th most powerful world economy seems to show no special interest in doing so.

In the case of Costa Rica, access to ICSID system is extremely interesting: Costa Rica signed the ICSID Convention in September, 1981 but didn’t ratify it until 12 years later, in 1993. We read in a memorandum of GCAB (Global Committee of Argentina Bondholders) that Costa Rica`s decision resulted from direct United States pressure due to the Santa Elena expropriation case, which was decided in 2000 :
"In the 1990s, following the expropriation of property owned allegedly by an American investor, Costa Rica refused to submit the dispute to ICSID arbitration. The American investor invoked the Helms Amendment and delayed a $ 175 million loan from the Inter-American Development Bank to Costa Rica. Costa Rica consented to the ICSID proceedings, and the American investor ultimately recovered U.S. $ 16 million”.

https://icsid.worldbank.org/apps/ICSIDWEB/Pages/default.aspx
)

Ecuador signed 30 BITs, 26 of them are still in force. Most of them were signed between 1992 and 2002. In many cases, simplified procedures were used, drastically breaking the laws. Authorities were convinced of the benevolence of foreign investment, they were therefore urged to attract it. Accession to ICSID was only formalized in 2001. However, treaties included ICSID’s intervention only as a direct, high level legal resource.

2. Structure of Treaties.

They are standardized models, which do not consider asymmetries and particular context of countries. There is scarce option for reciprocity.

Substantive clauses. These include open conditions that guarantee privileges to companies and hinder investor– State suits:

National Treatment, Most Favored Nation, Fair and equitable treatment (as “legitimate expectations of the investor”), Protection and full security, direct and indirect expropriation, Free transfer currency and legal stability, Survival (between 10 and 20 years).

The definitions are ambiguous in the interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. of the plaintiff. In addition, the plaintiff and the referees (or arbitrations) have been allowed extensive interpretations beyond agreement by parties.

This practice forbids States from asking “performance requirements” (job creation, transfer of knowledge and technology, use of local inputs). Responsibilities of investors regarding the respect for human rights and environmental protection are not included.

3. Dispute settlement system

The Washington Convention (1965), which created the ICSID, the rules the Commission of UN on International Trade Law (UNCITRAL) and BITs, allows a unidirectional or one-way process - only the investor may sue directly through international arbitration courts, ignoring the national or local ones. This implies the cessation of sovereignty of investment hosting States and the inability of domestic investors to enjoy such advantages (in clear contradiction of the “National Treaty” clause).

Conformation of arbitration courts.- In-depth research of suspicious performance of referees involved in cases against Ecuador, demonstrated unusual situations which cast doubt on the impartiality of the court |1| :

  • Conflict of interest of arbitrators. Commercial bias, not appropriate for disputes among the States. Disconnection with public international law as well as local legal systems.
  • Elite groups, referees with high level influences and repeated nominations. Revolving door.
  • Civil and criminal impunity of arbitrators. They are protected from any future claim or dispute.
  • Difficulties and resistance to recuse.
  • Final judgments with no appeal possible.

4. Arbitrators’ Lawsuits against Ecuador under BIT
The country has been sued 24 times since 2003. Multi-million suits started in 2006 when governmental measures were applied to guarantee rights and recover resources lost by the excessive benefits granted to foreign companies, but also for public, legitimate and unavoidable circumstances of a changing environment. Plaintiff are 22 firms, most of them belong to extractive industries (oil and mining); main field of operations in the Ecuadorian Amazon rainforest. Please refer to the following chart:

The BIT signed with the United States has been invoked in 17 cases; with Canada, on three occasions, and with France, Spain, Bolivia and Argentina, once each.

Seven of the claiming firms declared nationality in tax havens in countries with which Ecuador has not signed a BIT. To sue Ecuador they embrace a BIT from a different country, where effectively capital comes from.

Only five out of the 17 closed cases were favorable to the Ecuadorian State.

Amounts claimed by the plaintiff totaled around $18,000 million of US dollars. This amount includes the $9,500 million that Chevron pretends to impose its payment to the Ecuadorian State with a countersuit, which corresponds to the amount favorably granted to the native communities affected by oil exploitation. The total sum, which still lacks of other costs to be determined, is equivalent to 62% of the national budget for 2016. An amount of $ 1,300 million has already been paid by Ecuadorian State until July 2016 plus the costs of legal procedures (fees, contributions to ICSID and other costs) for around US$ 200 million. The sum of these amounts has implied depriving the Ecuadorian population of much needed schools, hospitals, universities, scholarships and housing.

5. Have BITs generated any benefit to Ecuador? None

- The FDI in Ecuador remained low. It represents only 1.1% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
between 2000 and 2013.
- During that period, largest investments came from Brazil and Mexico, countries with whom Ecuador doesn’t have any subscribed TBI.
- Express prohibitions protected transnational corporations. Therefore, they have not complied with performance requirements: incipient employment generated by these firms, no technology transfer or use of local intermediate goods, except those low or subsidized prices.
- Levels of poverty and poor living conditions remained in areas of influence where firms operated, especially oil companies.
- In BIT, there is no responsibility for caused environmental liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). .

6. Implications and impacts on social and economic development, human rights and nature of investment companies who have sued Ecuador.

Testimonies of human displacement and land expropriation where obtained. The firms subscribed fraudulent conventions and codes of conduct to subdue and to control social reactions. Depletion of natural resources, ecosystems destroyed and polluted was confirmed due to the use of unreliable, old technologies that were already outdated in other parts of the world.

In BIT there is no responsibility for environmental liabilities caused.

Chevron (formerly Texaco) is a very serious case. They caused oil spills of over 26,000 barrels and 18,000 millions gallons of toxic water, 916 waste oil pits left open, its filtrations deplete land, rivers and air. This caused human diseases. In a sample of 1064 households, 306 cases of cancer were registered. There is loss of crops, animals, fish, birds in six indigenous territories (Cofan, Secoya, Siona, Huaorani, Kichwa, Shuar) and 30,000 people affected.

National courts sentenced Chevron to pay US $ 9,500 million, but the firm would not acknowledge such sentence. Instead, Chevron sued the Ecuadorian State, with threats of massive foreclosures, payment of US $ 112 million, with no concern at all for the emergency situation Ecuador was going through due to the 7.8 (Richter scale) earthquake, which stroke on April 16th, 2016.

Persistent tax evasion of almost all companies. Among diverse forms of fiscal evasion (including those that allow ‘tax havens’), the Commission highlighted a systematic practice of thin capitalization: capital registered as debt, not as an investment as well as the establishment of not transparent subsidiaries. In this way, many businesses have registered most of their capitals as debts (many within the firms), with a minimum investment. An evidence of this practice is the drastic growth of private foreign debt by the mid 90s. This is when foreign firms had liberty and aperture to exploit oil in the country.

7. Sovereign decisions of Ecuador

According to the actual Ecuadorian Constitution in force since 2008, it is prohibited to yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. sovereign jurisdiction to international arbitration…(art. 422). Therefore, the Ecuadorian government has taken initiatives and made decisions related to the BIT and Investor-State controversies:

- Complaint filed against ICSID on July, 2009. It only produced effect six months later. However the lawsuits in ICSID continue.
- Rejection of all 26 BITs in force until 2008. Internal and external procedures are ongoing.
- Promote the establishment of UNASUR Dispute Resolution Center.
- Presented to the UN an initiative for a binding code for transnational firms on human rights.


III. Few guidelines on investment to be considered in trade agreements called “new generation”

The current investment protection system has been increasingly questioned by most countries (states and social movements), while it becomes untenable, as UNCTAD UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

http://unctad.org
and other multilateral agencies acknowledge this situation. It is then appropriate to promote new guidelines, which derive from the Ecuadorian experiences found in the audit, since there are similarities in substantive terms and other conditions of bilateral investment treaties and trade agreements known as: TPP, TTRP, CETA.

Investor rights: Access to sufficient, reliable and accessible information; clear rules, legal certainty and defined model of development; balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. and transparency in production and trade relations; effective financial and administrative system; honest and impartial judicial system; stability of concessions and incentives when commitments and responsibilities are met.

Responsibilities of investors: Investments committed to be transparent, sustainable, and consistent with the host country development; awareness of the risk of any investment. States cannot guarantee profits; respect and compliance with tax, currency, labor and environmental obligations; transparency, legality and legitimacy in capital movements.

Rights and responsibilities of host countries: Qualify and evaluate each case of FDI in the country; the sovereignty of the respective state to enact policies and decisions of public interest and development prospects and to care for the survival of domestic investments (forms of equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. partnership, joint management levels). In turn States must protect FDI committed to national sustainable development.

Alternative model investment agreement: Objectives should safeguard the hierarchy of human and environmental rights over commercial interests; prohibit retroactivity; universal definitions of consensus, according to international standards. Clauses to avoid “indirect expropriation” or “equivalent to expropriation”, “national treatment”, “most favored nation”. Accuracy of “intangible assets”, particularly intellectual property rights; also define those services that can be included and those that cannot.

In dispute settlement regime: Acknowledge administrative bodies of national jurisdiction and finally, neutral international arbitration. Tax issues should not be subject to international arbitration. Safeguard particular situations from disasters or serious obstacles to development.


Piedad Mancero
Commissioner of CAITISA


Footnotes

|1| It is considered that the industry of international arbitration on investment is one of the most lucrative because most of the huge fees that are shared among few is increasingly interconnected with the world of speculative finance (See “When injustice is a business”. Authors: Pia Eberhardt and Cecilia Olivet, published by Corporate Europe Observatory www.corporateeurope.org and Transnational Institute www.tni.org).

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