New Report Exposes How the World Bank Investment Court Undermines Democracy

Washington, DC - On April 29, the leaders of Bolivia, Venezuela, and Nicaragua agreed to withdraw from the World Bank’s international arbitration court, which rules on cases against governments brought by foreign investors.

The surprise announcement came just as two Washington, DC, based groups, the Institute for Policy Studies and Food & Water Watch, released a harsh critique of the court, the International Centre for Settlement of Investment Disputes (ISCID). According to the April 30 report, Challenging Corporate Investor Rule, ICSID has given global companies unprecedented power to undermine governments’ authority to protect human rights and natural resources and pursue national development strategies.

The three Latin American governments’ statement, signed at a summit in Merida, Venezuela, says that “(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.”

Bolivia was the target of an ICSID case brought by Bechtel corporation over a water privatization fiasco in the city of Cochabamba. Bechtel eventually settled the suit for a token sum, but only after an expensive five-year legal battle. Nicaragua was the target of another such suit filed by Royal Dutch Shell over a domestic court order related to compensation for banana workers made ill by a pesticide in which Shell had a financial interest. Venezuela currently faces four pending ICSID suits, the most recent filed in February by Italian firm ENI related to the government’s efforts to increase state ownership of the oil sector.

The IPS and Food & Water Watch report finds that most ICSID disputes, about 70 percent, involve private investment in public services such as water, electricity, and telecommunications, or investments in natural resources such as oil, gas and mining. According to Food & Water Watch, in too many cases, the World Bank or other international financial institutions required privatization of public services as a loan condition. In many cases, these funds then enable multinational corporations with poor environmental and public health records to assume control or management of local water supplies.

“When contracts fail, as they inevitably do when private corporations are unwilling to provide the needed investment to maintain, build and expand the water systems, investor protections allow the companies to demand outrageous settlements from the countries they failed to serve,” said Food & Water Watch Executive Director Wenonah Hauter.

The report explains how ICSID and other international arbitration tribunals enforce investment rules incorporated into trade and investment agreements, including U.S. trade pacts with 14 countries. Although the United States and other rich countries have faced a number of these “investor-state” lawsuits, 93 percent have targeted low- or middle-income developing countries.

The report highlights 10 of the most controversial investor-state cases, including two of the more than 30 cases against Argentina, one against South Africa’s affirmative action policies, as well as suits involving indigenous peoples’ rights in Ecuador, Bolivia, Canada, and the United States.

According to the report, ICSID tribunals have ruled in favor of the investor and ordered the government to pay compensation in nearly 70 percent of cases. Just the threat of an investor lawsuit can have a chilling effect on social or environmental initiatives, as policymakers justifiably worry about provoking an expensive lawsuit.

The announcement to withdraw from ICSID will not be enough to release the three Latin American countries from the inter-locking web of rules and institutions that now serve the interests of large corporations. Bilateral investment treaties signed by Bolivia and Venezuela would still be in force, while Nicaragua would still be bound by the investment rules of the Central American Free Trade Agreement. Instead of taking claims related to alleged violations of these agreements to ICSID, foreign investors could appeal to UN or other arbitration tribunals.

Nevertheless, according to IPS Global Economy Project Director Sarah Anderson, “This announcement was tremendously significant on a political level. It may empower other countries to challenge these excessive investor protections and, most importantly, put forth proposals for more just trade and investment regimes.” The report concludes with a summary of proposals for change.

The report can be downloaded here.

The Institute for Policy Studies is an independent, multi-issue think tank founded in Washington, DC in 1963. IPS Global Economy Project Director Sarah Anderson, a co-author of the report, served on the staff of the Congressionally appointed International Financial Institutions Advisory Commission and is the co-author of Field Guide to the Global Economy.

Food & Water Watch is a nonprofit consumer rights organization, based in Washington, D.C., that challenges the corporate control and abuse of our food supply and water resources. Water for All Campaign senior organizer Sara Grusky, a co-author of the report, works with communities and organizations, especially in Latin America, that are working to replace corporate control of their water resources with local, democratic control. Visit www.foodandwaterwatch.org.