Behind the Guns: International Economic Law as a Strategy for Regime Change

A Transcript of the Paper by Jane Kelsey, Professor of Law, University of Auckland, New Zealand, delivered at the 12th Rhodes Forum in September 2014

I am delighted to be able to make some contribution to such an esteemed panel. When I got the invitation I thought as a critic of international economic agreements what might I be able to contribute to this dialogue. My starting point is some reflections on international law from Tony Anghie in his book entitled “Imperialism, Sovereignty and the Making of International Law”. One of the features of the post-World War II period has been the increasing role of international economic law as a vehicle for superpowers. Anghie said quite incisively that the old law of conquest created the inequalities that we now see in the new international law of contracts that perpetuate, legalize and substantiate the concept of neutrality, but a neutrality that is in fact based on those inequalities when the international agreements that the Third World states entered into in particular are enforced against them. The notion of progressive international law that we heard in the last panel, I am going to take issue with to some degree as international economic law being in fact one of the vehicles for ongoing imperialism.

I want to skip to the contemporary period to illustrate my argument. Those who followed these areas will know that the Doha round of World Trade Organization talks was launched in the shadow of 9/11. One of the interesting statements of the Robert Zoellick who subsequently became president of the World Bank was that those who opposed a new round of WTO negotiations were siding with the terrorists. Similarly when the 9/11 Commission started looking at how the US should respond, the Bush administration was encouraged to expand trade in the Middle East as a vehicle for the advance of Washington’s interests. And indeed when we saw Zoellick discussing an FTA with the US as being a tool of foreign policy more generally, he said the Free Trade Agreement is a privilege, not a right, for which the US seeks at a minimum cooperation – and at better – foreign policy and security. That is you can not separate the economic agenda of the US from the broader strategic objectives. And indeed the very next day president Bush announced a new Middle East initiative for free trade area by 2013 as a strategy to back the US foreign policy interests.

More recently in 2011 Hilary Clinton as Secretary of State wrote a fascinating piece in Foreign Policy, where she set out what she called “America’s Pacific Century” and the agenda was strategy for achieving it. She talked about the need for the dual pivot of moving the military presence of the US from Iraq and Afghanistan and remilitarizing in the Asia-Pacific; and an economic pivot through the negotiation of a Trans-Pacific Partnership Agreement which would establish the rules of the US and US cooperation within the Asia-Pacific to neutralize the impact of China. There is no secrecy about this agenda. It is very explicit. But I do not want to talk so much about States, we have talked quite a lot today about States.

I want to talk about the nexus between the States, who are promoting these agreements, and the EU does it as we have heard in the European context to advance its own strategic agenda. I want to focus on how the States establish rules that serve both their foreign policy and their commercial objectives and empower the economic interests themselves to enforce those agreements against sovereign states. I want to talk in particular about how those are done in the context of states and crisis.

I am going to focus on investment agreements, bilateral investment agreements in particular, but also the investment chapters that are incorporated increasingly into so-called free trade or economic integration agreements. If we look here at the rise, it is rather similar to a graph in the last session, but on different issue. If we look at the rise in a number of disputes that are using these investment agreements, we can see that back in 1997 there were almost none. There has been an exponential increase in the number of them since 2002. This only reflects the known cases. There are many investment disputes that are not known, that are not notified and that no one actually knows that they have happened, let alone what the outcome is.

Jane Kelsey diagram I

If we look however at the winners and losers in these disputes, we see that over three quarters of these investment disputes are brought by investors from the US and the EU. If we look at the outcomes of these cases, we see that a majority of them are won by the investor, either outright or as a result of a settlement. But if we look at the cases in 2013, we see in fact the number of investor successes has increased dramatically. 7 out of 8 of those cases were won by the investors. If we look at who are the targets of these cases, Argentina is by far the target of the most cases, it has 40 of those disputes since 2001 economic and social crisis. The next highest numbers are Venezuela, and the Czech Republic, and Egypt is the 4th highest and the 3rd highest since 2011. If we look at the exposure of countries to potential investment disputes brought by foreign investors and we just look at the issues around us at present, Libya has 17 live bilateral investment treaties that investors could sue the Libyan government under. Iraq has 32 bilateral agreements and 9 multilateral agreements. Greece in the midst of its crisis has 39 such agreements in force. But these agreements are not all known. The projections of Egypt’s numbers, some say 69, some say 92, some say 100, the US says 111 agreements. No one actually knows the liability of governments because they do not know what these agreements actually are.

I am not going to go into any detail of these agreements because I want to give some case studies, but I need to set the backdrop for the rules. These rules give special privileges to foreign investors and rights to sue if certain rules are violated. One rule: fair and equitable treatment is interpreted by investors to main: the state does not change the rules on the investor after the time the investment is made. The second is indirect expropriations by new regulations that take away the value or the profit of the investment or direct expropriations, the state taking back ownership. The third is providing full protection and security including in times of insurrections or in times of instability. And the forth is unfettered movements of capital even at times when there are major crises, are imbalance of payments and the need for capital controls in times of crisis. These disputes are brought before international arbitral tribunals, the main one is attached to the World Bank, the International Center for the Settlement of Investment Disputes, but there are others as well. They have become very controversial. Many of these disputes are held in secret. The ad hoc tribunals involve ad hoc arbitrators. Often the arbitrators are investment lawyers who will also act for investors. They act in a circuit. There are no effective conflict of interest rules that operate. There are no effective rules of evidence. There is no effective system of precedent or consistency across decisions. There is no right of appeal in most instances. These tribunals that are very controversial in terms of the standards we would set for our domestic courts, are making vastly huge awards. Huge awards, billions of dollars including lost profits, not just lost investment, interest compounded, going back to the date even of the investment, and the average costs to a state in simply defending a case even if it wins is around 8 million dollars, but the Philippine government is currently racked up 54 million dollars in legal expenses dealing with a corrupt contact under the Marcos regime. What is happening now as well is the private equity firms are buying or leasing these claims, so they will run the claim and take a share of the proceeds in the outcome.

A recent report from the Transnational Institute “Profiting from Crisis” is talking about the way that vulture funds and speculators investing in these claims and also investing in what are known to be risky investments either before or during crises as they emerge and are then demanding full payment from the state as it is trying to reconstruct after the crisis. There are emergency provisions in some of these agreements, but even if they do exist, the tribunals have been reading them down, so that if they consider the state has contributed in any way to the outcome as Argentina was considered to have done in its financial crisis, they can not rely on it.

We now have law firms that are going and chasing investors. This is one on Libya in 2011 from one of the big firms. As events unfold, investors will be considering potential claims for any harm or loss caused, including those who just invested speculatively. As well as compensation, these treaties provide helpful leverage in obtaining support or protection from the host state, whether through direct negotiations or by intervention of the investors’ home state in leveraging including the countries that have cast into crisis. Compensation in situation of Libya must provide for full compensation and of course, there will be countries that have agreements with Libya that the investors can go to try through the backdoor to bring these disputes. This is the advice from the law firms.

Let me just give you several recent examples of how this is playing out. One case that was a property development case involving Libya in 2013, involved an award of almost one billion dollars by the Libyan state to a Kuwaiti investor, 2nd highest known award ever. It was a tourism project that was approved, but 2 years later the investor had not done anything. They had a 90- year lease, and this happens in many places. I’ve just been in Vietnam and there are many empty developments there. So the lease for 90 years is locked up, the government cancelled the lease and a claim was lodged not under a US or a EU agreement, it was Libya-Kuwait agreement. This is the one of the points I want to make that we are now seeing many other states coming in for their own reasons, commercial and strategic, to use these agreements. The initial claim was only 55 million, yet the investor was awarded nearly 1 billion dollars. How did that happen? The tribunal awarded these against the actions of Gaddafi regime: 5 million dollars actual loss, 30 million dollars moral damages, for the damage to the reputation of the investor and 900 million dollars for lost future opportunities in a development that was never started. The costs of course fall to the current Libya regime, which is facing massive stresses of its own.

The tribunal actually concluded that it hoped this arbitration would serve as an incentive to government agencies in Libya in charge of following up investment projects with Arab countries to provide favorable conditions for their investments.

Iraq. We know that before the US invasion there was no foreign investment from countries that were non-Arabic investors in Iraq. We know that during the Bremen era many oil concessions were granted of dubious legality. They did not have legislative approval. There is a risk that those will be declared unconstitutional by the domestic courts. But the Iraqi government is actually considering signing up to the World Bank ICSID tribunals because it is under pressure in a belief that this will attract foreign investment. They are concerned that this will retrospectively apply to investments made under the Ba’athist regime, and that they will effectively end up paying massive amounts of compensation for the oil concessions that the Bremen administration issued even if the domestic courts strike them down.

Egypt’s exposure. More than 22 of the known cases in the World Bank’s tribunals are against Egypt. Total claims of 20 billion dollars of public funds from Egypt. 11 cases decided and 11 cases pending. Egypt has won 2, the investor has won 4 and the rest have been settled with payments to the investor, so the investor has won part of them. In one of the cases which shows the real dangers that corrupt players inside a country can actually use these foreign agreements to recover against a new regime in Wajih Siaj case in 2009 74 million dollars awarded plus costs in interest to an Egyptian citizen. But who relocated himself and his investment in Italy to be able to come through the backdoor, to be able to sue the Egyptian government claiming that they were an Italian investor.

If we look in the post-revolution Egypt: 10 claims lodged since January 2011 including one by Veolia against a rise in a minimum wage claiming that it was going to severely impact on the profitability as an investor. The total risk, as I mentioned, for Egypt is unknown, the US says there are 111 agreements. Currently the new Egyptian government is negotiating more with the EU, so there will be more liability then this. But we know that already there are many of the contracts made under Mubarak: the investments, the privatizations, the land property developments that are being questioned by the Egyptian courts. Again what we are seeing is that those contracts will end up being live and compensatable through this tribunals. The government that again struggling financially and politically is going to face those issues. There is a twist: Al Jazeera is actually bringing an investment dispute against Egypt for closing down its operations. It was an investment, it’s claiming that this was a violation of its investor rights. But there are three things wrong with it. The first is that legally States actually have a greater claim to constrain freedom of expression that is likely to be viewed by the tribunals favorably in the arguments being put before them. The second is that human rights arguments actually do not appear in these agreements. So there is no legal basis on which the human rights aspect of Al Jazeera can be heard. And the third is that these dubious investment tribunals are the last place you would want deciding on those matters anyway. Even if Al Jazeera won, it does not neutralize all those other problems.

Let me conclude with just commenting on who are the winners and the losers in this process. Obviously the investors. They win out almost no matter what.  Especially if they can use leverage on the government. Investors in a former dubious regime are protected. They have no responsibility or accountability. The local elite can use the backdoor to protect their interests. The vulture funds can cash in with no responsibility. The source country, especially the US and the EU, but increasingly other Arab countries in examples we’ve seen can bring pressure to bear on the governments. We can see the industry itself of the lawyers is cashing in, but what we have is governments forced to privilege foreign investors over the needs of the local people. We are seeing reconstruction funds being used to pay out the compensational awards and we are seeing public finance diverted from social expenditure into paying off foreign investors. We are also seeing that the domestic rule of law is being usurped.

The final good news is there is a big backlash occurring against these agreements. Whilst the US is insisting on investor state disputes including currently in the negotiations with China, the EU is negotiating Deep and Comprehensive Free Trade Agreements after the so-called Arab Spring. South Africa is now renegotiating agreements because its post-apartheid legislation was challenged and it had to settle on a mining company. India is rethinking because corrupt licenses that were struck down by the courts of India are subject now to investment disputes. Indonesia has the same problem with corrupt forestry contracts. Australia was being challenged on plain packaging of tobacco. And Germany is now being challenged on both a closure of a nuclear power plant and climate change mitigation measures. So the spotlight is now turning on what is one of the dirty little secrets of international law. One of my concerns and my final point is: I started with the geopolitical and the foreign policy objectives that underpin these agreements. The focus is on the problems with investment arbitration itself. We have to turn the spotlight further on to the strategic and foreign policy objectives that are using these agreements as tools to complement the other kinds of repressive actions of states that we have been discussing here.

Thank you.