A recent piece in the CCSI blog on FDI and regulatory risk referenced a detailed World Bank Report of 2019 on FDI and political risk and policy responses to FDI retention and withdrawal. What are the factors that result in FDI being withdrawn? Why do disputes reach the stage of ISDS arbitral cases?
The report offers some explanations on why ISDS cases arise in the first place. Why can't they be settled at the governmental level?
Some results:
1. ISDS is often a last resort mechanism - when everything fails, it is taken up to seek compensation
2. 70% of ISDS claims are dealing with measures of sub-national or sectoral agencies instead of the national government
States are intricate and multilayered structures, comprising many internal factions and stakeholders. Given their broad scope of application, the norms and disciplines of IIAs may touch upon a plethora of policy matters that are handled by multiple governmental agencies operating at different jurisdictional levels, and even in multi-state contexts in countries with federal systems of government. Public agencies do not always have the same policy priorities, and not all agencies are aware of the existence of IIAs or prioritize compliance. However, IIAs operate under the premise that the state is a single entity—regardless of its internal administrative complexity—and is a subject under international law. Therefore, governments as whole are considered to be accountable for compliance with their international obligations.
3. Tertiary sectors have the highest claim of ISDS cases - not main manufacturing sectors
Examining the economic sectors where ISDS occurs most frequently shows that although ISDS has taken place in a wide range of areas, many of the disputes tend to arise in economic sectors characterized by high levels of state intervention. The sectors can be categorized into two baskets that are particularly prone to ISDS.17 The baskets are (i) natural resource industries such as extractives, agriculture, fishing, and forestry; and (ii) the tertiary sector, which many countries consider to be of “public interest” and is thus subject to close state supervision, or where public-private partnerships (PPPs) are typical, such as transport infrastructure and utilities (for example, water and electricity distribution).
4. Only a small proportion of actual FDI investment have used ISDS as a mechanism - 0.4% of total investments. The report has argued that ISDS is actually not very attractive to the investor - high costs, bot economic and political.
The empirical data already show that ISDS proceedings are neither cheap nor fast, and in the majority of the cases, arbitration tribunals tend not to support the arguments or amounts for compensation sought by foreign investors (Echandi 2019). These factors may explain to a great extent why so few ISDS cases are brought against developing countries relative to the potential number of episodes.
The report suggests that ISDS may not be the ideal mechanism to rsolve disputes. Othe rgrievance redressal mechansms within the State should ensire that the dispute doesnt reach the ISDS stage.
Fifth, host governments should do more when it comes to offering investors domestic tools to mitigate political risk. There is a sharp contrast between the investors’ preference to engage with host governments and their high degree of dissatisfaction with such engagement in practice. Thus, there is a need for governments to establish new or more efficient ways to respond to investors’ grievances. This would avoid the translation of frustration among investors into the high rate of FDI withdrawals and expansion of cancellations as unveiled by this study.
Some alternative models of state-investor consultation is important to resolve frustration and grievances of foreign investors. The Brazilian model of investment facilitation and resolution of disputes perhaps?
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