Investor State Dispute Settlement (ISDS) has been and will remain a contentious issue in national and international fora. Does it give foreign corporations an unbridled right to ride rough shod on national governments and priorities? On the other hand, is it essential for the maintenance of the rule of law and minimum protection against arbitrary action? Does it foster foreign direct investment? Has it been undeniably harsh on developing economies? Are the damages claimed in these proceedings unjustifiable?
For those following these issues, white papers are not uncommon. A recent white paper on why ISDS should be abandoned in the Americas is an interesting read. Titled "Turning the Tide: How to Harness the Americas Partnership for Economic Prosperity to Deliver an ISDS-Free Americas". It argues for an exit from ISDS for countries in this region.
One interesting aspect that the paper covers is whether ISDS promotes FDI at all. While the jury is still out on this aspect, the paper claims:
Promised Boost in Foreign Direct Investment Never Materialized: In essence, ISDS essentially offers corporations a form of government-subsidized, cost-free political risk insurance to move their capital across borders, and it does so largely irrespective of the investors’ motives or the impacts of their investments. Many countries entered into these agreements under the assumption that such investment protections and privileges would promote foreign investment flows. However, decades of econometric studies have found no conclusive evidence that investment agreements, of which ISDS is typically a prominent feature, actually result in increased foreign direct investment in host countries.
Another study quoted in the paper looks at the impact of IIAs on FDI and has this rather discerning observation:
Given the widespread interest devoted to the effect of IIAs and the intuitively appealing notion that providing a measure of protection for foreign investors should reduce the riskiness of FDI and thus increase it, it is worthwhile to reflect on why the measured effect of IIAs is so negligibly small. One possibility is that the protection provided to investors by IIAs is in fact insufficient to alter their investment decisions. This could be because investors find the cost of arbitration under IIAs to be too costly (potentially in excess of $5 million); too risky (in that they have no better than a 50:50 chance of winning in arbitration); or that the arbitral awards are inadequate compensation for their losses (arbitrators often award amounts that are less than the plaintiff firms claim as losses). A second possibility could be the proliferation of IIAs. Over 3000 BITs have been signed and to these should be added the investor protection mechanisms embodied in the other types of treaties we have discussed in this paper. Thus, as the number of IIAs increases, their marginal effect on FDI should fall, perhaps rapidly. Early treaties were negotiated between host countries that saw themselves as potentially attractive hosts and those countries that were a major source of FDI. Successive treaties had to include host countries that were less attractive targets for FDI for reasons other than the risks they posed to foreign investors and potential investors’ home countries that were less important sources of FDI. There are also IIAs signed between pairs of countries that are both net importers of capital and FDI, and the effect of such IIAs is likely nil. Thus, the importance of choosing appropriate home and host countries and their IIAs for study is important for the results obtained.
Will we see a re-evaluation of ISDS in investment agreements or just the status quo? Is there a rethink or will there be a re-emergence of ISDS in a different form. Is state to state dispute settlement an alternative - a la WTO? What about the Brazilian model of investment agreement and co-operation that shuns ISDS?
Where will the tide turn ultimately?
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