Rethinking foreign investment frameworks

Ben D. Kritz

Ben D. Kritz

Earlier this year, the government of Indonesia created a stir when it “mentioned” that it intended to terminate all of its bilateral investment treaties (BITs)—a total of 67 of them—with other countries.

The mention was made when Indonesia informed the government of the Netherlands that it would cancel its BIT with that country in July of next year, when the current agreement expires. Although the proposed move to terminate all its existing BITs is not really a formal policy of the Indonesian government—at least not yet—no one in Jakarta is denying that it is being seriously considered, nor are they being particularly circumspect about the reason for it: A high-profile arbitration case pitting a consortium of British and Australian mining firms against the Indonesian government at the International Centre for Settlement of Investment Disputes (ICSID), in which Indonesia stands to lose about $1 billion.

The lack of enthusiasm for the international dispute resolution framework is not unique to Indonesia; in 2011, Australia issued a controversial trade statement that said it would no longer agree to investor-state dispute settlement procedures in its BITs. The Australian government (which was replaced in 2013) has since backed down somewhat from a hard-line stance, but is subjecting the concept to a great deal of skeptical scrutiny in ongoing investment and trade negotiations.

And naturally, the anti-internationalization perspective has gained a great deal of traction here in the Philippines, which currently has 31 active BITs, and for the same reason countries like Indonesia have decided to take a hard look at the issue. The Philippine government seems almost certain to lose not one but two big arbitration cases—one involving German firm Fraport in the NAIA Terminal 3 controversy, and one involving Belgian firm Baagerwerken Decloedt en Zoon N.V. (BDZ) over President B.S. Aquino 3rd’s arbitrary cancellation of the Laguna Lake Reclamation Project in 2010—sometime in the near future. The two claims combined total nearly P25 billion ($425 million in the Fraport case, and about $135 million in the Laguna Lake dispute), not counting the undisclosed tens or even hundreds of millions of pesos in legal and administrative costs the government has incurred in defending itself.

Investor-state dispute settlement actually does favor investors, but it has to, and the sort of capriciousness on the part of the state that led to the Fraport and BDZ cases is exactly the reason why. From the point of view of the destination country, however, subjecting itself to international arbitration is increasingly being perceived as giving up at least a part of its regulatory sovereignty, and being obliged to treat foreign and domestic investors differently. Whereas investors make judgments as to the necessity or desirability of dispute resolution protocols based on the institutional soundness of the destination country—the clarity and relevance of laws and regulations, and the reliability of contract enforcement and other judicial proceedings—states make judgments based on economic need. Countries like Indonesia, and certainly Australia, who perceive that their own economic strength makes attracting foreign investment less critical, are more inclined to shy away from internationalizing dispute resolution.

At this point, following Indonesia’s lead would be suicidal for the Philippines. Although perceptions of the country’s investment environment have improved somewhat in recent years—although whether those perceptions are at all based on actual reality or simply casual acceptance of the Aquino government’s constant self-promotion is certainly debatable—they have not improved nearly enough to give would-be investors a great deal of confidence. That is something the country’s consistent lag in foreign direct investment intake tends to confirm.

By the same token, there is clearly room for improvement in the current investor-state dispute resolution framework. For one thing, the process is glacially slow; the Fraport case is now entering its twelfth year. And for a process referred to as “arbitration,” it is too flexible and subject to too much reconsideration and reinterpretation, which only adds to the uncertainty and lack of confidence in the process on the part of both states and investors. Nevertheless, “needs improvement” is not a good reason to reject the entire framework, and the country’s policymakers and opinion shapers would be wise to perish the thought, especially now when the Philippines is on the threshold of Asean integration, and looking at greater opportunities for trade and investment over the long term.


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1 Comment

  1. Well put. A speedier resolution to disputes would help allay the perception that “justice delayed is justice denied.” Whether the Philippine government would be in favor of this is another matter. But the Fraport and BDZ cases have done inestimable damage, which will not be quickly erased, to the Philippines’ reputation as a good place to do business.