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The myth of investment treaties

June 11, 2012

PAKISTAN’S obsession with bilateral investment treaties remains unabated.

The latest addition to the list is Canada with which Pakistan has formally initiated negotiations in Ottawa on a draft of BIT which Canadians call Foreign Investment Promotion and Protection Agreement. The treaty is expected to be inked by the end of the current year.

But as had happened in the case of the US BIT, the ministry of commerce has immediately opposed the proposed BIT with Canada or FIPA on grounds that the draft includes a controversial clause which gives extraordinary protection to Canadian companies. The ministry’s stance is that no treaty should be signed with Canada in haste as the Board of Investment (BoI) chairman Salim Mandviwala had done in initialing the US treaty draft in March.

The current practice adopted since 2004 is that negotiations for all investment treaties are conducted by the BOI but equally on board are the ministry of foreign affairs and the commerce ministry which must clear the draft before it is inked.

On May 23, the Board of Investment (BoI) signed a Bilateral Investment Treaty (BIT) with Turkey in Islamabad but no details were made public. It appears to be an instance of misreporting by a Lahore daily for no formal negotiations had taken place in the recent past to reach this stage. Then, Pakistan and Turkey had already signed a BIT on March 16, 1995 for a period of ten years. This BIT can be extended for further period by the contracting parties.

On November 15, 2011, the German parliament was reported to have ratified the Bilateral Investment Treaty (BIT) signed by Germany and Pakistan in 2009 and has now been sent to the European Commission for its final approval. This appears to be an updated version of the BIT the two countries had signed in 1959.

Another BIT that may pose financial problems for the country in the near future is the BIT signed with Australia. Canadian mission in Pakistan has said that it is going to invoke the BIT for having been violated by Pakistan government by rejecting the Tethyan Copper Company’s application for grant of mining lease licence in Reko Diq, Balochistan.

So far, Pakistan has signed nearly 50 treaties but all of them have failed to affect any significant rise in foreign investment. The illusion the most developing countries including Pakistan suffer from is that such treaties, once signed, would open the floodgates of investments into the countries. The hard fact is that investments do not come because of a BIT. Brazil has signed no BIT with any developed country but it remains the leading recipient of FDI in Latin America. Major determinants of investment flow are macro-economic factors, political stability and having a large and growing GDP.

Regarding the Canada FIPA, a Pakistani mission led by Chairman BoI Saleem Mandviwala was recently in that country to hold negotiations on the BIT and ways to promote trade and joint ventures.

Canada has FIPAs with 27 countries and is currently in negotiations with 10 others. Its model or template FIPA, according to its website, provides investors with a high-level of substantive protection. It incorporates key principles including fair and equitable treatment, non-discrimination, compensation for expropriation, unrestricted transfer of funds, transparency in measures affecting investment, and dispute settlement.

On February 8, 2012, Canada and China signed a declaration of intent which means the negotiations between them on a bilateral investment treaty have now come to a close which took almost two decades. Now the two countries will conduct a legal review or ‘scrub’ of the negotiated language of the English, French and Mandarin versions. Upon completing the legal review, the FIPA will come into force after completing a few formalities.

China is currently a signatory to over 100 BITs. It has historically negotiated significant limitations on the non-discrimination and dispute resolution provisions of its BITs but is taking effective steps to enable its BITs meet global standards. This shift is especially apparent in recent Chinese national treatment provisions. Despite these advances, Chinese dispute resolution provisions generally remain different from those in the Canadian model FIPA.

Meanwhile, trade circles are of the view that the bilateral investment treaty initialled with the US and likely to be formally signed soon (It was to be inked by President Zardari and some key US official after Chicago summit but the event was dropped in the wake of further deterioration in bilateral relations) will be of little benefit if not followed by a Free Trade Agreement (FTA) between Pakistan and the US.

Originally, Pakistan was seeking an FTA with the US but the latter insisted on conclusion of a BIT as a first step.

Dispelling the impression that Pakistan has emerged a loser after signing the US BIT draft in haste, Saleem Mandviwala has come out in defence of what he did. He says that the country has, while finalising draft of the treaty, “gained much and lost nothing” and the agreement would be a success for both the countries. Earlier, he had avoided to go into details of the agreed draft saying the matter was ‘sensitive’.

Giving some details, he recently said that, there was deadlock on key provisions of the proposed BIT like transparency, arbitration and sharing information in advance on changes in economic policies. But later the United States agreed to all the demands of Pakistan including taking disputes to local courts first before going for arbitration.

However, the basic objectives of a BIT, as outlined by the USTR on its website, are to protect American investment in countries where investors’ rights are not protected through existing agreements.

The fact remains that the BITs are mostly drafted by the developed countries with a view to protect their investors and they do not take into account obligations to protect the environment, labour rights, social provisions or natural resources.

According to UNCTAD’s World Investment Report 2010, international investment agreements are undergoing a ‘systemic evolution’, in reaction to the growing number of investor-state arbitrations and divergent interpretations of investment provisions by arbitral tribunals. This includes the process of reviewing model BITs — an exercise that Russia, France, Colombia, Mexico, Austria and Germany have undertaken in the last decade — to terminating certain treaties altogether, a move taken by Ecuador in 2008.