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Investment protection treaties endanger democratic reform and peace initiatives in Myanmar

October 17th, 2016  •  Author:   Transnational Institute  •  16 minute read
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In the volatile and fragile context of Myanmar’s nascent democratic reform, investment protection treaties must not be allowed to negatively affect processes that would make Myanmar more peaceful and democratic.

Following a reform process initiated by the previous military-backed government of President Thein Sein, there has been great interest among international governments and the business sector to promote foreign investment and trade with Myanmar. This momentum has been furthered by the subsequent endorsement by the country’s democracy leader Aung San Suu Kyi for the West to drop most of its economic sanctions. In order to facilitate this relationship, Western and Asian governments have pushed Myanmar to sign so-called “investment protection treaties”. While the Myanmar military government had signed investment protection treaties with China and India, since 2013 new treaties were signed with Japan and South Korea. Currently, now led by Aung San Suu Kyi’s National League for Democracy, the Myanmar government is negotiating an investment protection agreement (IPA) with the European Union (EU). There is also an investment protection clause in the Regional Comprehensive Economic Partnership (RCEP). This is a proposed Free Trade Agreement (FTA) between the ASEAN member states and Australia, China, India, Japan, South Korea and New Zealand.

While the benefits of signing investment protection agreements are highly overstated, the risks are seriously underestimated, and they could have major negative impacts on democratic development and sustainable peace in Myanmar. When signing these treaties, governments give away their sovereign right to regulate in the interest of the people and the environment, and they expose themselves to expensive lawsuits. The incentives offered to foreign investors come at a high price, depriving countries like Myanmar of the necessary policy space to harness investment to serve sustainable development and peace. Under the provisions of the investment protection agreements, foreign investors can challenge almost any government intervention if they consider that it will affect its current or future profits.

These interventions by foreign interests could, for example, include challenging new policies or laws introduced by the Myanmar government around more sustainable health or environmental approaches and priorities. They could also undermine agreements that come out of the country’s peace process: for instance, around natural resource management and sharing – or better regulations to make natural resource extraction more sustainable. If it signs up to these investment protection treaties, the Myanmar government may have to pay a heavy price to foreign companies or abandon policies and principles that it would like to promote in these vital situations of such importance to the country.

The investor-to-state dispute settlement (ISDS) clauses, which form a standard part of investment agreements, enable foreign investors to circumvent national courts and take a complaint straight to an ad hoc international tribunal consisting of three commercial investment lawyers, who will decide on whether government measures are legitimate or proportionate to their objective. These for-profit lawyers can, and do, award compensation that may run into many hundreds of millions, in some cases even billions, of dollars. These awards are enforceable and must be paid out of public budgets, reducing the funds that are available for public policies. Equally detrimental, the independence of lawyers is not guaranteed as they are paid commercial fees on a case-by-case basis in a one-sided system where only foreign investors can bring legal challenges and where there is thus an incentive to rule in their favour.

For these reasons, this week Myanmar civil society organisations (CSOs) are rallying all over the country against the RCEP and the proposed European Union-Myanmar IPA. The campaign by Myanmar CSOs is part of a campaign in most of the 16 RCEP countries. Neither details of the EU-Myanmar IPA negotiation dates, nor the negotiation text, are made public. As a result, Myanmar civil society groups have consistently raised serious concerns about the EU-Myanmar IPA and many of them refused to participate in the external EU Sustainability Impact Assessment on the basis that they can not say anything sensible as long as the negotiation texts have not been made public.

In a joint statement, the Myanmar CSOs point out:

“Myanmar is still in its very early stages of a democratization and peace building process, which will involve negotiations over ownership and revenue sharing of natural resources in the different ethnic areas. Many laws and policies still need to be revised. Signing an investment treaty like the one proposed by the EU would lock-in future policy space in Myanmar and severely endanger the prospects for democracy and sustainable peace. For Myanmar to take this course at this stage in its development appears not only inadvisable, it is also unnecessary.’’

There is a long history in such international investment law that Myanmar now has to face up to. Signing international investment treaties (IIAs), in the hope of attracting foreign investment, has been a central strategy for governments looking to improve economic development. IIAs have been around since 1959, when the first Bilateral Investment Treaty (BIT) between Germany and Pakistan was signed. By the end of 2015, there were 3,286 investment agreements (2,928 BITs and 358 “other IIAs”) globally. “Other IIAs” refer to economic agreements other than BITs that include investment-related provisions, such as investment chapters in EU Free Trade Agreements. The bulk of these investment protection treaties were signed during the 1990s and early 2000s when most governments believed that economic liberalism would bring development. The idea was that signing investment agreements would help countries attract foreign investment. At the time, there was no awareness of the risks involved and what governments were giving up in terms of sovereignty.

Today, more than 20 years later, the evidence that international investment agreements actually deliver on their stated purpose is at best inconclusive. Most research studies carried out by the academic community have failed to find a direct correlation between IIAs and attraction for Foreign Direct Investment (FDI). The experience of countries like South Africa, Ecuador, Hungary and Brazil show that increased foreign investment is not based on having IIAs. Even the European Trade Commissioner Cecilia Malmström recently admitted that most studies show no “direct and exclusive causal relationship” between international investment agreements and foreign direct investment.

Foreign investors, however, have already used the investment dispute settlement system to challenge environmental protections, energy policies, financial regulation, public health, land use and taxation measures.

The threat of claims can cause governments to reconsider or shelve public interest regulation. International Investment Agreements also have the effect of severely limiting a host government’s ability to design a national investment strategy that involves a tighter and dynamic regulatory framework for foreign investors. In particular, many IIAs prohibit or restrict the introduction of performance requirements for companies. The government cannot impose obligations for technology transfer or demand a percentage of domestic content. This means that the host government is unable to ensure that the supply of goods or services is provided by nationals or that the company employs a certain percentage of local employees in order to promote job creation. The government is also inhibited from introducing tax measures or demanding a minimum investment in research and development (R&D) activities. Such rules combine to severely limit government sovereignty to direct investment flows towards sectors that support national or state level development objectives.

The consequences of such IIAs could be especially damaging for Myanmar. At present, the country relies heavily on the exploitation and export of natural resources as a driver of economic development. Investors in the mining and extractives industry are among the most frequent users of the investor-state-dispute settlement (ISDS) system. Any future endeavours by Myanmar to reregulate its natural resources more effectively and equitably for its peoples could be challenged by foreign investors through the ISDS system. Such challenges could halt initiatives to ensure that the management of its extraction contributes to a sustainable peace or that Myanmar’s mineral commodities are not exported in raw form but that value is added domestically.

Some Exemplary Mining Cases

There are several mining cases where the decision of a government to deny or revoke a permit to mine due to environmental concerns has led to investment arbitration lawsuits.

Infinito Gold vs Costa Rica (gold): The government of Costa Rica revoked the license to exploit the open-pit gold mine due to concerns about the loss of tropical forest. There are allegations that the permit to mine was issued illegally. The Supreme Court of Costa Rica and 75% of the population who reject open-pit mining in the country backed the decision. Infinito demands USD 1 billion in compensation. The case is open.

Gabriel Resources vs Romania (gold/silver): Romania denied the environmental permit to settle the mine on the understanding that Gabriel Resources’ proposal to build Europe’s largest gold mine would destroy the ancient site of Roșia Montană (today a UNESCO World Heritage candidate) and cause severe environmental damage. A local 15-year-long campaign against the project had warned that the mining project would produce a massive pool of cyanide and would destroy priceless archaeological sites dating back to the Roman Empire. The company seems to want compensation for USD 4 billion. The case is open.

Pacific Rim vs El Salvador (gold): Canadian mining company Pacific Rim (now OceanaGold) sued the Salvadorian government after it denied the company the extraction permits needed to dig for gold. Pacific Rim failed to complete the feasibility study and the Environmental Impact Assessment (EIA) and did not obtain the environmental permit. These are minimum requirements to obtain an exploitation permit. Most Salvadorians, aware of the country’s clean water crisis (90% of its water is heavily contaminated), oppose mining. The company demands USD 315 million, which is equivalent to over 30% of the national education budget. The tribunal process has already cost the government of El Salvador over USD 12 million, a significant amount for a small, impoverished country.

Glamis Gold vs USA (gold): Canadian mining company Glamis (now part of Goldcorp) was planning an open-pit mining project in the USA in an area sacred to the Quenchan Indian Nation. The project drew strong local opposition due to concerns about the impact on the environment and on the rights of the indigenous people in the area. The government approved the project but, hoping to preserve the land and ameliorate the environmental damage, requested all new mining projects (including Glamis) to backfill all future open-pit mines. This measure was considered too costly for the company, which sued for “indirect expropriation” and claimed USD 50 million in compensation.

There is much international precedent in such warnings. Several mining companies, for example, lodged ISDS claims against Indonesia when it adopted a new mining law which required among other things mining companies to put in place downstream production: in other words, to refine and process minerals (for example by establishing a smelter) in the country prior to export in order to generate jobs and profits for Indonesia. The mining company Newmont used the Netherlands–Indonesia Investment Treaty to file a claim against the Indonesian government. Newmont only withdrew its case against Indonesia after it had reached an agreement with the Indonesian government, giving the mining company special exemptions from the new mining law.

This is a clear case of a regulatory chill, which is more and more used by investors to challenge proposed regulations. The impact can be immediate because of the risks to public budgets that may come under enormous financial pressures. The mere threat of a multi-million dollar international arbitration lawsuit can make governments reluctant to implement social or environmental protection measures that could affect the interests of foreign investors. For example, the government of New Zealand decided to postpone their plans to introduce stricter rules on cigarette packaging until they know the results of the investment arbitration lawsuit initiated by Philip Morris against the governments of Uruguay and Australia for their decision to change regulation on warnings in cigarette packaging.

The potential risks to governments do not end here. Often investors claim compensation not only for the actual investment made but for loss of future profits as well. In Myanmar’s case, this means that a definite cancellation of the Myitsone Dam could potentially cost the Myanmar government hundreds of millions to billions of dollars, which would have to be paid from the public budget. For the moment, the Chinese investor has not threatened to bring a case and has tried to solve the issue through diplomatic means, but this could well change in the case of a final cancellation. Germany, for example, faces a 4.6 billion Euros ISDS claim from the Swedish energy company Vattenfall after the parliament decided to phase out nuclear energy in response to the Fukoshima disaster. This by far extends the actual investments made by Vattenfall.

As concerns have risen over such practices, the argument that unregulated foreign direct investment will improve a country’s economic development has been widely discredited in recent years. Rather, it is recognised among communities in many countries dependent on natural resource production that the regulation of foreign investment in general, and the extractive industry in particular, is crucial in order to restrict the industry’s negative social and environmental impacts and to guarantee some positive contribution to economic development. Greater government influence in the extractive industries is the current trend among resource-rich countries. For example, African countries have developed a regulatory framework for mining, the “Africa Mining Vision” aimed at enhancing development by supporting the industrialisation of natural resources.

A growing number of countries are beginning to understand the financial, social and environmental costs of the system of investors’ protection — with countries as diverse as Australia, Bolivia, India, Indonesia and South Africa revising their investment treaty policies. They are dissatisfied with transnational investors challenging the legitimacy of their policy decisions and the threat to public budgets. Thus, since Myanmar is only opening up its economy recently, it can learn from experiences elsewhere in the world.

As Myanmar is opening up for business, the country is currently developing a very liberal investment law protecting the rights and property of foreign investors in the country, as well as giving very generous tax incentives. On top of this come the RCEP and the EU–Myanmar Investment Agreement, with EU actors interested in such diverse fields as Energy, Logistics, Infrastructure, Construction, Health and Agri-Food Sector. These will extend investors’ rights with even more countries, and they are a dangerous step that will prevent effective regulation of foreign investments in the interests of a durable peace. Worse still, unlike the existing Bilateral Investment Treaties that Myanmar has with for example China, India and Japan, it will be much harder for Myanmar to revise its investment policies in the future since regional trade agreements such as the RCEP have no expiry date.

Myanmar is a country in transition. For the first time in decades, a democratically elected government is in place. However, the national armed forces still play a significant role in the country’s political arena, and democratic reform has only just begun. The country has many outdated laws and policies that need to be reformed. At the same time, a peace process has started to finally seek a solution at the negotiating table to solve ethnic conflict in the country and end the 65-year old civil war. In this context, many new policies and laws need to be introduced. But in such a volatile and fragile landscape, it is essential that investment protection treaties do not have negative impacts on processes to make Myanmar more peaceful and democratic.

The threat of ISDS in numbers

  • Investor–state cases have mushroomed from a total of three known treaty cases in 1995 to 696 known investment treaty disputes today. A record number of disputes were filed in 2013 (66) and there were 70 new ISDS cases in 2015.
  • Developing and transition countries have been the hardest hit, with 489 known investment treaty disputes (70% of the total).
  • Investors have prevailed in 60% of investor–state cases where there has been a decision on the merits of the case. It is important to keep in mind that, since governments cannot initiate an ISDS lawsuit, the state never wins. The best scenario they can hope for is that the tribunal will dismiss the case and they will avoid having to pay compensation to the investor. Even so, they always incur millions in legal defence.
  • The financial cost of investment disputes is rising.
    1. Demands by investors: Between 2013 and 2014 there were 59 treaty disputes active where the investor was suing for at least US $1 billion—including ten with stakes of at least US $15 billion.
    2. Awards against states: In 2012, an investment tribunal issued the highest award in history against a government when it ordered Ecuador to pay US $2.3 billion to oil company Occidental.
    3. Legal costs: On average each side will pay US $4.5 million per case, but the cost can be much higher. In 2011, the Philippine government disclosed that it had spent (so far) US $58 million in costs related to lawsuits by the German company, Fraport.
  • The main financial beneficiaries have been large corporations and rich individuals: 94.5% of the known awards went to companies with at least US $1 billion in annual revenue or to individuals with net wealth of over US $100 million.

False solutions: The European Union replaces ISDS with an Investment Court System

In response to public outrage over the corporate privileges enshrined in ISDS, the European Union in November 2015 published a proposal for an Investment Court System (ICS). The EU plans to include this ICS in the EU-Myanmar IPA.

The European Commission claims that, with this proposal, they are preserving governments’ right to regulate and solving all the conflicts of interest of arbitrators. However, the proposed reforms leave intact the fundamental flaws in the investment protection regime. The principle of a one-sided system remains largely untouched, whereby only foreign investors can bring a claim. Equally limiting, cases are weighed on the basis of investment protections only without any reference to wider public interests underpinning regulatory interventions by the state or to corporate social and environmental responsibilities,

ICS is also a missed opportunity to counterbalance the extensive protections for foreign investors with corresponding actionable responsibilities in the fields of labour, environment, consumer affairs and other standards.

These concerns about ICS have been confirmed in a statement by over 100 professors of law from 24 European countries.

These commentaries are part of a TNI project funded by Sweden.

Original post.

Burmese version.