The ‘BIT’ Conundrum By Nida Mahmood

The Bilateral Investment Treaties (BITs) are international agreements between states inter se that commonly provide for a framework in which investment from one state (home state) is to be received and managed within the other state (host state). They typically impose obligations on the host states to provide for the basic standards of treatment and investment protection as enunciated in customary international law, including the Most Favored Nation Treatment, National Treatment and the Fair and Equitable Standard of Treatment. In addition to the codification of the customary principles, the BITs contain provisions that are much more detailed and innovative, for instance, the provisions containing the definition of key terms such as ‘investment’, ‘investor’, ‘expropriation’ etc. They usually last for a period of about 20 years, covering an additional stated period after the expiry of the agreement and in any event are mostly terminable by notice by either Contracting party, at least one year in advance.

Bilateral Investment Treaties first came to be negotiated in the latter half of the 20th century between Germany and Pakistan and since then, BITs have emerged as a cornerstone of investment protection for foreign investors because they grant them the regulatory protection and safeguard against political risks in foreign lands. In the absence of a global investment treaty, BITs have emerged as the single most influential instruments of investment promotion and protection. This is because negotiations at a bilateral level have been much easier to achieve given the North-South divide on the content and scope of the key investment principles. States have generally been more willing to compromise under BITs keeping in view the fact that the BIT will eventually last for a certain number of years and not create a binding universal norm, the way a multilateral treaty would.

For the promotion of foreign investment therefore, Pakistan has also followed suit and has concluded 49 BITs with different states till date, including most recently with Turkey in 2012. However, whether the conclusion of such treaties has made Pakistan the foreign investment haven or not; and whether the obligations that Pakistan has undertaken under these treaties have been in the larger interest of this State or not, are a few very important questions that need to be considered by the concerned authorities.

A recent study conducted jointly by this author and Advocate Ahmad Ali Ghouri in collaboration with the Punjab Board of Investment and Trade (PBIT) (Deciphering Pakistan’s Investment Policy: A Review of Pakistani BITs © 2012) reflecting the foreign investment policy trends of Pakistan shows that Pakistan has been rather liberal in its approach vis a vis the BITs it has concluded and the rights and obligations it has agreed to under those treaties. For instance, unlike some other States such as Uruguay, Pakistan has not reserved its right to accept and promote foreign investment so far as it is consistent with health, safety, environment and other key policy objectives of the state in majority of its BITs.

Moreover, all Pakistani BITs adhere to the established standards of treatment of foreign investment, including the MFN and the National Treatment standards and allow for investor-state dispute resolution in foreign arbitral tribunals such as ICSID and UNCITRAL. Free Transfer of Funds and compensation in event of expropriation or other loss or damage from political risks, war and civil strife are also amply allocated for. The terms investment and investors continue to be defined broadly thus extending the potential of BIT protection to a plethora of transactions and limiting the regulatory freedom of the State of Pakistan.

In other words, such investor friendly treaties tend to be lopsided and may have an impact of causing reverse discrimination in the host economy whereby foreign investors are offered extensive protection and rights that are usually over and above that of domestic investors, giving them an edge over local investors. In addition to that, the liberal BITs which envisage foreign dispute resolution regime expose the state government and matters of public policy concerns such as health, safety and environment to be adjudicated in private external forums such as ICSID and is an expensive proposition for a developing country like Pakistan.

Nonetheless, the basis for such pro-investor and investor friendly terms appears to be the belief that a liberal BIT would attract and inject more investment in the economy and consequently add to the economic growth of the country. It is precisely on these grounds that most liberal BITs are often defended and justified. However, how true these assertions are for Pakistan and how much weight this dominant theory has in practice should be put to test before any more treaties are concluded on this pretext.

Brazil is one country that has successfully attracted FDI without the conclusion of the very many investor friendly BITs. China has developed its own alternative dispute resolution mechanism known as ‘guanxi’ and has not strictly adhered to the settled and so called acceptable norms of international investment law. A study conducted by Amanda Perry-Kessaris of SOAS University in London on ‘Finding and Facing Facts about Legal Systems and FDI in South Asia’, further tests the dominant theory in relation to Sri Lanka and shows the minimal role the legal system really plays in attracting FDI. Latin American states such as Bolivia and even some developed countries such as Australia and now revisiting and retreating from their stance on BITs in general and foreign dispute resolution in international arbitral forums in particular.

It is therefore clear that a BIT can only do so much to attract investment in a given economy. The real factors i.e. infrastructure, economy, competitive edge, conducive political and investment environment together with the access to the factors of production seem to be the more plausible concerns for any investor considering making an investment into an economy. Having said that, one may ask how prudent it is to continue to attract FDI through liberal and lop-sided BITs at the cost of national sovereignty?  And if not, then how can the balance be achieved to secure our national interests and maintain a level playing field between foreign and domestic investors in true sense of the term?

For starters, it is important to re-evaluate the obligations we have committed to and the ground realities that actually exist in our economy so that we agree only to what we can deliver and undertake no further obligation than that. Secondly, careful and expert understanding of the terms of the BITs during negotiation stage is very important so that the scope of application and implications of the terms put forward can be assessed beforehand. More focus should be placed on the definitions of important terms such as what constitutes investment or who is an investor for the purposes of the BIT. Efforts should be made to preserve the policy space and regulatory freedom of the state wherever possible, by inserting the appropriate caveats. However, the contentious issue of foreign dispute resolution should be reviewed with due care and not removed from the practice of BITs by Pakistan as it is the only real incentive for foreign investors in a BIT. However, efforts can be made to make the treaties substantively strong and balanced so that there is less room for foreign arbitral forums to reach lopsided, inconvenient, awkward and costly decisions such as in the Metalclad case or the Maffeizini case which led to further expansion and extension of the protection under BITs.

The writer holds an LL.B (Hons) and LLM (Law & Development) from the University of London. She is currently working as an international law consultant at Shafiq Sons Law Associates.