(This memorandum is a redacted version of a confidential research project)
This report discusses the costs and benefits of becoming a Member of the ICSID (International Centre for Settlement of Investment Disputes) in the context of Country X. In doing so, it identifies the status quo in Country X with respect to foreign direct investment (“FDI”), and charts out the effect of ratification on Country X's international obligations. Investor-State dispute resolution is the focal point of this analysis.
There are five parts in this report, with several intermediate conclusions and one final word of advice for Country X. In the end, we find it advisable for Country X to ratify the ICSID Convention.
After a short introduction, Part 2 lays down the debate's context by highlighting economic, political and legal aspects of Country X's FDI regime. It recognizes Country X as one of the fastest growing economies in the world, with consistently increasing amounts of incoming FDI flows. The report proceeds with the assumption that, for now, Country X is concerned with attracting FDI into the Country rather than protecting Country X's investment and investors abroad.
Part 3 reflects on Country X's ratification process, once it has signed the Convention. Ratification is fairly straightforward and simple; the only main significant change ratification would bring is in the way awards could be enforced against the Country. The fear of loss of regulatory autonomy seems exaggerated because the Convention does not grant substantive rights to investors.
Part 4 discusses the importance of “consent to arbitration” clauses in Country X's Bilateral Investment Treaties (“BITs”) and multilateral agreements. There are two main conclusions:
a) with or without the ICSID, investors have multiple avenues to sue Country X; and
b) ratification would not lead to a rise in cases against the Country.
Prior to ratification of the ICSID, Country X could add limitations on consent and thus exclude certain classes of cases from its jurisdiction, should investors select ICSID as the arbitration avenue. Further, Country X would be able to design a subdivision or entity that may act independently and conclude contracts with investors. Finally, this section finds that Most Favoured Nation (“MFN”) treatment that extends to dispute settlement proceedings is not very significant since it is found in only one of Country X's international instruments (at the moment), and, in any case, it does not seem to be more advantageous than the one provided by the ICSID.
Part 5 forms the core of the report: it conducts a cost-benefit analysis of ICSID Membership, and juxtaposes International Centre for Settlement of Investment Disputes (“the Centre / the ICSID”) against other possible arbitration avenues. This part discusses both touted benefits of the ICSID and possible costs. The former category includes advantages relating to ‘depoliticization’, ‘stabilization’ and ‘specialization’. Depoliticization refers to prohibitions against interference with arbitral proceedings through the use of "non-legal" methods. However, this report finds this benefit to be largely theoretical. Stabilization refers to increased FDI inflows due to an increase in investor confidence, built upon the deterrence effect: large compensatory amounts in case of misconduct would prevent States from acting unfairly. The evidence for this, however, is far from concrete, and the report finds that this benefit does not always hold true in practice.
Finally, the argument behind specialization is that the ICSID provides for a nuanced and specific mechanism for Investor-State Dispute Settlement (“ISDS”), and the report finds that some aspects, including support by the secretariat and enforcement mechanisms, indeed constitute an advantage to ICSID Membership. From the outset, while the assumption is that ICSID is perceived advantageous for investors due its enforcement mechanism, this report proceeds under the assumption that Country X is neutral in this respect, as it is difficult to assess in the abstract whether or not it is preferable to Country X as compared to other ISDS forums.
In terms of monetary costs, this report finds that the ICSID is cheaper (though often marginally so) than other arbitration avenues. It also finds that post-ratification, there could be several reasons (other than ICSID membership) that could explain a rise of cases against Country X. As explained in the report, the experience of Argentina and Venezuela are proof of this. This part concludes that although ratification of the ICSID would not be very costly for Country X, the Country should not expect any hard benefits (such as increased FDI inflows).
Finally, to confirm its findings, Part 6 looks at the ICSID experience of two "comparable" countries –Kenya and Bangladesh. Though neither Kenya nor Bangladesh –both Members of the ICSID– saw a surge in cases against them after ratification, there is no evidence to prove that ratification led to an increased FDI inflow either.
There also exist options other than the ICSID, which may become a reality in the near future. These include, for example, a multilateral investment court system. Getting involved in its negotiations would be a significant advantage for Country X since it would be a 'rule-maker' rather than an ICSID 'rule-taker'.
Thus, this report recommends that Country X ratifies the ICSID Convention so as to send a positive message to investors, while being aware that most of the Convention’s touted advantages are overstated or theoretical, all of which should be viewed with caution.
The public version of the report can be accessed here.