Disputing foreign direct investmentNepal’s investment strategy should be designed from a legal, not just policy, perspective.
In 2001, a Swiss corporation sued Pakistan in an arbitrational tribunal. Initially hired to provide pre-shipment inspection services for Pakistan’s exports, the Swiss corporation claimed that by cancelling their contract, Pakistan breached its Bilateral Investment Treaty (BIT) with Switzerland. Thus began the arbitration case known as SGS v. Pakistan at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). From Pakistan’s viewpoint, this course of action came as a bit of a surprise. This was the first time that it had faced such a legal proceeding. The then-attorney general of Pakistan searched ‘ICSID’ and ‘BIT’ on Google to even comprehend what was happening.
This anecdote is no criticism of a particular country but a paradigmatic example of how developing countries have approached foreign investment and trade. Many leaders and policymakers see economic development, including foreign investment and trade, as high-level policy decisions and diplomatic formalities while ignoring the tangible and binding legal effects they could have in the governance of their own countries. One such legal effect of investment policy is investor-state dispute settlement.
International investment agreements and codes are critical instruments to attract and retain foreign direct investment (FDI). They often also contain arbitration clauses that allow investors to sue host countries. Worldwide, there are 3,300 international investment agreements, both bilateral and multilateral. Although Nepal has lagged behind in attracting FDI, today’s Nepal seems keen on catching up. The government is targeting a 10-percentage-point increase in investment rates by 2021, and a graduation to middle-income country status by 2030. The Investment Summit earlier this year unveiled projects worth $24 billion, and a similar Tourism Investment Summit is on the horizon, scheduled for 2020. Nepal has introduced some domestic law reforms meant to create an investment-friendly environment and signed BITs with countries like India, Mauritius, and Germany. At this critical juncture, we should learn from the experience of other developing countries and recognise that investment instruments are not just policy frameworks, but can be binding and legally-enforceable commitments at the international level.
This is an important lens for Nepal due to several reasons. First, it is theoretically likely that Nepal could be subject to arbitration proceedings in the coming years. Earlier this year, Axiata UK (through investment in Ncell) filed a request for arbitration against the government of Nepal, based on the UK-Nepal Bilateral Investment Treaty signed in 1993. If Nepal is indeed serious about attracting and retaining FDI, the government should simultaneously build its legal dispute resolution capacity. Second, Nepal’s administrative and legal bodies can be slow, ambiguous and unpredictable. Such conditions are fertile grounds for disputes to arise with foreign investors.
For example, in 1990, Mexico contracted with a foreign company to build a landfill, and the federal government had given some form of assurance about the proposed investment to the foreign investor. Shortly after, there was widespread local opposition to the landfill, and the municipal government denied the investor the final permit needed to continue construction, stating that the targeted area was ecologically sensitive. By 1994, construction had come to a complete halt and the investor brought an arbitration proceeding against Mexico. The tribunal found Mexico liable. It is not a stretch of the imagination to picture a similar scenario in Nepal. This is important in the context of Nepal because such disputes can influence domestic resources and decisions about tax, regulations, human rights, environment and other governance issues.
The future of international investment and trade dispute regimes are uncertain. With the rise of Chinese investments and numerous other states calling for reform in investor-state dispute resolution, there may be changes in the practicalities of the legal investment and trade regime. But it is especially important in uncertain times to make smart moves. Nepal’s leadership should learn from the investment and trade experiences of other developing countries: A smart path to development includes legal capability, foresight, and flexibility.
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