Investor-State Dispute Prevention Strategies Selected Case Studies

June 2013

Investor-State Dispute Prevention Strategies Selected Case Studies

DISCLAIMER

This document is made possible by the support of the American people through the United States Agency for International

Development (USAID). Its contents are the sole responsibility of the author or authors and do not necessarily reflect the

views of USAID or the United States government.

Acknowledgements This report was prepared for the Asia-Pacific Economic Cooperation (APEC) Investment Experts’ Group as part of the APEC Technical Assistance and Training Facility (TATF) program. The author of this report, Silvia Constain, would like to acknowledge the valuable input provided by officials from Chile, Colombia, Costa Rica, Mexico and Peru, and information made available by Canada and the United States.

APEC TATF is managed by USAID, with funding and strategic direction provided by the U.S. State Department Bureau of East Asian and Pacific Affairs, Office of Economic Policy. For further information, please contact Ms. Victoria Waite, Chief of Party, vwaite@nathaninc.com.

This publication was produced by Nathan Associates Inc. for review by the United States Agency for International Development.

Contents Abbreviations v

Executive Summary vii

1. Introduction 1

2. Context of International Investment Disputes 3

3. Case Studies 9

Chile 9

Colombia 13

Costa Rica 20

Mexico 23

Peru 31

4. Conclusion 35

References 39

I V

Illustrations

Figures Figure 2-1. Foreign Direct Investment, Net 3 Figure 2-2. Foreign Direct Investment, Net Inflows (% of GDP) 4 Figure 2-3. IIAs Signed 1980–2011 5 Figure 2-4. Number of Renegotiated BITs, Annual and Cumulative (1998–2011) 6 Figure 2-5. Basis of Consent Invoked to Establish ICSID Jurisdiction in

Registered ICSID Cases 6 Figure 2-6. Known Investor-State Treaty-based Disputes, 1987-2011 7 Figure 2-7. Geographic and Sector Distribution of ICSID Cases 8 Figure 3-1. Foreign Investment in Chile by Sector and Total 10 Figure 3-2. IIAs Signed by Chile 11 Figure 3-3. Foreign Investment in Colombia 13 Figure 3-4. Investor-State Dispute Management System in Colombia 16 Figure 3-5. Foreign Direct Investment in Costa Rica 20 Figure 3-6. IIAs Signed by Costa Rica 20 Figure 3-7. Timeline of ICSID Cases in which Costa Rica is a Respondent 21 Figure 3-8. Foreign Investment in Mexico 23 Figure 3-9. IIAs Signed by Mexico 24 Figure 3-10. Timeline of ICSID Cases in which Mexico is a Respondent 28 Figure 3-11. Foreign Investment in Peru 31 Figure 3-12. Timeline of ICSID–UNCITRAL Cases in which Peru is a Respondent 32 Figure 3-13. Peru’s Investor-State Dispute Management System 33

Exhibits Exhibit 3-1. New Language in Chile’s Agreements with Individual Investors 12 Exhibit 3-2. Outline of “Know Colombia’s Investment Commitments and

Obligations” 17 Exhibit 3-3. Outline of “Prevention and Management of Investor-State Disputes

under IIAs” 18 Exhibit 3-4. NAFTA Free Trade Commission Clarifications Related to

NAFTA Chapter 11, July 31, 2001 25 Exhibit 3-5. Outline: Mexico’s Guide to IIA Commitments 30

Abbreviations AMPPI Agreement for the Mutual Promotion and Protection of Investments APEC Asia-Pacific Economic Cooperation ASEAN Association of Southeast Asian Nations BIT bilateral investment treaty FDI foreign direct investment FTA free trade agreement HLGB High Level Government Body (Colombia) ICSID International Centre for Settlement of Investment Disputes IIA International Investment Agreement IPA investment promotion agencies IPPA Investment Promotion and Protection Agreement ISDS investor-state dispute settlement MFN most-favored nation NAFTA North American Free Trade Agreement OAS Organization of American States RTA regional trading agreement UNCITRAL United Nations Commission on International Trade Law UNCTAD United Nations Conference on Trade and Development

Executive Summary Investment, both foreign and domestic, contributes to economic growth, prosperity, and development. As part of their strategy to stimulate growth and employment following the global economic downturn, governments continue to design and implement policies to promote new investment. International investment agreements (IIAs) have been an instrument for investment promotion since the first bilateral investment treaties (BITs) were signed in the late 1950s.

As transnational investment has increased, so too have the number of IIAs and the number of disputes between investors and host states, and the use of international arbitration to resolve them. As the number of treaties and the amount of international investment increases, governments are more likely to face situations in which IIA investor-state dispute settlement (ISDS) mechanisms are invoked.

Preventing investor-state disputes from arising, or from escalating to the point of formal dispute settlement proceedings, is in the interest of both investors and the states that host them. An investor’s primary occupation is to conduct its business, and a government’s is to encourage and support growth- and job-creating investment; neither party has an interest in engaging in disputes. Where such disputes lead to formal proceedings, they can be costly, lengthy, and their outcomes unpredictable. Reputational risk can be suffered by the state and investor both, and disputes can unnecessarily sever otherwise mutually beneficial relationships.

In light of these facts, several governments have designed and implemented policies and practices to prevent and better manage such disputes. These policies may be formal laws or regulations, or more ad hoc measures, including early detection systems, training for government officials, design of institutional frameworks for optimal dispute prevention and management, and monitoring systems.

The case studies in this handbook provide a broad overview of different policies and programs implemented by governments as transnational investment, the number of IIAs, and the volume of ISDS cases all increase. Some governments have created an institutional framework that can better detect potential investment controversies, including by creating central investment contact points and lead agencies or commissions to prevent and manage investment disputes. In some states, the institution negotiating IIAs is also in charge of preventing and managing disputes and in others the agencies are separate.

Several governments have clarified the roles of other agencies and government officials in preventing international investment disputes. While the need to communicate international commitments has traditionally been a concern for governments, the increase in investor-state disputes, and ISDS cases in particular, suggests there may be benefit to IIA-specific training and communication strategies at all levels and branches of government.

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Agencies in charge of ISDS prevention publicize commitments among government officials through seminars or workshops, or through web-based materials on obligations taken on by a government in IIAs. Several governments have published pamphlets, handbooks, or presentations on IIA commitments and their relevance to public policy and decision-making, as well as promoted articles in specialized outlets (i.e., Mexico).

To spot difficulties that could lead to investment disputes and allow for timely correction, governments are mapping and monitoring possible obstacles. They are also promoting an improved environment for IIAs in general by including more precise language and more specific exceptions in agreements to better reflect policy. The impact of such measures is difficult to assess, but greater awareness and knowledge of IIA commitments at all levels of government contributes to a better understanding by officials of IIA obligations as they adopt measures and policies that may affect investors.

International investment agreements provide investors with increased security as they undertake new ventures, which can encourage investment and thereby contribute to host state economic activity and development, and promote predictable investment environments in host states. The IIA web will continue to expand with new bilateral investment agreements and free trade agreements with investment protection provisions, and states are likely to adopt new measures to prevent and better manage controversies and disputes with investors, and to avoid ISDS where possible. Having a strong and predictable ISDS management framework strengthens a government’s capacity to provide a more effective response to investment disputes, and may even serve as a deterrent to claims as investors assess the option of international investment arbitration.

1. Introduction As investment disputes and international investment agreements (IIAs) proliferate, it is increasingly important that governments communicate the obligations contained in these agreements, better manage relationships with investors, and establish mechanisms to identify and resolve disputes at an early stage.

Facilitating trade and investment is a cornerstone of APEC’s work. This handbook supports the recommendation in the Investment Facilitation Action Plan that economies put in place measures “to ensure effective compliance with commitments under international investment agreements.” It is intended to serve as a reference tool for policymakers on options to prevent investor-state disputes based on a review of efforts undertaken and policies implemented by the governments of Chile, Colombia, Costa Rica, Mexico, and Peru. It identifies formal as well as ad hoc policies and practices that contribute to a better understanding of IIA commitments within governments, and to the unnecessary escalation of investment disputes. Some measures or actions implemented for purposes other than or in addition to preventing international investment arbitration also contribute to reducing the likelihood of disputes.

Section 2 describes the context of international investment disputes in which these polices arise and are implemented. Section 3 presents case studies of the experiences of five economies, and the Section 4 concludes with a summary of measures and lessons learned.

2. Context of International Investment Disputes Foreign investment brings with it value added, jobs, technology, managerial know-how, integration into global supply chains, taxes, exports and investment in capital formation, among others. Because of the perceived and demonstrable benefits of foreign direct investment (FDI), and the contribution of investment in general to development and growth, most governments adopt policies to promote investment, both foreign and domestic, in their economies. Global FDI flows slowed with the financial crisis, although they seem to be slowly recovering since 2009 (Figure 2-1).

Figure 2-1 Foreign Direct Investment, Net (US$ at current prices and current exchange rates in millions)

Source: UNCTAD, UNCTADSTAT (http://unctadstat.unctad.org/TableViewer/tableView.aspx?Reportid=88)

The five economies studied in this report have all taken big steps to promote foreign investment, and the percentage of FDI to GDP in those economies has increased significantly since the early 1990s (see Figure 2-2).

Figure 2-2 Foreign Direct Investment, Net Inflows (% of GDP)

SOURCE: World Bank. Available at http://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS/countries?display=default

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011

LAC (all income levels) Chile Colombia Costa Rica Mexico Peru

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International investment agreements (IIAs) promote FDI in many states. They include bilateral investment treaties (BITs), regional agreements, free trade agreements (FTAs), economic cooperation agreements, and other international agreements with investment chapters. While some IIAs provide protection for investments once they are established in the host state, others provide access and protection commitments. Most IIAs include consent to investor-state arbitration in the event of disputes.

BITs make up the bulk of IIAs (2,833) although non-BIT IIAs (331) (UNCTAD 2012b) have increased over the past two decades. Non-BIT agreements are increasingly popular because they go beyond investment and are not limited to two-state relationships.

The evolution in international investment treaty making has resulted in an ever-growing labyrinth of investment treaties, with BITs negotiated in different decades, ever-changing models and negotiating outcomes, and new-generation more comprehensive agreements with investment provisions (Figure 2-3). Therefore, governments are faced with an array of IIAs with varying provisions and coverage.

Figure 2-3 IIAs Signed 1980–2011

SOURCE: UNCTAD.

The web of IIAs is dynamic and continues to grow. Governments negotiate new agreements—BITs and other IIAs—and renegotiate existing agreements to reflect new negotiating positions and objectives (see Figure 2-4). This at times may create parallel agreements with obligations that are different depending on type, partner, and time of negotiation (e.g., when parties decide that old agreements are not terminated with the development of new ones or negotiate a regional agreement while keeping in force a BIT previously signed with that partner). This situation requires host economies to make a special effort to ensure coherence between domestic legislation and measures and the commitments made in IIAs.

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Figure 2-4 Number of Renegotiated BITs, Annual and Cumulative (1998–2011)

SOURCE: UNCTAD.

The increase in investment flows and in investment agreements is the backdrop to an upsurge in investors’ use of international arbitration provisions imbedded in IIAs and, in some cases, in individual agreements signed by some states with individual investors or in their domestic legislation. The International Centre for Settlement of Investment Disputes (ICSID) reports that consent to establish ICSID jurisdiction in cases under the ICSID Convention and Additional Facility (AF) Rules has a basis in three forms: an investment contract between an investor and the host-state (20 percent of cases), the investment law of the host-state (6 percent), or an international investment agreement (74 percent) (ICSID 2013, 10) (see Figure 2-5).

Figure 2-5 Basis of Consent Invoked to Establish ICSID Jurisdiction in Registered ICSID Cases

The first case registered before ICSID was in 1974. For the next 20 years, investor-state dispute settlement (ISDS) was rare. This changed in the mid-1990s. Between 1987 and 1999 the average number of known ISDS cases per year was five, between 2000 and 2011 the yearly

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average was 34. The total number of cases is likely to be even higher because not all arbitration institutions publish the ISDS cases in which they are involved.

Most of the 279 ISDS treaty-based cases are registered under the ICSID Convention and AF Rules, while 126 follow UNCITRAL rules, which are sometimes administered by ICSID (UNCTAD 2012a). While ICSID administers the bulk of all known cases, other arbitration institutions or venues have also been used. These include the Stockholm Chamber of Commerce, the International Chamber of Commerce, the Cairo Regional Centre for International Commercial Arbitration, or the London Court of International Arbitration.

Figure 2-6 Known Investor-State Treaty-based Disputes, 1987-2011

SOURCE: UNCTAD.

At least 89 economies have been respondents in investor-state arbitration, most of them developing economies (55), although claims have also been filed against developed economies (18) and economies in transition (19) (UNCTAD 2012a). A review of geographic and sector distribution of past ISDS cases suggests that there are certain regions and sectors where investor-state arbitration is more prevalent (Figure 2-7).

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Figure 2-7 Geographic and Sector Distribution of ICSID Cases

The rise in ISDS cases has generated interest in some governments to identify and implement policies and practices that can diminish the incidence of investor-state disputes generally, and exposure to ISDS in particular. The following section explores what five economies have done in this regard.

3. Case Studies This section describes the experience of Chile, Colombia, Costa Rica, Mexico, and Peru with ISDS prevention. Each economy presents different situations: Colombia has never had an ISDS case; Costa Rica, Mexico, and Peru are all facing investor claims at different stages; and Chile´s last outstanding case recently concluded. But all have made efforts to prevent and better manage investor-state arbitration.

CHILE Foreign investment in Chile has grown considerably and is an important engine of its economy. Chile reached a record level of FDI in 2012, although over a quarter of all FDI since 1974 has gone to a single sector, mining (27.9 percent), followed by the electricity, gas and water supply sector (15.1 percent) (Figure 3-1). Chile has also signed 49 BITs, of which 36 are in force, as well as a number of free trade and economic association agreements (Figure 3-2).

Chile has been a respondent in three arbitration cases (see table below), which have lasted between 5 and 14 years (although the duration of ARB/98/2 is not the norm). Chile´s one active case concluded in December 2012.

Case No. Claimant Status

Date Registered

Final Decision Subject Matter

ARB/04/7 Sociedad Anónima Eduardo Vieira Concluded 27-Feb-04 10-Dec-10 Fisheries company

ARB/01/7 MTD Equity Sdn. Bhd. and MTD Chile S.A.

Concluded 6-Aug-01 21-Mar-07 Construction of residential and commercial complex

ARB/98/2 Víctor Pey Casado and President Allende Foundation

Concluded 20-Apr-98 18-Dec-12 Publishing enterprise

The Committee on Foreign Investments in Chile manages investor-state disputes and coordinates agencies involved in a dispute. (The coordination function was briefly transferred to the Ministry of Economy, but then returned to the committee several years ago.) Outside counsel is hired to support the government in its defense in ISDS cases.

Chile’s approach to ISDS prevention is ad hoc, although committee officials have made presentations on a regional level on the committee and its role, including aspects of IIA provisions and protections and Chile’s international responsibility. Sector-specific ministries and ProChile promote projects of their interest to domestic and foreign investors and the committee may promote sectors in a generic fashion.

Figure 3-1 Foreign Investment in Chile by Sector and Total

Figure 3-2 IIAs Signed by Chile

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While Chile does not have a formal investor-state dispute prevention program or mechanism, it does take steps to make its investment climate and foreign investment framework more transparent and accountable and thereby reduce the likelihood of disputes. In general, investors report that concerns or problems are handled directly by a sector agency and usually resolved at that level. When investors reach out to Chile’s embassy in the home state of the investment, the concern is always channeled back to the Committee of Foreign Investments. The committee reports that investor requests for assistance with disputes are very rare.

Chile’s strong and predictable legal environment also seems to provide investors with an alternative to ISDS. For example, an investor from one of Chile’s BIT partners discussed a dispute with the Committee on Foreign Investment. Although the discussion did not result in an agreement, the investor (who has a number of other investments in Chile) chose to take the case before the local courts instead of pursuing the ISDS option.

Like other economies, Chile has also taken steps to refine its IIA negotiating practices and the text of the legal instruments it signs to both ensure a balance between investment protection and the right to regulate, and to better guide investors’ expectations.

To avoid unintended interpretations of or ambiguity in investment contracts, Chile has introduced new language into agreements with individual investors, making clear that an approval from the Committee on Foreign Investment to transfer capital into Chile does not obviate the need to secure project-specific approvals and permits as required under applicable laws and regulations. See Exhibit 3-1.

Exhibit 3-1 New Language in Chile’s Agreements with Individual Investors

Foreign Investment Contract between the State of Chile and _______

FOURTH: Foreign investor __________ and the State of Chile establish that the authorization referred to

in the present instrument does not in any way constitute an authorization for the initiation or execution of

the economic activity that the investor intends to undertake in the country. Based on the aforementioned,

the foreign investor declares that all national legislation and regulations in force and all national and/or

sector policies are applicable during the beginning and execution of the economic activity, and expressly

recognizes that the authorization contained in the present contract is without prejudice to any others that,

in conformity with such legislation and regulations, are required by competent authorities.

FIFTH: Hereby, the foreign investor declares to have knowledge of and integrally respect the national

legislation and national and/or sector policies that may be applicable in the development of his/her

activities. For its part, the State of Chile declares that the authorization to transfer capitals referred to in

the present Contract and the rights that may be established for the Foreign Investor in Decree Law 600 do

not in any way prejudge the origin of the funds or the current or future legal, economic or technical viability

of the economic activities that the Foreign Investor will try to develop in Chile, a situation which the

Foreign Investor declares to know and accept.

Note: Informal translation..

To separate regulatory and investment promotion functions and better manage investors’ expectations, the committee no longer promotes foreign investment projects. It can undertake

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generic promotion and has projects of interest for sector ministries listed on its website but does not get involved in project-specific investment promotion.

COLOMBIA Colombia has promoted foreign investment in its economy for several decades. PROEXPORT is in charge of trade and investment promotion, and the promotion of foreign investment has been mentioned in every national development plan since the late 1990s. Foreign investment flows have increased significantly over the past two decades, although 45 percent is concentrated in two sectors: oil (25 percent) and mining and quarrying (20 percent). Nineteen percent of FDI into Colombia goes to the manufacturing sector.

Figure 3-3 Foreign Investment in Colombia

While Colombia started IIA negotiations in the 1990s, a Constitutional Court ruling regarding a provision in Colombia’s Constitution allowing for expropriation without compensation led to a de-facto moratorium until a constitutional amendment was approved. Since then, Colombia has negotiated a number of IIAs and has 10 in force with 12 countries (see table below).

Agreement Entry into Force

Free trade agreement with the United States (Chapter 10) 2012

Bilateral investment treaty with China 2012

Bilateral investment treaty with India 2012

Free trade agreement with Canada (Chapter 8) 2011

North Triangle (Guatemala, El Salvador y Honduras) FTA (Chapter 12) 2010

Free trade agreement with Chile (Chapter 9) 2009

Bilateral investment treaty with Switzerland 2009

Bilateral investment treaty with Spain 2007

Bilateral investment treaty with Peru 2003

FTA G2 with México, Chapter XVII 1995

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Colombia has signed free trade agreements with the European Union and members of the European Free Trade Association,1 but these do not have investor-state provisions. As it increases the number of its IIA partners, its exposure to ISDS increases as well. Colombia has never been a respondent in an ISDS case, but its strategy for preventing and managing investor-state disputes includes having an efficient and reliable system if and when it does face a dispute. The strategy is set out in CONPES 36842 of 2010 (a national policy document adopted by the National Council of Social and Economic Policy) and Decree 1859 of 2012. CONPES 3684 says:

It is necessary to strengthen the Colombian State’s strategy to guarantee compliance with the international commitments undertaken in IIAs, and for the timely prevention and appropriate attention to disputes that may arise between foreign investors and the Colombian State in the framework of these agreements. (page 2).

The government’s stated objective is to create conditions that will best take advantage of an IIAs it is a party to, and the first step, according to CONPES 3684, is to take steps to “reduce the risks of non-compliance with the international commitments entered into in the IIAs” (page 4). The government identified the challenge of the state in the face of international investment disputes based on IIAs as the central problem:

The country is not prepared to prevent and promptly and efficiently solve disputes that may arise from IIA commitments. The current institutional framework cannot effectively prevent and manage this type of dispute. The novelty and complexity of IIAs, their requirements in terms of technical knowledge and the lack of experience given that it has never been involved in arbitration under this mechanism, make the implementation of the required adjustments urgent. (page 13).

The government recognized that public employees’ lack of experience with IIA commitments could increase the likelihood of breaching an IIA commitment and lead to investment arbitration. It also noted that the lack of a clear lead agency could impede efficient and effective defense of the state, and that confusion regarding funds and administrative procedures for managing a dispute could impede adequate response to a dispute with a foreign investor under an IIA.

The CONPES sets out the following objectives:

• Strengthen the state’s capacity to prevent and manage possible disputes arising from IIAs to which Colombia is party.

• Centralize decisions on defense and ISDS prevention and management strategy and ensure opportune and efficient inter-institutional coordination.

• Establish a mechanism to ensure that resources necessary to defend the state are readily and easily accessible.

1 Members of the European Free Trade Association are Iceland, Liechtenstein, Norway, and Switzerland.

2 CONPES 3684 of October 19, 2010. Available at https://www.dnp.gov.co/LinkClick.aspx?fileticket=3K9mgifm1wo%3D&tabid=1063 Accessed February 2013

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• Establish administrative procedures that guarantee appropriate prevention and management of investment disputes. These include training government officials that may affect IIA commitments, ensuring that they understand the possible consequences of their decisions in relation to Colombia’s IIA commitments, adopting a law to secure the confidentiality of documents in investment arbitration, and setting objective and transparent criteria for the selection of outside legal counsel.

The CONPES recommends an action plan that includes the following:

• Creating a high-level commission or group to guide investment disputes and to define investment dispute prevention and management strategies.

• Designating the Ministry of Trade, Industry and Tourism as the lead agency of an inter-governmental investment dispute defense group.

• Allocating funds for ISDS proceedings and legal counsel.

• Promoting a law that provides for confidentiality of documents in ISDS proceedings.

• Defining procedures so that the agency that has triggered the dispute (involved agency) bears the costs of the process and any amounts awarded to the claimant.

• Delivering training programs and workshops at national and subnational levels on IIA provisions to reduce risk of agencies or officials breaching IIA commitments.

The government issued Decree 1859 in September 2012 to implement CONPES 3684. It created a high-level government body (HLGB) to advise and make recommendations to prevent investment disputes and diligently manage them when they arise. The members of the HLGB include the Minister of Justice and Law, the Minister of Finance, the Minister of Foreign Affairs, the Minister of Trade, Industry, and Tourism, the Legal Secretary of the Office of the President, and two external advisors (both of whom also serve as members of the Board of Directors of the National Agency of Legal Defense of the State). The HLGB has the following functions with regard to investor-state disputes:

1. To coordinate, direct, and develop recommendations for preventing and managing disputes and defending national interests.

2. To recommend the application of dispute resolution mechanisms other than arbitration.

3. To recommend measures to prevent and resolve international investment disputes.

4. To recommend measures to guarantee a timely and continuous defense of the state in any international investment disputes.

5. To make recommendations to hire outside counsel.

6. To recommend priority sectors and specific entities for actions in ISDS prevention.

The Inter-institutional Support Group is to support the HLGB and the Ministry of Trade, Industry and Tourism in the defense of the state in ISDS proceedings. It consists of designated officials from each HLGB agency, as well as a representative from the involved agency (agency that took the measure that originated the dispute), and a representative from any other agency the HLGB considers pertinent or relevant to the defense of the state. The group coordinator is the Director of Foreign Investment and Services of the Ministry of Trade, Industry and Tourism, who also heads all IIA negotiations.

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While preparing the strategy set out above, the government studied other experiences where the ISDS lead agency and the IIA negotiating lead agency are different, but decided to concentrate both functions in the Ministry of Trade, Industry and Tourism. The ministry is the lead agency and sole government voice in the defense of the state in ISDS proceedings and acts as the Technical Secretary to the HLGB, with the support of the National Agency of Legal Defense of the State. While the involved agency will be present in relevant HLGB meetings and has a voice, it does not vote on decisions. Additionally, the General Prosecutor may be invited to HLGB meetings.

The HLGB defines criteria and rules for conciliation or direct agreements with investors, and may recommend the adoption or rejection of a conciliation agreement to the Conciliation Committee. The Ministry of Trade, Industry and Tourism, the National Agency of Legal Defense of the State, and the involved agency are in charge of facilitating and negotiating any out-of-court settlement with a foreign investor. The involved agency will be responsible for any payment agreed to in conciliation.

Figure 3-4 Investor-State Dispute Management System in Colombia

The government has delivered training on Colombia’s IIA commitments in dozens of national workshops and published Know Colombia’s Investment Commitments and Obligations in cooperation with the Inter-American Development Bank in 2009, and Prevention and Management of Investor-State Disputes under IIAs in cooperation with the European Union in 2012 (see Exhibits 3-2 and 3-3). The first guide presents Colombia’s obligations in IIAs, the second advises state agencies on the prevention of IIA-based investment disputes. In the introduction to Prevention and Management the Minister of Trade, Industry and Tourism says:

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This handbook establishes a guide for actions public servants should take to provide a responsible and appropriate management of foreign investment, thus actively integrating themselves into the strategy. The objective is to achieve coordinated action by all State agencies to promote early alerts that can help prevent disputes or that facilitate an appropriate and timely defense of the Colombian State before international arbitration tribunals.

Exhibit 3-2 Outline of “Know Colombia’s Investment Commitments and Obligations”

Importance of Foreign Investment for Colombia • Why is foreign investment important for Colombia? • How do you attract foreign investment? • What is an international investment agreement? • What do IIAs have to do with attracting foreign investment? • What do IIAs have to do with government agencies and entities? • What do government agencies or entities need to keep in mind regarding foreign investment?

Fundamental aspects of foreign investment and commitments acquired by Colombia. • What is considered foreign investment in Colombia? • What types of foreign investment are there? • Who is considered a foreign investor? • What principles guide investment?

What commitments are included in an IIA? • Investment promotion • Standard of treatment (national treatment, MFN, minimum level of treatment) • Protection of foreign investment (expropriation, compensation for losses)

What other rights to foreign investors have?

• Free transfers

What obligations do foreign investors have?

How are disputes for IIA breaches resolved?

Note: Full document at https://www.mincomercio.gov.co/publicaciones.php?id=16563&dPrint=1. Accessed February 2013.

The Directorate of Foreign Investment and Services, which is under the Ministry of Trade, Industry and Tourism, is the government’s contact point for consultations and questions regarding investment disputes. The directorate has organized dozens of training sessions and partnered with local and regional governments, chambers of commerce, and associations to organize seminars on the prevention of international investment disputes and arbitration. The Ministry takes advantage of larger gatherings to make these presentations to broader crowds and recently began reaching out to high-level officials and general counsels.

The Ministry partnered with the Department of Economic Development of Bogota to launch the city’s strategy to strengthen the institutional capacity in foreign investment and international contracts in the framework of the free trade agreements signed by Colombia.3 The Office of the Mayor sees this as a first step toward an investment dispute risk mapping exercise in city agencies, from which specific agencies will identify recommendations. The objective for the Mayor of Bogota is to create the skill sets to anticipate possible investment controversies. This

3 See Bogota Secretary General Circular No. 109 of 2012 on the Second Training Session of Foreign Investment and International Contracts in the Framework of Colombia’s FTAs. Available at http://www.alcaldiabogota.gov.co/sisjur/normas/Norma1.jsp?i=50215

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project is a regional pilot, and the ministry expects to use the lessons learned to run similar proejcts at the municipal and regional levels.

Exhibit 3-3 Outline of “Prevention and Management of Investor-State Disputes under IIAs”

Presentation (by the Minister of Trade, Industry and Tourism)

Introduction

1. State responsibility under international investment agreements (IIAs) 1.1. Scope of IIAs 1.2. Who can affect the Colombian State’s international responsibility? 1.3. What role does Colombian law play in the international responsibility of the State? 1.4. What are the consequences of a decision that finds the State liable and therefore responsible? 1.5. How can State agencies affect State responsibility in the face of commitments in IIAs? 1.6. What should government agencies do to avoid responsibility before IIAs?

2. Preventing international investment disputes 2.1. What is international investment dispute prevention and what does it entail? 2.2. Who implements the international investment dispute prevention strategy in Colombia? 2.3. How is the international investment dispute prevention strategy in Colombia implemented? 2.4. What can government agencies do to form part of an ISDS prevention policy?

3. Investor-State dispute settlement mechanisms in IIAs

4. Managing international investment disputes 4.1. What is management of international investment disputes and what does it entail? 4.2. Who implements the international investment disputes management system? 4.3. How is the international investment dispute management strategy in Colombia implemented? 4.4. What can government agencies do to form part of an ISDS management policy?

5. Conclusion: What can government agencies to do appropriately integrate into the investor-State dispute prevention and management system?

Note: Full document at http://www.asistenciatecnicaalcomercio.gov.co/noticia.php?id=303. Accessed February 2013.

Training workshops use the publications mentioned above; presentations by experts on the importance of foreign investment, international investment agreements, and standards and dispute settlement provisions in agreements; and simulations of situations that demonstrate the link between IIA commitments and domestic policy. During simulations, participants are divided into investors and state representatives, and are tasked first with finding a negotiated outcome, and then represent the same case before an international investment arbitration panel.

In parallel with the policies and actions described above, Colombia periodically updates its model BIT and IIA investment chapter. Examples of new language include its agreement with Japan, which according to UNCTAD, “…offers examples for increasingly refined and innovative treaty language. Amongst others, the Colombia-Japan BIT contains balanced protective standards, elaborate procedural mechanisms especially with respect to ISDS and carefully crafted policy flexibility clauses (e.g. exceptions).” (UNCTAD 2012c, 6).

Another tool that helps with early detection of investment difficulties, and therefore to dispute prevention, is SIFAI or the Investment Attraction Facilitation System. SIFAI is a public-private mechanism that identifies and centralizes information on opportunities to improve the investment climate through reform of laws, regulations, or practices that could lead to

• The cancellation or suspension of a decision to invest;

• A modification in the characteristics of an investment, such as a reduction in the sum or in the number of jobs it would create;

C A S E S T U D I E S 19

• The reduction of liquidation of an investment;

• A delay in the investment;

• An increase in the cost of an investment.

SIFAI’s objectives are to

• Identify, centralize, and prioritize opportunities to improve Colombia’s investment climate, with the support of a central database and IT platform.

• Consolidate institutional memory of the investment climate and actions to improve it.

• Discuss, analyze, and recommend measures that will facilitate new investment.

• Promote, implement, and monitor initiatives, through a mixed technical committee, in the framework of the National Competitive System.

The technical committee includes the High Presidential Advisor for Public and Private Management; the Minister of Trade, Industry and Tourism; the President of Proexport, Colombia’s trade and investment promotion agency; and the President of the Private Council for Competitiveness. The committee promotes, coordinates, and monitors progress on reforms. Once its studies a situation and approves its entry into the database, it presents proposals for improvement and coordinates discussion and implementation with agencies. Information collected for each issue includes the name and description of the difficulty, amount of the investment and job creation opportunities, sector, determination of whether the measure has a local, regional or national impact, agency involved in the measure, and recommendations for its elimination or reform.

As the committee’s technical secretariat, Proexport identifies, analyzes, and prioritizes opportunities to improve the investment climate and presents them for further study by the committee. It also drafts proposals for action and reform. Proexport’s close relationship with foreign investors means it is exceptionally well placed to identify difficulties faced by investors. Proexport also has strong ties with regional and municipal investment promotion agencies, which are also important sources of information on investment difficulties. While it is not technically part of the system of dispute prevention, the mechanism allows the government to identify difficulties at an early stage and provides a high-level setting and process to address them.

Like SIFAI, Proexport does not promote projects or investments, but does work to improve the general investment climate and support investors with information and logistics in their search for investment opportunities.

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COSTA RICA FDI has increased in Costa Rica significantly since 2000. Forty-two percent of these flows have gone into the manufacturing sector, especially to activities under special trade regimes (WTO 2007, x). The government’s foreign investment promotion strategy has shown positive results.

Figure 3-5 Foreign Direct Investment in Costa Rica

The Ministry of Foreign Trade (COMEX) is in charge of trade and investment policy in Costa Rica. Costa Rica has signed BITs with 14 countries and FTAs with 9 partners. Costa Rica’s first case was in 1996, and it did not have any new cases until more than 10 years later (Figure 3-6). Since 2007 the government has had at least one if not several ongoing cases.

Figure 3-6 IIAs Signed by Costa Rica

C A S E S T U D I E S 21

Costa Rica has been a respondent in six ICSID cases: the parties discontinued one case, four concluded and one is ongoing.

Figure 3-7 Timeline of ICSID Cases in which Costa Rica is a Respondent

The government decided to create an institutional framework for preventing and managing IIA disputes based on the ad hoc functioning at the time. It issued the “Regulation for the Prevention and Management of International Trade and Investment Disputes” through Decree N° 35452-MP-COMEX in August 2009. The decree indicates that the regulation is justified for a number of reasons justifications:

• The number of IIAs to which Costa Rica is a party.

• Preventing and managing ISDSs is in the public interest given their potential impact on trade and investment and on Costa Rica’s reputation for abiding by its commitments in international agreements.

• ISDS cases may involve any public sector agency, and it is therefore necessary that all agencies involved cooperate and share information pertinent to an investor-state dispute to ensure the best possible defense of the national interests.

• A normative framework to address investment disputes is necessary to ensure the best interagency coordination.

• The Ministry of Foreign Trade implements, administers, and monitors international trade and investment agreements and leads defense proceedings in ISDS cases; relevant public entities and agencies must cooperate with and support the ministry as necessary in these tasks.

The decree created the Inter-institutional Commission (CISC) for the settlement of international trade and investment disputes. Members include multiple ministries (foreign trade, foreign

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affairs, finance, justice) and any agency the commission considers necessary for the defense of the state. The Ministry of the Office of the President is the coordinator. The commission coordinates and monitors investment and trade disputes against the state; makes decisions for ISDS proceedings; provides the technical secretariat with instructions to manage, monitor, and prevent disputes; requests support from other agencies; and hires outside counsel as necessary. The commission meets at least once a year if there are no cases against Costa Rica, and at least once every three months if there is a case.

The Director for the Implementation of International Trade Agreements (Ministry of Foreign Trade) is the Technical Secretariat. The secretariat provides the commission with technical advice on international trade and investment disputes, prepares documentation, follows the commission’s instructions on cases or dispute prevention, and manages day-to-day activities in ongoing trade and investment disputes.

The Ministry of Foreign Trade reports that the system works well. In general, investors with concerns reach out to the ministry when problems arise with sector ministries or other entities. The Minister can convene the commission and call the relevant sector minister to join and seek resolution of the potential dispute.

The Ministry of Trade has carried out some training with officials on IIA provisions and their impact on foreign investors, which have enhanced the understanding and knowledge of the commitments made by Costa Rica in its international investment agreements.

C A S E S T U D I E S 23

MEXICO Foreign Investment in Mexico has been an important source of resources, although flows tend to be irregular. Between 1999 and 2011 they were concentrated in manufacturing (44 percent) and the financial and insurance sector (21 percent).

Figure 3-8 Foreign Investment in Mexico

Mexico has signed 28 BITs and has 12 free trade agreements with 44 countries. The Secretary of Economy negotiates IIAs, renegotiates old agreements to update or clarify language that may have been agreed to decades ago, and, where necessary, works with partners to clarify the scope of commitments included in an agreement. An example of this is the NAFTA Parties 2001 “Free Trade Commission Clarifications Related to NAFTA Chapter 11.” The clarification adopts interpretations of Chapter 11 (Investment) to “clarify and reaffirm the meaning of certain of its provisions” regarding access to documents and Minimum Standard of Treatment (Exhibit 3-4).

Clarity with regard to commitments provides solid ground for ISDS prevention. Many IIAs explicitly provide for interpretations of provisions and, although this is not a frequent practice, give governments a means to clarify commitments even after an agreement has entered into force, and avoids ambiguity for investors as they decide on the applicability of IIA provisions to their specific circumstances.

Mexico faced its first ISDS case in 1997, and has been a respondent in 15 cases before the ICSID since then. Thirteen cases have been concluded, and the average case for Mexico has lasted less than four years. Cases have spanned a range of sectors including telecommunication services, debt instruments, manufacturing and waste disposal services (see table below).

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Figure 3-9 IIAs Signed by Mexico

Budgeting and resource allocation can be a challenge for governments when designing a strategy to address investor-state dispute settlement. The lack of predictability in the number of cases, their complexity, duration and number of involved agencies explains in part why states have prevention policies. Mexico is an example of this challenge. Figure 3-10 shows the number of active ICSID ISDS cases in any given month in Mexico since the filing of the first case. While there were seven active cases at the end of 2005, there was only one for almost two years from mid-2010 to mid-2011.

C A S E S T U D I E S 25

Exhibit 3-4 NAFTA Free Trade Commission Clarifications Related to NAFTA Chapter 11, July 31, 2001

Having reviewed the operation of proceedings conducted under Chapter Eleven of the North American

Free Trade Agreement, the Free Trade Commission hereby adopts the following interpretations of

Chapter Eleven in order to clarify and reaffirm the meaning of certain of its provisions:

A. Access to documents

1. Nothing in the NAFTA imposes a general duty of confidentiality on the disputing parties to a Chapter

Eleven arbitration, and, subject to the application of Article 1137(4), nothing in the NAFTA precludes the

Parties from providing public access to documents submitted to, or issued by, a Chapter Eleven tribunal.

2. In the application of the foregoing:

(a) In accordance with Article 1120(2), the NAFTA Parties agree that nothing in the relevant arbitral rules

imposes a general duty of confidentiality or precludes the Parties from providing public access to

documents submitted to, or issued by, Chapter Eleven tribunals, apart from the limited specific exceptions

set forth expressly in those rules.

(b) Each Party agrees to make available to the public in a timely manner all documents submitted to, or

issued by, a Chapter Eleven tribunal, subject to redaction of:

(i) confidential business information;

(ii) information which is privileged or otherwise protected from disclosure under the Party's domestic law;

and

(iii) information which the Party must withhold pursuant to the relevant arbitral rules, as applied.

c) The Parties reaffirm that disputing parties may disclose to other persons in connection with the arbitral

proceedings such unredacted documents as they consider necessary for the preparation of their cases,

but they shall ensure that those persons protect the confidential information in such documents.

(d) The Parties further reaffirm that the Governments of Canada, the United Mexican States and the

United States of America may share with officials of their respective federal, state or provincial

governments all relevant documents in the course of dispute settlement under Chapter Eleven of NAFTA,

including confidential information.

3. The Parties confirm that nothing in this interpretation shall be construed to require any Party to furnish

or allow access to information that it may withhold in accordance with Articles 2102 or 2105.

B. Minimum Standard of Treatment in Accordance with International Law

1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as

the minimum standard of treatment to be afforded to investments of investors of another Party.

2. The concepts of "fair and equitable treatment" and "full protection and security" do not require

treatment in addition to or beyond that which is required by the customary international law minimum

standard of treatment of aliens.

3. A determination that there has been a breach of another provision of the NAFTA, or of a separate

international agreement, does not establish that there has been a breach of Article 1105(1).

Closing Provision

The adoption by the Free Trade Commission of this or any future interpretation shall not be construed as

indicating an absence of agreement among the NAFTA Parties about other matters of interpretation of the

26 I N V E S T O R - S T A T E D I S P U T E P R E V E N T I O N S T R A T E G I E S

Agreement.

The Secretary of Economy’s Legal Adviser for Negotiations General Directorate manages investment disputes, while the General Directorate for Negotiations designs and implements policy to prevent disputes. To raise awareness of commitments, the government—with support from the Organization of American States (OAS)—designed and implemented the Investment Promotion and Prevention of International Disputes project.4 The project disseminates the national and international rules adopted by Mexico to promote and protect investments, provides training on Mexico’s IIA commitments; creates channels of communication between and among relevant agencies and the Secretary of Economy (the contact point for ISDS consultation); and produces educational material on the subject matter. To support project objectives the Secretary of Economy has delivered training in many central government agencies, regions, and municipalities on IIA commitments and their impact on day-to-day

4 http://www.economia.gob.mx/comunidad-negocios/comercio-exterior/tlc-acuerdos/acuerdos-internacionales-de-inversion/promocion-de-las-inversiones-y-prevencion-de-controversias-internacionales accessed February 2013

C A S E S T U D I E S 27

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Figure 3-10 Timeline of ICSID Cases in which Mexico is a Respondent

Telefónica S.A.Abengoa, S.A. y COFIDES, S.A.Cargill, IncorporatedBayview Irrigation District and othersArcher Daniels Midland Company and Tate & Ly le Ingredients Americas, Inc.Talsud, S.A.Gemplus, S.A., SLP, S.A. and Gemplus Industrial, S.A. de C.V.Corn Products International, Inc.Fireman's Fund Insurance CompanyWaste Management, Inc.Técnicas Medioambientales Tecmed, S.A.Marv in Roy Feldman KarpaWaste Management, Inc.Robert Azinian and othersMetalclad Corporation

20021997 1998 1999 2000 2001 2009 2010 2011 20122003 2004 2005 2006 2007 2008

C A S E S T U D I E S 29

activities and policy decisions.5 The Secretary and the National Institute for Federalism and Municipal Development, (INAFED) have also explained how the project is partly a response to the fact that regional and municipal governments are entering into concessions and other types of contracts with foreign investors. Training helps ensure that local authorities provide legal certainty and predictability for these investments and are aware tools that are available to them to avoid international investment disputes. The Secretary of Economy is exploring other potential partners, such as regional development boards and universities, to identify opportunities for broader dissemination of its message.

Also with the support of the OAS, Mexico disseminated “The Promotion of Foreign Investment and the Prevention of International Disputes, a pamphlet that succinctly answers the following questions:

• How can I help promote and protect investments? • What is the legal framework for foreign investment in Mexico? • What can cause an international dispute between a foreign investor and the Mexican

State? • How are disputes resolved? • What is the role of Mexican authorities in attracting investment? • How important is foreign investment in Mexico?

The Mexican authorities are now preparing a handbook for public servants on IIA obligations and their impact on public policy (see Exhibit 3-5).

The Secretary of Economy’s website on investment promotion and prevention of international disputes provides information on IIA commitments, investment-related news, and information to generate interest and identify the site as a resource for consultation. It is also in establishing a network of state officials involved in foreign investment to share information and discuss investment and investment disputes.

The investment promotion agency, ProMexico, is also important in investment attraction and aftercare. It provides investors with accurate and timely information on Mexico’s legal framework, supports an investor’s “soft landing,” maintains constant communication with investors, and is often the first resource for investor wishing to express a concern. ProMexico is often a mediator with an agency or institution that takes or threatens to take a measure that could affect an investor. While not formally in the early detection and prevention roadmap, ProMexico’s relationship with investors means it well placed to detect possible disputes and alert authorities. ProMexico also tries to resolve conflicts with foreign investors before they become full blown disputes and promotes alternative routes to ISDS that may result in a continued relationship with the investor. If its efforts fail and the case goes to arbitration, then communication with the investor ceases, and the office that manages investment disputes in the Ministry of Economy takes over.

Mexico has no legal or regulatory provisions to support its international dispute prevention policy, but has fostered understanding of IIA commitments at all levels of government, providing government officials and agencies with the tools to analyze the impact of planned

5 Mexico has 31 states (32 with Mexico City), and over 2,400 municipalities.

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actions and policies on IIA commitments. Although it is difficult to measure the impact of the knowledge base, it probably prevents the institution of measures that could be later challenged.

Exhibit 3-5 Outline: Mexico’s Guide to IIA Commitments

Introduction

The importance of understanding investment commitments and obligations

Fundamental aspects of foreign investment – the national legal framework • What is foreign investment? What types are there?

• What is the legal framework for foreign investment in Mexico?

• What is the foreign investment law about?

• Are there any authorizations for the entry of foreign investment?

• Is there a registry for foreign investment in Mexico?

• What is the impact of foreign investment?

How to attract foreign investment • What variables attract FDI?

• What are the factors that contribute to investor’s decisions to select Mexico as the main investment

destination?

• What are some international principles that guide foreign investment?

• What are agreements for the mutual promotion and protection of investments (AMPPI)?

• What disciplines do AMPPIs incorporate? What is the scope of investment protection in an AMPPI?

• What aspects are covered in FTA investment chapters?

• What is the main difference between an AMPPI and an investment chapter in an FTA?

Treatment standards for investors that can be found in an AMPPI or in an investment chapter in an FTA • National treatment

• Most favored nation treatment

• Minimum level of treatment

Protecting foreign investment • What other rights do foreign investors have?

• Where can IIAs signed by Mexico and rest of the world be consulted?

• What authority is responsible for negotiating AMPPIs and FTA investment chapters?

• What is the role of authorities in promoting investment and preventing international disputes?

• What should a government official at any level of government keep in mind regarding foreign

investment?

• What obligations do foreign investors have?

• What can trigger an international dispute between a foreign investor and the Mexican State?

• How are these disputes resolved?

• What is an amicable solution?

• What is a notification of intent by an investor?

Conclusions

Contacts

C A S E S T U D I E S 31

PERU Peru’s vigorous promotion of FDI has led to a spike in FDI over the past decade, especially in services (communication 34 percent and finance 17 percent).

Figure 3-11 Foreign Investment in Peru

Peru is also very active in IIA negotiations, and enters into contracts with investors that contain international investor-state provisions. Peru has a good deal of experience with ISDS; it is managing eight ICSID cases and one UNCITRAL case and is in direct negotiations with other investors. 6

6 http://www.mef.gob.pe/index.php?option=com_content&view=article&id=379&Itemid=101183&lang=es Accessed February 2013

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Figure 3-12 Timeline of ICSID–UNCITRAL Cases in which Peru is a Respondent

The Ministry of Foreign Affairs managed Peru’s first cases, after which an ad hoc inter-institutional committee, which included the Ministry of Economy and Finance, was set up to manage disputes. The increasing number of disputes led the government to create the State Coordination and Response System for International Investment Disputes (Response System) in 2006. In so doing, Peru sought to address the following:

• The increasing number of agreements with international investment arbitration clauses.

• The lack of a centralized agency to coordinate and lead the defense of the state.

• The lack of accountability in agencies that originated investment disputes.

• The difficulty in meeting the financial requirements of arbitration, including hiring legal counsel and paying arbitration costs.

• The high risk of new disputes due to lack of understanding of IIA commitments in general (UNCTAD 2011).

The Response System was created by Law Nº 28933 (December 2006) and has two regulatory decrees: Supreme Decree 125-2008-EF (October, 2008) and Supreme Decree 002-2009-EF (January 2009). Article 2 of Law 28933 sets out the following objectives:

• Optimize public sector coordination and response to international investment disputes and secure a timely and appropriate defense of the state.

• Centralize information on agreements and treaties entered into by Peru related to investment that contain international dispute settlement provisions.

• Establish a warning system for investment disputes.

• Centralize information on international investment disputes.

• Define coordination procedures for government agencies involved in a dispute.

• Assume costs incurred in dispute settlement proceedings.

• Standardize dispute settlement clauses included in agreements and treaties as much as possible.

C A S E S T U D I E S 33

The Response System Law created a Special Commission to represent the state in international investment arbitrations, with four permanent members: Ministry of Economy and Finance (MEF), Ministry of Foreign Affairs, Ministry of Justice and ProInversion, Peru’s private investment promotion agency. Non-permanent members of the commission are the Ministry of Foreign Trade and Tourism (which joins as a member of in any IIA-based dispute) and the agency that adopted the measure triggering the dispute (involved agency). The MEF is the coordinator or lead agency of the system, and acts as the Technical Secretary to the Special Commission (Figure 3-13).

Figure 3-13 Peru’s Investor-State Dispute Management System

The Special Commission analyzes each case, determines the feasibility of an amicable resolution, and conducts negotiations for resolution. It represents the state in negotiations with an investor and before the relevant body in an ISDS proceeding, coordinates information gathering, determines need for outside counsel and other advisers, designates ISDS arbitrators, ensures that funds to cover costs are readily available, and determines the responsibility of the involved agency in the dispute. The commission may also present regulatory or reform proposals to improve the state’s ability to defend its interests in investment disputes.

The law specifies that it is applicable to government agencies at all levels, national, regional and municipal, and to any enterprise in which the state has control via voting rights, as well as regulatory and supervisory bodies. It requires government agencies to report any agreement or treaty under the scope of the system, and to report any potential investment controversy. The law provides for the confidentiality of documents in ISDS proceedings, which had been an issue before the system was adopted, and sets out provisions on conciliation, mediation and direct negotiation, as well as provisions for funding of ISDS processes and the payment of arbitral awards.

Peru’s response system foresees continuous training and capacity building on IIAs and their commitments, as well as on the structure and functioning of the Response System and of its benefits and main characteristics, including the role of MEF as lead agency. The law creates the obligation for all public servants to cooperate with the Special Commission in relevant ISDS cases.

The MEF is designing a web-based platform so agencies can quickly report on treaties, agreements, or potential disputes. The platform will also provide information about IIAs entered into by Peru and the commitments therein; ISDS cases, including awards; and dispute settlement

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clauses. It will allow for contacting the Special Commission and provide a gateway for investors to report possible disputes that are within the scope of the system to the Special Commission.

The MEF has also provided training, mainly with central government agencies, and will redouble its efforts once the platform is completed. Training is an ongoing endeavor given turnover in government and the large number of agencies and institutions that adopt measures that may affect foreign investors

.

4. Conclusion International investment disputes can result in costly, resource-intensive, lengthy arbitration that is unpredictable in outcome. Such disputes pose reputational risks to states and investors and can sever otherwise mutually beneficial relationships. They can lead to large monetary awards, and entail legal and administrative fees that can go well into the millions of dollars during the arbitration period alone, diverting human and financial resources from other government objectives. The case studies presented herein provide a broad overview of government strategies for minimizing the incidence of investment disputes as transnational investment, number of IIAs, and volume of ISDS all increase.

Governments tend to address ISDS management and prevention in parallel, and in some cases one institution is responsible for both. Sometimes the lead agency for ISDS is the same one that negotiates IIAs; sometimes the institutions are distinct. The governments of Costa Rica and Peru have transitioned from ad hoc institutional setups for responding to investment arbitration into formal structures with functions and responsibilities defined by laws and regulations. The government of Mexico has introduced policies on training and information sharing without changing existing institutional arrangements. And Colombia has created formal mechanisms to respond to possible disputes even though it has never had an ISDS case. Given the range of agencies that a dispute could involve, however, several governments have formally designated a lead agency for ISDS purposes.

Having a strong ISDS management framework strengthens a government’s capacity to respond effectively in investor-state disputes. The path of an ISDS case may involve a number of government parties: IIA negotiators (central government), Congress, Constitutional Courts (some governments require prior constitutional review), the agency that takes the measure challenged under ISDS (may be at any level of government or from any branch of government), government defense teams, etc. Given the number of actors, the demanding information requirements for a proper defense, and the need for efficient and effective inter-agency coordination, the governments of Colombia, Costa Rica, and Peru have formally created the team and competencies necessary to manage an investor-state dispute. Certainty about its legal capability to manage an ISDS case is increasingly important when a government is confronted with several cases simultaneously.

All governments broadly disseminate information on IIA-related obligations and commitments among agencies and branches (judicial, legislative and executive) and at all levels (central, regional, municipal). Tools of dissemination include publications, websites dedicated to IIA disciplines, training, and platforms for discussing IIAs, including how they affect policy making and the design of measures that may affect investors. Published guides tend to be clear and simple and to present the most important investor protection provisions in IIAs. Some use real-life examples to help officials relate day-to-day decisions with ISDS and its costs and

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consequences. These guides also include contact points for agencies to be able to request additional information.

One strategy for understanding of IIA commitments in regional governments is opening the negotiations themselves to the participation of regional officials. While it is difficult to generate enough interest to obtain the necessary commitments in terms of time and efforts in smaller negotiations, and a politically sensitive decision given that the authority to negotiate international agreements generally lies with the central government, an economically significant agreement may generate enough interest to engage regional governments in such a way that officials are tasked with taking part in negotiations or monitoring them very closely.

Given the vast range of government entities that may adopt measures that affect IIA commitments, investment authorities should prioritize audiences for information dissemination and training: central, regional, and municipal governments; officials from the executive, legislative and judicial branches; and entities exercising delegated authority (e.g., state enterprises and investment promotion agencies).

Some governments, such as those of Colombia and Mexico, have systems that foster permanent contact with domestic and foreign investors to identify challenges or where action can be taken to improve the investment climate. These systems provide investors with a communication channel other than the agency with which they may be experiencing difficulty, and allow investment climate agencies to detect possible problems early on. These systems may not be designed with ISDS prevention in mind but they are useful in detecting investment obstacles that could become points of dispute.

After more than 60 years of international treaty making in international investment and the introduction of ISDS provisions in individual investment agreements, a government may have a vast number of instruments that form the legal universe of its ISDS exposure. Some agreements may be are several decades old and different agencies and government offices can introduce ISDS provisions into individual contracts. The case studies showed that dispute prevention and management can be improved by consolidating legal instruments in a single place.

To make IIA obligations more consistent and coherent, some economies are renegotiating old agreements, setting clear mandates and guidelines for current negotiations, and making language in agreements more precise, in part by adopting model treaties and clauses. More precise and carefully crafted language gives officials, investors and arbitrators guidance with regard to the intent of the negotiators and states as they enter into agreements, and is useful in explaining IIA commitments to other government agencies and officials who are bound by these commitments. Clearer language improves understanding of commitments, and may help prevent passage of inconsistent measures.

Finally, it is difficult to assess the impact of ISDS prevention policies because the desired outcome is an absence of cases—and a dispute can be prevented anywhere in the chain of relationships between and investor and the host state. Formal prevention strategies, such as those described in this report, seem to be recent. Nevertheless, the general impression is that these policies are having a positive effect on investment climates and on the capabilities and skills of officials as they design and implement measures that may affect IIA commitments, and as they report possible disputes to central authorities at an early stage.

C O N C L U S I O N 37

Different cases confront different situations with regard to investment, and investment dispute prevention and management. Nevertheless, the policy options presented in this report provides a useful reference for governments seeking to implement investment dispute prevention strategies. As investment flows increase, the number of IIAs continues to grow, and the international IIA system remains complex, efforts in early detection of investment disputes, communication of IIA commitments and the creation of a better system overall, will only support the role of investment in generating jobs, improving livelihoods and contributing to economic and social development.

References ICSID (2003), ICSID Review – Foreign Investment Law Journal, “The Allocation of Costs and

Attorney’s Fees in Investor-State Arbitration”, Noah D. Rubins, 18(1) ICSID Rev. 109 (2003)

__________ (2012), The ICSID 2012 Annual Report, Available at at https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDPublicationsRH&actionVal=ViewAnnualReports#. Accessed February 2013

__________ (2013), The ICSID Caseload – Statistics, (Issue 2013-1). Available at at http://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=CaseLoadStatistics. Accessed February 2013

IISD (2011), “Recent Developments in International Investment Agreements: Negotiations and Disputes”, Background paper for the IV Annual Forum for Developing Country Investment Negotiators. Mahnaz Malik, Canada. Available at www.iisd.org/publications/pub.aspx?id=1424. Accessed February 2013

OECD (2012), OECD Investment Policy Reviews: Colombia 2012, OECD Publishing. http://dx.doi.org/10.1787/9789264167742-en. Available at: http://www.oecd-ilibrary.org/finance-and-investment/oecd-investment-policy-reviews-colombia-2012_9789264167742-en. Accessed February 2013

Secretary of Economy of Mexico (2012), Memorias Documentales Unidad de Coordinación de Negociaciones Internacionales – Acuerdos para la Promoción y Protección Recíproca de las Inversiones, Secretaría de Economía, Administración Pública Federal 2006-2012. Mexico City, Mexico. Available at www.economia.gob.mx/files/transparencia/informe_APF/memorias/9_md_apris_sce.pdf Accessed February 2013

UNCTAD (2008). Identifying Core Elements in Investment Agreements in the APEC Region. Series on International Investment Policies for Development (New York and Geneva: United Nations), United Nations publication, Sales No. E.08.II.D.27. Available at: http://www.unctad.org/en/docs/diaeia20083_en.pdf. Accessed February 2013

__________ (2011). “Best Practices in Investment for Development. How to prevent and manage investor-State disputes:Lessons from Peru (New York and Geneva: United Nations), United Nations publication. Available at: unctad.org/en/Docs/webdiaepcb2011d9_en.pdf. Accessed February 2013

__________ (2012a). “Latest Developments in Investor–State Dispute Settlement”, IIA Issues Note, No. 1. Advance unedited version (New York and Geneva: United Nations), United

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Nations publication, CTAD/WEB/DIAE/IA/2012/03. Available at: unctad.org/en/PublicationsLibrary/webdiaeia2012d10_en.pdf. Accessed February 2013

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