ICSID in crisis

Straight-jacket or investment protection?

10 July 2009

The International Center for the Settlement of Investment Disputes (ICSID, see Update 66) is facing an explosion of cases and increasingly vocal criticism from Latin American countries. Questions remain over whether it helps channel productive investment to developing countries or serves as a tool for multinational corporations to get their way.

At end May, Ecuadorian president Raphael Correa publicly denounced ICSID and claimed Ecuador’s withdrawal from the ICSID is necessary for “the liberation of our countries because [it] signifies colonialism, slavery with respect to transnationals, with respect to Washington, with respect to the World Bank.” Following this, at the UN conference on the economic crisis at end June, the presidents of Bolivia and Ecuador called for the closure of ICSID and challenged existing free trade agreements. Ecuador’s threatened departure follows Bolivia’s decision to withdraw from ICSID in 2007 (see Update 58, 56).

ICSID is currently handling $12 billion worth of requests for arbitration over several disputes against Ecuador, not to mention the dozen of cases outstanding against Argentina. This explains Ecuador’s current dissatisfaction. Most recently, Ecuador’s cancellation of US oil company Occidental’s contract in 2006 leaves the company now seeking $3.2 billion in damages.

However, the controversies surrounding ICSID are deeper, including problems of loss of sovereignty, unequal bargaining power and poor governance. ICSID’s latest award brought a hefty penalty of $133 million against Egypt for expropriating the land of two Italian citizens, making it the largest award rendered to individual claimants and ICSID’s seventh largest yet.

Conflicting messages have been sent out as to whether ICSID can be lenient when governments take measures that they view as necessary to shield their citizens from an economic meltdown, with many prominent lawyers arguing that contract maintenance is a priority. This is at the heart of the accumulation of cases filed against Argentina. Some decisions are still pending but for others where decisions were reached, Argentina has not paid out the awards. US-based investors who are owed money are applying pressure on their own government to step up its demands that Argentina comply with the ICSID awards. This indicates how an investment dispute is easily politicised with investors lobbying government to force other states to pay reparation fees and uphold its obligations under bilateral investment treaties (BITs).

However, now the tables may be turning, as a Chinese investor may bring forward an arbitration case against the Belgian government because of its role in pushing the sale of Fortis Bank, a Dutch-Belgian financial firm, to BNP Paribas, a French financial firm, during the financial crisis. Ping An, a Chinese investment house, suffered a 90 per cent loss on its investment in Fortis during the crisis. In the takeover process the Belgian government took a 12 per cent stake in BNP in return for a bailout and guarantees in relation to the acquisition. The lack of leniency which ICSID tribunals have exhibited in dealing with cases from Argentina’s financial crisis, may now come back to haunt rich countries.