TPP & ISDS: New Tests For India

The U.S.-driven Trans Pacific Partnership agreement between 12 countries, which is aiming to become the new standard of world trade, impacts domestic systems globally. For India, it will skew investment and intellectual property rights, and especially the debate over the Investor State Dispute System which allows companies to challenge sovereign rights and public policy.

The closely-guarded Trans Pacific Partnership (TPP) agreement, which will up-end existing global trade standards, is now public[1]. The 30 chapters comprising 6,000 pages, will undoubtedly influence all future world trade talks — bilateral, plurilateral and multilateral. TPP aspires to become the “gold standard” for global trade – ‘WTO-plus’ standards. The clock has started ticking for the agreement, as legislators of the 12 signatory countries will be under pressure to ratify the agreement before President Barak Obama demits office a year from now.

This has multiple implications for India. In addition to potentially limiting India’s concessions to public sector units, is the issue of intellectual and property rights (IPR) contained with a controversial chapter on bilateral investment treaties (BITS) and the treatment of “investor-state dispute system” (ISDS) mechanism. Under this, foreign investors can sue sovereign countries in a third country through international arbitration.

ISDS was already a contentious issue, with many governments reviewing their ISDS mechanisms over the years in reaction to a growing trend of MNCs filing arbitration cases against host countries, seeking compensation for loss of potential revenue from changes inpublic policy. One of the most quoted cases is that of cigarette manufacturer Philip Morris Asia Ltd. finding the Australian government’s directive on health warnings prejudicial to its future revenues and seeking redressal in overseas arbitration. The arbitration of 2011 is still pending. India has faced its fair share[2] of arbitration cases on similar grounds, involving foreign companies such as — Cairn India, Vodafone, Bechtel and GE Structured Finance BNP Paribas, Deutsche Telekom.

Governments view such arbitration with skepticism. Many claim the system is being gamed, given the opacity of arbitration processes, its non-appellant provisions, its appointment of mostly private sector lawyers as arbitrators (thereby inducing an inherent bias in the judicial process) and its predilection for granting awards to private companies over governments[3].

Many experts also feel that ISDS mechanism creates economic distortions by reducing policy space for government and for the protection offered to investors. Prominent economists like Nobel laureate Joseph Stiglitz, oppose[4] the concept of ISDS as being unfair[5].

The public backlash probably has had a sobering effect. The preamble[6] to the TPP agreement acknowledges government’s rights: “Recognise their inherent right to regulate and resolve to preserve the flexibility of the Parties to set legislative and regulatory priorities, safeguard public welfare, and protect legitimate public welfare objectives, such as public health, safety, the environment, the conservation of living or non-living exhaustible natural resources, the integrity and stability of the financial system and public morals.”

But this self-correcting move seems only partial when viewed against the Investment chapter[7], which lists conditions to be followed by TPP signatory countries when soliciting foreign investment. Breach of these can result in ISDS being invoked. These are: offering foreign investors treatment equivalent to national companies (including state-owned enterprises), treatment equivalent to what’s accorded to companies from most favoured nations, minimum standard of treatment (which includes “fair and equitable treatment” and “full protection and security”), prohibiting expropriation or nationalisation (and, if in an extreme case it becomes necessary, then ‘fair value of compensation’ has to be paid which has been left undefined), free transfer of capital, no performance standards (such as minimum export commitment or minimum local content requirement), no restriction on nationality of senior staff or directors.

Other pernicious additions include a stretched definition of investment to include even IPR. This has opened up a rabbit hole of hidden clauses and tripwires. Contradictions abound between the chapters on Investment and Intellectual Property. For example, Article 9.7.5 exempts issuance of compulsory licenses (under the WTO’s Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement, host countries can permit a non-patent holder to produce a patented drug) from eexpropriation provisions. But it comes with an escape hatch: issuance of such license must be consistent with TRIPS or with the TPP’s chapter on Intellectual Property. Another insidious addition is that ISDS can also be initiated in cases of “indirect expropriation”, or if the corporation deems that a specific government action “interferes with distinct, reasonable investment-backed expectations…”[8] But here’s the catch: determining what indirect expropriation is will be decided on a case-by-case basis.

This open-ended definition gives arbitration tribunals a free hand to interpret TPP provisions. For example, any regulatory action that could, hypothetically, diminish the value of property/investment, without the government taking ownership of the property[9], could also be deemed to be “indirect”expropriation and invite action under ISDS.

These clauses will undoubtedly affect India’s quest for increased foreign direct investment as part of Make in India. India’s home-grown BITs version — called Bilateral Investment Promotion and Protection Agreement (BIPPA) — has been revised to allow foreign investors to opt for international arbitration only after exhausting all domestic legal options. The draft model agreement is awaiting finalisation. India’s draft BIT and its ISDS treatment is now being pulled in different directions by varied influences — TPP, the work-in-progress Trans-Atlantic Trade and Investment Partnership (TTIP) agreement being discussed between USA and European Union (EU) and the India-EU bilateral investment trade and investment agreement under negotiation. Contradictions are aplenty: While the EU has rejected[10] inclusion of ISDS in TTIP with the U.S., in its negotiations with India in the past, it has insisted on including ISDS[11]. In addition, India’s draft model text drops any reference to most-favoured nation treatment, while TPP includes it.

Clearly, internal and external pressure will be brought on the Indian government to amend its draft model agreement. Some U.S.-based think tanks[12] and administration-friendly publications[13] have already started the drumroll. As India’s Ministry of Finance prepares to finalise its draft agreement, two issues — moral and transactional — must be kept in mind.

The moral issue first. Allowing foreign investors to bypass local legal processes through ISDS creates a discriminatory structure. A transactional solution exists, one borrowed from the securities markets. Many companies offer different kinds of shares and each category is endowed with differentiated rights. For instance, preference shares are entitled to a fixed dividend every year, irrespective of the company’s performance, but forego the right to vote. Therefore, foreign companies wishing to appropriate special privileges over other investors should be willing to forego some rights.

As a test case, this should form the basis of the next round of BIT talks between India and the U.S.

References

[1] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership, 5 November 2015, <http://tpp.mfat.govt.nz/text#>

[2] United Nations Conference for Trade and Development, Database of Investor-State Dispute Settlement (ISDS) (reduced version); <http://unctad.org/en/Pages/DIAE/ISDS.aspx>

[3] Singhal, Rajrishi, ‘India-U.S. BIT: not a done deal yet’, Gateway House, 23 January, 2015; <http://www.gatewayhouse.in/india-u-s-bit-not-a-done-deal-yet/>

[4] Stiglitz, Joseph, ‘South Africa Breaks Out’, Project Syndicate, 5 November, 2015 <http://www.project-syndicate.org/commentary/joseph-e–stiglitz-on-the-dangers-of-bilateral-investment-agreements>

[5] Lise Johnson, Lisa Sachs and Jeffrey Sachs, Investor State Dispute Settlement, Public Interest & U.S. Domestic Law, CCSI Policy Paper, May 2015, <http://ccsi.columbia.edu/files/2015/05/Investor-State-Dispute-Settlement-Public-Interest-and-U.S.-Domestic-Law-FINAL-May-19-8.pdf

[6] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership – Preamble, 5 November 2015,http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/TPP-text/0.%20Preamble.pdf

[7] New Zealand Foreign Affairs and Trade, Government of New Zealand, Text of the Trans Pacific Partnership – Investment, 5 November 2015, <http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/TPP-text/9.%20Investment%20Chapter.pdf>

[8] Trans Pacific Partnership, Annex 9-B, Expropriation

[9] Intellectual Property Watch, ‘How The Leaked TPP ISDS Chapter Threatens Intellectual Property Limitations and Exceptions’, 26 March, 2015 <http://www.ip-watch.org/2015/03/26/how-the-leaked-tpp-isds-chapter-threatens-intellectual-property-limitations-and-exceptions/>

[10] Robert, Aline; translated from French by Samuel White; ‘European Parliament Backs TTIP, Rejects ISDS’, Euractiv, 9 July, 2015, <http://www.euractiv.com/sections/global-europe/european-parliament-backs-ttip-rejects-isds-316142>

[11] Mishra, Asit Ranjan, India Rejects Clause on Litigation, Live Mint, 4 July, 2011, <http://www.livemint.com/Home-Page/T8uMUbH7Psx9sJawlwtzvN/India-rejects-clause-on-litigation.html>

[12] Rossow, Richard M, ‘Going To Bat For The BIT’ U.S.-India Insight, Volume 5, Issue 9, September 2015, <http://csis.org/files/publication/150910_USIndiaInsight_September_Clean.pdf>

[13] Worstall, Tim, ‘Cairn Energy’s Indian Tax Dispute Shows The Value Of ISDS Provisions In Trade Treaties, Forbes, June 28, 2015, <http://www.forbes.com/sites/timworstall/2015/06/28/cairn-energys-indian-tax-dispute-shows-the-value-of-isds-provisions-in-trade-treaties/>

Courtesy: Gateway House

India-U.S. BIT: Not A Done Deal Yet

India is revising the model draft agreement of its existing bilateral investment treaties. Some of the new clauses are unlikely to be accepted by either U.S. negotiators or U.S. corporations without substantial dilution

U.S. President Barack Obama’s second visit to India has resurrected hopes that the two countries will revive talks on the dormant but in-progress Bilateral Investment Treaty (BIT). A BIT is being eagerly sought by both sides—from the U.S., to provide comfort to American companies that they will not be treated unfairly, and from India in the belief that it will help increase foreign investment inflows into India.

But negotiating the many tripwires of the BIT will take time and effort. It may therefore be wise to rein in the optimism that is usually generated by high-profile state visits and the associated optics. More so because every significant India-U.S. bilateral visit in recent times—by Prime Minister Narendra Modi to Washington DC in September 2014, by U.S. Secretary of State John Kerry to India in June 2014 and January 2015, and by U.S. Trade representative Michael Froman in November 2014—has rekindled expectations about the abandoned BIT.

Talks on a BIT between the two countries have been on hold since February 2014. [1] Preparations to restart the conversation resumed in the backrooms soon after Modi’s swearing-in on 26 May 2014. Kerry discussed the pending BIT agreement with Modi on the sidelines of the Vibrant Gujarat Summit earlier in January. Diane Farrell, acting president of the U.S. Indian Business Council, confirmed this in a press statement. [2]

However, many hurdles will have to be cleared before any real progress can be made on the BIT. One of the obstacles is that India’s own BIT regime—the Bilateral Investment Promotion and Protection Agreement (BIPPA)—is in cold storage. India is currently reviewing the draft of the existing model agreement and is yet to produce a blueprint that is acceptable to all stakeholders, including different ministries (such as Finance, Commerce, Law and External Affairs). India has signed 83 BIPPAs since 1994 and enforced 72 of these agreements.

The existing text has been under review since early 2013 because many international companies have initiated overseas arbitration against the Indian government—17 new arbitration proceedings over issues as varied as Supreme Court’s cancellation of 2G licences and retrospective taxation notices were filed in the past two years alone. The companies which have sued the Indian government include Deutsche Telecom, Vodafone, and White Industries, under India’s BIPPAs with Germany, The Netherlands, and Australia, respectively.

Another speed-breaker is conflict within the government. The Department of Industrial Policy and Promotion (DIPP, in the Ministry of Commerce and Industry) is opposed to BIPPAs in general [3, 4]. The DIPP is responsible for framing India’s foreign direct investment (FDI) strategy, as well as promoting, approving, and facilitating FDI. The DIPP believes that a conducive economic and legal environment is sufficient to attract foreign investments. It also believes that the existing BIPPAs are likely to result in increased lawsuits and has suggested that the sunset clause in these agreements be invoked to annul them. On the other hand, India’s finance and external affairs ministries are both in favour of an overhaul of the existing template, which will then have to be applied to all existing 83 agreements.

The conflict also arises from the government’s duality in matters of foreign investment—while the DIPP is responsible for FDI, the Ministry of Finance is responsible for administering the BIPPAs.

Talks could face headwinds due to certain new clauses in the draft model agreement. There is a proposal to dilute the “investor-state dispute settlement” (ISDS) system. Unlike the existing contract, henceforth foreign investors will not be able to take the Indian government to international arbitration unless they have first exhausted all legal and administrative options within India.

Clearly, this is a reaction to the spate of offshore arbitration proceedings. It is likely that this defensive move was inspired by external developments. Brazil has eschewed ISDS and South Africa is likely to follow. Australia is under pressure from its civil society to drop ISDS from all its agreements (especially the one with U.S.) and not from a select few, as is the case currently.[5]

The entire ecosystem of perverse incentives built around the international arbitration system could have also compelled the Indian government to dilute ISDS—armies of highly-paid, ambulance-chasing lawyers who have created an entire business model out of arbitrations and arbitrators who keep dragging cases on because they get paid handsomely by the hour—all operating in a highly secretive system. [6] The reworked BIPPA draft tries to ensure a transparent arbitration system by stipulating certain conditions.

But a BIT bereft of ISDS is bound to be opposed by American negotiators and potential U.S. investors. The popular narrative has portrayed the Indian judicial system as slow and inefficient. Indian authorities, on the other hand, are wary of biases in the overseas arbitration tribunals. Achieving a consensus between India and the U.S. on this count is going to be tricky, but India seems to have global precedent set by Brazil, Australia and South Africa in its favour.

A deal-breaker could be intellectual property rights (IPR), a vexed issue on both sides. The U.S.’s private sector has been persistently lobbying with its government for extracting concessions from India, with the National Association of Manufacturers even pushing the U.S. Trade Representative to label India as a “priority foreign country”, an epithet reserved for the worst IPR offenders.

India’s counter-argument has been that its IPR regime is compliant with the World Trade Organisation’s TRIPS (Trade-Related Aspects of Intellectual Property Rights) multilateral agreement, and it considers the U.S.’s Special 301 report—an annual publication from the United States Trade Representative (USTR) identifying trade barriers to U.S. companies and countries which do not provide “adequate and effective” protection of intellectual property rights—unilateral.

Several other prickly issues could sabotage talks—a proposal to drop the most favoured nation status from the agreement, re-phrased expropriation clauses, and re-worded text that ensures that the BIT/BIPPA does not end up favouring foreign investors while discomfiting domestic ones.

Negotiations are all about give-and-take, ceding some strategic space while appropriating critical concessions. This is, admittedly, a time-consuming process. A lot will, however, depend on American corporations and their attitude to doing business in one of the world’s biggest and fastest growing markets in the world.

REFERENCES

[1] Parashar, Sachin, ‘India, U.S. Agree to Restart Talks on Bilateral Investment Treaty’, Times of India; 12 January 2015, <http://timesofindia.indiatimes.com/india/India-US-agree-to-restart-talks-on-bilateral-investment-treaty/articleshow/45846021.cms>

[2] US India Business Council, USIBC Members Brief John Kerry, Secretary of State, and Catherine Novelli, Under Secretary of State for Economic Growth, Energy, and the Environment at Vibrant Gujarat 2015, 13 January 2015, <http://www.usibc.com/press-release/us-india-business-council%E2%80%99s-delegation-vibrant-gujarat-hosts-us-secretary-state-john>

[3] Sidhartha, ‘Finance ministry to move Cabinet for clearing new BIPA text’, Times of India, 24 June 2014, <http://timesofindia.indiatimes.com/business/india-business/Finance-ministry-to-move-Cabinet-for-clearing-new-BIPA-text/articleshow/37108910.cms>

[4] Press Trust of India, ‘Finance & Commerce Ministry to discuss draft BIPA model tomorrow’, Business Standard, 13 August 2014, <http://www.business-standard.com/article/pti-stories/fin-min-com-ind-min-to-discuss-draft-bipa-model-tomorrow-114081300432_1.html>

[5] Chan, Gabrielle, ‘Bill to ban investor-state dispute settlements garners support’,The Guardian, 14 April 2014, <http://www.theguardian.com/world/2014/apr/14/bill-to-ban-investor-state-dispute-settlements-garners-support>

[6] The Economist, The arbitration game, 11 October 2014, <http://www.economist.com/news/finance-and-economics/21623756-governments-are-souring-treaties-protect-foreign-investors-arbitration>

© Copyright 2014 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

Reprinted with permission from Gateway House: http://www.gatewayhouse.in/india-u-s-bit-not-a-done-deal-yet/
and
Quartz India: http://qz.com/332427/the-biggest-investment-deal-between-india-and-the-us-is-nowhere-close-to-completion/