The weakening of BIT protection is bad for business

Bilateral Investment Treaties (BITs) are an important safeguard for investors.

Investors sometimes forget that the converse side of lucrative returns for investing in overseas territories is that host governments sometimes seize their assets. Expropriation, confiscation and nationalisation of assets, often referred to as resource nationalism, is one of the most significant challenges confronting companies operating in developing markets.

Bilateral Investment Treaties (BITs) have for many years acted as a safeguard for investors.  These agreements between states are designed to provide investors with protection in the event of government action or inaction that makes investments unviable. The United Nations estimates BITs cover approximately two-thirds of global FDI and one-fifth of possible bilateral investment relationships.

Today there are over 2,800 BITs in existence. At the heyday of such agreements in 1995, four new agreements were signed every week. By 2012 this figure had declined to a rate of one per week. As it is theoretically possible for over 40,000 BITs to be in existence when one considers that there are around 200 countries in the world, the reason for the decline is more to do with the efficacy of BITs in the presence investment environment, rather than an exhausting of the possibilities.

The appeal of signing BITs has decreased amongst sovereign governments because the stability they bring to the investment environment is perceived to thwart their room for independent action. For foreign investors the appeal of BITs is that they generally offer arbitration under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, better known as the ICSID, the dispute resolution arm of the World Bank. ICSID arbitration has become an increasingly popular and effective forum for dispute resolution, with victorious investors being able, for example, to reclaim assets seized by a host nation overseas. The number of arbitrations against host countries has grown enormously in recent years. In 1997 the number of known Investor v. State disputes in arbitration was seven. By 2012 this number had reached fifty-eight.

South American countries, assisted by the outstanding efforts of Venezuela, which nationalised over a thousand companies during Hugo Chavez’s tenure as president, account for 30 percent of cases registered with ICSID. As one might expect, the developing world accounts for the majority of cases lodged with ICSID, as governments in Russia, Uzbekistan, Bolivia and Uganda have resorted to the outright expropriation of assets to seize a greater share of returns from the exploitation of their natural resources. In contrast, although just six percent of cases concern North America and western European countries, these governments have proved themselves as adept as their counterparts in the developing world at taking the money of foreign investors. In 2012 Canada was sued by a petroleum company for USD250 million, challenging a moratorium on fracking enacted by the government of Quebec.

The ICSID has become a victim of its own success. Aggrieved investors, who have received recompense through the system, believe it performs well. Host nations who have been instructed to honour claims have been less pleased.  There is a widely held view among governments that BITs are too investor friendly, and place too much restriction on a government’s ability to make changes to the legal or regulatory changes that might be in the broader public interest. Governments are citing this apparent bias and lack of freedom as their reasoning not to renew individual treaties. In 2009 the South African government announced that it would not be renewing a treaty with the Belgo-Luxembourg Economic Union when it expired in 2013, and would be allowing all other BITs with European Union states to lapse as well.  

As fewer new BITs are signed and some of those already in existence are permitted to lapse, we will see a broad deterioration in the investment landscape. Future agreements are likely to offer host governments more flexibility to make legal and regulatory changes, which will of course be to the detriment of investors. We are also likely to see less recourse, in treaties which are new or renewed, to robust and independent arbitration forums such as ICSID.

Careful due diligence and the adoption of effective risk management strategies will become even more crucial as protection offered by BITs declines. For those risks that cannot be managed can often be insured. The credit & political risk insurance market continues to evolve and for well structured transactions can offers a final safety net that neutralises many of the more pernicious aspects of country risk.

Dr Elizabeth Stephens is JLT Head of Credit & Political Risk Advisory

Washington, DC – 12 October 2013: (L-R) Federal Reserve Chairman Ben Bernanke of the U.S., Finance Minister Luc Frieden of Luxembourg, IMF Managing Director Christine Lagarde and Finance Minister Tharman Shanmugaratnam of Singapore attend an annual IMF Wo

JLT Head of Credit & Political Risk Advisory

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Inside a shaken city: "I just want to be anywhere that’s not Manchester”

The morning after the bombing of the Manchester Arena has left the city's residents jumpy.

On Tuesday morning, the streets in Manchester city centre were eerily silent.

The commuter hub of Victoria Station - which backs onto the arena - was closed as police combed the area for clues, and despite Mayor Andy Burnham’s line of "business as usual", it looked like people were staying away.

Manchester Arena is the second largest indoor concert venue in Europe. With a capacity crowd of 18,000, on Monday night the venue was packed with young people from around the country - at least 22 of whom will never come home. At around 10.33pm, a suicide bomber detonated his device near the exit. Among the dead was an eight-year-old girl. Many more victims remain in hospital. 

Those Mancunians who were not alerted by the sirens woke to the news of their city's worst terrorist attack. Still, as the day went on, the city’s hubbub soon returned and, by lunchtime, there were shoppers and workers milling around Exchange Square and the town hall.

Tourists snapped images of the Albert Square building in the sunshine, and some even asked police for photographs like any other day.

But throughout the morning there were rumours and speculation about further incidents - the Arndale Centre was closed for a period after 11.40am while swathes of police descended, shutting off the main city centre thoroughfare of Market Street.

Corporation Street - closed off at Exchange Square - was at the centre of the city’s IRA blast. A postbox which survived the 1996 bombing stood in the foreground while officers stood guard, police tape fluttering around cordoned-off spaces.

It’s true that the streets of Manchester have known horror before, but not like this.

I spoke to students Beth and Melissa who were in the bustling centre when they saw people running from two different directions.

They vanished and ducked into River Island, when an alert came over the tannoy, and a staff member herded them through the back door onto the street.

“There were so many police stood outside the Arndale, it was so frightening,” Melissa told me.

“We thought it will be fine, it’ll be safe after last night. There were police everywhere walking in, and we felt like it would be fine.”

Beth said that they had planned a day of shopping, and weren’t put off by the attack.

“We heard about the arena this morning but we decided to come into the city, we were watching it all these morning, but you can’t let this stop you.”

They remembered the 1996 Arndale bombing, but added: “we were too young to really understand”.

And even now they’re older, they still did not really understand what had happened to the city.

“Theres nowhere to go, where’s safe? I just want to go home,” Melissa said. “I just want to be anywhere that’s not Manchester.”

Manchester has seen this sort of thing before - but so long ago that the stunned city dwellers are at a loss. In a city which feels under siege, no one is quite sure how anyone can keep us safe from an unknown threat

“We saw armed police on the streets - there were loads just then," Melissa said. "I trust them to keep us safe.”

But other observers were less comforted by the sign of firearms.

Ben, who I encountered standing outside an office block on Corporation Street watching the police, was not too forthcoming, except to say “They don’t know what they’re looking for, do they?” as I passed.

The spirit of the city is often invoked, and ahead of a vigil tonight in Albert Square, there will be solidarity and strength from the capital of the North.

But the community values which Mancunians hold dear are shaken to the core by what has happened here.

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