ICSID jurisdiction over sovereign bonds

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ICSID Jurisdiction over Sovereign Bonds

Cornélie Marianne den Outer 10194142 July 2015

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Thesis Master International Trade and Investment Law

University of Amsterdam

July 2015

‘ICSID Jurisdiction over Sovereign Bonds’

Cornélie Marianne den Outer 10194142

Mrs dr. Hege Elisabeth Kjos Number of words: 13278

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the advent of unique developments in both sovereign debt restructuring and arbitration at the International Centre for the Settlement of Investment Disputes (ICSID). The ICSID Convention intends to enhance the economic development of countries through the promotion of foreign investment. In order to achieve this end, it offers foreign investors the possibility to initiate claims against host states at the ICSID arbitral tribunal.2_During

Argentina’s one-hundred-month financial restructuring, foreign creditors filed

unprecedented claims against Argentina at ICSID. Creditors holding Argentine sovereign bonds alleged that the Argentine debt restructuring violated their rights under the Bilateral Investment Treaties (BITs) entered into between their home state and

Argentina. 3_{However, until this moment in time it had been unclear whether a sovereign}

bond could qualify as an ‘investment’, which is a jurisdictional requirement under the ICSID Convention and also under International Investment Agreements (IIAs) that provide consent to arbitration.4

In August 2011, the Abaclat v Argentina tribunal held that sovereign bonds were indeed covered by the definition of investment under the BIT, and that they can be considered an investment under the ICSID Convention.5_{However, not all agree with the reasoning}

of the Abaclat tribunal; the award was accompanied by a strong dissenting opinion from one of the arbitrators Abi-Saab.6_{Moreover, earlier this year an ICSID tribunal denied}

jurisdiction over a claim concerning Greek sovereign bonds brought by the Slovak bank Poštová under the Slovakia-Greece BIT.7_{The respective tribunals applied similar}

reasoning, yet the different BITs led to different outcomes. The Poštová tribunal concluded that sovereign bonds do not constitute an investment neither under this particular BIT nor under the ICSID Convention.8

It is debatable whether disputes over sovereign bonds should be admitted into the realm of ICSID jurisdiction. The possibility of being sued in the aftermath of a restructuring might limit a government’s (perceived) room for manoeuvre when handling an economic crisis, which could be to the detriment of a country’s economic recuperation. This is particularly relevant in the context of the current European debt crisis, especially regarding the economic situation of Greece. Nonetheless, the

groundbreaking Abaclat ruling on jurisdiction quite possibly opened the floodgates for increased ICSID involvement in future disputes concerning sovereign debt

restructuring.9

1_{‘Argentina defaults for second time’, BBC (website).}

2_{The enhancement of economic development through the promotion of foreign investment, is an aim of}

the Convention set out in its preamble.

3_{Abaclat v Argentina, formerly: Giovanna a Beccara and others v Argentina.}

4_{Article 25 of the ICSID Convention provides the ratione materiae for jurisdiction, the consent required}

by article 25 is given in the IIA.

5_{Abaclat v Argentina, par. 331 & 367.} 6_{Abi-Saab, dissenting opinion Abaclat.} 7_{Poštová v Greece, par. 350.}

8_{Poštová v Greece, par. 350 & 360.} 9_{Norton, 2012, p. 300-312.}

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Until recently, international law has played a limited role in the resolution of sovereign debt crises, unable either to effectively protect the rights of the creditor or to relieve sovereign debtors. Yet the Abaclat case demonstrates that the tides might possibly be turning.10_{The availability of investor-state dispute settlement through ICSID arbitration}

is advantageous for holders of sovereign bonds. Instead of being referred to a national court of the host state, creditors have the possibility to bring a dispute to an

independent ICSID tribunal. In comparison to national courts, the neutrality and flexibility of arbitral tribunals, as well as the greater enforceability of awards, are significant advantages for creditors.11_{Moreover, the availability of arbitration can}

stabilise the market for sovereign debt due to the increased protection of creditors, and will allow for more balanced bargaining during periods of sovereign debt

restructuring.12

Access to ICSID arbitration is limited by a jurisdictional hurdle, which hinges on, among other criteria, the identification of the disputed transaction as an investment under both the relevant IIA and the ICSID Convention. This paper seeks to answer the question as to whether sovereign bonds constitute such an investment. An analysis of this question requires a differentiation between sovereign bonds at the moment of issuance and when being traded on the secondary markets. This division is a central argument of this thesis as the characteristics of sovereign bonds differ according to the market they are in. Nonetheless, thus far no tribunal has specifically addressed this distinction. Both the

Abaclat and the Poštová cases concern bonds on the secondary market. However, by

referring to sovereign bonds in general, the tribunals implicitly treated bonds on different markets as an economic unity without differing characteristics.13_Abi-Saab,

dissenting in Abaclat, does mention this distinction. Nonetheless, although he argues that secondary bonds do not qualify as an investment, he does not elaborate on whether this would be different for bonds on the primary market.14

Section 2 of this thesis will first define ‘sovereign debt’, ‘bonds’ and ‘sovereign debt restructuring’ and will illustrate these concepts by outlining the facts concerning the Argentine and Eurozone economic crises. Section 2 will also elaborate on the distinction between primary and secondary bonds. Section 3 discusses the establishment of ICSID jurisdiction and will examine relevant jurisprudence on the ICSID Convention’s

jurisdictional requirements. As will be seen, the Convention requires a ‘double-barrelled’ test pertaining to the concept of an investment under both the Convention and under the IIA at hand. For the purpose of determining whether there is an investment under the Convention, ICSID tribunals have developed and to differing extends applied the Salini-criteria; section 4 will therefore look into the possibility of qualifying sovereign bonds as an investment by applying the Salini-criteria. In the application of these criteria, the fourth criterion, which requires a transaction to make a contribution to the economic development of a host country, proves to be the most

10_{Waibel, 2011, p. 19-20 & Norton, 2012, p. 293.}

11_{A party can seek enforcement of pecuniary obligations at all the members of the ICSID Convention,}

article 54 ICSID Convention.

12_{Cross, 2006, p.354-364 & Norton, 2012, p. 300.} 13_{Abaclat v Argentina & Poštová v Greece.} 14_{Abi-Saab, dissenting opinion Abaclat, par. 67.}

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controversial. The contribution-criterion implies some type of positive nexus with the host country’s economic development. Section 5 looks at the definition of investment under different IIAs, which provide consent to arbitration. It then discusses the

application of the IIA definition on sovereign bonds in two famous cases in this regard:

Abaclat and Poštová.15_{The words ‘in the territory’, suggesting that a transaction is}

required to have a legal or material territorial link with the host country, are included in the preamble of many IIAs. The final part of section 5 will discuss whether sovereign bonds could be considered to be ‘in the territory’ of the host state when applying the criteria listed by Abi-Saab for the determination of a territorial link.

In short, the question whether ICSID tribunals have jurisdiction over disputes

concerning sovereign bonds requires the qualification of bonds as an investment; this qualification pivots on three points of contention. The first is the distinction between bonds on the primary and secondary markets. The second point is the establishment of a nexus with the host country in the form of a contribution to the host state’s economy in order for a transaction to constitute an investment under the ICSID Convention. The final point is the identification of a territorial link of a transaction with the host country, which is a requirement in many IIAs.

2 Sovereign Debt, Bonds and Restructuring

Section 2 answers the following set of preliminary questions: what is sovereign debt, what are sovereign bonds and what does sovereign debt restructuring entail? The Argentine and Eurozone crises illustrate the relevance of exploring the scope of ICSID jurisdiction for conflicts arising in the wake of sovereign debt restructuring. The reason for distinguishing between bonds on the primary, and on the secondary market will be discussed in the final part of section 2.

2.1 Sovereign Debt, Bonds and Restructuring

In order to finance their budget deficits, governments take on debts. The national debt of a nation comprises of a combination of internal and external debt. One common way to finance national debt is through the internal or external sale of sovereign bonds to investors, corporations and to other governments. The government borrows money, and in return issues bonds as an acknowledgement of the indebtedness with the promise of periodic payments of interest rates and the agreement to redeem the face value of the bond at maturity. The bonds can be either local-currency-denominated or denominated in a foreign currency. Loans to a government are often considered safe because

governments can raise taxes or, in extreme instances, print more money in order to prevent defaulting.16_{However, bonds issued in a foreign currency are considered to be}

riskier than internal debt as the government does not have the ability to create more money in the currency in which it has sold the bonds. As a result, the more questionable the payment ability of a certain country is, the riskier the sovereign debt becomes. In

15_{Abaclat v Argentina, par. 343-361 & Poštová v Greece, par. 225-350.} 16_{Perry, 2015 (website).}

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such cases, the demand for the bond declines, bringing down its price on the market, propelling the yield level upwards.17

For centuries the issuance of sovereign bonds has been a primary means for governments to raise public funds. For developed and developing countries alike, issuance of bonds has been the instrument of choice for raising long-term funds

domestically and abroad.18_{The size of the international sovereign debt market at time of}

writing constitutes roughly US$ 56 billion (US$ 56 trillion US terminology).19

Some states, such as the UK, the Netherlands and the USA, make use of an intermediary for the issuance of sovereign bonds. These intermediaries are called ‘market makers’ or ‘primary dealers’. While providing continuous two-way price quotes, these primary dealers provide assurance of market liquidity, which means that the market is always able to facilitate the purchase or sale of (a large amount of) sovereign bonds without that transaction affecting the price of the sovereign bond.20

Although the sovereign debt market offers states possibilities to finance their budget deficit, it is not uncommon for countries to find their debt loan unsustainable.

Consequently, after or under the threat of defaulting, countries restructure their public debt. Sovereign debt restructuring refers to the amendments to the originally envisaged payments in order to manage the debt better over time or to reduce its net present value. There is no particular method or forum in which debt can be restructured. However, exchange offers have become the primary means of dealing with

unsustainable sovereign debt. The debtor country generally provides their creditors with a debt-restructuring proposal. With reference to its financial circumstances the country offers to replace the old bonds with new ones that better reflects the country’s ability to repay. These swaps are typically a take-it-or-leave-it deal with significant bondholder losses as the exchange-offers commonly entail a reduction in principal amounts, drops in interest rates or extended payment periods.21

2.2 Argentine and Eurozone Crises

In 2001 Argentina’s default led to one of the most complex and long sovereign debt restructurings in history. The restructuring concerned several hundred thousand creditors and different types of sovereign bonds denominated in six currencies and governed by eight different municipal laws.22_{A sovereign debt crisis does not only affect}

the welfare of a country, it also threatens regional, or even global political and financial stability. The Argentine default catapulted the country into economic and social turmoil where unemployment, poverty and crime levels rose.23_{Against this backdrop the}

Argentine government negotiated its debt restructuring. Concerning its external debt, it

17_{Financial Times Lexicon online (website) & Investopedia (website).}

18_{Waibel, 2011, p. 12 & Financial Times Lexicon online (website) & Investopedia (website).} 19_{Economist World Debt Comparison (website).}

20_{Horgan, 1999 (website).}

21_{Waibel, 2011, p. 14 & Norton, 2012, p. 293.} 22_{Norton, 2012, p. 293-294}

23_{Unemployment went up from 14.7 per cent in 2000 to 18.1 per cent in 2001. The percentage of people}

living below the poverty line went from 29 per cent in 2000 to 52 per cent in 2002. Figures according to the Instituto Nacional de Estadistica y Censos, Encuesta Permanente de Hogares, 1988-2003.

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presented its final debt exchange proposal in 2004. The bondholders were offered to swap their old bonds for new bonds with a two-thirds haircut: a two-third reduction of the face value. Not all creditors accepted this offer, and in 2010 Argentina launched a new swap for the outstanding holders on slightly better terms than those offered in 2004/2005.24_{Adding up both rounds, the creditor participation amounted to 92.5 per}

cent. However, holders of bonds worth initially approximately US $20 billion did not participate in the exchange. A group of these creditors pursued legal claims through international investment arbitration. In 2006, while alleging violations of the Argentina-Italy BIT, 170,000 Italian bondholders initiated the first ICSID arbitration concerning sovereign bonds requesting approximately US $ 5.5 billion in compensation from Argentina.25

The ongoing crisis in the Eurozone or Euro area, the monetary union of 19 European Union (EU) Member States, is also a sovereign debt crisis with Greece as its infamous protagonist. The crisis was the result of the debts accumulated by some of the Eurozone members. As the markets started to question the sustainability of the debt of these struggling members, their suspected default was reflected in their credit ratings. Investors no longer invested in sovereign bonds of these countries or required high yields. As a consequence, the governments lost their main source of financing their budgetary deficit. For some countries public funding from predominantly Eurozone members mended this deficit. For Greece however, this aid was insufficient. The Greek debt was restructured in 2012.26_{Part of the restructuring consisted of retroactive}

legislation: the Greek Bondholder Act. This legislation amended the terms of the bonds and forced creditors to participate in exchange offers that were not to their benefit. Poštová Banka, a Slovak bank, started ICSID proceedings against Greece for losses

incurred due to the 2012 haircut on Greek sovereign bonds. According to Poštová Banka, this restructuring resulted in a diminution of their investment for which they claimed compensation.27

2.3 Primary and Secondary Markets

Regarding the discussion as to whether sovereign bonds constitute an investment for the purpose of ICSID jurisdiction, it is important to distinguish between the issuance of a bond, and the trading of a bond on the secondary market. It has been argued that such a distinction is not necessary, as from a legal point of view some have argued that

although the identity of the bondholder changes when a bond is traded, the bond itself remains constant.28_{In the same vein the Fedax tribunal found that where an investment}

is freely transferrable, all rights attached to that investment, such as the right to arbitrate, should also transfer.29_{In the Abaclat case the majority ruled that a bond’s}

existence in the two separate markets should be considered part of the same economic

24_{Hornbeck, 2013, p. 1-6.}

25_{Abaclat v Argentina, par.235 & Waibel, 2011, p. 15-19 & Waibel, 2007, p. 711 & Norton, 2012, p. 293.} 26_{Poštová v Greece, par.45-50 & Hoffman, 2012 (website).}

27_{Poštová v Greece.}

28_{Sauvant, K. Yearbook on International Investment Law & Policy 2011-2012 (2013) OUP, 500 through}

Glivanos, 2014, p. 478.

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operation.30_{In other words, the rights and obligations pertaining to a bond do not alter}

according to the market in which it is present.

The argument made in this paper however, is that the characteristics of a bond vary according to the particular market they are in, and that not all bonds necessarily transfer into the secondary market. Existence in both markets can therefore not be considered part of the same economic operation. When states issue bonds, these can be bought by first-buyers on the primary market directly from the treasury, generating a flow of financial funds towards the state. Neither primary dealers, nor many regular primary bondholders necessarily keep their bonds until maturity but trade them on an open secondary market without any involvement of the debtor state. At this point, the flow of money is between the buyer and seller on the secondary market in which prices are set based on the conditions prevailing in these capital markets. Here, the bonds are traded within seconds without passage through the territory or the legal system of the issuing state. Although many bonds are prone to transfer from the primary to the

secondary market, it is by no means a given that they always do. Creditors might want to keep their bonds up until maturity and primary dealers might at times be faced with insufficient demand and therefore keep bonds in their portfolio.31_{According to}

Abi-Saab, sovereign bonds have lost all nexus with the issuing state when they enter into the secondary market.32_{However, this is not entirely accurate as the holder of the bond is}

entitled to periodic interest payments by the issuing state and the value of the bond on the capital markets depends on the credit ratings of the issuing state. However, the flow of money from the bondholder to the state is a one-off and it is therefore true that this particular financial link no longer exists on the secondary market.

3 The ICSID Convention

Section 3 seeks to answer the question how jurisdiction is established by ICSID tribunals. As will be discussed, jurisdiction is double-barrelled which means that the necessary combination of jurisdiction ratione materiae and consent to arbitration is established by looking at both the ICSID Convention and the applicable IIA. This section will deal with the scope of the Convention; the span of IIAs will be discussed in section 5.

3.1 The ICSID Convention and International Investment Agreements

The International Centre for Settlement of Investment Disputes was established under the 1965 ICSID Convention, also known as the Washington Convention, which came into force in 1966. At time of writing (June 2015) the Convention has 151 Contracting

Parties. Significant exceptions include Brazil and Mexico. Russia, along with seven other states, has signed but is yet to ratify the Convention.33_{The ICSID Centre administers the}

Convention’s possibility to settle investment disputes between host states and foreign

30_{Abaclat v Argentina, par. 359.}

31_{Abi-Saab, dissenting opinion Abaclat, par. 57, 58, 70 & 71.} 32_{Abi-Saab, dissenting opinion Abaclat, par. 118.}

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investors by means of arbitration or conciliation.34_{The World Bank sponsored the}

Convention,35_{stressing that the basic goal of the ICSID system is to promote}

international investment by offering a neutral dispute resolution forum.36_Nonetheless,

the ICSID centre in Washington DC is not the equivalent of a court, it neither conducts arbitration proceedings nor controls the arbitrators; it merely administers their

initiation and functioning. ICSID brings uniformity into the proceedings by establishing a standard procedure that arbitrators can follow.37_{Despite the fact that ICSID arbitral}

awards do not possess formal precedential value, tribunals frequently rely on past awards, consequently contributing to the slowly growing corpus of international investment law. An award rendered by an ICSID tribunal is in principal final. Following article 52 of the ICSID Convention, an award may only be challenged before an ad hoc committee in certain narrowly defined circumstances relating to formal aspects of the proceedings.38

A Bilateral Investment Treaty (BIT) is a type of International Investment Agreement (IIA) between two states stipulating that a foreign investor with the nationality of one of the contracting states is granted certain treaty protections with regard to the behaviour of the other contracting party: the host state in whose territory the investment is being made. Consent of both parties is needed in order to initiate arbitration proceedings. Initially, investors and host countries had to individually negotiate arbitration clauses consenting to arbitration in investment agreements. IIAs such as BITs and investment chapters of Free Trade Agreements can provide ‘blanket consent’, eliminating the need to establish consent to arbitration in each separate contract.39_{In the last decades the}

number of BITs surged to more than 2279 BITs in force in 2015.40_{IIAs may provide}

direct access to arbitration for alleged breaches of treaty obligations and may call for different arbitration rules to be applied during these proceedings. Examples of

arbitration rules are those of UNCITRAL, ICC and ICSID. This thesis will only focus on the latter. Under the ICSID Convention investor-claimants have the possibility to start

arbitration proceedings against the host country without the obligation to first address the issue through diplomatic protection or to exhaust local remedies.41

3.2 Double-Barrelled Jurisdiction

Article 25 of the ICSID Convention sets up jurisdiction ratione materiae for legal disputes arising ‘directly out of an investment’.42_{Hence ICSID jurisdiction does not cover}

34_{Article 28-35 ICSID Convention handles conciliation, Article 36-55 ICSID Convention handles}

Arbitration, Griffin and Farren, 2005, p. 21.

35_{Officially called: The International Bank for Reconstruction and Development.} 36_{Waibel, 2007, p. 716 & Reed et al., 2011, p. 1-2.}

37_{Reed et al., 2011, p. 1-10 & Grabowski, 2014, p. 291-293.} 38_{Waibel, 2011, p. 209-211 & Waibel, 2007, p. 716-717.} 39_{Waibel, 2011, p. 209-213.}

40_{UNCTAD Investment Policy Hub (website).}

41_{Article 36 ICSID Convention & Waibel, 2011, p. 209-210 & Waibel, 2007, p. 716-717.}

42_{Article 25 ICSID Convention: “}_{(1) The jurisdiction of the Centre shall extend to any legal dispute arising} directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State,

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commercial transactions but is intended to cover investment disputes. The exact scope of ‘investment’ however, is not given by the Convention.43_{The lack of definition in the}

Convention has made jurisdiction a point of contention under ICSID.

Before the surge of BITs, it was commonly accepted that by including an ICSID

arbitration clause in an international investment contract, parties implicitly agreed that they were dealing with an investment under article 25 ICSID. With the rise of IIAs, containing an investment-definition and an arbitration clause, consent to arbitration was established when recognizing that the dispute concerned an investment as defined in the IIA. Consequently, a double review for ICSID jurisdiction became the norm. A double-barrelled review requires the establishment of an investment under both the Convention and the respective IIA: i.e. an investment should be present under the IIA to establish consent, which is required in conjunction with an investment under the Convention itself in order to establish jurisdiction.44_{Parties are free to formulate their}

own definition of investment in the IIA; the definition in the Convention however, cannot be altered. This means that although not defined, the term ‘investment’ in art. 25 ICSID does form the outer limit of what constitutes an investment.45

Although it is widely recognized that jurisdiction is double-barrelled, the relationship between the two ‘barrels’ has vexed a number of tribunals. Aron Broches, former general counsel of the World Bank and spiritual father of the Convention, pointed out that the absence of a definition in the Convention should not lead to unlimited

jurisdiction. He agreed that the fundamental condition for jurisdiction is consent, but stressed that consent alone is not enough. The jurisdiction of ICSID is limited by the nature of the dispute.46_{In Salini the tribunal noted in that regard:}

“It would be misguided to consider that demand of a dispute ‘directly related to an investment’ can always be equated with the consent of the contracting parties (…) the case-law of the ICSID and commentators are consistent in regarding the necessity of an investment as an objective condition for the Centre’s jurisdiction to be activated.”47

The definition in the Convention has to set the outer boundaries of ICSID jurisdiction; otherwise countries would be able to submit any type of dispute to ICSID arbitration regardless of the subject matter. This would then result in unlimited jurisdiction. Prosper Weil dissenting in Tokio Tokelés and the Joy Mining tribunal cautioned against interpreting the Convention’s silence as a carte blanche for jurisdiction, turning article 25 ICSID into a meaningless provision.48_{The annulment committee in Mitchell v DRC,}

confirmed this view and pointed out that: “the special and privileged arrangements

which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may with- draw its consent unilaterally.” (Emphasis added).

43_{Rand et al, 1986, p. 36.} 44_{See footnote 42.} 45_{Waibel, 2011, p.212}

46_{The Report of the Executive Directors on the Convention on the Settlement of Investment Disputes}

between States and the National of Other States, 1965, section V.

47_{Salini et al v Morocco, par. 52.}

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established by the Washington Convention can be applied only to the type of investment which the Contracting States to that Convention envisaged.”49

Notwithstanding the considerable concurrence on the necessity of double-barrelled jurisdiction50_{, a certain tension remains between the definition in the Convention and}

the respective IIA. Parties are free to define their concept of investment in the IIA; consequently this constitutes an obstacle to the predictability and consistency of ICSID jurisdiction questions. It has been argued that the Convention’s definition should gloss over these inconsistencies by applying a clearly outlined concept of investment.51

However, it remains disputed what this outer limit should be.

Krishan distinguishes two options regarding the limits of ICSID jurisdiction and the relationship between the Convention and the IIA.52_{The first, the subjective approach,}

puts the onus on the definition in the IIA and considers that in the absence of any limitation to the concept of investment in the Convention, the outer limits set by the Convention should be very broad. Accordingly, parties may widen or narrow the scope of jurisdiction by drafting a broader or more limited definition in the IIA.53_{E.g. in the}

Abaclat decision on jurisdiction, the tribunal applied a simple and broad ‘contribution to

the generation of value test’ in order to qualify the investment under the Convention and focused instead on the definition under the BIT.54_{The second, objective, option is to}

formulate benchmark requirements reflecting the scope of the Convention, which means that a transaction qualifies as an investment under the Convention if it meets certain criteria.55_{An example of this are the Salini criteria discussed below.}

Although double-barrelled ICSID jurisdiction is a well-established and accepted concept, it is worth juxtaposing this view with some final remarks as it has become clear e.g. from the Abaclat decision that tribunals have considerable leeway in the interpretation and application of a double-barrelled test for jurisdiction. The Abaclat tribunal viewed the relationship between the definition under the Convention and under the BIT as focusing on different elements of an investment. According to the tribunal the definition under the BIT focuses on the fruits and value generated by the investment. The Convention on the other hand, aims to protect the contributions, which constitute the investment.56

Accordingly, double-barrelled does not mean that one definition forms the outer limit in which the other must fit, but that the investment needs to fit within both concepts, bearing in mind that each focuses on a different aspect of the investment.57_{Although it}

is widely rejected that jurisdiction is solely depended on the consent of the parties and on their definition of investment, the tribunal in Pantechniki did pose the question whether the term investment in the Convention carries a meaning that is “so clear that it must be deemed to invalidate more extensive definitions of the word investment in

49_{Mitchell v DRC (Annulment), para 31.}

50_{The requirement of double-barrelled jurisdiction was e.g. also confirmed by}_{SGS v Philippines, par. 154.} 51_{Harb, 2011, p. 8.}

52_{Krishan, 2008, p. 5-7.} 53_{Krishan, 2008, p. 5-7.}

54_{Abaclat v Argentina, par. 366-367.} 55_{Krishan, 2008, p. 5-7.}

56_{Abaclat v Argentina, par. 350-351.} 57_{Fouret and Khayat, 2013, p. 115.}

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other treaties”.58_{In other words, it wonders why the ICSID definition is granted so much}

authority as constituting an outer limit. Even widely endorsed outer limits cannot be elevated to jurisdictional requirements unless the Convention compels it. In favouring the Convention’s definition, subjective judgement of the tribunal is required, which transforms judicial organs into policy-makers and enhances the unpredictability of decisions on jurisdiction under ICSID.59_{Notwithstanding the relevance of this}

discussion, it should be noted, that the conceptual decomposition of investment is only an issue in the margin of ICSID subject matter jurisdiction, as in most cases there will be no discussion as to whether a transaction fits within the scope of both, or neither

definitions.60

In summary, a double-barrelled review test for ICSID subject matter jurisdiction is the standard practice. An international investment has to qualify as such under both the Convention and the relevant IIA or investment contract stipulating consent to ICSID arbitration. There is no definite answer to the question as to how the two definitions relate to each other. Although it is commonly accepted that the Convention forms the outer limits of the jurisdiction, tribunals differ in whether this outer limit is a broad outline or a set of benchmark criteria.61

3.3 Defining ‘Investment’ under article 25 ICSID Convention

The word ‘investment’ has been introduced in the text of article 25 as a qualifier before the word ‘disputes’ in order to limit the ambit of the jurisdiction.62_{The inclusion of}

investment in the text implies that ICSID subject matter jurisdiction, whilst flexible enough, is not infinitely elastic. It leaves a wide margin for states to interpret and further specify the notion of investment in IIAs, but not to the point that the term is rendered completely vacuous and without any legal effect.63_{The omission of a definition of the}

term ‘investment’ in the ICSID Convention was deliberate and enabled a broad interpretation of the subject matter over which ICSID tribunals are granted

jurisdiction.64_{Although it was generally held among the representatives that a definition}

was necessary, they could not agree on an acceptable definition and therefore

deliberately left the term undefined. Instead, they settled on the expectation that while the outer limit should be flexible, state consent granted in the IIA, would define the scope of the jurisdiction according to the wishes of the parties.65_{Moreover, they}

believed that the tribunals would be better equipped to develop a useful test or

definition of ‘investment’ as they were closer to the facts on the ground.66_{The definition}

of investment can be deduced from its ordinary meaning, preparatory works of the

58_{Pantechniki v Albania, par. 43} 59_{Pantechniki v Albania, par. 38-43} 60_{Waibel, 2011, p. 215.}

61_{Grabowski, 2014, p. 289.} 62_{Schreuer, 2009, p. 110-112.}

63_{Abi-Saab, dissenting opinion Abaclat, par. 46.} 64_{Rand et al, 1986, p. 35.}

65_{Hwang and Fong, 2011, p. 114.} 66_{Biwater Gulf v Tanzania, par. 312.}

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Convention, subsequent practice of ICSID tribunals, arbitral awards and doctrine.67

Nonetheless, ICSID tribunals have experienced difficulties in finding a definition apt to be rendered conclusive and have applied a plethora of differing tests. As a result, this area of international law lacks legal certainty for parties involved.68

The first rigorous analysis of the definition of ‘investment’ was given in Fedax N.V. v The

Republic of Venezuela.69_{This case from 1997 laid the foundation for what would}

eventually become a four-part test formulated in Salini et al. v Morocco.70_{The Fedax}

dispute concerned a set of debt instruments, six promissory notes, that Venezuela had issued to Fedax and which Venezuela then refused to honour. The claimant had acquired the notes on the secondary market. Venezuela argued that the promissory notes were not a foreign direct investment and therefore did not constitute an investment ex. Art. 25 ICSID. Venezuela stated that an investment entails: “A long term transfer of financial resources -capital flow- from one country to another in order to acquire interests in a corporation, a transaction which normally entails certain risks to the potential

investor.”71_{The panel in Fedax rejected Venezuela’s classic definition of a direct}

investment. Although it did not give a clear definition of the term, it did list some important hallmarks of an investment e.g. certain duration and the contribution to a host state’s development. These features would later become part of the Salini test. According to the tribunal there was nothing that prevented the purchase of promissory notes or other financial instruments such as sovereign bonds in certain circumstances to qualify as an investment. The tribunal gave special weight to the fact that the

transactions involved a fundamental public interest as they contributed to the Venezuelan treasury and therefore to its economic development, which set the

transactions apart from normal commercial transactions.72_{Waibel however, argues that}

the mere presence of a public interest does not transform a commercial transaction into an investment because there is no sound basis in the Convention for this reasoning.73

3.4 The Salini Criteria

A dispute between two Italian companies and the Moroccan government set the scene for the facts out of which the Salini-test was born. Salini Construttori and Italstrade had jointly won a bidding issued by the Moroccan authorities for the construction of a highway in Morocco. The two companies had completed the highway beyond the scheduled end date and the Moroccan government therefore refused to pay for the highway. After having exhausted domestic channels, Salini and Italstrade submitted the dispute to ICSID arbitration.74_{The arbitrators in Salini set out to develop a test that}

could determine if the companies had in fact made an investment as to enable jurisdiction under ICSID. In order to do so they looked at previous international

67_{Waibel, 2011, p. 212.} 68_{Grabowski, 2014, p. 289} 69_{Fedax N.V. v Venezuela, par. 16.} 70_{Salini et al. v Morocco, par. 52.} 71_{Fedax N.V. v Venezuela, par. 19.}

72_{Fedax N.V. v Venezuela, par. 41-43 & Grabowski, 2014, p. 296 & Reed et al, 2011, p. 67.} 73_{Waibel, 2011, p. 219.}

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investment law decisions and extrapolated three elements from the case law.75_They

then added a fourth element after the examination of the ICSID Convention’s preamble. The preamble makes special mention of the role of international investment for

economic development.76_{The ICSID Convention’s preamble reads in relevant part: “The}

Contracting States; Considering the need for international cooperation for economic development, and the role of private international investment therein.”

The tribunal thus constructed a so-called benchmark test for the establishment of whether a particular transaction constitutes an investment under the ICSID Convention. According to the Salini tribunal, in order to constitute an investment, the four

cumulative elements of the test that need to be met are: 1) a contribution of money or assets;

2) a certain duration over which the project was to be implemented; 3) an element of risk; and

4) a contribution to the host state’s economy.77

Although the criteria are considered by the tribunal to be cumulative, the tribunal does note: “In reality, these various elements may be interdependent. Thus, the risks of the transaction may depend on the contributions and the duration of performance of the contract. As a result, these various criteria should be assessed globally even if, for the sake of reasoning, the Tribunal considers them individually here”.78

An objective core meaning of the term investment under ICSID strengthens legal certainty. However, according to Schreuer it is not realistic to attempt to find an objective definition of investment.79_{Instead, he reflects upon typical characteristics of}

an investment, which show great similarity to the Salini criteria. However, whereas the Salini hallmarks were formulated as benchmark criteria, Schreuer’s list was intended to be mere descriptive and subject to adaptations. Nonetheless, subsequent tribunals have given the elements normative content. Schreuer however later reacts to this

development by emphasising again that: “these features should not necessarily be understood as jurisdictional requirements but merely as typical characteristics of

investments under the Convention.”80_{Typical characteristics of an investment according}

to Schreuer are certain duration, a regularity of profit and return, the assumption of risk and the substantiality of the commitment. As a fifth element he adds the significance for the host state’s development. The latter is not a feature of investments in general but reflects the object and purpose of the Convention,81_{and therefore constitutes a feature}

of investment under the Convention.82

Although the Salini-test has invoked a lot of controversy, especially regarding its fourth element, tribunals have freely mixed and matched the criteria in order to best aid their

75_{Salini et al v Morocco, par. 52.} 76_{Grabowski, 2014, p. 296-297.} 77_{Salini et al v Morocco, par. 52.} 78_{Salini et al v Morocco, par. 52.} 79_{Schreuer, 2009, p. 128.} 80_{Schreuer, 2009, p. 128.}

81_{Based on the preamble of the Convention and on the Executive Directors’ Report}_. 82_{Schreuer, 2009, p. 128.}

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assessment of whether a certain transaction qualifies as an investment. Even

subsequent tribunals that rejected or modified the test used the elements as a starting point, demonstrating that Salini does have a certain degree of legitimacy.83

Joy Mining v Egypt concerned a dispute regarding a contract to provide mining

equipment that was supposed to replace the equipment already in place in a phosphate-mining project. The equipment was faulty for which both parties blamed each other.84

Egypt argued that the dispute fell outside ICSID jurisdiction as it concerned a simple contract for sale. The tribunal applied the Salini test in its entirety and contended that although the contract did include some additional activities such as engineering and design, maintenance and supervision of installation, training and technical assistance, these features akin to the supply of complex equipment do not morph a contract into an investment.85_{In another case against Egypt, Jan de Nul N.V the panel established that the}

dispute was within its purview. After having reviewed previous ICSID case law, the tribunal decided to adopt the Salini-test in its totality and noted that the application of this test should be done while taking into consideration all other circumstances

concerning the case.86

Some tribunals have accepted the validity of the Salini test as useful guidance but not as a rigid jurisdictional requirement. Biwater Gauff v Tanzania for example, contended that the criteria are not fixed or mandatory as a matter of law but mere yardsticks to the aid of tribunals assessing the existence of an investment.87_{In the absence of a strict}

definition given by the Convention, the tribunal advocated a more flexible approach, applying the Salini test alongside all other circumstances of the case. Reasoning that if contracting states intentionally left investment undefined, tribunals should not

endeavour in finding a fixed or autonomous definition set to prevail in all cases.88

There is however a broad, though not absolute, agreement that article 25 of the Convention sets boundaries to ICSID jurisdiction and that consequently the term investment, despite its elusiveness, should have an identifiable core. Nonetheless, considering the liberty every tribunal has in establishing the existence of an investment, the craving for some legal certainty regarding the definition of investment ex article 25 is difficult to satisfy. When extrapolating from the case law it becomes clear that

advocates and opponents of the Salini-test alike have applied its criteria as the starting point of their argumentation. Indeed, Grabowski argues that Salini offers a persuasive precedent that should be followed.89_{According to him, the rigid Salini-test creates}

certainty, which enhances investment activity, i.e. the reason for which ICSID was created. The value of precedents in international law differs among the range of

international organisations and balances between predictability and giving justice to an individual case. Grabowski reasons that an organisation such as ICSID is apt to apply precedents more strictly as it deals with well-informed parties who would benefit from

83_{Grabowski, 2014, p. 297.}

84_{Joy Mining Machinery v Egypt, par. 15-21.}

85_{Joy Mining Machinery v Egypt, par. 15-16, 31-34, 53.} 86_{Jan de Nul N.V. v Egypt, par. 91-96.}

87_{Biwater Gauff v Tanzania, par. 312 & Reed et al, 2011, p. 68.}

88_{Biwater Gauff v Tanzania, par. 312-313 & Waibel, 2011, p. 228-229.} 89_{Grabowski, 2014, p. 289-302.}

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more legal certainty, which is necessary for the planning of their international

operations. Moreover, article 31 of the Vienna Convention on the Law of Treaties90_that

deals with the general rules of treaty interpretation, mentions subsequent practice and preambles to be considered part of the text of the treaty and therefore relevant for the interpretation of the treaty. In other words, the ICSID Convention’s preamble and subsequent case law add to the interpretation of the term ‘investment’ in the

Convention. This argument therefore counsels for the retention of the Salini doctrine for the interpretation and definition of investment and particularly for the inclusion of its fourth element, which stems from the preamble of the Convention.91_{The argument that}

case law should be considered ‘subsequent practice’ however, casually glosses over the fact that “which establishes the agreement of the parties” could also refer to the parties to the Convention, and not only the parties to this particular dispute.

Nonetheless, the Salini doctrine has not convinced all. According to Krishan the use of any ‘test’ to qualify transactions as investments under the ICSID Convention does not bode well for the entire investment dispute realm.92_{Grabowski views the fact that the}

Salini-test is widely adopted and applied as a sign of its legitimacy,93_{Krishan however}

sees no apparent reason, apart from populism, for the accession of the Salini-criteria to the ‘pinnacle of reason’.94_{The cumulative criteria of the Salini-test are rigid and freeze}

the definition of investment. Investment however, is a fluid concept that even

economists are hesitant to pin down. Instead of utilising rigid benchmark requirements such as the Salini-criteria, Krishan advocates a subjective approach. The definition under the Convention should be regarded as signposting the outer limits of what may

constitute an investment. The necessary requirements indicating which transactions actually fall within the jurisdictional scope of the tribunal, would be those set out in the document stating the written consent to arbitration, e.g. the IIA.95_{A second argument}

Krishan puts forward against the adoption of an objective approach such as the Salini-criteria is that such Salini-criteria, designed by a particular tribunal, contradict the ICSID structure. The ICSID Convention is a multilateral treaty and every state party to this treaty has an equal interest in, and authority to the formulation of an objective definition of the term investment. Furthermore, there is no multilateral authority granted to

individual tribunals to identify such objective definition. As a result, the definition of a provision for any purpose other than the dispute at hand would amount to an

abrogation of the sovereign authority of the other states. Hence the identification of an objective definition falls upon the parties to the treaty; tribunals are to merely declare pre-existing definitions.96

90_{Article 31 VCLT: 1. A treaty shall be interpreted in good faith and in accordance with the ordinary}

meaning tobe given to the terms of the treaty in their context and in the light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes (…) 3. There shall be taken into account together with the context: (a) any subsequent agreements between the parties regarding the interpretation of the treaty or the

application of its provisions (…).

91_{Grabowski, 2014, p. 289-302.} 92_{Krishan, 2008, p. 1-11.} 93_{Grabowski, 2014, p. 289-302.} 94_{Krishan, 2008, p. 9.} 95_{Krishan, 2008, p. 1-11.} 96_{Krishan, 2008, p. 1-11.}

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Were the Salini-test to be rejected because it is based on the view of one particular tribunal, question remains what a sound, objective alternative would be. A sole focus on the definition in the respective IIA is not possible in the light of required

double-barrelled jurisdiction. Krishan offers two possibilities. The first suggestion is a party-autonomy based approach that calls for the extrapolation of a definition from the thousands of investment treaties currently in force. The second suggestion is to utilise the definition of investment stated in the International Monetary Fund’s Articles of Agreement, which is signed by 184 states and therefore has a certain degree of

authority. Krishan explains the IMF definition of investment as including transactions that pass through a country’s capital account, but presumptively excluding transactions passing through the country’s current account.97_{According to the categorisation of the}

IMF, both direct and portfolio investments fall within the definition of investment. Douglas suggests two rules for the definition of investment, which boil down to the retention of three of the Salini-criteria.98_{According to Douglas, the only applicable}

criteria are a certain contribution of money or assets, duration and risk. He thus

excludes the necessity of an investment contributing to the economic development of a host country. His main concern however, lies with the legal certainty given by the

definition. Investors must know from the outset whether the investment they made falls within the jurisdictional scope of ICSID tribunals.99

Although the Salini-hallmarks have been much disputed, opponents and proponents alike have utilised the criteria as a starting point in their reasoning concerning the presence of an investment under article 25 ICSID. Schreuer notes that in cases in which the tribunal did apply the Salini-criteria, it is not entirely clear whether the tribunals did so because they regard the criteria as benchmark requirements or as mere illustrative indicators of what features an investment may have. However, according to Schreuer, the repeated application of the criteria does strengthen the perception of tribunals utilising the criteria not as a mere indicative guideline but rather as a mandatory standard.100

In the discussion on the suitability of the Salini-requirements as a benchmark test, the fourth element, ‘the contribution to the economic development’-requirement has proven to invoke the most controversy. Indeed, in the application of the Salini criteria for the assessment of whether sovereign bonds constitute an investment, the fourth element is most likely to become a dominant point of contention. Although less debated, since the Poštová decision on jurisdiction, the presence of a certain degree of risk might be the

97_{Krishan, 2008, p. 19.}

98_{Rule 22: “The legal materialization of an investment is the acquisition of a bundle of rights in property}

that has the characteristics of one or more categories of an investment defined by the applicable

investment treaty where such property is situated in the territory of the host state or is recognized by the rules of the host state’s private international law to be situated in the host state or is created by the municipal law of the host state.” (Douglas, 2009, par. 77 & 161)

Rule 23: “The economic materialization of an investment requires the commitment of resources to the economy of the host state by the claimant entailing the assumption of risk in expectation of a commercial return.” (Douglas, 2009, par. 189).

99_{Hwang and Fong, 2011, p. 116-117.} 100_{Schreuer, 2009, p. 130.}

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other hallmark that will be difficult to satisfy in future disputes regarding sovereign bonds.101_{Therefore, these two elements will be discussed in more detail below.}

3.4.1 Risk

Poštová was the first judgement in which the tribunal explicitly addressed the question whether sovereign bonds would fall within the scope of article 25 of the ICSID

Convention.102_{Although the judgment was mere hypothetical and pro-forma because}

the disputed sovereign bonds had already failed to meet the test under the applicable BIT, the tribunal did state that if it were to assess the presence of an investment in terms of the Convention, the emphasis would have been on the establishment of a risk and on a contribution to the host state’s economy.103_{Regarding the former hallmark, the tribunal}

distinguished three types of risks: (i) the commercial risk of non-performance, (ii) a sovereign risk of government interference in a contract or relationship and (iii) an operational risk.104_{It reasoned that all economic activity entails a certain degree of risk.}

Risk as a general notion cannot therefore set apart an investment from a regular

commercial transaction. Only the presence of an operational risk is a benchmark for the establishment of an investment. The tribunal adopted the Romak tribunal’s definition of operational risk, which states:

“a situation in which the investor cannot be sure of a return on his investment, and may not know the amount he will end up spending, even if all relevant counterparties

discharge their contractual obligations. Where there is ‘risk’ of this sort, the investor simply cannot predict the outcome of the transaction.”105

The Poštová tribunal’s approach to the risk-element diverges from ICSID case law, which has always confirmed the existence of risk in the application of the Salini-criteria.106_In

Fedax, the dispute itself was considered an indication of the existence of risk.107_{In Joy}

Mining the tribunal reasoned that risk was inherent to any long-term commercial

contract.108

3.4.2 Contribution to the Host State Economy

In the discussion on the suitability of the Salini-criteria, the fourth element has been the most debated and rejected. The fourth element is argued to emanate from the

Convention’s preamble, stating: “the need for international co-operation for economic development and the role of private international investment therein”, this supposedly enhances the authority of the fourth requirement as a valid criterion. The tribunal in the

Victor Pey Casado case however, also took consideration of the text and in particular the

101_{Poštová v Greece, par. 371.} 102_{Poštová v Greece, par. 360.} 103_{Poštová v Greece, par. 360.} 104_{Poštová v Greece, par. 367.}

105_{Romak S.A. v Uzbekistan, par. 229-230.} 106_{Schreuer, 2009, p. 131.}

107_{Fedax v Venezuela, par. 40.} 108_{Joy Mining v Egypt, par. 57.}

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preamble of the Convention but drew a different conclusion. According to this tribunal, a contribution to the host state’s economy would hopefully be the outcome of an

investment, but is not a constitutional element of the investment.109_{Similarly, in Saba}

Fakes v Turkey the arbitrators contended that in establishing whether Mr Fakes had

made an investment, the fourth element of the Salini-test did not need to be applied at all. Based on a pure textual interpretation of the basic meaning of the word investment the arbitrators concluded that unlike the fourth prong, the first three elements were indispensable and satisfactory for the qualification of an investment.110_{In LESI S.p.A. v} Algeria the arbitrators chose to omit the fourth prong due to procedural reasons as they

considered that ‘contribution to a host state’s economy’ would be an element that is difficult to assess and implicitly already covered by the first three elements of the Salini- test.111_{According to Waibel a contribution to the development of the economy is an}

element that would be difficult to operationalize which would not be to the benefit of arbitral economy.112_{Douglas views the subjective nature of the fourth criterion as an}

impediment to its applicability. He takes the position that “whether or not a commitment of capital or resources ultimately proves to have contributed to the economic development of the host state can often be a matter of appreciation and generate a wide spectrum of reasonable opinion.”113

Those in favour of the fourth element view the fact that it springs from the Convention’s preamble as a solid ground for its authority. As mentioned earlier in section 3.4, in accordance with article 31(2) of the Vienna Convention on the Law of Treaties,

preambles can be used for the interpretation of undefined terms in treaties. Although a preamble is not binding, it does reflect the intention for the aim and functioning of the agreement and the motivation of states for entering into that agreement. According to Abi-Saab, states thus intended to generate economic development through the

encouragement and protection of international investments. He therefore regards the fact that a transaction contributes economically to the host state’s development as constitutive for an investment as defined in the Convention.114_{Hwang and Fong would}

agree with this vision as according to them, the contribution-element, while not perfect, is a way of capturing the ‘amorphous distinction’ between an investment in the ICSID sense and a regular commercial transaction.115_{Although Hwang and Fong agree that the}

critics and concerns about the fourth element are not without merit, they argue that in order to enhance the objectivity and legal certainty of the Convention’s interpretation, the fourth hallmark helps to further refine the term investment, and should therefore not be eliminated. Moreover, if this criterion would be excluded, the other three criteria could easily be superficially matched.116_{For example, many commercial loans may meet}

the first three criteria, but only few loans would also meet the fourth element. The tribunal in the CSOB-case decided that a particular loan constituted an investment and stated: “The tribunal considers that the broad meaning which must be given to the

109_{Victor Pey Casado and President Allende Foundation v Chile, par. 232 & Grabowski, 2014, p. 299.} 110_{Saba Fakes v Turkey, par. 110 & Grabowski, 2014, p. 298-299.}

111_{LESI S.p.A. v Algeria, par. 72 & Grabowksi, 2014, p. 299.} 112_{Waibel, 2011, p. 234.}

113_{Douglas, 2009, par. 408.}

114_{Abi Saab, dissenting opinion Abaclat, par. 49.} 115_{Hwang and Fong, 2011, p. 119.}

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notion of an investment under Article 25(1) of the Convention is opposed to the

conclusion that a transaction is not an investment merely because, as a matter of law, it is a loan. This is so, if only because under certain circumstances a loan may contribute substantially to a State’s economic development”.117

Hence, those in favour of including the contribution to the economy requirement reason that the criterion should not be regarded as a hard calculable measure but as a criterion to purposively interpret the Convention. Considering that economic development is a major purpose for concluding IIAs,118_{the assessment of the first three criteria should be}

done while simultaneously taking into account the consideration whether this particular transaction contributes to that objective, and whether the parties to the Convention envisaged such transactions to be included. This element cannot be set aside as a mere desirable byproduct of an investment. Schreuer notes that a purposive approach supports the presumption that a transaction designed to contribute to the economic development of the host country constitutes an investment. However, this does not mean that a transaction that does not obviously contributes to the economic

development, automatically lies outside the realm of the Convention.119

The tribunal in Poštová applied the contribution requirement in its assessment of whether sovereign bonds are an investment by splitting it up into two concepts. It first considered that an investment, in an economic sense, is linked to the process of creating value, and that without a contribution to an economic venture there can be no

investment. The creation of value is the feature that distinguishes investments from sale; the latter is a mere process of exchange of values. The tribunal then added that when it concerns the purchase of sovereign bonds, ‘contribution to economic development’ requires the transaction to contribute to an economic activity of the state.120_{The second}

element of the Poštová reasoning is that, if sovereign bonds are to contribute to an economic activity of the state, it is of paramount importance what the sum raised is used for. In order for this money to be deemed creating value, and thus be a contribution to the host state’s economy, it has to be used in economically productive activities within the country. If the government uses the money to pay off debts, instead of investing it in e.g. the construction of public infrastructure, it cannot be considered an investment.121

Krishan would not agree with this statement. Krishan reasons that such economic contribution is always the case, regardless of whether the incoming funds are used for public spending or to pay-off pre-existing debts. He explains that as a Balance of Payments means that the current account122_{of a country must be offset by the capital}

account,123_{the two accounts are inversely related. The balance of the two accounts must}

be offset by a third account: the cash account. The cash account is the balancing factor, which determines the liquidity needed to close the gap between the current and the capital account. An increase of the capital account leads to a decrease of the needed

117_{CSOB v. Slovakia, par. 76.} 118_{Hwang and Fong, 2011, p. 121.} 119_{Schreuer, 2009, p. 134.}

120_{Poštová v Greece, par. 360-363, Hwang and Fong, 2011, p. 119-122.} 121_{Poštová v Greece, par. 360-363.}

122_{Surplus or deficit trade balance with the rest of the world.}

123_{Surplus or deficit payments balance with the rest of the world. The capital account consists of foreign}

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reserves. Investment lessens the stress on the country’s monetary reserves as it

contributes to the capital account and frees up money to be spent on other purposes. As a result, flow of financial funds into a country’s treasury in theory always contributes to the economic development of a state.124

However, what does begin to implicitly become clear is that in order to match the contribution to the economy element, there has to be a financial link, i.e. with an economic venture within the host state or with the host state itself. Linking financial instruments to an economic purpose in order to qualify transactions as an investment is a purpose-orientated approach that was also adopted in the Fedax and CSOB cases.125

Mirroring that requirement, in Joy Mining and Alps Finance financial instruments were not considered an investment on their own because they lacked a link with an economic venture.126

According to Waibel, a territorial link of the investment with the host state’s territory is implied within the term investment in article 25 of the Convention. He argues that the regime of IIAs and the gateway it offers to investor-state dispute resolution at ICSID, is designed to counterbalance the disadvantage a foreign investor encounters vis-à-vis a host state’s authority in its territory. In other words, a link with the host country is inherent to the system; set up to create a more secure investment climate for foreign investors.127_{Waibel argues that an investment should have a territorial link with the}

host country in the form of a physical presence. A mere financial flow he argues would not be enough to establish such link.128_{This line of reasoning does not make clear}

however, why a financial flow to a host country is not to be considered a contribution to the host state’s economy. Yes, a physical presence reflects the traditional notion of a foreign direct investment, yet this physical presence is not a requirement under the Convention. The Report of Executive Directors on the Convention stipulates that ICSID was set up with the aim to stimulate the flow of private international capital into those countries and territories, which wish to attract it.129_{Hence, it is not clear why this link,}

according to Waibel, should be limited to economic ventures of the state or within the state and cannot be stretched to include a financial contribution to the state.

4 Are Sovereign Bonds an Investment ex article 25 ICSID?

In the light of a lacking definition, bonds and other financial instruments are at the core of the controversy regarding the scope of investment ex art. 25 ICSID. As discussed above, two differing approaches can be distinguished: an objective and a subjective approach, the former can be split up in a broad outline-requirement and benchmark-requirements. An example of benchmark-requirements is the Salini-test. In this section the Salini-criteria will be applied to sovereign bonds in order to assess whether they

124_{Krishan, 2008, p. 22-23.}

125_{CSOB v Slovakia, par. 88 & Fedax v Venezuela, par. 42.}

126_{Joy Mining v. Egypt, par. 60-63 & Alps Finance v. Slovak Republic, par. 93-112 & Poštová v Greece, par.}

365.

127_{Waibel, 2011, p. 238-240.} 128_{Waibel, 2011, p. 238-242.}

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constitute an investment. The emphasis in the application of this test will be on the ‘risk’ and ‘contribution to the host state’s economy’ requirements.

4.1 Subjective Approach

According to the subjective approach, the relevant IIA supplies the definition of

investment. In order to enhance economic development pursuant to the preamble of the Convention,130_{tribunals accept jurisdiction over a broad spectrum of economic activity}

in order to accommodate the parties’ views on what constitutes an investment.131_Thus

the Convention provides a broad outer limit and the main reference regarding jurisdiction should be found in the document providing consent: e.g. the BIT.132

Regarding the jurisdiction over sovereign bonds it is therefore presumed that the ICSID definition is broad and jurisdiction falls or stands depending on the definition provided by the IIA.

In the groundbreaking Abaclat decision on jurisdiction, the tribunal endorsed the

concept of double-barrelled jurisdiction but rejected the Salini-criteria. According to the tribunal, it is contradictory to the aim of the Convention to exclude parties from

procedural protection under ICSID when the Salini requirements are not met. The aim of the Convention is “to encourage private investment while giving the parties tools to further define what kind of investment they want to promote.”133_{The tribunal simply}

concluded that the purchase of security entitlement in the bonds constituted the required ‘contribution generating value’ that Argentina and Italy intended to protect under the BIT. In other words, the security entitlements in Argentinian bonds

constituted a contribution that qualified as investments under Article 25 ICSID.134_{As a}

result, the only real test was under the Argentina-Italy BIT.

If the subjective approach were to be followed, the key to ICSID jurisdiction over

sovereign bonds lies with the definitions provided in IIAs. This element will be discussed in chapter 5.

4.2 Objective Approach

The other possibility in dealing with the lacking definition is to identify the core hallmarks of an investment that cannot be set aside by a definition in another legal instrument such as a BIT.135_{The Salini test is the key example of such an objective}

approach. In order to constitute an investment, a transaction requires a contribution of money or assets, certain duration, an element of risk and a contribution to a host state’s economy. Whilst considering that these criteria, although extensively referred to and applied by tribunals, are neither cumulative nor precedent setting, sovereign bonds will

130_{Which states the need for international cooperation and economic development and the role of private}

international investment therein.

131_{Griffin and Farren, 2005, p. 21.}

132_{Poštová v Greece, par. 357; CSOB v. Slovakia, par. 64-66; MHS v. Malaysia annulment, par. 73.} 133_{Abaclat v Argentina, par. 364.}

134_{Abaclat v Argentina, par. 365-367.} 135_{Romak S.A. v Uzbekistan, par 180 and 207.}