The Status and Treatment of Sovereign Investors under Investment Treaties
C.M. (Chris) van de Kuilen, LL.M
University of Amsterdam (2016-2017). Thesis coordinator: Prof Dr. S.W.B. (Stephan) Schill. Date of submission: 28 July 2017.
Abstract
The growing presence of State-owned enterprises (SOEs) and sovereign wealth funds (SWFs) on the international economic scene has resulted into a steady share of sovereign foreign direct investment (SFDI) in global foreign direct investment (FDI) flows. While acknowledging the contribution SFDI could make to the overall well-being of the economy, policy makers have expressed concerns over SFDI-activity on a number of aspects. A small number of States have sought to alleviate those concerns by making changes in their FDI-policies, treating SFDI as a specialised category. It is the goal of this thesis to inquire further into the consistency of special regulatory approaches to SFDI with the law of international investment treaties.
Preface
A significant development in the law and governance of international investment concerns the increasing amount of foreign direct investment (FDI) conducted by State-owned enterprises and sovereign wealth funds (SWFs). SOEs and SWFs are not unfamiliar creatures in the global economic landscape. Nevertheless, in the past few years, the rapid increase in sovereign foreign direct investment (SFDI) has attracted the attention of policy makers and practitioners in the field. However, research and commentary on SFDI have until now been relatively limited. This is all the more pressing since the recent rise in SFDI has been met with mixed policy reactions, and some States have responded by strengthening their foreign investment review mechanisms The consistency of host State policies discriminating between private foreign investment and SFDI for the purposes of foreign investment regulation with the law of international investment treaties remains uncertain and continues to be a challenging subject.
The aim of my thesis is to inform readers about the issues underlying both national and international policy responses to SFDIs and to give suggestions regarding the legality of those responses in light of international investment law. In the course of my research I have experienced that the formulation of a theoretical approach to SFDI does not come without its difficulties, as this topic gives rise to a range of questions which all can be studied from a different perspective. I nevertheless have full confidence that this thesis forms a valuable contribution to related scholarly studies.
As a Master of Laws candidate at the University of Amsterdam in the year 2016-2017, I have had the privilege of getting acquainted with the basic doctrines, sources and notions of the law of international trade and investment through an academic learning scheme. I would like to thank my family, friends, colleagues, study mates and, of course, my coordinator Professor Dr. Schill for providing me with their support and useful advice in finishing this work.
Table of Contents
List of Abbreviations ... Table of Cases ... I. Introduction ... II. Background ... 2.1 Understanding SOEs and SWFs ... 2.2 SOEs and SWFs as Global Investors ... III. Policy Concerns and Regulatory Responses ... 3.1 Arguments raised against SFDIs ... 3.2 Conventional and Contemporary Approaches ... IV. The Legal Standing of SOEs and SWFs under Investment Treaties and their Ability to Challenge a host State’s Admission Restrictions ... 4.1 Sovereign Investors as Claimants in Investor-State Arbitration ... 4.2 Restrictions on the Admission of SFDI ... V. Post-Entry Regulation of SFDI
5.1 Fair and Equitable Treatment
5.2 Expropriation of Sovereign Investments?
VI. Conclusions ... References ...
List of Abbreviations
BIT Bilateral Investment Treaties
CFIUS Committee on Foreign Investment in the United States EFTA European Free Trade Area
EU European Union
FDI Foreign direct investment FET Fair and equitable treatment FINSA Foreign Investment Act (US)
FTA Free trade agreements
GATS General Agreement on Trade in Services
ICA Investment Canada Act
ICSID International Centre for the Settlement of Investment Disputes
ILC International Law Commission
MFN Most favoured nation M&A Mergers and acquisitions
OECD Organisation of Economic Co-operation and Development SOE State owned enterprise
SWF Sovereign wealth funds
TNC Transnational corporation
List of Cases
• Hrvatska elektropriveda d.d. v. Republic of Slovenia, ICSID Case No ARB/05/24 (Decision on the Treaty Interpretation Issue) (12 June 2009)
• Saipem S.p.A. v. The People’s Republic of Bangladesh, ICSID Case No ARB/05/07 (Decision on Jurisdiction and Recommendation on Provisional Measures) (21 March 2007)
• LG&E Energy Corp LG&E Capital Corp, LG&E International INC v. Argentine Republic, ICSID Case No ARB/02/1 (Decision on Liability) (3 October 2006)
• Telenor Mobile Communications AS v. Republic of Hungary, ICSID Case No ARB/04/14 (Award) (13 September 2006)
• Saluka Investments BV v. The Czech Republic, UNCITRAL (Partial Award) (17 March 2006) • International Thunderbird Gaming Corp v. United Mexican States, UNCITRAL (Award) (26
January 2006)
• Noble Ventures Inc v. Romania, ICSID Case No ARB/01/11 (Award) (12 October 2005) • CMS Gas Transmission Co v. The Argentine Republic, ICSID Case No ARB/01/8 (Award) (12
May 2005)
• MTD Equity Sdn Bhd & Chile SA v. Chile, ICSID Case No ARB/01/7 (Award) (25 May 2004) • Tokios Tokelés v. Ukraine, ICSID Case No ARB/02/18 (Decision on Jurisdiction) (29 April 2004) • CDC Group plc c. Republic of the Seychelles, ICSID Case No ARB/02/14 (Award) (17 December
2003)
• Middle East Cement Shipping and Handling Co SA v. Arab Republic of Egypt, ICSID Case No ARB/99/6 (Award) (12 April 2002)
• CME v. The Czech Republic, UNCITRAL (Partial Award) (13 September 2001) • Ronald Lauder v. the Czech Republic, UNCITRAL (Final Award) (3 September 2001) • SD Myers Inc v. Canada, UNCITRAL (First Partial Award) (13 November 2000)
• Metalclad Corp v. United Mexican States, ICSID Case No ARB(AF)/97/1 (Award) (30 August 2000)
• Ceskoslovenska Obchodní Banka, A.S. (CSOB) v. Slovak Republic, ICSID Case No. ARB/97/4 (Decision on Objections to Jurisdiction) (24 May 1999)
• Tradex Hellas S.A. v. Republic of Albania, ICSID Case No ARB/94/2 (Final Award) (29 April 1999)
• Elettronica Sicula S.P.A. (ELSI), Judgement, I.C.J. Reports 1989, p. 15
• James and Ors v. the United Kingdom, ECHR, app. No 8793/79 (Judgement) (21 February 1986), Series A
I. Introduction
As can be demonstrated by their history, nature, structure and function, State-owned enterprises (SOEs) and sovereign wealth funds (SWFs) possess a distinct set of characteristics that render them inescapably different from private firms and privately held funds. At the same time, both private and public entities are able to act in the capacity of a foreign investor. This reality gives rise to complexities in the fields of foreign investment governance and international investment law, as the ramifications of inward flows of sovereign foreign direct investments (SFDIs) may diverge significantly from those that follow from ordinary (i.e. private) FDI. The distinctive impacts of sovereign and private FDI on host economies have gradually become more evident as a result of the increased internationalisation of SOEs and SWFs in the past couple of years. The benefits of this new trend have mainly followed from the (highly needed) contribution of capital from (foreign) SOEs and SWFs in the aftermath of the global financial crisis. On the other hand, the normalisation of SFDI-activity has been accompanied with growing concerns among regulators and policy makers. Important arguments that have been raised in this regard are that SFDIs have a tendency to be politically motivated and may pose threats to national security. In response to these issues, some States have enacted stricter surveillance standards in respect of SFDIs within their foreign investment review-legislation. In general, differential treatment of SFDIs may result unjustified impairment of the rights and interests of foreign SOEs and SWFs under international investment law. Although stricter review standards and entrance conditions specifically applying to SFDIs are normally covered by a host State’s legitimate right to regulate the admission of foreign investments within its territory, measures affecting SFDI-projects that have already been completed have a good chance of breaching one or more of the investment treaty’s substantive standards of protection, like, for example, the fair and equitable treatment (FET) standard. Since the intricacies of such possibilities have been generally left unexplored, this thesis stands in the centre of the question whether, and, if so, under what circumstances, national measures targeted at the regulation of SFDI could be incompatible with the law provided for by international investment treaties. In order to address that question, this thesis will proceed as follows. Chapter II addresses the background of SOEs and SWFs and their increased presence on the international investment scene. Chapter III outlines in further detail the policy concerns raised over SFDIs and the regulatory practices followed by States to deal with those matters. Chapter IV will further look into the legal standing of SOEs and SWFs under investment treaties and whether they have a right to challenge a host State’s admission restrictions. Chapter V considers host States’ regulatory treatment of SFDIs from the moment of their successful implementation. Chapter VI finishes with some overall remarks.
II. Background
This Chapter serves two main functions. Firstly, paragraph 2.1 provides general background information on SOEs and SWFs. Secondly, paragraph 2.2 discusses SOEs and SWFs in their capacity of global investors.
2.1 Understanding SOEs and SWFs SOEs
“State-owned enterprises”, or “SOEs”, can be defined as corporate legal entities that have been created by a governments and engage in commercial activities on behalf of a State, which owns either all or a controlling stake of its shares. The element of State- or public ownership relates to the ‘property interests that are vested in the State or a public body representing a community as opposed to an individual or private party’.1 The raison d’être of every SOEs lies within the
intervention of the State within the (domestic) economy. SOEs have traditionally been created because governments felt the need to address failures in the markets of natural monopolies (e.g. electricity, gas, railway sectors), public goods (e.g. law and order) and merit goods (e.g. health care and education), but also to mitigate the effects of negative externalities produced by certain economic activities (e.g. pollution), in case ordinary regulation or outsourcing would either not be desirable or too complex under the given circumstances.2 Through their SOEs, governments were able to ensure an affordable price, minimum quality and reliable supply of the (natural) monopoly-, public- or merit good at issue, and to keep in check negative economic externalities. Under the influence of political economy issues and the desire to achieve various social goals, States have also used SOEs for more “strategic” kind of purposes, such as to stabilize, sustain and develop important economic sectors and key industries, and to increase and (re-)distribute (social) welfare.3 This “instrumentalisation” of SOEs can be illustrated by numerous (historical) events. Not infrequently have governments made economic interventions in response to various economic crises, such as the Great Depression in the 1930s and the global financial crisis that started in 2008. In the post Second World War period, SOEs were not only used as tools for the economic reconstruction war-devastated countries, such as Japan and the United Kingdom, but also as a means for developing countries and former colonies to industrialise. SOEs are not free from some “inborn” stumbling blocks. As they have a tendency to grow too large for their own good, and to become captured by favoured constituencies, their eficiency is prone to hindered. Their size often renders them not flexible enough to accustom to changing economies realties. Since SOEs are most likely to enjoy monopolistic market positions, they are not exposed to real competitive pressures that could fuel their incentives for innovation. All these internal setbacks of SOEs gradually became apparent in 1970 and 1980s. In these years, the boundaries between public and private ownership shifted, as States evolved in their capacity to regulate and to reach social goals more directly. SOEs were generally not able to adapt to the rapid diffusion of new technologies and the opening up of foreign markets. People came to realise that SOEs were not as productive and profitable as their private counterparts. These developments underpinned the creation of extensive market economies in the 1980s and 1990s. The accompanying wave of privatisations demonstrated the willingness of governments to cut governmental expenditures,
1 Clarke, A.; Kohler, P., ‘Property Law: commentary and materials’, Cambridge University Press, 2005, p. 40. This definition includes state-owned enterprises held by either central or federal governments, or national, regional or local bodies.
2 OECD (2005), Corporate Governance of State-Owned Enterprises: A Survey of OECD Countries, OECD
Publishing, Paris, p. 20-21
3 Schclarek Curutchet, A., ‘Five Theoretical Reasons in Defence of State-owned Enterprises’ in Chavez, D. &
Torres, S., ‘Reorienting Development: State-owned Enterprises in Latin America and the World’ (2nd ed),
make SOEs more efficient and let market forces determine the production and distribution of public goods. However, in a significant though concentrated number of countries the political climate did not allow similar advancements to occur. Thus, nowadays, the world is left with a group of countries having quite impressive State sectors. However, there remains to be a huge scarcity in precise and reliable comparative information on the actual size and scope of State sectors around the globe. Then again, what comparative analysis has been able to demonstrate is that SOEs have no uniform legal status and may be governed by various types of laws across different countries. In addition, it is quite clear that ownership as such does not say much about the actual degree of control exercised by States over their SOEs: such influence is rather determined by their stakes within the company. Lastly, it deserves mention that, although States and their peoples can be seen as the ultimate “owners” of SOEs, in practical sense, distinct parts of government have been allocated with the task of performing the ownership function. The number and types of entities exercising the ownership function, as well as their relationships with each other, all vary greatly from one country to another.4
SWFs
Sovereign wealth funds (SWFs) can be described as government-funded investment vehicles that are distinct from the official reserves of countries and manage foreign denominated assets.5 SWFs are not entirely new creatures, but their number and resources have risen intensely since the late 2000’s. The majority of the total funding of SWFs comes from oil and gas proceeds. The rest of SWFs’ funding sources are more dispersed and include financial holdings and export earnings gained from raw materials and commodity trade. Recently, SWFs have been seeking to diversify their sources of funding by reaching out to the private capital market. SWFs have traditionally been created to achieve higher return rates than those that are typically earned on (official) instruments of foreign exchange, but may explicitly or implicitly carry other purposes such as to stabilize revenues, diversify national wealth or preserve wealth for future generations. The success of SWFs’ in achieving these goals not only determines, but also highly depends on transfers received from current accounts (reflecting a State’s net income) or capital accounts (reflecting a State’s net change in ownership of national assets), which together form a State’s balance of payments.
2.2 SOEs and SWFs as Global Investors SOEs
Foreign expansion of SOEs whether through trade or investment, constitutes the main pathway for States to internationalise their public entities. In the past few decades, an increasing outward orientation of SOEs has proceeded in parallel with the trend towards further liberalisation and privatisation, as their count fell and power rose.6 The reason why SOEs choose to
4 Robinett, D., ‘Held by the visible hand : the challenge of state-owned enterprise corporate governance for
emerging markets’, Washington, DC: World Bank, 2006
5Gordon, M. & Niles, S.V., ‘Sovereign Wealth Funds’, in Sauvant, K.P, Sachs, L.E. and Schmit Jongbloed, W.P.F
(eds), ‘Sovereign Investment: Concerns and Policy Reactions’, Oxford University Press, 2012
6Kowalski, P., Büge, M., Sztajerowska, M. & Egeland, M., (2013), ‘State-Owned Enterprises: Trade Effects and
internationalise may depends on the goals and ambitions of the ones responsible for managing the SOE, and in particular whether these include foreign expansion. The increased international prominence of SOEs might be explained by the political inclination of (some) States to dominate in particular industries worldwide. It could be said that SOEs are more resilient than private firms to the risks brought along by international business operations on account of their governmental support, although this in itself cannot be a decisive factor. In any event, the restraining effect of institutional and political factors make SOEs less likely to internationalise than private firms. To be sure, not every SOE is a global competitor, i.e. a transnational corporation (TNC). In fact, statistics indicate that State-owned TNCs make up only a fraction of the total amount of SOEs worldwide.7 The absolute amount of State-owned TNCs in past years, ranging from 650 to 900 companies, constitutes less than 1% of the total population of TNCs. Although State-owned TNCs thus form a clear minority in the universe of TNCs, some rank among the world’s largest TNCs. Moreover, State-owned TNCs may differ significantly in their degree of internationalisation, as measured by indicators such as foreign assets, sales, employees, transnational networks or foreign affiliates.8 Perhaps not surprisingly, the transnationality indexes of ordinary TNCs way surpass those of State-owned TNCs. What is more, in a relatively large number of cases States only hold minority ownership stakes in their State-owned TNCs.9 Remarkably, State-owned TNCs do not necessarily originate from developing countries or countries in transition. A considerable amount of State-owned TNCs, though not the majority of them, originate from Western economies and are listed with the world’s top TNCs.10 The share carried by SOEs in global FDI flows ranges between 10-11%,
although the value of their FDI projects has, as of late, been in decline.11 The cumulative stock value of those projects has been ranging between 140-160 billion USD since 2010. As regards the mode of entry, SOEs have mainly dedicated themselves to greenfield investments, building operations in foreign countries “from the ground up”. The FDI projects of SOEs are normally targeted at capital-intensive sectors that are of strategic interest to home economy and where a monopolistic position is necessary for achieving economies of scale. Roughly 10% of the SOEs
7 Moreover, some State-owned TNCs, like, for example, General Motors, have only been created on a temporary basis due to crisis induced intervention.
8 Whereas State-owned TNCs from Europe on average operate in more than 8 foreign economies, those from developing and transition economies are present in 3 to 6 foreign locations.
9Forty-four percent of SOTNCS are majority-owned; some fully integrated into the State, and other publically
listed with the State controlling more than 50% of the voting shares. In 42% of SOTNCs, the government stake is less than 50% (and 10% had a government stake below than 10%). However, besides outright ownership, state authorities can exert power in other ways; for instance, by so-called “golden shares” that give the State the power to constitute executive boards and shape strategy.
10 In 2010, more than 34% of all SOTNCs (223) originated in the European Union [WIR, 2011, p. 8]. Denmark had 36 of such enterprises, France – 32, Finland – 21, Germany – 18, Sweden –18 and Poland –17. 27 SOTNCs were located in Norway and 11 in Switzerland. In 2009, 15 of the “30 TOP non-financial SOTNCs ranked by foreign assets” come from Europe. In 2012, 10 of the “TOP 15 non-financial SOTNCs” are from Europe. In 2013 8 of the “TOP 10 non-financial SOTNCs” were European SOTNCs
11In 2014, the values of foreign acquisitions by SOEs declined by nearly 40% (reaching 69 billion USD). The
value of their greenfield investments declined by 18% (to 49 billion USD). Some State-owned TNCs even started consolidating their global presence. For example, GDF Suez, a French SOE, launched a divestment program in 2012, leading to significant assets sales abroad.
are involved in the direct use of natural resources (primary sector), especially mining and crude oil- and gas extraction. More than twice as much SOEs are active in the production industries, with a particular focus on the manufacturing of motor vehicles, transport equipment, chemicals, metals and textiles (secondary sector). The respectable majority (nearly 70%) of SOEs, operate in services (tertiary sector), ranging from transport (air, railway), storage, communications, civil engineering, financial services and electricity, gas and water services.12 Whereas SOEs from
developed countries concentrate on utilities and invest abroad to profit from foreign markets and capitalize on knowhow, SOEs from developing economies largely represent the extractive sectors and invest abroad to secure access to natural resources. In the same vein, a pattern can be discerned in the direction of FDI and the mode of investment: whereas the majority of foreign merger and acquisition deals are directed towards developed countries, the greater part of FDI in developing countries take the form of greenfield investments.
SWFs
The rise of SWFs in the global economy has been fostered by the generation of massive foreign exchange reserves perpetuated by higher export surpluses and growing commodity prices. After having suffered certain losses due to the 2008 financial crisis, some SWFs have used FDI as a means to diversify their own asset portfolios. Although SWFs were able to fare relatively well during the financial crisis, many of them have reduced foreign exposition and “re-routed” funds to domestic economies as a counter-response. Despite the drop in assets and other unfortunate developments caused by the financial crisis, the view has been expressed that SWFs are not that easily withheld from investing abroad as they face less time pressure and financial constraints than, for example, private equity funds. In the overall, it can be said that the internationalisation of SWFs has fluttered in congruity with changes in domestic economic conditions, the external environment, policies, and attitudes towards them. The share of SWFs in global FDI remains very low, with an average stake of less than 1%. The value of SWFs’ FDI has witnessed peaks and drops, with an estimated amount of nearly 30 billion USD in 2009, whilst ranging between 5-20 billion USD in subsequent years.13 Conversely, the cumulative stock value of SWFs’ FDI projects has been steadily increasing with an average worth of 125 billion USD in 2011 to 130 billion USD in 2013. It is of note, however, that the value of FDI carried out by SWFs is very little (2-5%) when compared to the value of all their assets under management (which estimates indicate is worth more than 7 trillion USD). As regards their predominant mode of foreign direct investment, in contrast to SOEs, SWFs focus on mergers and acquisitions.14 The FDI streams
of SWFs have principally been directed towards the finance and business sectors in developed
12Christiansen, H., (2011), ‘The Size and Composition of the SOE Sector in OECD Countries’, OECD Corporate
Governance Working Papers, No. 5, OECD Publishing
13 This unprecedented fall could be explained (in part) by the virtual non-involvement of previously active Gulf region SWFs and by exceptionally volatile global financial markets.
14 In the years 2003–2012, foreign mergers and acquisitions represented nearly 90% of SWFs FDI. This contrasted
with the bulk of global FDI, done as Greenfields. It must be mentioned, however, that SWFs generally do not spend that much of their assets on direct modes of foreign investment, even when it comes to foreign mergers and acquisitions. SWFs are typically portfolio investors holding mainly liquid financial assets in mature market economies.
economies, such as those of Canada, the EU and the US.15 However, the financial crisis of 2008 increased the risk of this investment strategy. Whilst in response reformulating their strategies and concentrating on industries less vulnerable to financial volatilities, SWFs have gradually spread their horizon by committing assets to neglected segments such as manufacturing, mining and petroleum, in a greater variety of countries.
III. Policy Concerns and Regulatory Responses
This Chapter gives a detailed outline of the policy arguments raised against SFDIs in paragraph 3.1, before engaging in a discussion of the conventional and contemporary approaches taken by States to deal with the concern so identified in paragraph 3.2.
3.1 Arguments Raised against SFDIs
Policy-makers (especially among some developed countries) have received the growing impact of investments made by foreign SOEs and SWFs (i.e., sovereign foreign direct investments or “SFDI”) with suspicion and concern, while, at the same time, undercapitalisation caused by the financial crisis prompted them to be more open to such investments. In light of this predicament, SFDI has been gaining increasing regulatory attention in recent years.16 The uneasiness felt by governments on this matter centres on concerns about the ambiguity of the goals that are being pursued with SFDIs, and in particular whether those goals may be politically biased instead of commercially orientated. These concerns are exacerbated by misgivings about adverse effects on national security in sensitive or strategic industries and a perceived absence of transparency. Other, distinct issues relate to the distortive effects caused by SFDIs on domestic markets and the shortcomings of SOEs in the fields of governance and performance. All of these issues are given some further remarks below.
Goal ambiguity and political bias
Since SOEs and SWFs invest abroad for the benefit of their home-governments, commentators and politicians have expressed the concern that SFDIs are not primarily driven by commercial risk- and reward analyses, and in some cases are managed to achieve political, interventionist or strategic goals rather than purely business-oriented purposes settled on economic return. The politically motivated investment strategies of foreign SOEs and SWFs may potentially come in conflict with the national interests of their target countries. These concerns have gained serious weight as SOEs and SWFs from strategically important countries, such as China and Russia, have multiplied and expanded their international orientation. SFDIs are well-suited as tools for international diplomacy, inducing uncertainties in target economies and thwarting confidence in global markets.
Threats to national security
15 In the 1987–2008 period these two sectors represented 26% and 15% (by value), respectively, of SWFs’ foreign mergers and acquisitions.
The most common concern over SFDIs shared between host countries is that such investments may detrimentally affect national security interests. More specifically, the possibility of having SFDIs made in sensitive or strategic industries has raised anxieties about foreign SOEs or SWFs acquiring access to or gaining control over delicate technologies, important natural resources, key industrial facilities or critical infrastructure. A State’s national security would arguably also be endangered in cases where foreign SOEs or SWFs have successfully merged with or acquired firms falling under “national champion” policies. In a similar vein, governments have expressed worries about the tendency of SOEs and SWFs to direct their SFDI so as to fulfil the industrial demands of their home countries. The main fear is this respect is that SFDIs may prioritise the supply of critical goods to foreign countries or cut off industrial support for the host country’s security efforts.
Poor transparency
Another principal area of concern involves the lack of transparency in the structure, governance and investment strategies of foreign SOEs and SWFs, resulting in information gaps that make it difficult if not impossible to obtain clear insights into their market efficiency and regulatory compliance. Whereas deliberate disclosure would indicate high chances of investment decisions being based on commercial considerations, SOEs or SWFs that use that SFDIs for political ends are generally more likely to be opaque. While signalling potential political seizure, such opacity has its direct bearings on market environments, especially in regard of shady practices followed by foreign SOEs and SWFs, as there is usually no telling whether they are purely motivated by commercial objectives (unlike, for example, hedge funds and private equity funds). All these transparency issues are further compounded by disquiet over failing and unaccountable SOE and SWF managers that are liable to rent-seeking behavior and inefficient long-term strategies that mainly support immediate tactical interests.
Distortive effects on domestic markets
Furthermore, apart from political issues, critics have also emphasized the distortive effects felt in domestic markets, having their source in the dominant position enjoyed by foreign SOEs and SWFs. The latter often keep hold of extensive financial resources, for instance because they’re heavily subsidized by their home governments, and therefore have a significant advantage in outbidding and outlasting (private) commercial competitors. Moreover, as SFDI may imbue foreign capital markets with sovereign assets, the presence foreign SOEs and SWFs pose the risk of obscuring public and private spheres. Additionally, there is concern that foreign SOEs and SWFs, in view of their control by the government, may not allocate capital as efficiently as private firms. This can be illustrated, for example, by the fact that SWFs have been seeking to spread risk by investing in industries that are underrepresented in their home countries. Governance and performance deficiencies
Whereas in general SWFs are more likely to be opaque and have ambiguous goals, SOEs have higher vulnerability to governance and performance deficiencies. That does not mean, however, that the issues pointed out henceforth are never applicable to SWFs. From a theoretical point of view, commentators have argued that SOEs are likely to emerge in weak institutional settings, which are often characterised by the absence of constraints on executive power and raise the possibility that SOEs are operated for the benefit of self-interested politicians. In this respect, the concerns surrounding SOEs relate to their presumed weak governance attributes in terms of vague and perhaps conflicting corporate objectives, political interference, complicatedness in
the relations between multiple (and often unidentifiable) principals and agents, difficulties in providing high-powered incentives for SOE-managers (which, in turn, compromise the firm’s efficiency), prejudiced and subordinate board members and the absence of pressures to contain the costs of expenditures. From an empirical perspective, evidence has demonstrated that SOEs operating in a competitive environment do not perform as well as comparable private sector companies. In the overall, governance problems and performance backlogs may significantly limit the net benefits of SFDI to host economies.
3.2 Conventional and Contemporary Approaches Traditional approaches
The most obvious way for States to address national policy issues raised by FDIs in general is to prohibit such investments or condition their entry and/or operation. As a matter of fact, States have always maintained barriers against inward FDI, although the exact reasons and substance of those restrictions necessarily changed with political and economic currents.17 In this view,
the recent concerns raised over SFDIs prompt the question of the desirability to impose new types of restrictions. Therefore, light needs to be shed on what general approaches are taken by States to oversee and regulate the inflow of FDI within their respective territories. These approaches can be divided into four principal categories: border restrictions, industry-specific restrictions, targeted transaction approaches and comprehensive FDI review regimes. Of course, these types of approaches are not mutually exclusive and indeed many States combine at least two or more of them.18 According to the first type of approach, i.e. border restrictions, foreign investors are prohibited from, or face restrictions related to, real estate ownership near territorial borders.19 The second approach, i.e., industry-specific restrictions, implies that FDI
in a particular industry is either prohibited or requires approval by one or more designated authorities. Such restrictions are, however, often coupled with thresholds, to the effect that only foreign investments having certain total values or resulting in pre-determined degrees of control will trigger the regulatory approval process. Some notable examples of States that take the industry-specific approach are Russia20 and France21. The third type of approach, i.e. the targeted transaction approach, has a more narrow functioning than the industry specific
17 Wehrlé, F., & Pohl, J., (2016), ‘Investment Policies Related to National Security: A Survey of Country
Practices’, OECD Working Papers on International Investment, 2016/02, OECD Publishing
18Shima, Y., ‘The Policy Landscape for International Investment by Government-Controlled Investors: A Fact
Finding Survey’, OECD Working Papers on International Investment, OECD Publishing, 2015
19 These restrictions are prevalent in Latin America. For example, Argentina, Brazil, and Honduras all have such restrictions in place.
20 Under the Russian legislative provisions addressing the matter, which came into force in 2008, foreign investors are required to obtain governmental approval in case they seek to acquire more than 50% of the control of Russian companies in any one of the designated strategic areas, including military equipment and telecommunications. 21 France likewise requires prior approval for FDI in certain industries and meeting certain thresholds. Common industries for which each foreign investor needs to obtain approval are mainly defense related. Industries for which only non-EU and non-European Economic Area (EEA) investors have to obtain approval include regulated private security and computer security.
approach, but nevertheless gives the State’s authorities broader discretion in reviewing foreign transactions, as according to this approach each foreign transaction is examined individually on its compatibility with the host country’s national security interests or public order. Such a review may result in an executive decision ordering the prohibition, suspension or dismantlement of the transaction. It may also condition the completion of the transaction to the fulfillment of “special undertakings” on the side of the foreign investor. Two notable countries using the targeted transaction approach in combination with industry-specific exceptions are the United States22 and Germany23. The fourth and last type of approach, i.e. comprehensive FDI-review regimes, similarly instructs the authorities of the receiving State to review foreign transactions on a case by case basis, granting them even more discretion in assessing the overall benefit of a particular transaction to the host country’s economy. Unlike, the targeted transaction approach, which centres on national security interests and public order, comprehensive FDI-review mechanisms allow for a much broader range of factors to be taken
22Rose P., ‘US Regulation of Investment by State-Controlled Entities. ICSID Review, 31(1), 2016, p. 77-87. The
United States’ (US) regulatory framework incorporates ownership restrictions tied to particular economic sectors, including the shipping, air transport, mining, telecommunications, financial services, energy and investment company sectors. In fact, foreign ownership of some US entities is either prohibited or further restricted by statutory provision. In the US, the main task of regulating foreign investment falls upon the Committee on Foreign Investment in the United States (CFIUS), which is governed by a series of congressional acts, including the Foreign Investment Act of 2007 (FINSA). CFIUS was established in 1975 by an Executive Order which laid down its organisational structure and set out its mandate to monitor the impact of foreign investment in the US and coordinate the implementation of the US policy on such investment. When a particular transaction is covered by the scope of the CFIUS review process, it may be filed voluntarily or on request of the Committee itself. In case the transaction has already been completed, the US President or CFIUS may require the parties to put in mitigation measures or to unwind the deal. Upon receipt of the filing, a 30 day review period will be set in motion, which
may be followed by a 45-day national security investigation. It is possible that the review process results in a
mitigation agreement between the CFIUS agencies and the parties to the transaction, in which case the latter must agree to comply with various measures designed to ensure national security. If the transaction poses threats to national security that cannot be mitigated, CFIUS will recommend that the US President issue an executive order which either suspends or blocks the transaction.
23Germany traditionally relied solely upon an industry-specific approach to FDI. Under the German system, prior
notice and governmental approval have long been required if a foreign investor sought to acquire more than 25% of the voting rights of a German company that produces objects for military use, special weaponry, or codification or cryptographic systems used by the government. However, in 2009, Germany amended its Foreign Trade and Payments Act and implementing regulations to allow the review of foreign acquisitions of German firms irrespective of their target industries. Foreign acquisitions of 25% or more of the voting rights in German businesses may now be prohibited, suspended or unwound in case it is found that the transaction impairs national security or public order. The new rules place no advance notification requirement on foreign investors. Nonetheless, the relevant German authority has the task of collecting information on foreign transactions and the power to review the certain transactions within three months from the moment it could have been aware that they were (likely to be) made. The German reforms are still very limited the scope since the requirements only apply to planned acquisitions of German companies by any non-EU or non-European Free Trade Area (EFTA) purchasers and do not pertain to greenfield investments.
into account within the examination. Countries like Canada24 and Australia25 are renowned for having comprehensive FDI-review regimes.
New domestic trends
In response to the above mentioned policy concerns associated with SFDIs, and in the attempt to ensure that the behaviour of foreign companies leads to optimization of economic, social and political benefits at the domestic level, some States have brought some slight modifications in their foreign investment policies. The changes so effectuated include the adoption of industry-specific restrictions explicitly applying to SFDIs, the (formal) instruction towards investigating authorities to employ more vigilance against SFDI in reviewing particular FDI-transactions, a broadening of the scope to assess the compatibility of SFDIs with the host country’s national security or other “net benefit” interests, along with a “tightening” of the rules governing the eventual approval of SFDIs. To illustrate, under Russian laws subjecting acquisition of Russian companies in a list of strategic sectors to prior governmental approval, foreign SOEs or SWFs are severely restricted in acquiring direct or indirect control over strategic Russian enterprises. In the United States (US), the so-called Exon-Florio provision was revised by Congress under the Byrd Amendment in order to instruct the President and the US’s foreign investment agency, CFIUS, to investigate any instance in which an entity controlled by or acting on behalf of a foreign government seeks to engage in any merger, acquisition, or takeover which could result
24Henderson, G.E., ‘Regulation of SOEs in Canada’, 2013 Workshop on Harmonizing Cross-Strait Financial
Regulations, AIIFL Working Paper No. 14, (June 2013). The Canadian regulatory framework on foreign
investments safeguarding its national interests is set up by the Investment Canada Act (ICA). The ICA provides for a process according to which, subject to certain exemptions, every acquisition of control by a non-Canadian of a Canadian business valued above a certain threshold amount requires either notification or review and pre-closing approval of the Minister of Industry. The non-Canadian investor will be prohibited from carrying out its investment subject to review under the ICA, unless the Minister is satisfied that the investment is likely to be of “net benefit” to Canada. This “net benefit” test gauges how foreign investment proposals benefit Canada as a whole. In the assessment account will be taken of economic factors relating to the impact of the investment on, inter alia, the level of employment, Canadian services and exports, the locus of head office functions, participation of Canadians in senior management, innovation, industrial efficacy, competition and technology transfer. All relevant factors will be looked at individually, with any negative impacts weighed against positive ones. An investment will be determined to be of net benefit when the aggregate net effect is positive, regardless of its extent. Foreign investors are normally required to offer certain commitments called “undertakings”. In 2009, the statement of purpose of the ICA was amended to emphasize the importance of protecting national security. The further amendments that were introduced had no impact on the previous-described net benefit assessment. However, the ICA was now supplemented with a national security review process, according to which the Canadian Government has the power to prohibit or attach conditions to a foreign investment in an existing Canadian business or the establishment of a new Canadian business if such investment would be injurious to Canada’s national security. On the same basis, the Canadian Government became competent to order a divestiture in case the investment has already been completed. Remarkably, in contrast to the net benefit assessment, the national security review process has a much wider scope, covering both transactions falling below the review threshold and minority investments irrespective of whether or not they constitute an acquisition of control.
25In Australia, the Foreign Acquisition and Takeovers Act 1975 (FATA 1975) empowers the Federal Treasurer
to prohibit investments if two fundamental conditions are met: the foreign investor must come within a position to exercise effective control of the target company and the exercise of that control must be contrary to the “national interest” of Australia. Even though Australia’s foreign investment policy clearly points out at which instances notification of foreign transaction is required, the scope of the Treasurer’s authority is not thereby limited, so that action may be taken even if notification is not mandated.
in control of a person engaged in interstate commerce in the US that could affect the national security of the US. The introduction of the US’s Foreign Investment Act (FINSA) in 2007 not only clarified when and how CFIUS must examine foreign investments, but also put significant emphasis on investments of State-controlled entities. Under the current framework provided for by FINSA, application of a national security review of transactions of foreign State-controlled entities is mandatory, whereas US authorities retain discretion in initiating such review in regard of ordinary foreign transactions. In Germany, the 2009 amendment of the Foreign Trade and Payments Act, establishing an FDI-review mechanism founded on national security and public policy considerations, tightened the rules for all foreign investors, and thus not only for foreign SOEs and SWFs. However, the reforms were predominantly motivated by the rise of SWFs and targeted against their acquisitions of German enterprises.26 Witnessing the increase of SFDI in Canada in the past few years, authorities acting under the Investment Canada Act (ICA) have struggled to develop policies on the matter. In 2007, following a tide of takeovers of Canadian companies operative in the natural resources sector, new guidelines were issued clarifying the way in which the Canadian authorities would review SFDIs and stipulating additional factors relevant in the “net benefit” evaluation of such investments.27 In the years that followed the
issuance of the 2007 guidelines the Canadian Government begrudgingly approved a number of major transactions involving foreign SOEs and SWFs.28 Promptly after the approval of two of such deals in late 201229, the Canadian Prime Minister announced the start of a new and stricter policy framework for the review of SFDIs. Scrutiny of SFDIs would intensify, especially with regard to sectors deemed of strategic interest. The 2007 guidelines were revised to underscore
26In Germany, the rise of SWFs sparked off a heated public debate around the midst of the year 2007. The concerns
underlying this debate essentially arose from public statements, news messages, rumours and other events relating to the acquisition of shares in some renowned German enterprises by certain SWFs. For example, the acquisition of a 3% stake in the European aircraft producer EADS by Dubai International Capital in July 2007 and rumours that the German companies Siemens AG and Deutsche Bahn AG could be targets of SWFs caused reason for widespread alarm. Prominent members of the German government felt the need to emphasize the potential threats posed by the investments of SWFs towards national security and the market-based economy system. In particular, fears were expressed about the risk of having non-democratic SWFs gain significant influence in the national defence sector and/or other areas that were deemed to be of strategic economic importance. In consequence, arguments were being made for the justification of a law that would shield domestic companies from investments made by foreign SWFs. For instance, it was argued that acquisitions by investors such as Russia’s Gazprom would have detrimental effects on the freedom of German companies in the energy sector to make investment decisions. Further allowance of sovereign investments would also run contrary the successful German privatization policy that had taken place in past two decades.
27 The additional factors included state control, corporate governance, transparency, shareholder treatment, board independence and commercial orientation. The 2007 Guidelines also outlined the types of binding commitments or undertakings that may be required to ensure that sovereign investments result in a net benefit to Canada, including, for example, commitments to appoint Canadians as independent directors or the incorporation of the target business in Canada.
28These included, among others, the acquisition by Abu Dhabi National Energy Company of PrimeWest Company
in 2008, the acquisition of Korea National Oil Corp of Harvest Energy in 2009, PetroChina’s acquisition of interests in two oil sands projects owned by Athabasca Oil Sands Corp in 2010 and Sinopec’s acquisition of Daylight Energy in 2011. Standing out in this series of approvals, however, is rejection by the Canadian Government of the proposed acquisition by BHP Billiton of Potash Corp of Saskatchewan in 2010.
29 The envied approval of the acquisition of Progress Energy Resources Corp by Malaysia’s Petronas and the acquisition of Nexen Inc by China National Offshore Oil Corporation (CNOOC) in late 2012.
that sovereign investors are expected to be transparent, constrain State influence, and operate according to free market principles.
Transnational efforts
Whereas domestic approaches to SFDI can be said to be rather watchful and defensive in nature, efforts made by countries at the transnational level seem to more proactively tackle SFDI-issues at the “roots” of their cause. By focusing on the improvement of transparency, accountability, governance and performance of SOEs and SWFs, as well as avoiding protectionist reactions by States against FDI, transnational responses aim to mitigate both the concerns emanating from SFDIs and the negative consequences of excessive national FDI-policies. However, all that has been done by States on this matter in transnational organisations and other networks has resulted in little more than voluntary guidelines, best practices and codes of conduct. In early 2008, the European Commission communicated a proposal on a common approach to SWFs among the EU Member States, although this has not led into EU-level legislation on SWF investments.30 The Organisation for Economic Co-operation and Development (OECD) has used the OECD’s Investment Committee’s project of Freedom of Investment, National Security and ‘Strategic Industries’ (FOI Roundtables) as a forum for discussions concerning national policies towards SWFs and other government-controlled investment entities among members and non-members. This has resulted into the development of a set of standards useful for countries receiving SWF investments, taking the form of three OECD guidance parts.31 In addition to this, the OECD has also developed guidance instruments in support of the corporate governance and management of transparency and accountability of SOEs.32 States have also responded to the international concerns about SFDIs by creating the International Working Group for Sovereign Fund (IWG) with the aid of the International Monetary Fund (IMF). The IWG has brought into being a set of Generally Accepted Principles and Practices for SWFs, commonly known as “the Santiago
30 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions of 27 February 2008 – ‘A common European approach to Sovereign Wealth Funds’ [COM/2008/ 115 final – Not published in the Official Journal]. Nevertheless it was clearly stated by the Commission that such investments do not operate in a legal vacuum, as the existing regime between the EU and the Member State level regulating the establishment and actions of foreign investors applies indiscriminately to SWFs, while the Member States retain the power to restrict the free flow of capital only in limited cases and for limited reasons.
31The OECD’s guidance framework on SWF policies consists of (i) an OECD Declaration of sovereign wealth
funds and recipient country Policies, (ii) Guidance that reaffirms long-standing OECD investment principles and (iii) Guidelines for recipient country investment policies relating to national security. These documents have been adopted with the goal ensuring that SWF investments are evaluated on an equal basis with other investments and that host countries’ policies do not create barriers to efficient flows of capital across borders. While the OECD’s standards recognize the right of governments to take actions they consider necessary to protect essential security interests and public order, such measures, if taken in bad faith, are equally recognized as disguised protectionism. The FOI Roundtables also focused on the difficulty of distinguishing between commercial and political investments, suggesting that these exist along a continuum. OECD members highlighted the importance of strong governance and accountability in both home and host countries, especially to aid the credibility of a state’s commitment to commercial objectives when investing directly abroad.
32 OECD (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition, OECD Publishing, Paris; OECD (2010), Accountability and Transparency: A Guide for State Ownership, OECD Publishing, Paris.
Principles”. These Principles set out voluntary standards for better management, transparency, governance, independence and accountability of SWFs.33
IV. Legal Standing of SOEs and SWFs under Investment Treaties and their Ability to Challenge a host State’s Admission Restrictions
This Chapter will discuss the extent to which SOEs and SWFs are protected under international investment treaties by taking a further look into their legal standing before investment treaty tribunals (paragraph 4.1). Another subject that is addressed in this Chapter is whether SOE and SWFs would be able to challenge a host-State’s policies that impose restrictions on the admission on SFDIs (paragraph 4.2).
4.1 Sovereign Investors as Claimants in Investor-State Arbitration
The legitimacy of special regulatory approaches towards SFDIs might be taken into question if evaluated against the background of host States’ investment treaty obligations. The Contracting Parties to investment treaties grant foreign investors a certain measure of legal protection, as expressed in procedural as well as substantive treaty rights. The question that arises is whether, and if so, under what conditions, it is recognised and accepted by States that SOE and SWFs make part of that deal. In order to determine the scope of the protection offered by investment treaties to foreign investors, a closer look should be given to the conditions for the initiation of an investor-State arbitration, as this procedure, in ordinary practice, comprises the venue for enforcing investment treaty rights in case of an investment dispute between foreign investors and host States. The most important of such conditions is that the dispute at issue falls within the jurisdiction of the international arbitral tribunal that is to be constituted in order to address investment claims in accordance with the dispute settlement terms of the applicable investment treaty. In other words, it has to be in accordance with the consent of the Contracting States to submit their investment disputes with SOEs or SWFs from their treaty partners to international investment arbitration.34
33These principles seek to demonstrate—to home and host countries, and the international financial markets—
that SWF arrangements are properly organized and that investments are made on an economic and financial basis, contributing to the stability of the global financial system, reducing protectionist pressures, and helping to maintain an open and stable investment climate. Although SWF compliance with the Santiago Principles is uneven,there seems to be a trend toward greater compliance and hence greater transparency. The work of the IWG and IMF on formulating the Santiago Principles has been well received by host and home countries alike, both for its commercial logic and as an example of international consensus building. Despite the international welcome, the Santiago Principles are generally recognized as de minimis requirements in their scope and nature. The non-binding nature of the Santiago Principles, however, leaves parties with no legal recourse against funds that do not adhere to these principles. The Santiago Principles are also subject to home country rules, regulations and numerous other caveats. An October 2009 study, published on the first anniversary of the adoption of the Santiago Principles, found wide variance in SWF compliance with the Principles’ disclosure guidelines.While some SWFs have made progress in becoming more transparent, there is a wide dispersion in the level of opacity among the funds. The study finds that about half of the ten largest SWFs have achieved a relatively high level of disclosure, while other funds have yet to adopt meaningful initiatives to improve compliance with their self-imposed disclosure code of conduct.
34 Blyschak, P.M., ‘State-Owned Enterprises and International Investment Treaties: When Are State-Owned
Entities and Their Investments Protected?’, Journal of International Law and International Relations, vol. 6(2), 2011
Exclusion by the ICSID Convention of inter-State disputes
In this respect, an important preliminary step is to identify whether the dispute settlement clause provides for the submission of investment disputes to the dispute settlement framework of the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). This is because the ICSID Convention was not meant to cover disputes between States themselves. Accordingly, what needs to be determined is whether the SOE or SWF claimant must be equated with its home government. In order to delineate the boundaries of State conduct, arbitral tribunals could take recourse to customary international law rules on the attribution of conduct to a State, in particular those laid down in the International Law Commission’s (ILC) Draft Articles on State Responsibility, such as ILC Article 8 on the attribution of conduct on the basis of State control, and ILC Article 5 on the attribution of conduct on the basis of delegated governmental authority.35 Moreover, these
provisions closely resemble the two factors proposed by Mr. Broches – known as ICSID’s “principal architect” – for distinguishing private from public international investment under the ICSID Convention and thus for determining whether a sovereign investor qualifies as a “national of a Contracting State” in accordance with Article 25(1). Mr. Broches acknowledged that SOEs can engage in private international investment and bring claims against States under the ICSID Convention, and hence proposed that a SOE ‘should not be disqualified as a “national of another Contracting State”, unless it is acting as agent for the government or is discharging an essentially governmental function’. This test was deemed adequate because nowadays ‘the classical distinction between private and public investment, based on the source of the capital, is no longer meaningful, if not outdated’.36 Unfortunately, however, in the set of claims that
have been submitted to ICSID arbitration by a sovereign investor37, only one tribunal did actually consider the factors proposed by Mr. Broches (and, arguably, not in the right manner).38 In taking rather permissive approaches, the tribunals in all these cases considered that the sovereign investor party was able to fulfill the “national of a Contracting Party” requirement of Article 25(1).39 All in all, no absolute answer can be given to the question whether SOEs and SWFs would have legal standing under the ICSID Convention, as this always depends on the
35 International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts, November 2001, Supplement No. 10 (A/56/10), chp.IV.E.1,
36 Feldman, M., ‘The Standing of State-owned Entities under Investment Treaties’ in Sauvant, K. P. (ed),
‘Yearbook on International Investment Law & Policy 2010-2011’, Oxford University Press, 2012, Ch. 15, p.
615-637.
37 CDC Group plc c. Republic of the Seychelles, ICSID Case No ARB/02/14 (Award) (17 December 2003),
Telenor Mobile Communications AS v. Republic of Hungary, ICSID Case No ARB/04/14 (Award) (13 September
2006), Hrvatska elektropriveda d.d. v. Republic of Slovenia, ICSID Case No ARB/05/24 (Decision on the Treaty Interpretation Issue) (12 June 2009) and Ceskoslovenska Obchodní Banka, A.S. (CSOB) v. Slovak Republic, ICSID Case No. ARB/97/4 (Decision on Objections to Jurisdiction) (24 May 1999)
38 In CSOB v. Slovak Republic, the tribunal seemed to apply Mr. Broches’ test conjunctively (although it is stated as a disjunctive test) in finding that CSOB would qualify as a “national” of a Contracting Party unless it had acted as an agent of the State and had discharged an essentially governmental function (see para. 20-21).
39 Although in neither case it made part of the tribunal’s analysis, all the respective factual circumstances would have merited a consideration of not only the nature, but also the purpose of the sovereign investor’s conduct. Then, probably, different outcomes would have been conceivable.
particular circumstances of each case. It is still unclear what the degree of State-control must be in order to be excluded from ICSID-arbitration. The control a State exercises over its SOEs or SWFs may fluctuate depending on range of factors, for example the amount of stakes it holds within the company. Moreover, it can be debated whether State-ownership as such if sufficient to qualify as State-control. And whereas some SOEs or SWFs are true extensions of their home governments and invest solely for public purposes, others operate in a purely private sphere. Terms of the dispute settlement clause
In general, the scope of an investment treaty’s protection is defined by reference to the words “investor” and “investment”, as stated within the dispute settlement clause. For SOE and SWFs, those terms form the key to unlocking the door to investment treaty arbitration, whether it is before ICSID, or under the auspices of any other international dispute settlement system. Hardly ever do investment treaties explicitly exclude public entities or enterprises from their scope.40 Instead, the majority of investment treaties have a broad definition of “investor”, including, for example, terms such as “government-owned” or “State(-owned)” enterprises.41 Many others are
indifferent on the distinction between sovereign and private investors and simply refer to “legal persons”. It is not undoubtedly clear whether these terms also cover investors acting in a purely governmental capacity. This is not problematic if the treaty’s definition of “investor” refers to “States” themselves42 or “State-controlled” entities. However, ambiguous terms such as “State
(-owned)” or “government-owned” enterprises, or even just “legal persons”, do not (as such) indicate an element of governmental control or authority. It could be said that the inclusion of “State-owned” or “government-owned” enterprises reveals the drafters’ consciousnesses of the possibility that claims would be brought by investors that act in a purely governmental capacity or are otherwise controlled by the State. Even when the treaty’s definition of “investor” makes no practical distinction between private and sovereign investors by referring only to “legal persons”, it could be argued that State-owned and State-controlled enterprises are both, at least, not expressly precluded from issuing investment treaty claims. On the other hand, this should not be understood so as to accord arbitral tribunals wide discretion in giving SOEs and SWFs “the benefit of the doubt” in case they do not entirely operate on the commercial level, because
40 Examples of BITs containing some form of exclusion of SOE claims are those entered into by Panama in 1983 with Germany and Switzerland respectively. See: Jo En Low, ‘State-Controlled Entities as “Investors” under International Investment Agreements’, Columbia FDI Perspectives, No 80, 2012
41Examples include US BITs, which typically define “company” as “any entity constituted or organized under
applicable law, whether or not for profit, and whether privately or governmentally owned or controlled” (e.g., US-Argentina BIT, Art. (1)(1)(b)), Canadian BITs, which generally define “investor” to include “any enterprise incorporated or duly constituted in accordance with applicable laws of Canada” and “enterprise” as “any entity constituted or organized under applicable law, whether or not for profit, whether privately-owned or governmentally-owned” (e.g. Canada-Barbados, Art. 1(g)(ii) and (a)(i)) and Australian BITs, which usually define “investors” to include companies “regardless of whether or not the entity is organised for pecuniary gain, privately or otherwise owned, or organised with limited or unlimited liability” (e.g. Australia-India BIT, Art. 1(a)). 42 Examples include BITS based on the 2004 US model BIT, which defines “investor of a Party” in the relevant part as “a Party or state enterprise thereof, […] that attempts to make, is making, or has made an investment in the territory of the other Party”, BITs based on the 2004 Canada Model BIT, which defines “investor of a Party” as “in the case of Canada: (i) Canada or a state enterprise of Canada, […]” and the 1980 Unified Agreement of the Investment of Arab Capital in the Arab States concluded between the members of the league of Arab States, which defines “Arab citizen” as including “Arab States and bodies corporate which are fully State-owned, whether directly or indirectly”.
otherwise the terminological separations between “States”, “State-controlled entities”, “State- or government-owned” enterprises and “legal persons” would be rendered meaningless.43 For establishing the jurisdiction of investment treaty tribunals it is further required that the subject matter of the dispute falls within the treaty’s definition of “investment”. The majority of investment treaties contain asset-based definitions of “investment”. These definitions tend to be broad in scope since “asset” can mean anything that is of certain value. Most of the treaties that containing asset-based definitions of “investment” cover “every kind of asset” owned or controlled by a protected investor, followed by a non-exhaustive list of investment forms.44 Others contain a broad asset-based definition specifying substantive investment characteristics in addition to examples of assets.45 Another category of treaties combines asset-based definition of “investment” with an exhaustive list of investment forms.46 The existence of such lenient
definitions of “investments” renders irrelevant both the sources of the funds invested47 and the
motivation of the investor48 in determining whether the investment under consideration is protected by the treaty. In other words, the fact that the investment has been financed by public resources or made for sovereign purposes does not imply ipso facto that it is excluded from the treaty’s scope of protection. In the uttermost scenario, those treaties requiring “investments” to be for business purposes or to have the characteristics of an investment may exclude sovereign investments from coverage if the investor has acted in governmental capacity.49
43Feldman, M., ‘State-Owned Enterprises as Claimants in International Investment Arbitration, ICSID Review,
31(1), 2016, p. 24-35
44 See, for example, Article 1(1) of the Germany Bosnia-Herzegovina BIT (2001), which defines “investment” as “every kind of asset” and includes in the list of examples of investment forms: (i) movable and immovable property and any related property rights; (ii) shares of companies and other kinds of interest in companies; (iii) claims to money and claims under a contract having financial value; (iv) intellectual property rights; and (iv) business concessions (emphasis added). Another example can be found in the US-Bahrain BIT (1999), Article 1(d) of which states: “ ‘Investment’ of a national or company means every kind of investment owned or controlled directly by the national or company, and includes but is not limited to […].”
45 See, for example, Article 1 of the US-Uruguay BIT (2005), which provides that “investment” means every asset of an investment, including such characteristics s the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk (emphasis added). This provision proceeds with an illustrative list of the forms an “investment” may take. Also note the definition of “investment” in Article 4 of the ASEAN Comprehensive Investment Agreement (2009). A footnote to this provision clarifies that: ‘Where an asset lacks the characteristics of an investment, that asset is not an investment regardless of the form it may take. The characteristics of an investment include the commitment of capital, the expectation of gain or profit or the assumption of risk.’
46 See, for instance, Article 1 of the Canada-Peru BIT (2006).
47 Tradex Hellas S.A. v. Republic of Albania, ICSID Case No ARB/94/2 (Final Award) (29 April 1999), para. 109.
Tokios Tokelés v. Ukraine, ICSID Case No ARB/02/18 (Decision on Jurisdiction) (29 April 2004), para. 74. Saipem S.p.A. v. The People’s Republic of Bangladesh, ICSID Case No ARB/05/07 (Decision on Jurisdiction and
Recommendation on Provisional Measures) (21 March 2007), para. 106.
48Saluka Investments BV v. The Czech Republic, UNCITRAL (Partial Award) (17 March 2006), para. 209: “Even
if it were possible to know an investor’s true motivation in making it investment, nothing in Article 1 [of the Netherlands-Czech Republic BIT] makes the investor’s motivation part of the definition of an ‘investment’. 49 Based on the object and purpose of BITs, the Swiss Federal Department of Foreign Affairs concludes that Swiss BITs protect States and State entities investing abroad except when they act jure imperii and therefore enjoy immunity under the rules of State immunity. See: Swiss Federal Department of Foreign Affairs, Avis de droit du
