Bending it for investors?

President Barack Obama has returned to the United States after his whirlwind visit to New Delhi. As the media and analysts pick up the pieces of real information concealed in the officialese in which the joint and separate statements released after the visit are written, the picture that emerges is one of a desire for a new strategic partnership that is still in the making. Even the joint statement described it as a Joint Strategic Vision. This is true in the economic sphere as well. The promise held out by the joint statement is to advance ongoing and often stalled negotiations on trade and investment, besides other important areas such as intellectual property and the digital space. No major “deals” have been struck

Yet, there is a problem here because the main plank of Prime Minister Narendra Modi’s effort to accelerate lagging Indian industrial growth by making India a manufacturing hub is to urge foreign (besides domestic) industrialists to “Make In India” for export to international markets. The only way to reconcile this apparent conflict of interests would be to open India’s markets to U.S. business and provide investment opportunities to U.S. capital. Not surprisingly, besides demands for greater trade liberalisation, there is an effort at reviving negotiations on a bilateral investment treaty that began in 2008 but have not proceeded very far.

Herein lies an area, besides others like intellectual property, in which the Indian government would be under pressure to offer major concessions. Bilateral investment treaties have been seen as substitutes for the Mulitlateral Agreement on Investment that failed to get off the ground in the late 1990s. A subsequent effort on the part of the U.S. and the European Union to include it in the World Trade Organisation (WTO) agreement was also stalled, with India playing an important role in the process. The strategy since then has been to sign bilateral investment treaties (BITs), with more than 2,000 reportedly in place. These treaties seek to define what is considered foreign investment and include provisions for national and most favoured nation status to the signatories; the assurance of fair and equitable treatment; promises to compensate in case of expropriation; guarantees for repatriation of incomes and capital gains from sale of assets; and dispute settlement measures in case of any conflict between the investor and the host state.

Since these agreements are bilaterally negotiated, there are differences across agreements between different pairs of nations. But the tendency is for parties to define for themselves templates with which they approach each individual negotiation. As is to be expected, developed and predominantly investor nations try to win for themselves significant concessions and important guarantees that implicitly privilege foreign investors over local ones.

Among the most infamous of them is the case in which the water multinational AdT (formed by Bechtel and a consortium of investors) demanded $50 million as compensation from the Bolivian government in a case filed with ICSID, based on a BIT between Bolivia and Holland, where Bechtel had a paper-only registered office. The demand arose when the Bolivian government was forced to reverse the privatisation of water supply in Cochabamba municipality in the aftermath of protests triggered by hikes in water rates that led to large sections of the population being deprived of access to water. The protests that followed worldwide finally forced Bechtel and its investor allies to settle for a token payment of around 30 cents.

Such incidents have made some governments wary. Thus, a positive feature in the case of a potential U.S.-India BIT is that in 2012 India developed a template for treaties it would negotiate, which sought to address the problems that arose with an earlier template, the use of which led to a series of arbitration notices and demands for compensation from companies such as Vodafone. Not surprisingly, India’s current template differs significantly from the model treaty favoured by the U.S.

In a guest post on Financial Times Beyondbrics blog, Kavaljit Singh has detailed these large differences. They begin at the level of definition of investment, with the U.S. model favouring an asset-based definition (that includes besides enterprises, financial instruments, real assets, and even intellectual property rights). That allows a variety of policies to be challenged in the name of BIT violation. The Indian template, therefore, focusses on investment by an enterprise with substantial and long-term commitment of capital (which is supposed to be the vehicle for stable, foreign direct investment).

Moreover, the U.S. template provides for pre-establishment national treatment, which precludes full scrutiny of foreign investors and their intentions, and for most-favoured nation status, both of which are not included in the Indian template. Finally, the ISDS in the Indian template can be resorted to after all domestic measures of recourse have been exhausted with the foreign investor barred from demanding arbitration if the domestic judicial system has ruled in favour of the host government.

On the surface these seem to protect India against predatory foreign investment. These are all only differences in the template and can be modified in the course of negotiations. It helps that the details of those negotiations are not subject to parliamentary or public scrutiny. Given the Modi government’s desire to accelerate neoliberal reform and clearly align with the U.S. to further its external economic and political goals, those concessions, like ordinances, could be pushed through despite domestic opposition. The government has shown no reticence in revising policies adopted by the United Progressive Alliance (UPA). The changed and ambiguous stand of the National Democratic Alliance (NDA) after coming to power with regard to the civil liability of equipment suppliers in case of a nuclear accident illustrates its willingness to go back on its own positions. And the decision of the government not to challenge the Vodafone judgment by the Bombay High Court on the claim made by the tax department in the transfer of shares case points to its deep desire to woo foreign investors with major concessions. Tampering with an investment treaty template, which can be done by the executive bypassing Parliament, is no major challenge.