Date
On the 26th of May, the bilateral investment treaty (BIT) between Kenya and France expired. On the 10th of July, the BIT between Switzerland and Kenya will do the same. Renewal of both treaties seems likely but is not necessarily desirable. A decision not to renew these treaties would put Kenya in a large and growing group of countries (including countries such as India, Indonesia, and Equador) who are revisiting their investment treaty policy. In light of the questionable advantages and very real disadvantages of BITs, it is a group the Kenyan government should consider joining.
The dominant argument in favor of BITs is that it provides security to foreign companies wishing to invest in Kenya. As such, it is said that BITs stimulate foreign direct investment (FDI). However, while uncertainty about government actions that might affect expected profits can certainly be a deterrent to investment, it is decidedly not the be-all and end-all influence on FDI that it is sometimes made out to be. A good example of this fact is provided by Ethiopia. The largest sources of foreign direct investment in this country are The United States, the United Kingdom, India, and Qatar. Currently, there are no bilateral investment treaties between Ethiopia and any of these countries that have entered into force[1].
While the necessity of signing BITs to obtain FDI might thus be uncertain, the limitations such agreements place on the sovereignty of a country are very real. Vague language, most favored nation provisions (the requirement to treat all WTO member countries equally in terms of trade provisions in an agreement), and the possibility for companies to bring arbitration cases directly against governments are the three dominant elements of BITs that cause power to shift from national governments to foreign companies.
The BIT between Kenya and Switzerland provides a good example of the broad and vague language employed in such treaties that give a wide scope for companies to object to government policies. Article 4 of this agreement provides investors of both signing countries the assurance that they “shall enjoy full protection and security in the territory of the other Contracting Party.”. What such full protection and security shall entail is left undefined. The article then goes on to state “[n]either contracting party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment, extension or disposal of such investments.” [emphasis added]. The phrase ‘in any way’ effectively puts any government action within the scope of this article as long as the effects of such action are found to be ‘unreasonable’ or ‘discriminatory’. Clearly, unreasonableness is a highly subjective term and a failure to define this phrase thus provides corporations with ample opportunity to invoke this article with respect to any government action that negatively impacts their business.
Since 2000 corporations are not even limited to the advantages stemming from the vague and broad language in treaties struck between Kenya and their country of origin. The case of Maffezini v. Spain[2] appears to have established that under Most Favored Nation articles in BITs (such as in article 4, paragraph 2 of the Kenya-Switzerland BIT) corporations can ‘import’ provisions that are more favorable to them from other BITs struck by the host state. I.e. if a Swiss company sees a provision in the Kenya-France BIT it likes it can simply import it. In effect allowing corporations to build something of a Frankenstein BIT that best serves their need. This ruling thus created a situation where treaty shopping was made exponentially easier. Further putting more power in the hands of corporations vis-à-vis national governments.
The most dominant provision affecting the power dynamic between investing corporations and hosting national governments is constituted by articles on dispute settlement (article 9 in the Kenya-Switzerland BIT). Such provisions allow corporations to engage in investor state dispute settlement (ISDS) where they bring cases directly against their host states in front of a qualified international tribunal. It is not rare for tribunals to decide in favor of corporations, thus providing them with an effective tool to influence government policy. Even victory in ISDS cases might come at great cost. In a recent case where Cortec Mining Kenya, Cortec Limited and Stirling Capital Limited claimed Kenya’s cancellation of their mining license translated through expropriation, the tribunal found that Kenya was operating within its rights by cancelling the license. However, the court only ordered the companies that had initiated the dispute to pay 50% of Kenya’s legal fees. This left Kenya to pay Sh320 million out of government funds. When even winning is such an expensive affair, one can imagine that just the threat of bringing a case might be an effective tool for a company in influencing a government to refrain from enacting policy the company views as unfavorable.
BITs thus give investing companies extensive opportunities to challenge policies initiated by democratically elected governments. Proposed policies to shift the tax burden from average citizens to corporations are likely to suffer this fate. The same goes for any policies that might place stricter environmental burdens on foreign corporations. In fact, corporations are likely to take aim at any policy that might negatively impact their bottom line, regardless of the social utility of such policies. The sacrifice of national sovereignty inherent to BITs is justified by referring to its importance in attracting FDI. As has been demonstrated above, the link between BITs and FDI is questionable at best. Considering all the above, it seems the expiration of the France-Kenya and Switzerland-Kenya BITs might fruitfully be used as a way for Kenya to turn over a new leaf in its foreign investment policy. Kenya should strive for a policy where the benefits of foreign investment outweigh its damages. BITs in their current form can be no part of such a policy.
Authored by Martijn van de Kerkhof, TJNA Fellow and student in MSc Africa and International Development, University of Edinburgh.
[1] Ethiopia has signed BITs with the United Kingdom (2009) and India (2007) but to date neither of these has entered into force. Given the long time that has passed since signing them, it is unlikely that this will change in the near future.
[2] Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID, ARB/97/7, Decision on Jurisdiction, January 25, 2000. Retrieved from http:// www.italaw.com/sites/default/files/case-documents/ita0479.pdf