The double-standard in investor-state dispute settlements

In January 2021, Rwanda revoked the mineral export license of Aldango, a mineral processing company, over tax evasion. Aldango had entered a joint venture agreement with the Rwandan government to refine and export gold, with a refinery kick off processing activities in 2019.

Part of the shareholding was controlled by Aldabra Limited, a United Arab Emirates (UAE)-based mineral processing group owned by Belgian businessman Alain Goetz.

In March 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), sanctioned Goetz, who also owns the African Gold Refinery in Uganda, and a network of his companies involved in the illicit movement of gold valued at hundreds of millions of dollars per year from the Democratic Republic of the Congo (DRC).

The illicit movement of gold, the U.S Treasury said at the time, provides revenue to armed groups that threaten the peace, security, and stability of the DRC.

“Alain Goetz and his network have contributed to armed conflict by receiving DRC gold without questioning its origin,” Brian E. Nelson, the then Under Secretary of the Treasury for Terrorism and Financial Intelligence said of the decision.

In November this year, Goetz took his case to the International Centre for Settlement of Investment Disputes (ICSID), a World Bank affiliated dispute settlement body. Although the case is pending and its outcome is unclear, it could likely cost Rwanda’s government millions of dollars in the arbitration process.

The case is a classic example of how bilateral investment treaties, agreements signed by countries to attract investors, tend to favour foreign investors over national interests.

This is not the only dispute case that Rwanda has been involved in. Perhaps the famous case is that which involved Bay View Group LLC and Spalena Company LLC, both American companies. The two companies pursued arbitration against Rwanda in 2018 at the ICSID over allegations of expropriation and other bleaches of obligations under Rwanda’s bilateral investment treaties.

The case was closed in 2022.

Although ICSID found that failure to grant long term mining concession in Rwanda to the two American companies did not amount to a treaty breach that would have led to the government paying over $90 million, in the end, Rwanda spent £1.3 million and $361,783.72 in legal representation expenses and arbitration costs, respectively.

Complexity of dispute settlement

These cases reflect the complexity of international bilateral investment treaties that countries, especially in the Global South, often sign up in hope to lure foreign investors.

These treaties are increasingly scrutinised for their tendency to prioritise investor interests at the expense of public goods such as environmental sustainability, labour rights, and the protection of local industries.

These treaties often include investor-state dispute settlement (ISDS) provisions, which establish a legal mechanism that allows foreign investors to sue host governments in international arbitration tribunals for alleged violations of their rights under the treaty.

ISDS provisions in many investment agreements have been widely criticised for undermining countries’ sovereignty and ability of countries to regulate industries in the public interest.

The mining sector has particularly been a frequent source of ISDS cases, often due to disputes over licenses, environmental regulations, or expropriation. The recent caseload statistics report by ICSID shows that 25 per cent of all registered cases were in oil, gas and mining.

“When Tanzania changed its mining laws, this landed us into three [arbitration] cases, costing us $90 million in total. In the end, one case was settled and Tanzania paid $30 million,” says Olivia Costa, Executive Director at Tanzania Trade and Investment Coalition (TATIC), a trade advocacy organisation.

Data from the UN Conference on Trade and Development (UNCTAD) International Investment Agreements Navigator, a database of investment agreements, indicates that Rwanda has signed at least 15 BITs, with six currently in effect.

However, these agreements are increasingly being leveraged by foreign investors to initiate ISDS arbitration against African nations. Such claims often challenge the host country’s regulatory decisions across various domains, including public services and social policies such as race relations.

“ISDS allows investors to sue governments for public policies that reduce profits,” says Rob Davies, former Minister of Trade and Industry of South Africa, labelling them as 'indirect expropriation.' “This undermines sovereignty and drains resources from developing nations.”

Davies asserts that treaties incorporating ISDS provisions were widely adopted and promoted from the late 1980s to the 2010s during which they were regarded as a cornerstone of neoliberal economic policies, aligning with efforts by Western nations to implement reforms aimed at removing price controls, liberalising capital markets, and reducing trade barriers to facilitate global economic integration.

“Now countries have realised that this standard model for which most treaties were based on has not worked,” he notes, adding that this discontentment rose out of the desire for some countries like Ecuador to reform their mining laws, only to find themselves trapped in what he calls a “package of troubles.”

Playbook doesn’t favour Africa

African countries have found themselves more frequently before international arbitration tribunals for claims of violating their investment treaty obligations. In some of these cases, African governments have been found liable and paid large awards or compensation to foreign investors.

Egypt, Libya, Zimbabwe, Tanzania, Algeria, and DRC are among the countries recently confronted with exorbitant investor-state dispute claims.

In this year, Tanzania reached an out-of-court settlement with Australian mining company Indiana Resources, agreeing to pay $90 million to end arbitration proceedings.

This was the second such settlement between Tanzania and international firms that filed for ICSID arbitration after their mining licences were controversially revoked by the late President John Magufuli government in 2018.

Under the agreement, it was agreed that payment modalities will be in three instalments, however, in the event Tanzania defaulted on the subsequent instalments, the company reserves the right to recommence the annulment process at ICSID.

This also includes the right for Indiana Resources to pursue enforcement activities which would involve the seizure of Tanzania assets in any jurisdiction that is a member of the World Bank. 

Despite BITs being seen as a way out for countries to attract foreign investors in the past, countries have increasingly expressed concerns treaties that contain ICSID clauses.

As a result, countries that do not bow to the demands of foreign investors find themselves trapped in legal litigations that often costs millions or billions in dollars depending on how often a country is taken to the tribunal.

This is more apparent for Africa.

In total, out of all cases registered under the ICSID Convention and Additional Facility Rules as of end-June 2024, Sub-Saharan Africa accounted for 14 per cent of these cases, making it the third continent being sued at ICSID.

In 2014, cases against Sub-Saharan Africa amounted to 20 per cent of the overall number of new cases brought under ICSID during that year. This has cost the African government billions of dollars.

The number of ICSID cases increased from 38 in 1996 to 706 in 2018, with an average cost per case rising to $8 million and the average award in the event of an adverse ruling rising to over half a billion US dollar.

According to Bart-Jaap Verbeek, Senior Researcher at the Centre for Research on Multinational Corporations (SOMO), the current investment architecture was created 60 years ago by rich countries in the Global North to protect and promote their foreign investors abroad.

“Over the years we saw that these investors have been able to use the system to challenge all kinds of regulations and policy measures that countries in Africa have enacted to bring about changes that are in public interest such as human rights and sustainable development,” he says, calling the system ‘one-sided.’

Verbeek laments that this system is harming sustainable development in Africa since it allows foreign investors to claim compensation from governments, compensation he suggests is in the millions and potentially billions that African governments have to pay to foreign investors from North America and Europe.

“While Africa is in dire need to get financial support to bring about structural transformation, actually what we see is that financial flows are reversing in form of this financial structures,” he notes.

‘BITs don’t attract investment’

In 2009, South Africa undertook a review and it concluded that there was no correlation between existing or non-existing bilateral investment protection treaties and actual flow of investments.

“In fact, South Africa attracted more investments from the U.S. and Japan even though it did not have any existing BIT with them,” says Davies, who’s also an honorary professor at the Nelson Mandela School.

This can be observed in Rwanda’s case if one looks at investment flows in 2023.

According to data from Rwanda Development Board (RDB), Rwanda attracted $2.47 billion in investment commitments in 2023.

In the same period, 61.2% of these investments were foreign investment commitments, but 42.7% of these were attracted from countries that do not have BITs with Rwanda.

India, for instance, which does not have a BIT with Rwanda was Rwanda’s leading source of investment in 2023 (7.1%).

Nyaguthii Maina, international legal expert at International Institute for Sustainable Development (IISD) agrees, indicating that there is a lack of evidence that investment protection treaties lead to more investment.

“However, their costs are certain and has been demonstrated over the past few decades. The current regime of international investment treaties, especially its ISDS mechanism, has been causing more problems than solving them,” she argues.

According to Maina, these problems range from concerns about the lack of predictability and coherence, issues related to conflict of interest, the exorbitant cost of the ISDS proceedings and growing damages awards, and problems related to regulatory chill. 

Africa discontented

For some years now, developing countries, including some African countries have expressed discontent over the current dispute settlement system and as a result many have started pushing for a change in the status quo.

South Africa, Kenya, Zimbabwe, Liberia, Tanzania, and India have reviewed and re-negotiated BITs by the recognition that their existing BITs were making them vulnerable to legal challenges pertaining domestic development policies.

Kenya amended its Treaty Ratification Act, which is now the Treaty Making and Ratification (amendment) Act 2024, for the urgent need to enhance parliament’s role and public participation in the country’s treaty making process.

South Africa has over the years reviewed most of its existing treaties. The decade leading to 2010’s most of South Africa’s treaties were expiring. The country took the opportunity to lapse all the treaties that were coming to an end.