Bolivia denounces its Bilateral Investment Treaties

Introduction[1]

For many years now corporate power has been a cornerstone of the Democracy Center’s research and advocacy projects. From our work with activists and advocates in Bolivia and around the world, we’ve seen time and again the ways in which these powerful, profit-driven institutions can impact our natural environment, our cultures and our democracies.

After the ‘Water War’ in Cochabamba, Bolivia in 2000, we saw first hand how the system of investment rules and arbitration tribunals is being used to enforce the interests of corporations over and above the popular will.

Following on from that experience, the people of Bolivia mandated their new government to withdraw from the agreements and tribunals that make up this system. The current report -prepared by the Democracy Center as part of the Network for Justice in Global Investment[2] project - documents the first phase of Bolivia’s attempt to do just that.

It is based on an interview with the Deputy Minister for Trade and Integration of Bolivia, Walter Clarems Endara Vera who very graciously welcomed us into his office to provide information on Bolivia’s 21 Bilateral Investment Treaties (BITs) and the new investment law passed in April of this year. (The whole interview in Spanish can be found here).

The report holds some invaluable lessons for other countries regarding the challenges involved in unraveling the web of trade and investment agreements and the rights they grant to corporations.

Bolivia and the Investor-State Dispute Settlement system

In a recent publication, the Attorney General of the Bolivian government announced the signing of an agreement with the British company Rurelec PLC. The agreement was in relation to the nationalization[3] of the shares of its subsidiary, Guaracachi America INC. (GAI) in Eléctrica Guaracachi S.A (EGSA), on May 1st 2010[4]. It brings to a close RURELEC’s legal action against the Bolivian state for $142.3 million that formally began in 2012 in the Permanent Court of Arbitration at The Hague[5]. The case was brought under two Bilateral Investment Treaties (BITs) that Bolivia signed with the United States and Great Britain.

Rurelec’s initial demand for payment of $142.3 million, was rejected by the government from the start. However, on 31st January this year, the International Court of Arbitration in The Hague ruled that Bolivia should pay the sum of $41,956,614. In the end the government and Rurelec came to an agreement to pay the company $31,534,613, which became effective with the signing of the deal on May 29th this year.

Attorney General Héctor Arce, who signed the agreement on behalf of the Bolivian State, said it was "... a successful operation given that the arbitration award made on January 31st this year by the International Court of Arbitration in The Hague ruled that Bolivia should pay $41,956.614; now as a result of negotiations conducted by the Ministry of Hydrocarbons, the ENDE (National Electricity) Corporation and the Attorney General, this has been reduced by $10,422,000 or 25%", and this is 75% lower than the amount originally demanded by the company.

Subsequently Rurelec handed over its shares to the Bolivian state (50.01% of the EGSA shares), thereby ending another chapter in the struggle to regain control over the country’s strategic companies, as was determined by the new Constitution adopted in February 2009.

The Rurelec case reminds us of the first case that Bolivia had to face in international tribunals under the Investor-State Dispute Resolution system. That case came as a result of the expulsion of “Aguas del Tunari” from Cochabamba during the "Water War" in April 2000. On January 19th 2006, on the eve of the inauguration of newly elected president Evo Morales, representatives of the main investors of "Aguas del Tunari" (headed by the Bechtel Corporation in the United States) visited the country to finalize a deal in which the consortium sold its shares to the government of then President Eduardo Rodríguez Veltzé, bringing to an end the $50 million case that this corporate group had initiated against Bolivia at the International Centre for Settlement of Investment Disputes Disputes (ICSID) in 2002. However, on that occasion, the payment made was not ​​in the tens of millions of dollars, but for the paltry sum of 2 Bolivianos (then $ 0.30). This event was considered historic at the time, both because of the context in which it occurred, and because it was the first time a corporate group had abandoned an international arbitration case as a direct result of international public pressure. On becoming aware of the case, dozens of activists from around the world, from San Francisco to Amsterdam, had mobilized campaigns and actions to pressure Bechtel and its directors to abandon the case. In the end, the victory went to the Bolivian David and not the Corporate Goliath.

The Bechtel case was certainly very different to the Rurelec one. For one thing, the case was rooted in a popular struggle that had international support. In addition, the Bechtel case lacked any substantial grounds- the company was demanding $50 million in compensation having invested less than $1 million in the five months it was in Cochabamba. However, in the case of Rurelec, when the company demanded excessive compensation, the government launched a negotiating strategy, which, as the government itself insists, helped to save the Bolivian state more than $10 million compared to the judgment of the Court of Arbitration at The Hague, and more than $100 million if one considers Rurelec’s initial expectations. This time round the government denied the excessive compensation claim, but acknowledged that the company had invested something in the country and decided to negotiate an "acceptable" payment. As Deputy Minister Clarems Endara said when we interviewed him: "In many cases ... it is best to negotiate before spending millions on an arbitration mechanism; and that is basically what has happened in some of the emblematic cases where we have paid the amount of the actual investment, a fair payment, for want of a better term."

However, the central problem is not so much the way in which these two cases began or ended, but rather how they came about in the first place. This is the common denominator between the cases mentioned above and all of the other cases that Bolivia faces in international tribunals. They are made possible by the vast web of Bilateral Investment Treaties (BITs)[6] that Bolivia began to sign in the late 80's. This is the main reason why Bolivia has been, and can still be, sued in international courts.

Bolivia and Bilateral Investment Treaties

Since Bolivia began implementing the neoliberal model in 1985[7] a total of 21 Bilateral Investment Treaties have been signed, which, added to the Investment Chapter of the only Free Trade Agreement signed by Bolivia, with Mexico, gives a total of 22 investment agreements.

The first Bilateral Investment Treaty was signed in March 1987 with the then Federal Republic of Germany, and was ratified in November 1989. The other 21 BITs to which we refer were signed by the Executive and ratified by Congress[8]. The final treaty was signed with Spain in October 2001 and ratified in May 2002, although the BIT signed with Paraguay in May 2001, was the last to be ratified by the Bolivian Congress, in June 2003[9].

These Bilateral Investment Treaties, just like elsewhere in the world, contain a number of provisions on investment protection and authorize the use of the Investor-State Dispute Settlement (ISDS) system by which corporations can bypass national courts and sue governments for millions of dollars in international tribunals when they believe their investments have been affected by a public policy, be it economic, labor or environmental. It doesn’t matter if these measures are socially beneficial or whether or not they are in compliance with national laws, the national Constitution or binding international agreements on health[10], environment and human rights. In summary, these BIT's and the international arbitration tribunals that enforce them pose a real threat to national sovereignty and democracy.

The Struggle to Dismantle the Investor-State Dispute Settlement System

In the Bolivian context, it is important to note that, unlike at the time of the first case with Aguas del Tunari, the country now has a legal and constitutional framework, as well as public institutions and a clear policy, to address these Bilateral Investment Treaties and the system of international arbitration that corporations are using to undermine the actions of sovereign countries.

The Evo Morales government rejected the Investor-State Dispute Settlement mechanism from the outset. This was reflected in the country’s withdrawel from ICSID –the most widely used Investor-State Dispute Settlement forum- in May 2007. In addition, the new Constitution prohibits the state from settling investment related disputes with foreign investors in international tribunals. Subsequently, in late 2010, the government created, also by constitutional mandate, the State Attorney General’s office, also known as the country’s “lawyer", now responsible for promoting, defending and protecting the interests of the state in various fields, including disputes with foreign investors.

However, one of the most important provisions of the new Constitution in this regard is to denounce and renogiate all international treaties that are contrary to the constitutional text, that is to say, the BITs, which is ultimately where the power lies for corporations to do whatever they want in the countries in which they operate. The BIT's are where the rules of the game between companies and states are established. They are also the reason why Bolivia, despite regaining sovereignty from corporations and shielding itself from this system, could still be liable to further lawsuits in international tribunals similar to ICSID, which establish their jurisdiction in such treaties[11].

The Constitution in its ninth transitional provision reads that "international treaties that predate the Constitution and do not contradict it will remain part of the domestic legal order, with the force of law. Within four years after the election of the new Executive Body, this Body shall denounce, and if necessary, renegotiate the international treaties that are contrary to the Constitution.[12]" Given that the elections (convened by the new Constitution) took place in December 2009 and that the government of President Morales began its new term on January 22nd, 2010, the deadline established by the Constitution to denounce and bring Bilateral Treaties in line with the new Constitution has been completed.

With this in mind, and in order to obtain further information about the process of bringing Bilateral Investment Treaties in line with the new Constitution, the Democracy Center requested a meeting with the Deputy Minister of Foreign Trade and Integration, Walter Clarems Endara. We would like to share some sections of the interview with our readers below.

Bolivia denounces its Bilateral Investment Treaties

We began the interview by asking Deputy Minister Endara about how the Bilateral Investment Treaties signed by Bolivia in the past are being handled now that the four year period allowed by the new Constitution to denounce or modify them has expired.

The Deputy Minister began by making reference to the clear parameters for the treatment of foreign investment in the country laid down in the new Constitution. These parameters, according to him, consist of three pillars: "The first pillar is in relation to the recovery of all strategic natural resources for the country, which is what led to the nationalization of different companies ... the second pillar is in relation to the process of reviewing and denouncing all Bilateral Investment Treaties contrary to new Constitution ... the third pillar is in relation to the prohibition of any international arbitration in disputes between private investors and the Bolivian state ...", that is to say that "... any dispute that may arise between a private investor and the state has to be resolved within national jurisdiction, this implies an explicit renunciation of any international forum in which disputes could be resolved."

The Deputy Minister went on to tell us that the 21 BITs that Bolivia signed in the past have been denounced. Of course we then asked him about the process, and he replied that, "the first Bilateral Investment Treaty was denounced in 2006. Starting from that date we began to systematically denounce all agreements when their dates expired". He continued "then we began to see matching dates and started denounce the first BITs ... Subsequently, to meet the requirements of the Constitution, we collectively denounced all remaining BITs on May 6th, 2013. That is to say, 8 of Bolivia’s agreements were denounced when their dates expired, and the other 13 were denounced collectively". Within that group of BITs were those signed with Belgium and Luxembourg, Ecuador, Peru, Chile, France, Romania, Germany, Argentina, China, Denmark and Great Britain. Among those denounced when their dates expired were BITs with the Netherlands (2009) and United States (2011)[13].

When we asked about the reaction of other countries, he said that obviously there was concern on the part of European countries and the United States, which are among those that invest most overseas, and with which Bolivia signed most of it’s BITs. However, he also said that "in all of these cases there has not been a negative response", and that, "in conclusion, our understanding is now that we do not have bilateral investment agreements."

Deputy Minister Endara also noted that "..many countries are interested in signing a new investment agreement with Bolivia." Of course this has to be in the framework of the new Constitution and the new investment law approved in April of this year. The law established that all international agreements related to foreign investments must be renegotiated and adapted to the Constitution in order to then be formalized into the framework of Investment Agreements. The Deputy Minister said that when the respective countries were made aware that the BITs were being denounced, they were invited to negotiate new agreements under the new legal framework for investment. He said "this means that we are on the eve of negotiating a new model agreement, a new framework for bilateral investment...".

When we asked the Deputy Minister Endara why he believed that these countries were being so accommodating, his response was that "... chickens have now come home to roost. Countries promoting BIT's are now also being sued in forums such as ICSID as well as other tribunals, sometimes by their own investors. Unfortunately, the economic crisis in Europe has led some countries to take measures affecting foreign investments and they are now being sued. This means that the conversation with some European countries is now different. We can now talk as equals because they are suffering the same problems we have suffered ... I mean, we can now see some of the biggest defenders of the investor-state dispute settlement mechanism defending their own countries against these cases. The situation really has changed."

New Investment Promotion Law

The most important thing to highlight here is that this law[14] constitutes the basis on which future international investment agreements with other countries will be negotiated, and it establishes that any disputes will have to be resolved under Bolivian law. This is why one of its transitional provisions, establishes that within three months (ending in July this year) a new arbitration and conciliation law will be developed in line with the new Bolivian legal framework. In the words of Deputy Minister Endara, "The Investment Promotion Law ... tells us that there must be an immediate adjustment of all national regulations to this new investment regime. What this new system does is to no longer recognize external dispute mechanisms. So we're talking about a transition period..."

Regarding the future Conciliation and Arbitration Law, the Deputy Minister said that "... I think there will be continued expectation until the end of this process, because that's what is of most interest to potential investors. However, in my personal opinion, the rules of the game have already been established, now it only remains to define what color the referees will wear, how long will be played etc.., and that is something that we will have to wait and see. Once we have the amendment to the law 1770 (the old law of Conciliation and Arbitration) we basically will have a regulatory framework for investment, which, like it or not, will mean the establishment of new rules of the game."

Given these statements and optimistic outlook, of course several other questions arise that need to be answered, for example: How will the Constitution be made to prevail above these BITs? What will happen if a company ignores the Bolivian laws and the Constitution and brings a legal case for a government policy that affects their investments? What will happen with the ‘sunset clauses’ in these agreements that keep them alive even after being denounced?

Sunset clauses in the denounced BITs

This is perhaps one of the most controversial issues now that the government has announced that all BITs had been denounced. Even though Bolivia can denounce treaties unilaterally, these agreements have ‘sunset clauses’ that extend their validity for several more years. That is, although one party, in this case Bolivia, formally expresses their will and moves to denounce an agreement, once the treaty has expired (the duration is stipulated in the treaty) the agreement will still be valid for 10 years or more. During this time the investment clauses are as binding as when they were first signed and ratified, which means they still represent a threat to national sovereignty.

When we asked the Deputy Minister about the possibility of new cases emerging in the context of these BIT clauses, he replied that "Obviously the periods of protection for certain investment agreements go far beyond the validity of the current investment law, so we will have to make specific analyses case by case ... ".

By means of example, the BIT with the Netherlands was signed on March 10th 1992 and ratified on August 12th 1994, the date from which it enters into force. The first section of Article 14 of this BIT says that it will run for 15 years, i.e. until 2009. As this agreement has already been denounced, section 3 of this article is activated. It says "regarding investments made before the date of termination of this Agreement, the previous relevant Articles will remain effective for a period of 15 years from that date”. This means that existing investments in Bolivia that are registered in the Netherlands will still be protected under the provisions of this agreement until 2024.

The Deputy Minister acknowledged that "(we are not)... exempt from investment cases in international forums ...” precisely because of the structure of these agreements, but he stressed that if the possibility of a lawsuit arises, "... what should be done is to analyze each one case by case, investment by investment. " He said it is difficult to generalize as to what types of investments remain protected by the system, and what types don’t, and that it is the function of the Attorney General to analyze each case, and to look at issues such as jurisdiction, if new cases were to arise. However, despite all of this, Deputy Minister Endara told us that "... the important thing is that we have gotten to the underlying root of the problem and it is now clear that any new investment must be in line with the new legal framework, and that, we believe, is what’s most important. "

Later the Deputy Minister added "... at the end of the day a foreign investor …will invest wherever they feel that they can make a profit. The bonus with BITs is precisely that they allow them to make claims for loss of potential future earnings, or to sue for any reason that has prevented them from investing. In actual fact foreign investment has increased in Bolivia. " Indeed, according to ECLAC’s 2013 report on Foreign Direct Investment (FDI) in Bolivia, the country received $2.030 billion in FDI in 2013, 35% more than in 2012, especially in the hydrocarbon sector. Alicia Barcena, Executive Secretary of ECLAC, said while presenting this data that "people could say: if Bolivia is nationalizing, why would foreign investment come? Well the news is that FDI is coming to Bolivia at very high levels ", a statement that reinforces the comments made by Deputy Minister Endara[15].

Conclusions

Bolivia has a well-known history with the ISDS system, beginning with the “Water War” and Bechtel's follow-up case for $50 million. The Bechtel case sparked a growing awareness among Bolivians that finally led to a Constitutional mandate to dismantle the system. Both the Bechtel and RURELEC cases that we are covering in this report, related to water management and electricity services respectively, represent strategically important resources to the state. These and other cases regarding the protection and recuperation of key natural resources relate to major public policies that should be designed and implemented through the democratic process. The Bolivian case is very clear. Like many countries in the region, Bolivia was effectively treated as a “lab rat” to be subjected to neoliberal policies of privatization and the systematic stripping of natural resources. However, after the water war broke out, a movement came together to reclaim Bolivia's natural resources, its basic services, its water, its electricity etc. But during this struggle it soon became clear that the ISDS system, designed to be able to overturn government decisions, threatened any potential victories.

Even though the legal and institutional framework built by the country from the new Constitution: the creation of the Attorney General; the approval of the new Investment Law; the denunciation of ICSID; the prohibition of international arbitration tribunals; and the process of denouncing all BITs gives the country a solid basis from which to counter the power of corporations, Bolivia will continue to be tied to the system for at least another 15 years. This goes to show that although it may be easy to enter the system, getting back out is another story.

These lessons should be a warning to those countries and regions of the world that are currently negotiating free trade and investment agreements that include the ISDS system, such as the Transatlantic Trade and Investment Partnership (TTIP) between the European Union and USA, or the Trans-Pacific Partnership (TPP), in which our neighbors Peru and Chile are participating, along with several other countries from this continent and from Asia.

Meanwhile in Bolivia, we still have to resolve the outstanding investor-state cases that we face in international tribunals. As the Deputy Minister said, the strategy is to negotiate "fair" agreements. Bolivia currently has three formal cases, two of which are still under the ICSID framework. The biggest case is by Pan American Energy LLC, for $1496 million for the nationalization of its shares in 2009. There are also two other processes with Arbitration Notifications and two further cases with Notifications of Dispute.[16]

Finally, it is important to note the changes that Bolivia has undergone since the Bechtel case. The balance of power has shifted, and the country is now attracting investment because of its resources and the opportunities that exist here, and not due the existence of investment protection agreements. And this is exactly why we must be careful. Corporations will be friendly with the government as long as they are making money, but they can make use of these weapons at any time. When that happens, people should be reminded that this is an issue that affects us all and that the battle against Bechtel was not won in court, but in the streets and with international solidarity. Lastly, we must always bear in mind that this is not a system used by corporations to recoup their investments, but to shield themselves from democracy and national sovereignty.

- Aldo Orellana is a Bolivian activist and investigator who works with the Democracy Center in Cochabamba, Bolivia. @AOrellanaLopez

This brief report was originally published on the website of the Network for Justice in Global Investment, here.


Acknowledgements

The author would like to thank the following people:

The Deputy Minister for Trade and Integration of Bolivia, Walter Clarems Endara Vera for his collaboration.

Jim Shultz for general guidance and support

Philippa de Boissiere for translation support

Thomas Mc Donagh for collaboration and support at various stages of this project.



[1] This is the first edition in a series of updates on Bolivia and the ISDS system. Next edition: Bolivia’s New Investment Law.
[2] The Network for Justice in Global Investment project is a partnership with the Institute for Policy Studies in Washington D.C.
[3] We don't go into detail on the concept of "nationalization" in this report.
[4]The nationalization of the shares occurred by means of Supreme Decree No. 0493, in favor of Empresa Nacional de Electricidad - ENDE, representing the Bolivian state.
[5]According to Bolivia’s Attorney General, Bolivia was notified in November 2010 of the beginning of the ad hoc arbitral proceedings brought by GAI and Rurelec under United Nations Commission on International Trade Law (UNCITRAL) regulations. Finally, Bolivia was notified of the formal arbitration case in March 2012, and began its formal defense in August of the same year. More details are avilable in this Gestión 2013 report from the Bolivian Attorney General. See also this link to the Court of Arbitration.
[6]According to the United Nations Conference on Trade and Development’s website http://investmentpolicyhub.unctad.org/IIA there are a total of 2783 Bilateral Investment Treaties to date, of which 2095 are in force. To this we must add 338 other international investment agreements, of which 269 are in force.
[7]It was the government of Victor Paz Estenssoro which adopted the precepts of the Washington Consensus in August 1985 by signing Decree 21060 to liberalize the Bolivian economy.
[8] The total list of BIT's signed by Bolivia and the laws that ratify them are available on the website of the Attorney General of the Plurinational State of Bolivia, with the exception of the BIT signed with Belgium and Luxembourg in April 1990 and ratified in July of the same year. There is another BIT signed with Costa Rica in October 2002, however it was never ratified by Congress and so it never took effect. While there are sources that give a date of entry into force of the BIT with Costa Rica, the Legal Information System of the Plurinational State has no record of ratification on file.
[9]The website http://investmentpolicyhub.unctad.org/shows that the BIT with Paraguay was not ratified. However, the website of the Attorney General of Bolivia shows that it was ratified, at least by Bolivia, and may have therefore not been ratified by the Paraguayan Congress.
[10]See: A Tobacco Giant Uses Investment Rules to Fight Health Warnings ;
Unfair, Unsustainable, and Under the Radar: how Corporations use Global Investment Rules to Undermine A Sustainable Future.
[11]In its latest report, ICSID stated that 63% of the reported cases in this arbitral forum were based on jurisdiction consent established in BITs, followed by investment contracts between investors and receiving states (19%) and the investment law of the receiving state (8%), among others.
[12]See: http://www.patrianueva.bo/constitucion/
[13]It was not possible to access a detailed list.
[14] We only address the new Investment Law in this report in relation to the ISDS system. Find the Law here.
[15] It’s important to note that ECLAC has also stated that most ForeignDirect Investment that arrived in Latin America in 2013 did not generate productive capacity or new jobs. However, this is beyond the scope of the current report, which is focused on the process of denouncing BITs and not on the nature of the investment that is arriving in the country.
[16]To see the details of all of the cases that Bolivia now faces, see this report Gestión 2013 from the Attorney General or this summary of the cases.