Tuesday, 27 May 2014

Investor-State Dispute Settlement: Slow down and proceed with caution

In a previous blog I referred to the current negotiation of the so-called Trans Pacific Partnership and to the concerns in some of the participating countries about a US proposal to introduce the ISDS system (Investor-State Dispute Settlement). This entitles private foreign investors to seek compensation in international tribunals for any law, regulation or policy which can be construed as an unfair change in the rules of the game and detrimental to their profitability. In fact, those concerns have cropped up in the US itself, prompting the United States Trade Representative to issue a statement(1) arguing against what it calls the myth that “ISDS somehow limits our ability – or our partners’ ability – to regulate in the interest of financial stability, environmental protection, or public health…These assertions are false.”

A recent Issues Note from UNCTAD’s Programme on International Investment Agreements contains data that seem to throw some question marks on that statement. In particular, the Note refers to cases decided at the World Bank’s International Centre for the Settlement of Investment Disputes, ICSID, awarding compensation to the investor on the grounds of a purported violation of the Fair and Equitable Treatment (FET) clause, a nearly universal provision of bilateral investment treaties. The problem here is that there is no authoritative definition of FET; defining its scope is effectively left in the hands of the ISDS tribunals in each case, and it would appear that ICSID and other ISDS tribunals are tending to interpret it broadly, thus impinging on the legitimate regulatory powers of governments.

Two ICSID cases reported in the UNCTAD Note exemplify the perils of this expansive approach. In Micula v. Romania(2) the tribunal found that the repeal by Romania of certain investment incentives was a reasonable action in pursuit of a rational policy; it nevertheless also found that it was a breach of FET vis-à-vis the investors – and entitled them to compensation - because of Romania having created a reasonable expectation of regulatory stability. To establish the reasonable expectation the tribunal declared that it is irrelevant whether the State actually wished to commit itself; it is sufficient that it acted in a manner that would reasonably be understood to create such an appearance. The doubtful logic of this line of reasoning was emphasised by the fact that one of the three arbitrators dissented(3).

In the other case, Inmaris v. Ukraine(4), the tribunal held that the FET clause in the Germany-Ukraine bilateral investment treaty (BIT) was not restricted to, but went beyond, the international minimum standard of treatment required by customary international law, since there was no such limitation in the BIT itself. “[A] government act” the tribunal states, “could be unfair or inequitable if it is in breach of specific commitments, if it is undertaken for political reasons or other improper motives, if the investor is not treated in an objective, even-handed, unbiased, and transparent way, or for other reasons” (my italics).

There are other criticisms of the ISDS system as currently practised. A seasoned and respected US international arbitration lawyer has identified nine other major problems in it(5), leading him to conclude that “it is seriously flawed and … needs a complete overhaul”. Before that happens, developing countries considering adopting it or extending its coverage would do well to heed the advice associated with yellow traffic lights: Slow down and proceed with caution.

(1) USTR, The Facts on Investor-State Dispute Settlement: Safeguarding the Public Interest and Protecting Investors, 27 March 2014.
(2) International Centre for the Settlement of Investment Disputes, Ioan Mikula et al. v. Romania, ICSID Case No. ARB/05/20, Award, 13 December 2013.
(3) ICSID, Micula et al. v. Romania, Separate opinion of Professor Georges Abi Saab.
(4) International Centre for the Settlement of Investment Disputes, Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/05/20, Award, 1 March 2012.
(5) Kahale, George, Keynote Speech, Eighth Annual Juris Investment Treaty Arbitration Conference, Washington D.C., 28 March 2014.

By Carlos Fortin, Research Associate, Institute of Development Studies

Monday, 19 May 2014

More ‘strategy’ needed in private sector development?

Jodie Thorpe photo
Last week was a busy week in the ‘business and development’ world. On Tuesday, the European Commission published its Communication on ‘A Stronger Role of the Private Sector in Achieving Inclusive and Sustainable Growth in Developing Countries’. Within 24 hours, civil society groups including Eurodad, Concord and Oxfam had responded with warnings that the EU’s focus on the private sector risked privileging narrow investment interests over development objectives. And then on Thursday, The Independent Commission for Aid Impact (ICAI) published a report on the Department for International Development’s (DFID) private sector development work, questioning how well DFID’s approach is transforming the private sector as a tool for economic growth and poverty reduction. The common thread through all was a question of strategy and theory of change.

ICAI’s assessment of DFID
I have to say that I have some reservations about ICAI’s assessment – principally that once you look behind the headlines, much of the critique has little to do with DFID’s private sector approach specifically. Instead, many of the findings seem to reflect general challenges in delivering aid and development. For example, the report points out that the target culture incentivises a focus on reporting results at the output rather than at the outcome or impact levels, with decisions potentially driven more by the need to meet office targets than calculations around the strategic use of resources. I don’t think these issues are unique to private sector work – or to DFID for that matter.

However, I believe that ICAI do make one crucial point: that DFID needs to better define and articulate where it can add most value in private sector development, relative to other stakeholders. ICAI particularly question DFID’s capacity to influence the regulatory environment for business and international trade rules, and point out that it is difficult to assess how such changes impact on end beneficiaries.

The European Commission and the private sector
Comparing DFID’s approach to the new communication from the European Commission, there are substantial differences. The Commission emphasises job-creating businesses in the formal and informal sectors (DFID’s framework barely acknowledges that job creation varies between companies or mentions the informal sector). Even more importantly, the Commission focuses on a ‘differentiated approach’ (again absent in the DFID framework), recognising the need to identify where the profit incentives of private actors coincide with public interests, and how different private actors require different conditions and incentives to contribute to development.

That said, the European Commission does also echo DFID’s focus on creating better regulatory environments in partner countries. Here the EU development commissioner, Andris Piebalgs, would do well to reflect on ICAI’s cautions to DFID. What capacity does the EU have to influence the regulatory environment for business in developing countries, and how would these changes actually translate to positive impacts on end beneficiaries?

Towards a more strategic approach
In a recent working paper, IDS’ Business and Development Centre sets out some key ways we see business and development becoming more effective and strategic. These include firstly understanding alignment between business and development goals – where does alignment exist, what can strengthen it and where are the costs to increasing alignment prohibitive. Secondly, prioritising interventions – focusing on a small number of select initiatives that tackle the greatest obstacles to development, which in turn requires understanding how particular policies or barriers affect the poor. And thirdly, employing adaptive approaches that drive long-term transformative change.

By Jodie Thorpe, Research Fellow, Institute of Development Studies

Thursday, 1 May 2014

How can markets work better for nutrition? Lessons from Nigeria

Ewan Robinson photo
Reducing undernutrition is an urgent priority in Nigeria. The country has the highest rate of stunting in Africa, and malnutrition is the root cause of 350,000 child deaths each year. Recently, nutrition has risen up Nigeria’s federal government’s political agenda, with the country joining the Scaling Up Nutrition movement in 2012. For more than a decade, the government has pushed for a set of basic foods (including wheat flour and vegetable oil) to be fortified with vitamins and minerals important for human health.

Yet at the moment, food markets in the country are failing the poor. Research by Sahel Capital and IDS in several Nigerian cities found no complementary food products for infants that contained enough nutrients at an affordable price. Since markets don’t allow poor people to buy products that are sufficiently nutritious, they are forced to either water down the products they feed to their children or rely on cheaper products that lack nutrients and can be unsafe. The result can be early death or a lifetime of ill health.

Can businesses tackle the nutrition problem on their own?
This failure isn’t due to lack of interest from businesses. There are lots of Nigerian food companies producing widely-eaten foods like porridges, pounded yam and custards. In case studies of two companies, we found that they had produced products that were fortified with micronutrients. The problem was that they could not make these products – and deliver them – at a price that was affordable for poor people.

Why weren’t products affordable? Reaching poor consumers created high costs for companies; shipping products to urban slums and rural areas was expensive and often required building new distribution chains. Meanwhile, convincing consumers that products were healthy and nutritious was also expensive, especially since consumers are suspicious of claims on food labels, in a context where fake products and false claims are common. These are problems that businesses struggle to overcome on their own.

How can policy get around market problems?
Nigeria’s experience provides important lessons about what can be done. The Federal government, State governments, donors and NGOs have backed a variety of strategies to encourage production of nutritious foods and get them to the people who need them.

Though not all strategies have been successful, the lessons are clear: the most successful programmes worked because they sidestepped some of the larger problems that constrain businesses from making nutritious foods at an affordable price. Rather than trying to resolve systemic problems like false products or bad infrastructure – which would require huge resources and major reforms, successful efforts found ways to work around these problems. Here are some examples of how organisations and partnerships worked around the market constraints.

Using non-profit distribution to reach the most vulnerable people
One of the most effective ways to encourage businesses to produce nutrient-rich products – and to make sure they reached the most vulnerable people – was for government or non-profit agencies to buy products and distribute them.

By taking on distribution, public agencies can cover the high costs of delivering to poor people, while also eliminating the problems of convincing consumers to pay for nutrition. They can also guarantee the quality of the product. These systems have suited those businesses that have participated; they provide a secure source of demand and allow the business to focus on product development and manufacturing.

Bringing companies on board for fortification
Other strategies can also side step the key problems. For instance, laws requiring all manufacturers to add vitamins and minerals to products like wheat flour mean companies don’t have to compete with each other on fortification; the government requires all players to pay the costs of adding micronutrients, and this cost is passed on to consumers.

A second benefit of this approach is that consumers don’t even have to be aware of nutrition needs, since they will receive nutrients through foods they already eat.

But this approach also faces major challenges. Unless companies’ profits fall when they fail to comply with the law, food processors have an incentive to cut corners. In Nigeria, despite a decade of support from international donors and NGOs, regulatory agencies haven’t been able to consistently monitor companies and sanction those that don’t fortify. The Nigerian experience highlights just how daunting it is to enable government to effectively regulate large industry.

What can Nigeria teach us about making markets work for nutrition?
With our partners in Nigeria, we are asking what the big problems are and what strategies government, businesses and partnerships can use to address them. Nigeria is unique; it has the largest population in Africa, its private sector displays unparalleled levels of dynamism, complexity and chaos and its public institutions face corruption on a staggering scale.

Yet the breadth of experience in Nigeria offers crucial lessons for other countries, and for development partners and others working on food and nutrition. Our research points to policy approaches that can work with markets to improve nutrition. These include ensuring public programmes deliver to the most vulnerable, while strengthening regulatory agencies and industry bodies, aligning agricultural policies to support more nutrient-rich foods and building more targeted partnerships that specifically address the market problems.

In the coming months, we’ll be sharing our findings and inviting people from across the food and nutrition sectors to share their own experiences. In the meantime, read about our key findings and share your own experiences in the comment box below.

In memory of Professor Isaac O. Akinyele, a leader in the field of nutrition, and co-author of the report on policy experience with markets and nutrition in Nigeria.

By Ewan Robinson, Research Officer, Institute of Development Studies