The Annapurna Express | 1 March 2020
Nepal’s bilateral investment treaties
by Prabhash Ranjan
Bilateral Investment Treaties (BITs) are treaties signed by two countries for the reciprocal protection of their investment in each other’s territory. The first BIT was signed in 1959 between Germany and Pakistan, according to UNCTAD, and by the end of 2019, more than 3,000 such BITs had been signed. Another critical function of BITs is to promote foreign investment—developing countries and least developed countries (LDCs) that have signed BITs are seen as favorable destinations for foreign investment as they guarantee protection to foreign investors, not just under domestic law, but also under international law.However, the global evidence on BITs leading to greater foreign investment inflows remains inconclusive. Some studies show a positive correlation between the two, while some show negative or no co-relation. The spread of BITs has also resulted in an increase in the number of investor-State dispute settlement (ISDS) claims being brought by foreign investors against the host State. Again, according to UNCTAD, the total number of known ISDS cases till the end of 31 July 2019 stands at 983.
Against this backdrop, this short piece looks at BITs signed by Nepal. According to UNCTAD’s World Investment Report 2019, foreign direct investment (FDI) inflows to Nepal increased from $71 million in 2013 to $161 million in 2018—an increase of over 100 percent in just five years. This is even more remarkable given that in 2014 FDI inflows to Nepal had dipped to $ 30 million.
Nepal has signed six bilateral investment treaties (BITs) with the following countries: India, Mauritius, Germany, Finland, the United Kingdom (UK) and France. Out of them, only four are in force. Nepal’s BITs with India and Mauritius have not come into force. In fact, a writ petition was filed in the Supreme Court of Nepal challenging the BIT that Nepal has signed with India. However, the court quashed this writ because India has already declared its intent not to ratify the BIT.
The BITs signed by Nepal can be described as those belonging to the first generation investment treaties i.e. a template of BITs that were championed by investor-friendly Western European countries. In other words, the BITs signed by Nepal, thus far, contain broad and vague investment treaty provisions providing expansive rights to foreign investors with scant regard to the host state’s right to regulate. These BITs also provide for an ISDS, which allows a foreign investor to bring claims against the host State before international arbitration tribunals.
A good example of a Nepali BIT containing broad and vague substantive provisions is the Nepal-UK BIT. Article 1 of this BIT defines ‘investment’ by relying on an asset-based definition of investment, where investment means every kind of asset. Likewise, Article 2 of the same BIT contains a broad and vague fair and equitable treatment (FET) provision and a full protection and security provision without providing the normative content of these standards. The BIT also covers both direct and indirect expropriation but does not define or provide any guidance as to how to determine that sovereign regulatory measures may amount to indirect expropriation.
One of the most important aspects of Nepali BITs is that they contain the ISDS provision. For instance, Article 10(2) of the Nepal-Germany BIT provides that any dispute between a foreign investor and a host State that is not settled amicably within three months of a written notification made by the foreign investor, shall be submitted for ICSID arbitration. The BIT further provides that both the contracting States have given their consent to BIT arbitration under the aegis of ICSID.
The rising FDI levels to Nepal have resulted in greater integration with the global economy, thus enhancing the chances of ISDS claims being brought by Nepal. Indeed, Nepal has already had its first brush with ISDS in a case known as Axiata and Ncell v Nepal. This case has been brought under the Nepal-UK BIT. The dispute arose due to the imposition of capital gains tax by the Nepali government on Axiata’s acquisition of a company called Reynolds Holding limited from TeliaSonera in 2016, levied on Axiata’s subsidiary Ncell. While the foreign investor has nominated an arbitrator, the Nepali government is yet to appoint an arbitrator. The outcome of this case might affect the trajectory and contours of future Nepali BITs.
As an LDC, Nepal needs FDI to boost its economic growth. BITs can play a role in this regard. BITs can signal to foreign investors that their investment in Nepal shall be protected, not just as per domestic law but also under international law. This would boost investor confidence. However, it is critical for Nepal to ensure that its BITs are not too investor friendly and contain provisions that would allow Nepal to defend its bona fide sovereign regulatory measures adopted in good faith. The future Nepali BITs should strike a balance between protecting foreign investor’s money and safeguarding Nepal’s sovereign right to regulate.
It is equally important for Nepal to invest in capacity building to better understand the implications and ramifications of investment treaties and BITs. Such capacity building efforts need to be undertaken at all levels—executive, judiciary, legislature, civil society, and academia. A better and deeper understanding of BITs and ISDS shall enable Nepali policymakers to internalize BITs and ISDS. Such internalization of BITs and ISDS shall allow them to evaluate domestic laws and policies in terms of their compatibility with Nepal’s BITs
The author is a senior assistant professor at South Asian University’s faculty of legal studies.