The almighty investor

Trying to take back failing privatized public services exposes governments to the risk of being sued for gargantuan amounts by foreign corporations. Lavinia Steinfort reports

The privatization of public services is being rejected all around the world because it has led to underinvestment and price hikes.

Yet undoing privatization when it’s been carried out by foreign firms can run into serious problems; those who take this path can soon discover an adder in the grass. Tucked into the international trade treaties that countries often sign are ‘investor protection’ provisions, which give foreign corporations the ability to attack any attempt at a public take-back by suing the government.

International investment arbitration is also known as investor-state dispute settlement (ISDS) and its powers are hard to overestimate. It makes populations pay for failed privatizations, allowing investors to claim sky-high sums from governments.

Lithuania’s experience is typical. In 2016, the Paris-based multinational Veolia sued Lithuania when its capital Vilnius, and several other municipalities, decided against renewing the district heating contract of Veolia’s subsidiary, Vilniaus Energija. Instead, the cities prepared to return the energy service to municipal control. Additionally, the Lithuanian government scrapped gas subsidies, which according to Veolia, forced the subsidiary to close one of its power plants. Veolia used the France-Lithuania bilateral investment treaty (BIT) to sue the government of Lithuania for €100 million ($123m).

Undoing privatization when it’s been carried out by foreign firms can run into serious problems; those who take this path soon discover an adder in the grass

This remunicipalization – returning a public service to local public control – was a response to mounting public pressure, alleged fraud and Vilniaus Energija’s lack of financial transparency. Research by the Lithuanian energy regulator concluded that the company was responsible for manipulating fuel prices, thereby significantly increasing energy costs for households and generating an unlawful excess profit of €24.3 million ($29.8m) between 2012 and 2014. In 2017 the local authorities brought the district heating back into public hands but the ISDS case is still pending.

Lithuania’s experience shows that investment arbitration puts excessive price tags on the reclaiming of public services. This is despite publicly owned essential services outperforming private management time and time again. Additionally, when energy, water or transport services are in public hands and democratically controlled, profits don’t drain off to private shareholders but can be reinvested in service accessibility, employment and infrastructure.

One-way streets

What exactly is the ISDS regime? ISDS tribunals are one-way streets which are used and abused by foreign investors. They are inaccessible to governments, small and medium-size enterprises, to civil society organizations and ordinary people.

Investment protection gives privileges to foreign investors without any corresponding enforceable obligations, like creating jobs, protecting workers’ rights, upholding environmental standards or guaranteeing universal access to public services. The governments that are party to such agreements, regardless of their democratic rights and responsibility to regulate, must comply no matter the social costs.

‘ISDS constitutes an assault on democracy, subverts the rule of law and violates numerous civil, political, economic, social and cultural rights,’ according to Alfred de Zayas, the first independent UN expert on the promotion of a democratic and equitable international order.

Foreign investors are often awarded obscene payouts, regardless of their misconduct or breaches of contract, while states stand defenceless against an ISDS claim since they cannot appeal a verdict.

Hammer of big investor looms over public
(C) Jayesh Sivan

Proponents present investment protection as a necessary mechanism to hold governments accountable. However, most of the countries that are sued through ISDS have effective and impartial legal systems that are sufficient to protect the properties of foreign investors. ISDS is not only unnecessary, it discriminates against domestic investors. In a European context this goes far beyond the legal and constitutional framework.

Giving foreign investors special rights that can be enforced through opaque and biased international tribunals, which consist of three for-profit arbitrators who tend to put private investor rights above public interest, is a shocking state of affairs. As Juan Fernández-Armesto, an arbitrator from Spain, put it: ‘When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all… Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.’

The brick that flew

Argentina’s eye-watering experience with ISDS tops even Lithuania’s. In 2009, the Spanish multinational Grupo Marsans sued the government of Argentina for a whopping $1.5 billion under the Argentina-Spain BIT, after the government deprivatized its two national airlines in 2008. On Argentina’s side, the reasons for deprivatization were overwhelming: $900 million of accumulated debt, poor management, lack of investment and suspicions of corruption.

After the airlines were returned to public control, their financial situation improved with an 85 per cent rise in revenues, and, by 2013, the aircraft fleet had increased from 26 to 63. Regardless of Grupo Marsans’ misconduct, the tribunal ruled in July 2017 that the government owes the foreign investor $320.8 million. One can but imagine what a difference this massive amount could have made if spent in the public interest.

Since 2000, decisions to deprivatize public services have triggered at least 20 international arbitration cases (ten in the water sector, four in telecommunications, and three each in energy and transport).

Feeling the chill

The spectre of an ISDS claim is enough to have a chilling effect on governments who want to regulate or deprivatize their outsourced services, preventing them from taking action.

Take Bulgaria, where the residents of the capital Sofia and some city officials organized to reverse their water privatization by collecting enough signatures to hold a referendum. The reason: the private company Sofiyska Voda, another subsidiary of Veolia, is infamous for its lack of transparency, exorbitant management salaries and financial losses. On top of that, the company had disconnected 1,000 households and requested to prosecute 5,000 more for unpaid water bills. The local government did not permit the referendum to go ahead for fear that the private investors might invoke a clause secretly added to the contract which would potentially enable the company to sue Bulgaria at the Vienna International Arbitral Centre.

But this chilling effect hasn’t deterred the grassroots movements against privatization. In recent years, political opposition to investment protection and the gargantuan trade deals, like TTIP, that legalize them has been rising, with unions, local governments and citizens joining forces in their thousands. These movements are not simply oppositional, they help provide a positive vision of the future: a world of socially and environmentally just trade regimes where public services are controlled by democratic institutions, citizens and workers.

Lavinia Steinfort is a researcher at the Transnational Institute.