State-owned enterprises and international investment treaties: when are state-owned entities and their investments protected?

• Author: Blyschak, Paul
• Position: P. 1-27

1. Introduction II. State-Owned Enterprises and Domestic Investment Law 1. The Increasing Significance of Sovereign Wealth Funds and State-Owned Companies 2. Primary Concerns Regarding Sovereign Wealth Funds and State-Owned Companies 3. National Investment Review Acts--the United States and Canada III. International Investment Law in a Nutshell IV. State-Owned Enterprises and the Jurisdiction of Investment Arbitration Tribunals 1. SOEs and International Investment Treaties 2. Jurisdictional Issue #1: Does an SOE have Standing under an IIT? 3. Jurisdictional Issue #2: Does an SOE have standing under the ICSID Convention? V. Conclusion I. Introduction

   The activity of Sovereign Wealth Funds (SWFs) and State-Owned Companies (SOCs), referred to collectively here as State-Owned Enterprises (SOEs), has been attracting intense scrutiny in recent years. (1) This is due in part to the remarkably rapid growth in their size, number and influence as they participate with increasing significance in industries of political, economic and strategic importance. The increased scrutiny can also be partially attributed to the fact that many SOEs hail from regions that have at times experienced strained relationships with the Western states in which they conduct much of their investment. Consequently, while Western states are interested in attracting SOE investment, they are simultaneously intent on ensuring that this investment is conducted in a politically neutral manner.

   Investment by SOEs is regulated in multiple ways, and at multiple levels. At the international level a number of guidelines have been developed by supra-national organizations. Aimed at easing the concerns of national regulators and politicians, these prescribe best practices for SOEs, including transparency mechanisms and disclosure practices. (2) At the national level various countries have amended their foreign investment legislation to account for SOE activity by inserting tests relating to national security that must be met by inbound foreign investment. SOE investment is also subject to a third form of law and regulation that in its application to SOEs has gone largely overlooked to this point, (3) namely international investment law of the kind contained in Bilateral or Multilateral Investment Treaties (BITs or MITs) such as Chapter Eleven of the North American Free Trade Agreement (NAFTA) (4) and the Energy Charter Treaty (ECT). (5)

   The lack of scholarship on this point deserves remediation. While national investment review procedures screen proposed foreign SOE investment ex ante, international investment law applies to SOE investment ex post, when circumstances relating to the investment itself and to relevant national security issues may have changed substantially. Furthermore, international investment law was largely originally conceived and constructed to apply to foreign private investment rather than the foreign public investment carried out by SOEs. The application of international investment law to SOEs can therefore give rise to various legal ambiguities and conceptual difficulties. This is particularly the case with respect to the standing of SOEs to bring investment arbitration claims under International Investment Treaties (IITs) such as BITs and MITs. While the growing body of international investment law has generally been well received, it has also been the subject of controversy, not least for the often inconsistent rulings of investment arbitration tribunals. (6) It is therefore important that the law pertaining to the jurisdiction of investment arbitration tribunals over claims brought by SOEs is developed in a consistent and comprehensive fashion that respects the rights and obligations of not only the States parties to IITs, but also the SOEs intended to benefit from them.

   This article will attempt to lay the framework for such a body of law. (7) In particular, as a roadmap for practitioners of international investment law, it will focus on some of the jurisdictional issues most likely to arise where SOEs pursue investment arbitration under IITs. This analysis will be composed of three parts. The next section will provide additional background on SOEs. It will examine their activities, the concerns that they have typically inspired in Western nations, and the domestic investment laws applicable to foreign SOEs that have been enacted partially in response to these concerns. Section three will then briefly review several concepts fundamental to the jurisdiction of investor-state tribunals, including the basic features and rationale of international investment law and arbitration. Section four then turns to the central analysis of the paper, focusing on two of the more problematic jurisdictional issues posed by SOEs' investment arbitration claims.

   The first issue that may arise is whether or not investment by SOEs is protected by a particular IIT. Many IITs inadequately distinguish between privately and publically owned foreign investors. As such, in many instances it will not be immediately clear from the ordinary meaning of the IIT's terms whether a SOE has standing to bring arbitration. Where this is the case the relevant IIT must be interpreted on its own merits. The level of protection granted to SOEs is assessed by interpreting the jurisdictional provisions' ordinary meaning within the broader context of the IIT, as well as the larger objects and purposes underlying the agreement. This may include consideration of asymmetrical definitions of "investor" contained in the IIT, references to "public" or "private" investment in the IIT, and other provisions directly or indirectly referencing the participation of States parties or their agencies.

   The second issue that may arise is whether the SOE has standing to bring its investment arbitration claim before the forum of its choice--typically the International Centre for the Settlement of Investment Disputes (ICSID), pursuant to the Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention). (8) While investment arbitration before the ICSID has its advantages, it is also accompanied by added jurisdictional requirements. Most importantly for this article, ICSID arbitration is subject to the "Broches test" for jurisdiction, and is therefore unavailable to an SOE either "discharging an essentially governmental function" or "acting as an agent" of its home state. Moreover, although this two-pronged inquiry has been the accepted standard governing the availability of ICSID arbitration to SOEs for over 40 years, further analysis will reveal that its parameters remain rather insufficiently defined. This creates uncertainty as to the availability in different circumstances of ICSID arbitration to SOEs, demanding a review of the applicable law and commentary. In particular, these uncertainties demand a thorough inquiry into when a SOE will be considered to be "discharging essentially governmental functions," when a SOE will be considered to be "acting as an agent" of its home state, and which entities will be considered SOEs in respect of ICSID arbitration in the first place.

2. State-Owned Enterprises and Domestic Investment Law

   This section will discuss how the growth of SOEs during recent decades, and the accompanying rise in concerns regarding their influence, has resulted in increasing domestic regulation of their activities. It will explain the increasingly significant scale of SOEs' activities, the intense domestic politics surrounding these activities, and the notable degree of ambiguity in much domestic investment law concerning SOEs. The discussion below does not directly relate to the jurisdictional issues in international investment law that are the focus of this article, but it does place these issues in context, and is essential to understanding why it is important to identify reliable legal principles to govern the standing of SOEs to bring investment claims under IITs.

   1. The Increasing Significance of Sovereign Wealth Funds and State-Owned Companies

      Sovereign wealth funds are defined by the United Nations Conference on Trade and Development (UNCTAD) as "a fund which is owned by the State or the Government and which is composed of financial assets such as stocks, bonds, property, gold, currencies and other investment vehicles." (9) The first SWFs were based in Middle Eastern countries, (10) but these have recently been joined by similar investment vehicles from China, Russia, Brazil, Algeria, Libya and Venezuela. (11) As this history suggests, the growth of most SWFs can be tied to the rapid escalation of oil prices over the last decade and the increasing foreign reserves accumulated by oil and gas exporting nations as a result. (12) The Abu Dhabi Investment Authority, thought to be the world's largest SWF, was in 2007 estimated to hold over US$875 billion in assets. (13) In total, in 2007 the world's SWFs were estimated to hold over US$15 trillion in assets, at least two thirds of which were international in nature. (14) Indeed, SWFs now collectively control more capital than the international hedge fund industry. (15)

      The goals pursued by SWFs vary but may include securing access to natural resources (including energy and minerals), growing national brands into global leaders, and strengthening international relationships. (16) Specific interests prized by SWFs have traditionally included oil and gas properties, financial services, mining ventures and technology companies, but they have been diversifying their holdings as of late with ventures into the education, health and entertainment sectors. (17) The type of assets pursued by SWFs has also evolved, moving from bonds and other financial instruments to real estate, hedge funds and, most noticeably, to equity investments. (18) This includes greater participation in the mergers and acquisitions market, and lately the distressed assets markets...