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Reforms could put Myanmar at risk of arbitration suits

April 30, 2014

Efforts by the European Union to push forward with an investor-state international arbitration agreement with the Myanmar government may backfire in the form of costly arbitral suits arising from new policies implemented on the back of the country’s expeditious reform agenda, experts said.

As of the start of the year, parliament announced it was moving forward with an ambitious schedule to debate some 40 legal acts and ancillary policies and by-laws, many of which are aimed at modernising business rules across all sectors, while simultaneously approving new amendments to existing legislation.

“The danger of the system is that it exposes a government to the risk of claims arising from legitimate legal and policy changes,” said Jonathon Bonnitcha, a legal adviser in Yangon at the International Institute for Sustainable Development.

“In other countries, foreign investors have used investor-state arbitration to demand compensation for new environmental regulations, tobacco control measures and for losses resulting from bank bailouts during financial crises.”

The government is negotiating an investment agreement with the EU that would include international arbitration for investor-state disputes.

While the EU has stressed the importance of the clause for investor confidence, Mr Bonnitcha said that the ongoing and dramatic policy changes of President U Thein Sein’s government could land it in hot water.

“Myanmar is particularly at risk because of the process of legal and political change currently underway here. During this process of transition, many of the laws and policies governing foreign investment will change,” Mr Bonnitcha said.

“For example, new environmental regulations will be introduced, and the terms of investment contracts awarded by the previous government will need to be renegotiated on an arm’s-length basis,” he said

“These are the types of government actions that have led to investor-state arbitral claims in the past.”

Trade analyst Christopher Knight, CEO of Singapore-based commercial consulting firm Everett Knight, said that Myanmar’s vulnerabilities under an investor-state dispute settlement (ISDS) mechanism could be controlled by careful wording of such agreements.

“In general, an ISDS mechanism for Myanmar could be excessive given Myanmar’s current legal infrastructure and legal reforms,” Mr Knight said by email. “Depending on the details of the ISDS mechanism, there could be a potential that it could stifle the legal reforms through investors challenging legislation.

“However, this risk could be mitigated by the details of ISDS, and Myanmar could include some provisions that create exclusions on how the mechanism is used.”

One example of an investment that could potential trigger an international legal battle is the Myitsone Hydropower Dam project, as evidenced by 2011 comments by the Chinese partner company’s president.

In September 2011 President U Thein Sein halted the Myitsone Dam project, being built by Myanmar government contractors and a state-run Chinese company, on the back of public pressure over environmental impact concerns.

Environmental groups and experts had criticised the opaque and low-bar environmental impact reporting.

U Thein Sein said the project would not resume during his tenure. At the time, the president of the state-run China Power Investment corporation president Lu Qizhou warned halting the dam could lead to legal action.

In an interview with the China Daily at the time, Mr Lu said he was “astonished” when he heard news of the suspension as there had been no discussions between Myanmar and China before U Thein Sein’s announcement.

“In February this year, Myanmar’s Prime Minister urged us to accelerate the construction when he inspected the project site, so the sudden proposal of suspension now is very bewildering.

“If suspension means construction halt, then it will lead to a series of legal issues,” Mr Lu was quoted as saying at the time. U Thein Sein flew to Beijing shortly after to negotiate with the Chinese government.

While legal action has not yet eventuated, community groups complain that small-scale work continues at the dam and on January 3 the Chinese People’s Daily published a special report calling for the contractually agreed-upon dam to be resumed.

It is this kind of policy back-flip that could land the government on the receiving end of lengthy litigation, Mr Bonnitcha said.

“Investors have been successful in many of these claims, which often run into the billions of dollars,” he said. “Even where a state successfully defends a claim, the cost of legal fees is normally several million dollars.”

Ultimately, investors can not strike confidence in an investor-state dispute mechanism alone, said Mr Knight of Everett Knight. Investor confidence and a stable FDI arena was best bolstered by strengthening the domestic legal framework, he said.

“For investors, despite Myanmar’s lack of legal infrastructure, FDI continues in Myanmar, so I don’t see that an ISDS mechanism would be essential in facilitating increased trade and investment,” Mr Knight said.

“For protecting investments, the priority should be given to the ongoing legal reform and creating a legal infrastructure that is predictable, transparent, and functional,” he said.

“An ISDS isn’t necessary in addressing those issues, and could actually counter it.”

 

A version of this story first appeared in The Myanmar Times

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