I. Introduction
The World Bank (hereinafter referred to as the Bank) is often regarded as simply an international institution which provides loans for productive purposes in its member countries. However, the Bank’s mandate is not limited to making loans. Indeed, the founders of the Bank thought that direct lending would be a secondary function of the institution.1 Early plans for the Bank show that it was expected that the principal function of the Bank would be “to encourage international investment by private investors.”2 The Articles of Agreement of the Bank3 reflect this expectation. Article I of the Articles of Agreement emphasizes the role of the Bank in “facilitating the investment of capital for productive purposes”4 and describes the promotion of private foreign investment as one of the chief objectives of the Bank.5
In the 42 years since its inception, the Bank has pursued this objective in a variety of ways. In acting as a financial intermediary between its borrowers and foreign capital markets, and as a provider of funds which mainly finance imports from foreign suppliers, the Bank can be seen as carrying out its mandate to encourage international investment. Through cofinancing and the exercise of its guarantee power, the Bank also stimulates increased international investment by commercial banks in particular.6 The provision of advice and other technical assistance, either in conjunction with its financing operations or separately, is a further means by which the Bank has been able to help its members to attract foreign investment.7 One of the most visible and interesting actions of the Bank has been its sponsorship of the establishment of three other international organizations designed to promote investment. The first such organization was the International Finance Corporation (IFC), whose Articles of Agreement were approved in 1955.8 Unlike the Bank, the IFC exclusively encourages private sector investment, both domestic and foreign, and makes equity investments as well as loans.9 The two other organizations, which I will examine later, are the International Center for Settlement of Investment Disputes (ICSID, or the Center) and the Multilateral Investment Guarantee Agency (MIGA, or the Agency), whose constituent instruments were approved in 1965 and 1985, respectively.
It is in the context of this broad objective of the Bank that I would like to discuss its role in the settlement of investment disputes. Although the Articles of Agreement of the Bank do not specifically mention the Bank’s power to undertake this type of activity, the settlement of investment disputes is clearly a way to improve investment conditions and thus to stimulate increased flows of international investment.
II. The Bank’s Direct Involvement in Settlement of Investment Disputes
As a financial intermediary between its capital-importing and capital - exporting members, the Bank has an institutional interest in promoting the settlement of investment disputes. An unresolved investment dispute involving one of its borrowing countries can jeopardize the economic interests of a borrower which the Bank is meant to serve and eventually might affect the Bank’s own access to capital markets. The settlement of investment disputes in a smooth and orderly manner can assist the Bank in its borrowing, and therefore in its lending, operations.
On a number of occasions, the Bank has taken an active role in the settlement of disputes between its member governments (or their subdivisions or agencies) and foreign investors.10 During 1951–52, for example, the Bank attempted to provide a basis for the settlement of the dispute over the nationalization by Iran of the Anglo-Iranian Oil Company’s assets.11 Following Egypt’s nationalization of the Suez Canal Company in 1956, the Bank successfully mediated the settlement of claims by the Company’s shareholders against the Egyptian Government.12 More recently, in 1985, the Bank agreed to provide technical advice to help the Argentine state gas company and a Dutch company to settle their differences.
The President of the Bank, in his personal capacity, has also been willing to assist in the settlement of investment disputes. In 1958, the City of Tokyo and certain holders of bonds issued by that city entered into a Conciliation Agreement which requested the President of the Bank to propose a plan to settle the parties’ long-standing dispute. Pursuant to this request, the President delivered a plan to the parties in 1960 which led to a resolution of the controversy.13 In 1959, the President of the Bank assisted in the settlement of claims arising from the nationalization and sequestration of British assets after the military intervention in Egypt in 1956.14 In 1965, the President of the Bank also agreed to act as a conciliator between the parties with regard to certain private claims resulting from Tunisia’s nationalization of electric power properties in the late 1950s. Finally, in 1968, the President lent his good offices to the amicable settlement of a dispute arising from the nationalization of certain foreign mining interests by the Democratic Republic of the Congo (now Zaïre).15
When the President of the Bank has intervened, it has been either as a mediator or as a conciliator who submits a report, including specific proposals for a settlement. He has not been prepared to act as an arbitrator rendering a binding decision on the merits of the dispute. In the smaller number of cases where the Bank as an institution has intervened, it has acted as neither an arbitrator nor a conciliator. Instead, the Bank has provided good offices or advice to assist the parties in reaching agreement on a practical and effective solution to the problems involved. Resort to the Bank or to its President has proved to be a cost-effective and highly efficient means of settling investment disputes. Compared with the typically high costs of international arbitration, the expenses involved for the parties have been minimal. Through this procedure, parties have benefited from the vast experience available at the Bank and the diversity of its staff, both of which have facilitated the reaching of satisfactory settlements in a relatively short time.
III. Role of ICSID
Background
In spite of its obvious attractions, practical constraints, as well as the limits of the Bank’s mandate as a development finance institution, argued against a wider involvement by the Bank or its President in the settlement of investment disputes. In addition, there was the difficulty that a country might hesitate to seek the Bank’s involvement if it was not certain of the validity of its position and was afraid that noncompliance with the Bank’s advice would have a negative effect on its overall relationship with the Bank. Thus, the President of the Bank, while noting its past successes in facilitating the settlement of investment disputes, observed in 1961 that the Bank was not really equipped to perform this type of function in the course of its regular routine.16 At the same time, it was felt that a special forum for the conciliation or arbitration of these disputes could make a contribution to encouraging greater flows of capital to developing countries. The fact that governments and private investors had turned to the Bank to provide this assistance indicated that there was a lack of any other specific machinery for conciliation and arbitration that was regarded as adequate by investors and governments alike. The President of the Bank announced that he would therefore be examining the possibility of the establishment of machinery of this kind.17
Extensive preparatory work and consultations on this proposal followed. By 1964, the prospects for negotiating a convention establishing the dispute-settlement facility appeared favorable. Accordingly, the Board of Governors of the Bank directed the Bank’s Executive Directors to formulate such a convention and submit it to governments together with such recommendations as the Executive Directors might deem appropriate.18 Pursuant to this directive, the Executive Directors, assisted by a committee of experts comprising representatives from 61 governments, formulated the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention)19 and submitted it to member governments of the Bank in March of 1965 “for consideration with a view to signature and ratification, acceptance or approval.”20 The ICSID Convention, which entered into force on October 14, 1966, following its ratification by 20 countries, established ICSID as an autonomous international organization whose purpose is to provide facilities for conciliation and arbitration of investment disputes in accordance with the provisions of the Convention.21 Under the ICSID Convention, the Center’s only formal link with the Bank is that the President of the Bank is the ex officio Chairman of ICSID’s governing body, the Administrative Council.22 However, ICSID has much closer ties with the Bank than a reading of the ICSID Convention might suggest. The Vice President and General Counsel of the Bank has consistently been elected Secretary-General of ICSID, and the Bank meets the total cost of the ICSID Secretariat.
Balance of Interests in the ICSID System
In formulating the ICSID Convention, the Executive Directors of the Bank devised a system that carefully balances the interests of investors and host countries. The arrangements made for ICSID’s Administrative Council reflect this balance of interests. The Council consists of one representative of each Contracting State. Since each representative casts one vote, the ICSID Convention assures equal representation for all Contracting States.
The ICSID Convention gives private investors direct access to an international forum. Moreover, provisions of the ICSID rules, which will be examined in greater detail later on, assure investors that refusal or abstention by the state party to the dispute to participate in the proceedings after it has consented to ICSID arbitration cannot frustrate the ICSID arbitral process.
Against these advantages for investors, the ICSID Convention (Article 26) provides that a Contracting State may, as a condition of its consent to ICSID arbitration, require prior exhaustion of local remedies. This condition may be stipulated in the investment agreement, in a bilateral treaty between the host country and the investor’s country, or in a declaration made by a Contracting State at the time of signature or ratification of the ICSID Convention, although only one Contracting State has ever made such a declaration. In addition, the ICSID Convention (Article 42(1)) expressly provides that, unless the parties have specifically agreed otherwise, the arbitral tribunal must decide a dispute in accordance with the law of the host state, along with such rules of international law as may be applicable. Finally, it was recognized at the time the ICSID Convention was finalized that:
When a host State consents to the submission of a dispute with an investor to the Centre, thereby giving the investor direct access to an international jurisdiction, the investor should not be in a position to ask his State to espouse his case and that State should not be permitted to do so.23
This consideration finds its expression in Article 27 of the ICSID Convention. That provision expressly precludes the investor’s state from exercising diplomatic protection or instituting an international claim unless the host state fails to comply with the award rendered in the dispute. The ICSID Convention’s suspension of the right of diplomatic protection is one way in which the ICSID system helps to depoliticize investment disputes. The depoliticization of such disputes, which is meant to promote an atmosphere of mutual confidence between states and foreign investors favorable to increasing the flow of resources to developing countries, is a fundamental objective of the ICSID system.24 The main features of this system include its voluntary character, flexibility, and effectiveness.
ICSID’s Voluntary Character
ICSID’s facilities are available on a voluntary basis. States eligible to join ICSID (members of the Bank and other states invited to sign the ICSID Convention under its Article 67) are obviously free to decline to do so. Their decision has no bearing on their relations with the Bank itself. Even the act of ratification of the ICSID Convention is only an expression of a Contracting State’s willingness, in principle, to make use of the ICSID machinery. Ratification does not constitute an obligation to use that machinery. That obligation can arise only after the Contracting State concerned has specifically agreed to submit a particular dispute or class of disputes to ICSID arbitration.
Under Article 25(4) of the Convention, any Contracting State may in addition notify ICSID, either at the time of its ratification of the Convention or at any time thereafter, of the class or classes of disputes that it would or would not consider arbitrable under ICSID’s auspices.25
Within this framework, there is more freedom to determine whether a transaction is suitable for ICSID arbitration than might be assumed from the stated limitation of the Center’s jurisdiction to investment disputes of a legal character. The ICSID Convention does not define the term “investment,”26 and this lack of definition, which was deliberate, has enabled ICSID tribunals to accommodate both traditional types of investment in the form of capital contributions and new types of investment, including service contracts and transfers of technology. Disputes submitted to the Center have ranged from those relating to the exploitation of natural resources to those relating to management contracts or technical and licensing agreements.27 Interestingly, no disputes relating to financial transactions have been submitted to the Center. Parties are, of course, also free to decide not to submit their investment disputes to ICSID, and although provision for ICSID arbitration is sometimes made in transnational loans to foreign governments, it is no secret that lenders often continue to require the judicial adjudication of loan disputes before the domestic courts of New York or London.28
Flexibility of the ICSID System
The rules applicable to ICSID proceedings are flexible, in the sense that the parties may derogate from them in order to meet their particular needs. For example, most of the provisions regarding the number of arbitrators and the method for their appointment are permissive and apply only in the absence of agreement between the parties.29 While they have the necessary flexibility, the ICSID rules are specific enough to ensure that a party cannot frustrate the proceedings. Thus, if one of the parties refuses to cooperate in the appointment of arbitrators, the tribunal may still be constituted through the appointment of arbitrators by the President of the Bank in his capacity as Chairman of ICSID’s Administrative Council.30 Even if a party which has consented to ICSID arbitration fails to participate in the proceedings, the ICSID Convention ensures that the proceedings can continue and lead to an award.31 In practice, there has been little occasion for these provisions to be used, in view of the high degree of state participation in the proceedings and the frequent termination of these proceedings by amicable settlements.
Effectiveness of the ICSID System
Several factors account for the unique effectiveness of the ICSID system. While parties are free to decide whether or not to make use of the ICSID machinery, the ICSID Convention (Article 25(1)) assures both parties that once they have consented to submit disputes to ICSID conciliation or arbitration, neither party can unilaterally revoke its consent. The exclusivity of the ICSID system also contributes to its effectiveness. Under the ICSID Convention (Article 26), consent of the parties to ICSID arbitration is deemed to be exclusive of any other remedy, unless the parties otherwise agree. This rule has several consequences, one of which is that ICSID proceedings are insulated in all Contracting States from any form of judicial intervention or control.
The ICSID Convention furthermore assures the effectiveness of an ICSID arbitral award once it has been rendered. Article 53(1) of the Convention provides that such an award is binding on the parties, while Article 54(2) provides that a party may obtain recognition and enforcement of the award by simply furnishing a certified copy thereof to the competent court or other authority designated for the purpose by each Contracting State. It is true that the ICSID Convention does not derogate from the rules of immunity from execution that may prevail in a Contracting State32 and that it is thus possible that an ICSID award could be executed against the assets of the state (or of one of its subdivisions or agencies) party to the dispute in certain Contracting States and not in other Contracting States. However, this issue has not arisen in practice and is unlikely to arise. Reliance by the state in question upon its immunity from execution would be contrary to its obligation under the ICSID Convention to comply with the award and would expose that state to various sanctions set forth in the ICSID Convention.33 Moreover, refusal by the state involved to comply with an ICSID award would deprive it of credibility in the international business community. This is not a risk that a state would be likely to assume lightly. ICSID arbitration thus offers a degree of finality which, combined with the relatively low cost of ICSID arbitration, makes it an attractive alternative to other forms of international arbitration.
Out of 25 disputes submitted to ICSID, 9 have been either discontinued or amicably settled. This relatively high proportion of settlements is encouraging, but ICSID’s effectiveness cannot be assessed only on the basis of the number of disputes that have been submitted to or settled by that institution. When an ICSID clause provides for compulsory arbitration, it may be assumed that the prospect of involvement in such proceedings will work as a deterrent to the actions which give rise to the institution of proceedings. ICSID thus contributes to conflict avoidance as well as to settlement of conflicts if they arise.
These features of the ICSID system have not only contributed to the willingness of parties to have recourse to conciliation or arbitration under the ICSID Convention but also have helped to foster confidence in parties seeking the Center’s specialized services outside the framework of the ICSID Convention. In particular, officials of the Center, and especially its Secretary-General, have, in an increasing number of cases, been requested by parties to act as the appointing authority of arbitrators or conciliators in disputes which, for one reason or another, are not suitable for arbitration or conciliation within the context of the ICSID Convention.34 To a large extent, this latter type of intervention by ICSID has replaced ad hoc recourse to the Bank or its President, and in several instances it has been adopted by parties who had initially sought the Bank’s intervention.35
IV. The Role of MIGA
Background
At about the same time that ICSID’s establishment was proposed in the early 1960s, various other schemes were being examined in international forum s to encourage greater investment flows to developing countries by reducing the effects that non-commercial risks have on investment decisions. One possibility, considered in the Bank since the late 1940s, was the establishment of an international agency which would provide insurance to investors against non-commercial risks. For a variety of reasons, however, the early proposals to create such an insurance facility did not materialize.
Against a background of declining resource flows to developing countries, in 1981, the Bank’s management revived the proposal to create a globally operating investment guarantee agency under the Bank’s auspices.36 As had been done during development of the ICSID Convention, extensive studies and consultations were carried out, and support for the proposed new agency gradually broadened. Starting in June 1985, the Bank’s Executive Directors held 20 sessions of meetings as a “Committee of the Whole” under the chairmanship of the Bank’s Vice President and General Counsel in order to discuss a draft of the Convention Establishing the Multilateral Investment Guarantee Agency (the MIGA Convention). Assisted by experts from member governments and by a drafting team from the Bank’s Legal Department, the Committee of the Whole agreed on a text of the MIGA Convention in September 1985. After its formal approval by the Bank’s Executive Directors, the MIGA Convention was submitted to the Bank’s Board of Governors. On October 11, 1985, the Governors adopted a resolution opening the MIGA Convention for signature by member governments of the Bank and Switzerland.37
As of June 27, 1988, the MIGA Convention had been signed by 70 countries.38 The MIGA Convention entered into force on April 12, 1988, and the Agency’s Council of Governors held its inaugural meeting on June 8, 1988.39 On June 22, 1988, the Board of Directors of MIGA held its first meeting, at which it appointed Mr. Barber B. Conable, the President of the World Bank, as MIGA’s first President. As a result, the President of the World Bank is now simultaneously President of both the International Finance Corporation (IFC) and MIGA. Mr. Yoshio Teresawa of Japan was appointed by Mr. Conable as MIGA’s Executive Vice President in charge of day-to-day operations effective July 1, 1988. At its meeting on June 22, the Board of Directors of MIGA also adopted MIGA’s detailed operational and financial regulations. Representatives of 42 countries, meeting as a preparatory committee in September 1986, had already adopted the drafts of these regulations by consensus.
An examination of MIGA’s operational features, organization, and financing will help to clarify MIGA’s role in the settlement of investment disputes.
Operational Features
MIGA’s objective is to encourage the flow of investments for productive purposes among its member countries and, in particular, to developing member countries.40 To fulfill its objective, MIGA will guarantee and reinsure eligible investments against losses resulting from non-commercial risks.41 However, such insurance activities represent only one means of achieving MIGA’s objective; the Agency will carry out a broad range of promotional activities as well.42
Article 11 of the MIGA Convention specifically provides for coverage of four broad categories of non-commercial risk, but authorizes the Agency to cover any other non-commercial risk upon the joint application of the investor and the host country, provided the Agency’s Board of Directors approves such coverage by a special majority decision. The four risks specified in the MIGA Convention are (1) the transfer risk resulting from host government restrictions on currency conversion and transfer; (2) the risk of loss resulting from legislative actions or administrative actions or omissions of the host government which have the effect of depriving the foreign investor of his ownership or control of, or substantial benefits from, his investment; (3) the risk of repudiation or breach of government contracts in cases where the investor has no access to a competent judicial or arbitral forum, or faces unreasonable delays in such a forum, or is unable to enforce a judicial or arbitral decision issued in his favor; and (4) the risk of armed conflict and civil disturbance.43
To be eligible for the Agency’s guarantee, investments will have to be new medium-term or long-term investments, and must be judged by the Agency to be sound investments which contribute to the development of the host country.44 At the outset, MIGA will focus on equity interests and such other forms of direct investment as its Board of Directors may determine. These other forms of direct investment may include management and service contracts, licensing and franchising agreements, and turnkey contracts, as well as arrangements concerning the transfer of technology and know-how where the investor assumes a stake in the performance of the venture.45 This will enable MIGA to service several new types of investment, especially among developing member countries, which take non-equity forms. In due course, the Agency may also cover any other medium-term or long-term form of investment, including commercial loans which are related to a specific investment to be otherwise covered by the Agency.
To be eligible for the Agency’s guarantee, investors must be nationals of a member country or, in the case of juridical persons (corporate investors), must either be incorporated and have their principal place of business in a member country or have a majority of their capital owned by nationals of a member or members.46 Eligible investors include both public and private sector corporations and even joint ventures among member governments. An innovative feature of the MIGA Convention should be noted in this context: eligibility may, under certain conditions, be extended to nationals of the host country if they transfer the assets to be invested from abroad.47 MIGA will therefore be able to assist member countries in their efforts to reverse capital flight.
In recognition of host governments’ sovereign control over the admission of foreign investment into their territories and the treatment of such investment, Article 15 of the MIGA Convention provides that the Agency “shall not conclude any contract of guarantee before the host government has approved the issuance of the guarantee by the Agency against the risks designated for cover.” The approval must hence extend both to MIGA’s involvement (i.e., the issuance of a guarantee) and to the scope of that involvement (i.e., the risks designated for cover). A member government may, if it wishes, limit its use of MIGA’s services to the coverage of investments by its nationals in foreign member countries without necessarily allowing it to cover foreign investments in its own territory. In short, MIGA’s facilities, like those of ICSID, will only be made available where there is consent by all concerned.
MIGA’s promotional activities will include carrying out research, disseminating information on investment opportunities in developing countries, and providing technical advice and assistance requested by members to improve investment conditions in their territories.48 Article 23(c) of the MIGA Convention provides that in its promotional efforts, MIGA “shall give particular attention … to the importance of increasing the flow of investments among developing member countries.”
Organization
MIGA has full juridical personality and, like other international financial institutions, its organizational structure includes a Council of Governors composed of one representative of each member (and an alternate), a Board of Directors elected by the Council, and a chief executive officer selected by the Board and responsible for the ordinary business of the Agency.49 The president of the Bank is ex officio chairman of the Agency’s Board of Directors.50
Membership in MIGA is open to all members of the World Bank and to Switzerland on a voluntary basis.51 As in the case of ICSID, every country is free to join without affecting its position in the Bank or any other organization.
The distribution of voting rights in MIGA presents a further innovation which highlights the balance of interests maintained by the MIGA Convention. The management of the Bank had originally proposed that voting power be shared on an equal basis between home countries and host countries as groups, with countries initially classifying themselves as members of one of the two groups, subject to approval of the Agency’s Council.52 During discussions among the Bank’s Executive Directors, it became clear that many countries from both groups would join MIGA at the outset and that in view of the unpredictability of the relative sizes of the two groups, it would be inequitable to allocate equal voting power to them before knowing the actual membership structure. However, the basic tenet of the management’s proposal—namely, that both groups should receive equal voting power when all members of the Bank became members of MIGA—was generally accepted.53 In the first three years of its operations, the minority group is guaranteed 40 percent of the total votes, through the allocation of supplementary votes as required, and all decisions will be taken during this period by the special majority of two thirds of the total votes representing not less than 55 percent of subscriptions in the Agency’s capital.54 The supplementary votes and the special-majority requirement will be canceled at the end of the three-year period; MIGA’s Council will then review the voting structure with a view to reallocating shares to assure voting parity between both groups of countries once they subscribe in the reallocated shares.55
Financing
MIGA is expected to meet its liabilities from premium income and other revenues, such as returns on its investments. Accordingly, Article 25 of the MIGA Convention directs the Agency to carry out its activities in accordance with sound business and prudent financial management practices. Under Article 26, MIGA will be able to vary its premiums in accordance with the actual risks assumed under its guarantees, but such variations are expected to be based on the specifics of the investments and risks involved, and would not simply reflect political judgments regarding the host country.
The principle of self-sustenance, though borne out by the experience of public and private national entities providing political risk insurance, will be supported by arrangements to ensure the Agency’s viability even when losses exceed reserves at a given moment. These arrangements include a combination of capital subscriptions and “sponsorship.”
The Agency has an initial authorized share capital of SDR 1 billion.56 The shares are subscribed by member countries in accordance with their relative economic strength as measured in the allocation of their shares in the Bank’s capital. Only 10 percent of the subscriptions is payable in cash; an additional 10 percent is payable in the form of nonnegotiable, non-interest-bearing promissory notes to be encashed only if needed by MIGA to meet its financial obligations.57 The rest of the subscribed capital is subject to call.58 While developed member countries must make all payments in freely usable currencies, developing member countries may supply up to 25 percent of the paid-in-cash portions of their subscriptions in their own currencies.59 The amount of guarantees MIGA may issue on the strength of its capital resources will initially not exceed 1½ times the amount of the subscribed capital, plus reserves, plus a portion of MIGA’s reinsurance coverage (a 1.5:1 ratio).60 Once MIGA accumulates a balanced risk portfolio and gains experience, it might increase this ratio up to a maximum of 5:1.61
In addition to the guarantee operations based on the Agency’s capital and reserves, MIGA, acting in fact as administrator of a separate sponsorship account, will be able to underwrite investments sponsored by member countries.62 Revenues from sponsorship operations will be accumulated in a “Sponsorship Trust Fund” which will be kept apart from the Agency’s own accounts.63 Claims and other expenses resulting from sponsorship operations will be paid out of this fund.64 Upon its depletion, remaining liabilities will be shared by sponsoring countries only, with each country sharing in the proportion which the guarantees sponsored by it bear to the total of guarantees sponsored by all countries.65 This “sponsorship window” represents a particularly interesting feature of MIGA, not only because it has no financial ceiling but also because it allows coverage of investments in all countries, not just in MIGA’s developing member countries, without placing any restrictions on the nationality of the investor.66
The combination of capital subscription and sponsorship is another factor which distinguishes MIGA from the international investment insurance schemes previously discussed in the Bank. Those schemes relied chiefly on sponsorship by investors’ home countries (with some suggesting that an initial contribution be made by the Bank). Yet adoption of this concept would have made the Agency dependent, to a great extent, on one group of members. By contrast, MIGA will primarily rely on capital subscriptions from all member countries and will have the necessary independence to carry out its development mandate in the common interest of all its members.
MIGA and Settlement of Investment Disputes
Since it is directed to operate on a financially viable basis, MIGA, after it paid a claim, would assume the rights that the indemnified investor acquired against the host country as a result of the event giving rise to his claim.67 The MIGA Convention envisages that unless the Agency agrees otherwise, MIGA would ultimately have recourse to international arbitration to enforce such subrogated rights.68
However, where a conflict arises, MIGA’s involvement, like that of ICSID, will facilitate an amicable settlement. If an investor files a claim, MIGA will have to assess this claim and possibly defend itself against it. In so doing, MIGA will find itself in a position similar to that of a host government when it is confronted with the investor’s demands. In many cases, however, MIGA will be in a better position to assess the investor’s claim. MIGA’s assessment, based on the broad information available to it and its worldwide experience, is likely to moderate the conflicting claims of the investor and his host country and increase the likelihood of a settlement.
Another way in which MIGA may induce host governments and investors to arrive at amicable settlements is to alleviate the financial burden of such settlements on the governments. For example, MIGA might accept the local currency of the host country on a temporary basis and pay the investor out of its own funds in freely usable currency. MIGA might then, under an agreement with the host country, sell the local currency to the Bank or other international institutions, companies importing goods from the host country, or the host government itself over a period of time and recover its position accordingly.69 MIGA might also finance the settlement by paying the investor in cash and accepting debt instruments from the government as recoupment. As a variant of this approach, MIGA could persuade the investor to accept installments rather than insisting on a cash payment by backing the government’s commitments with its guarantee. Finally, where the views of the investor and the host government with respect to an adequate compensation cannot be completely reconciled, MIGA might pay all or part of the difference and, in this way, facilitate a settlement. In view of its developmental mandate and institu tional interests, MIGA can be expected to use its potential for the facilitation of amicable settlements at least as actively as some of the national agencies, especially the U.S. Overseas Private Investment Corporation (OPIC), have successfully done.70 In fact, the MIGA Convention71 specifically directs MIGA to encourage the amicable settlement of disputes between investors and host countries, since such disputes constitute the seeds of conflict between MIGA and its capital-importing members.
MIGA’s Contribution to Conflict Avoidance
MIGA’s viability and continuity will depend in no small part on its ability to establish and maintain good relations with its capital-importing member countries. It will have every incentive to avoid conflicts with them whenever possible. From the beginning, the MIGA initiative aimed at the creation of “a synergism of cooperation” between capital-exporting and capital-importing countries.72 MIGA’s operations would be generally based, much as were the discussions which led to agreement on the text of its convention, on the consensus of both groups of countries. Since every conflict with a member country might weaken this consensus, it is certainly to be expected that MIGA will try to avoid conflict. Moreover, the pressures of MIGA’s very business will force it to underwrite risks with a view to the avoidance of claims.
The origins of an investment conflict can often be traced to the investment terms and conditions, and to the absence of clear and stable rules applicable to the treatment of foreign investment. If the terms of the investment turn out to be unfair to either party or if they cannot be smoothly adjusted to accommodate changing circumstances, a party, especially a host government, might later feel tempted to remedy the arrangement by unilateral action. Also, if a project runs into financial or technical difficulties, a host government might interfere in order to protect its interests or those of its nationals. In addition, the absence of applicable standards or the application of ambiguous rules often leads to the initiation or aggravation of disputes. MIGA will therefore carefully screen every investment project to make sure it is economically sound, will contribute to the development of the host country, and is consistent with that country’s laws and development objectives.73 It will deny coverage when it finds deficiencies in the investment arrangement. It is, furthermore, mandated to enter into agreements with member countries on the standards applicable to the investments guaranteed by it and is, in fact, prohibited from initiating guarantee operations in a country if it is not satisfied as to the availability of fair and equitable treatment and legal protection for the investment.74 A final safeguard against conflicts with respect to guaranteed investments is the MIGA Convention’s requirement that the host government approve both the issuance of MIGA’s guarantee and the risks designated for cover.75
V. Conclusion
On a number of occasions, particularly during its early history, the Bank or its President has assisted parties in the settlement of investment disputes. Though limited in scope, these interventions frequently yielded positive results. As it became clear that special machinery would be needed for the conciliation and arbitration of such disputes, the Bank sponsored ICSID’s establishment. The wide membership76 that ICSID has since attracted reflects its value as an effective and truly neutral forum where disputes are to be settled according to objective, nonpolitical criteria. Since the services ICSID can offer have become known for their neutrality, effectiveness, and relatively low cost, parties have increasingly made use of them, not only for the resolution of disputes by conciliation or arbitration under the ICSID Convention but also as an alternative to seeking the Bank’s assistance in ad hoc dispute resolution. Twenty years after the approval of the ICSID Convention, the Bank proposed the establishment of MIGA, an agency whose constituent instrument and institutional imperatives demand that it promote the amicable settlement of investment disputes. Significantly, both ICSID and MIGA are also meant to contribute to the avoidance of investment disputes. This is in keeping with the expectation that they will help in creating a climate of mutual confidence between states and foreign investors. In so doing, ICSID and MIGA serve the broad objective, which they share with the Bank, of promoting investment for development purposes.
COMMENT
RUSSELL L. MUNK
I’d like to make some brief remarks about the International Center for the Settlement of Investment Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA) which supplement those made by Messrs. Voss and Parra.1 But before I begin, I would like to compliment the World Bank’s Legal Department for the key role it played in bringing MIGA into existence.
Let me begin by describing the U.S. views of both of these institutions. We are strong supporters of ICSID and MIGA. I particularly like ICSID because it is cheap, useful, and easy. We think that MIGA is also going to be a very useful organization, but participation in it is not cheap and has not been easy so far. As you all know, like governments in other countries, the U.S. Government is pressed for money, and the budget is very tight. One of the questions I had had when looking at the possibility of participation in MIGA was whether the policy people would be willing to commit any money to this new initiative. The Treasury Department did press very hard, and Congress, in the continuing resolution which made the appropriations for the functioning of the Government of the United States—and I think this is a 20-pound document (we measure by pounds, not by pages)—had a provision enacting the MIGA legislation and providing for a paid-in contribution by the United States of $44 million and an additional, callable contribution which was, I think, about $175 million. So this commitment of resources indicates that the United States takes MIGA very seriously. We joined MIGA less than a month ago, taking a step which, together with the United Kingdom’s joining, made it possible to fulfill the conditions for bringing the MIGA Convention into force.
You have already heard this morning that the ICSID and MIGA documents were balanced, with features attractive to both capital importing and capital exporting countries, developed and developing countries. Some might ask why the United States should be a strong supporter of a balanced institution. The short answer, leaving aside the fact that the United States is now a net capital importer (I do not think that we are a developing country yet, but we are a capital importer), is that the United States supports the creation of an open investment environment in which private investment can flow in response to market forces and in which disputes can be settled impartially and fairly on their merits without being politicized. Both MIGA and ICSID will help us to achieve these goals. We also support an increase in investment flows to developing countries and to developed countries. MIGA will help us achieve this aim by providing guarantees and by encouraging sound investment policies in member countries. Both Mr. Parra and Mr. Voss have stressed the procedural role that ICSID and MIGA can play in settling investment disputes. ICSID basically establishes procedures for settling any disputes, and MIGA, as a subrogee, can help facilitate amicable settlements.
At the same time, I think we should remember that both institutions will play a major role in creating, framing, and finally developing substantive rules concerning investment. Now, as lawyers, we all understand that these rules are critical for both domestic and foreign investors. Clear rules of the game provide the certainty that will enable investors to plan for the future. These rules also assure that host country interests are fully protected. Uncertainty, in contrast, is bound to discourage both domestic and foreign investment. As investors, we will want higher returns on investment to compensate for the risks associated with the uncertainty, and we will not make investments that will not yield those returns.
Well, how will ICSID and MIGA help create or develop substantive rules? Arbitral decisions under ICSID auspices will clarify the legal rules governing investment disputes, for both investors and host governments, under international law. Decisions can also give substance to those rules in practical cases by applying them to practical facts, particularly fact situations. In a number of cases they have ruled in domestic law. For example, in the Amco v. Indonesia case,2 the arbitral tribunal accepted rules applying to a state’s responsibility for its military forces. Even outside ICSID—for example, in ad hoc arbitral decisions and in rulings by the U.S.-Iran Claims Tribunal—we find arbitral tribunals applying and elaborating foreign investment rules and applying them in concrete situations. MIGA may play an even greater role in developing sound rules applicable to foreign investment. Under its articles, MIGA is specifically directed to undertake activities to promote investment flows to developing countries, with a view to improving the environment for foreign investment flows. It may, as we have heard, on the request of a member, provide technical advice and assistance to improve the investment conditions in the territory of that member. MIGA is thus authorized and directed to provide advice to interested countries on, among other topics, the legal rules applicable to foreign investment. In providing this advice, MIGA is to be guided by relevant investment agreements among member countries.
We all know that there is a gradually expanding network of bilateral investment treaties which establishes basic and agreed rules for treating foreign investment. About three hundred of these treaties between developed and developing countries, and even between developing countries, in all areas of the world have been signed and ratified. It is true that these treaties differ one from another, but there are still common core principles. The host country should not discriminate against foreign investment because of the nationality of the investor and should not seize the investor’s property without paying just compensation. I might mention at this point that the United States has negotiated a number of these bilateral investment treaties, none of which has been ratified yet. Each of these treaties provides for, or gives investors an option to undertake, arbitration or mediation under ICSID auspices. The ICSID option is a very prominent part of each of these treaties to which the United States is a party.
MIGA will, in fact, draw on this treaty network in other ways. First, MIGA will only issue guarantees if it is satisfied with the investment conditions in the host country, which, among other things, will have to include the availability of fair and equitable treatment and legal protection for investment. Under a proposed regulation, MIGA will regard an investment as having adequate legal protection if it is protected under the terms of a bilateral investment treaty between the host country and the investor’s home country. Second, MIGA itself may conclude investment agreements with developing member countries. These would be formulated in general terms and might specify that a given agreement be at least as favorable to MIGA as the most favorable investment agreement concluded with another state or investment guarantee agency. MIGA’s own investment agreements will have an official stamp of approval, since they will be approved by a large majority of its membership. They may thus serve as models for other investment agreements and as a possible standard for the international community. Third, MIGA is specifically enjoined to promote and facilitate the conclusion of agreements among its members on the promotion and protection of investments. In the course of these activities, MIGA will be able to draw on existing experience with bilateral investment treaties, as well as its own experience in its day-to-day insurance activities. Fourth, in its own dispute-settlement procedures, MIGA may have recourse to arbitration. While MIGA will only have recourse to arbitration in rare cases, arbitral tribunals in these cases are to apply any relevant agreement between the parties, MIGA’s by-laws and regulations, the applicable principles of international law and the domestic law of the member concerned, and the applicable principles of the investment contract. Those arbitral decisions themselves will further clarify and develop the rules applicable to foreign investors.
MIGA thus can build upon the network of existing bilateral investment treaties and help crystallize the basic principles and rules applicable to foreign investment. This may lead eventually to widespread consensus on the treatment of foreign investment and the rules applicable to it. Should this occur, we would have moved a great distance toward achieving an integrated and efficient international economy. Everyone would benefit. It would signify that we have put to the side the political and factious disputes of the 1970s about foreign investment which may, indeed, have impeded development in many of the world’s countries. Thank you.