The Aakhya Weekly #55 | A BIT of a problem?
The Aakhya Weekly #55 | A BIT of a problem?
In Focus: India’s BIT dilemma
By Sujaya Sanjay
The Government of India is negotiating hard with other major economies on free trade agreements (FTAs) that will help to consolidate and strengthen supply chains and to promote economic activity. So far, India has successfully concluded FTAs with Australia and the UAE, and is actively engaging with the UK, the EU, Canada, and Israel, among others. FTA talks are reported to be progressing smoothly, although (in the case of the UK) parties have missed the Diwali 2022 deadline for finalising the FTA. Even so, optimism is in the air, and both sides appear to be quite committed to the negotiation progress.
In addition to FTAs, India is also separately negotiating investment protection agreements with the UK and the EU. The UK is keen on signing an investment protection agreement at the earliest and believes that this will generate greater flow of investments between the two countries. Such agreements, also known as bilateral investment treaties (BITs), reciprocally guarantee investment protection to investors from one State concerning their investments made in the territory of the other State (commonly referred to as the ‘host State’). There are also multilateral agreements such as the Energy Charter Treaty (ECT), which has recently incurred the disaffection of the European Union, but the most common arrangement is the BIT.
BITs confer a number of rights upon investors and their investments, the most important being the right against expropriation. Most BITs also provide investors with direct access to dispute resolution by arbitration, before a neutral panel of (usually) three individuals, known as arbitrators. Investor-state arbitration is therefore a unique mechanism under which investors can sue States for breach of their rights under the treaty. Globally, there are thousands of BITs between States. Most BIT disputes are generally adjudicated through an institutional mechanism set up by the World Bank, known as the International Convention for the Settlement of Investment Disputes (ICSID). Over 160 countries worldwide are signatories to the ICSID Convention, with Brazil, India, and South Africa being the noteworthy exceptions.
India’s BIT programme
At the time of economic liberalisation in 1991, India embarked on its own BIT programme and opened negotiations, ultimately signing the first BIT with the UK in 1994. From then on, India signed BITs with several countries – a over 70 such treaties were signed. It was thought that India being a net recipient of foreign investment – a capital importer, so to speak – would be able to secure greater foreign investment if it were to offer BIT protections to investors. While the post-liberalisation economic boom in India and the increase in foreign investment is well-documented, it cannot be said for certain this is entirely due to the BIT programme, which guaranteed promotion and protection of foreign investment.
The role of BITs in securing foreign investment is a contentious one that continues to be debated to this day. For instance, investment inflows rapidly increased from the UK to India following the signing of the UK-India BIT. However, most inflow of investment into India comes from the United States, with which India has never signed a traditional BIT. It also does not explain the massive inflows of capital into a country like Brazil, which never bought into the BIT system. In any case, India had a full-fledged BIT programme, which continued for about 20 years, till it received (and lost) its first dispute.
White Industries and India’s turning point
India received its first claim by an Australian investor, White Industries, under the India Australia BIT, which was adjudicated before a neutral arbitral tribunal, and which India lost, thereby having to pay millions of dollars in compensation. Indian officials were flabbergasted by the fact that there existed international tribunals above and beyond the Supreme Court, which is the highest authority in the land, which could review decisions taken by the Government of India. Almost immediately, the Government put all further BIT negotiations on hold and a few short years later, terminated all existing BITs. However, India continues to be on the receiving end of BIT claims to this day, due to “sunset clauses” present in these BITs that ensure the survival of investment protections for upto ten years after their termination. As of today, India has faced over 25 claims, most of which it has endeavoured to settle, and some of which involve sums as high as US$1 billion. India has since terminated all of its old BITs and has taken a somewhat hostile position to the regime, which it sees as ‘supra-constitutional’, one-sided, and prioritising investor rights at the cost of public interest considerations. India published a new, heavily State-favouring model BIT in 2015 and is signing new BITs which it sees as more balanced. However, India’s Parliamentary Committee on External Affairs (2020-21) in its Tenth Report has remarked that the number of new BITs signed and/ or under negotiations is “not commensurate with the growth of India’s interest in this domain and our rising stature in global affairs.” Further, while it is true that India is a net recipient of foreign investment, it is also true that Indian investors also export capital abroad, and have even filed several BIT claims in respect of their investments. For instance, India is the second largest exporter of capital to the UK. The question does arise as to whether India’s position on BITs could be hurting Indian investors and their investments abroad.
The global backlash against BIT arbitration
India is not alone in its views. There has been a growing global backlash against the investor-state arbitration worldwide, along similar lines of what India has been saying. In 2012, Corporate Europe Observatory and the Transnational Institute published a piece called ‘Profiting from Injustice’, as a means to generate conversation about the BIT system, which was seen as prioritising corporate interests over public interest. The EU has also recently withdrawn from the Energy Charter Treaty, citing that the treaty does not align with its climate change goals.
Governments around the world, particularly in the EU, have come around to the view that investor-state dispute settlement (ISDS) is unworkable and needs to be reformed. Indeed, the United Nations Commission on International Trade Law (UNCITRAL) even set up Working Group III to deal with the issue of ISDS reform, which has been active since 2017 and is working with States on how to make the BIT system workable for all stakeholders – above and beyond protecting investor interests.
India is now faced with a real dilemma on the issue of BITs. While it is true that the system does need reform and must be reworked so as to prevent corporate considerations from overriding public policy objectives, it is also true that the BIT programme did, in part, contribute to greater inflow of foreign investment into India and consequently contributed to economic growth, job creation and increase in per capita income. As India negotiates with the UK on a BIT 2.0, it remains to be seen what policy position India will take on the issue of protection and promotion of foreign investments.
Top Stories of the Week
New incentives for Green Hydrogen
The Ministry of New and Renewable Energy (MNRE) has introduced the Strategic Interventions for Green Hydrogen Transition (SIGHT) program to promote green hydrogen production and boost domestic electrolyzer manufacturing. With a budget of ₹17,490 crore, the program allocates ₹13,050 crore for incentivizing green hydrogen production and ₹4,440 crore for boosting electrolyzer manufacturing. This positions India as a leading nation in allocating funds for green hydrogen, aligning with global efforts in the United States and the European Union.
Green hydrogen is produced by splitting water into hydrogen and oxygen through electrolyzers, using renewable energy sources. It has gained global momentum due to its versatility and potential to decarbonize hard to abate sectors like steel, fertilizers, and cement. As a clean and low-carbon alternative to conventional “grey” hydrogen - which is made from methane - it offers an attractive solution for achieving deep decarbonization in industries such as heavy-duty transport and aviation.
In August 2021, the Prime Minister introduced the National Green Hydrogen Mission (NGHM) to promote green hydrogen production through carbon-capture technologies. The Ministry of Power then notified the Green Hydrogen and Ammonia Policy supporting these efforts. Subsequently, NITI Aayog also released its report, "Harnessing Green Hydrogen," which highlighted that green hydrogen could meet 94% of hydrogen demand by 2050, resulting in significant CO2 emission reductions and energy import savings. Finally, the Ministry of New Renewable Energy (MNRE) published the official NGHM document in January 2023, outlining India's target of producing five million metric tonnes of green hydrogen by 2030 and the strategies to achieve this goal.
The SIGHT program falls under the first phase of NGHM, providing supply-side incentives to enhance the cost competitiveness of GH. As the cost of electrolysers must decrease for green hydrogen to be cost-competitive, incentivizing electrolyser manufacturing becomes crucial, along with overall green hydrogen production. The MNRE has identified two modes for incentivizing green hydrogen production. Mode 1 allows interested parties to bid for the least incentive, while Mode 2 involves SECI aggregating demand and issuing bids for procuring green hydrogen and its derivatives at the lowest cost. The guidelines for Mode 2 are yet to be released.
DoT launches the Bharat 6G alliance
On July 3, 2023, the Department of Telecommunications launched the Bharat 6G Alliance (B6GA) - a collaborative platform that aims to accelerate the development and deployment of 6G technology in India. The alliance brings together key stakeholders from the public and private sectors, as well as others (such as academia, research institutions and standard setting organisations), with a common goal of facilitating the development of 6G in the country. Primarily, the alliance seeks to (a) understand the business and social needs of 6G technology, (b) foster consensus on them, and (c) promote high impact research initiatives. It also aims to forge coalitions and synergies with other 6G Global Alliances, fostering international collaboration and knowledge exchange.
Although the form 6G shall take is impossible to predict at the moment, 6G is likely to have many benefits over its predecessor. It shall be significantly more reliable, with lower latency and greater capacity, and shall be more affordable than 5G. Artificial intelligence shall help with the management of 6G networks, making it considerably more efficient. At the same time, it shall allow for speeds of a 100 times faster than 5G, and while little is known yet, a speed of 1 terabyte per second appears to be a theoretical possibility.
The technology is still a good way away, and is expected to reach the public only by 2030. Even so, India is determined to be an early mover. The B6GA is part of a broader 6G project, which was outlined in the Bharat 6G Vision Document released by PM Modi in March. The country already has over 200 6G-related patents, and by 2030, the Government aims to corner 10% of the world’s 6G related patents. Its emphasis, in particular, is on finding a bigger role in standard-setting for the technology, and making a larger contribution to standard-setting bodies like 3GPP and ITU.
A Few Good Reads
What unites the durable autocracies of the world? Perhaps it is that unlike a conventional power grab, these were born out of activists seizing power to reshape how people lived. Excellent piece by Lucan Ahmad Way.
There is a ticking time bomb in Indian politics - an impending delimitation exercise, on hold for the last half a century, that will vastly alter the power that different states have in the Centre. Shruti Rajagopalan looks at the solutions that are available to us.
Gulzar Natarajan illustrates “wicked problems” through the persistence of inflation - arguing that there is no reason, in principle, that an inflation rate of 2% should be seen as ideal.
Will Duffield lays out how social media regulation has taken place not through the promulgation of clear laws that pass constitutional muster, but through “jawboning”, or Governments informally bullying platforms into compliance.
Our very own Sujaya Sanjay highlights concerns with the Delhi Government’s push for online gig platforms to adopt electric vehicles.