Foreign Investment and Economic Growth

Chapter 1: Introduction

Literature indicates that there is a positive link between foreign investment and economic development, especially in the context of developing countries. Due to the foreign investment in developing countries, spill-over effects ensure that investment also links to development in the field of technology through technology transfers, trade inflows, as well as employment market through the potential for higher employment. Considering these benefits to the developing countries, it is a matter of interest whether there can also be some negative effects of such foreign investment, and whether these negative effects are related to the laws that the developing countries enact to facilitate foreign investment. While international investment laws have led to the greater foreign direct investment (FDI) in developing countries, a question as to the impact of FDI is relevant to developing countries, particularly in context of environmental legislation and policy, and domestic industries. In this context, the interesting question is also if the investments by multinational enterprises (MNE) lead to new downstream or upstream investments, therefore development; or whether such investments have the effect of displacing domestic producers or pre-empting their investment opportunities.

Another angle that may be particularly important in the link between international investments and domestic law is that of local political developments as it may help explain why certain developing countries receive more FDI, while others do not. In other words, domestic legislation of developing countries may show a tendency to placate foreign investors at the cost of interest of the country, which may have implications for the developing nations. Literature indicates that international corporations wield significant political influence in the developing countries, as seen in the way that major oil companies have been able to use their powerful and influential position in the oil producing nations of Africa. At the same time, it is argued that such corporations that invest heavily in the developing economies do not necessarily lead to spill over effects, such as through technology transfers as such companies also keep their technological prowess as confidential and secret. This means that the benefits that are considered to be accrued from the foreign investment do not always percolate to the developing countries’ economy.

One of the methods which has seen the developing countries make favourable laws for the foreign investors is through the mechanism of Bilateral Investment Treaties (BITs). BITs have played a key and significant role in helping developing countries create favourable conditions for foreign investment. This is done by creating legal duties on the part of the host state to treat investments from its treaty partners in the same way it treats investments by host country nationals and companies. However, a negative impact of BITs may be that host states may have to compromise on the environmental and social justice policy in order to ensure such favourable conditions for the foreign investors. Therefore, one of the important areas of consideration in this research is related to BITs agreements that have been entered into by Bangladesh with other countries, the role these treaties play in attracting more FDI into Bangladesh, and the impact of the BITs on the domestic law and policy of Bangladesh. Bangladesh has BITs with many countries, such as, India, Italy, and Germany, to name a few. These treaties form a part of the discussion in the research.

Statement of Problem

Developing countries, such as, Bangladesh, have seen increased levels of foreign investments, especially through the investments of multinational corporations or enterprises. The problem is that international investment law, BITs and the effect of these on the domestic laws of a developing host nation may at times be adverse to the interest of the host nation. This research seeks to analyse the international investment law and BITs with reference to such impacts in the context of Bangladesh.

Objectives and Aims of the Research

This research tests how international investment law affects the foreign investment in developing countries. The focus of this research is particularly on Bangladesh and its investment laws. With respect to this, focus will also be on types of investment treaties, especially BITs.

Research Questions

This dissertation seeks to answer the overarching research question on whether international investment law is effective in linking international investment to economic development and therefore, beneficial for the economy of developing countries, or whether it is detrimental to the interests of the developing countries. There are three other research questions related to the overarching research question. The first question is related to how international investment laws are linked to the development of developing nations. The second question is related to the ways in which Bangladesh responds to international investment laws through its BITs with other countries of the world. The third question is related to the impacts of international investment laws and BITs in the domestic legislation and policy of Bangladesh.

Research Methodology

The research methodology will be guided by doctrinal research method. Doctrinal research methods are defined as research conducted to determine the applicable law in a particular area. This is a qualitative method of research. Doctrinal research method is applied to analyse legislation, precedent and other sources of law for a given area. This section explains the research methods that will guide the research design. Doctrinal methodology is chosen for this research because it allows the researcher to apply interpretation skills and legal reasoning skills for the evaluation of legal rules on a given area of law. The researcher can also use this for deriving recommendations from the analysis of legal rules that can inform the future development of the law. This is one of the advantages of the doctrinal legal research method in that it has the ability to help formulate recommendations for future evolution of the laws concerned, which are derived from a critical evaluation of the relevant legal rules. Doctrinal legal research methods are also called as ‘black-letter’ law research because of the emphasis on the study of the legal provisions or rules and the analysis of the same. Therefore, the objective of the doctrinal legal research method is to identify the correct legal provisions and court judgments and analyse this content in a critical and interpretative manner. Hence, the use of interpretative tools and legal reasoning are two of the hallmarks of doctrinal legal research methodology. As per the tradition of the qualitative research methodology, this research will not see the researcher formulating a hypothesis; instead, research questions are formulated that will guide the research. Furthermore, as this is qualitative research, both primary sources and secondary sources form part of the data to be studied and analysed in the research. The current research concerns the investment laws of Bangladesh as well as international investment laws, therefore, the primary sources for this research consist of legislation, rules and policy documents of the Government of Bangladesh related to foreign direct investment. International laws that Bangladesh is a party to, also form part of the primary sources. The objective of studying these laws and policy statements is to critically analyse whether the international investment law has been a tool of economic development for Bangladesh. The simple question that this research seeks to answer is whether investment laws have helped Bangladesh link foreign investment with economical development.

Chapter 2: Bangladesh and its investment laws

Bangladesh is a capital poor and a labour rich country. Therefore, in order to develop its economy, Bangladesh needs to attract foreign investment. Due to its labour intense conditions, Bangladesh has seen a significant increase of foreign investment and its Foreign Direct Investment (FDI) has seen significant growth in the last two decades. Bangladesh has also entered into a number of Bilateral Investment Treaties with other countries. These treaties provide mutual benefits to both Bangladesh and the other parties to the treaties. It has been said that considering the importance of foreign investment to Bangladesh’s economy, it is necessary that it makes laws and creates policies that are able to provide security to the foreign investment in Bangladesh. Hussain and Haque write on the significance of protecting foreign investment in Bangladesh from the perspective of the effect of foreign investment on the trade and growth in Bangladesh, writing: “Since FDI and trade are two important components of economic growth in Bangladesh, it is imperative to frame policies that will promote growth; in addition to eliminating the barriers to capital flows, comprehensive investment provisions ought to be incorporated into the laws, and would be more effective in boosting the FDI.” Hussain and Haque above make an argument for including comprehensive investment provisions in the laws of Bangladesh so as to lead to framing of laws that will boost economic growth. This argument is based on the interlinks between trade and FDI and investment and law. To some extent, this argument is justified because law does have the potential to protect and further encourage trade and investment. However, laws are not made only to protect or encourage foreign trade and investment, and there are a host of other factors that need to be taken into account, such as, local business, and environment. Therefore, while laws should be made to respond to needs of trade, investment and economic growth, consideration needs to also be given to other important factors. This is also noted in the Economic Policy Paper by the government of Bangladesh, which states that it would be wrong to misconceive the issue of domestic investment vis a vis foreign investment as wrong policy measures may be adopted as a result of this misconception. It is further noted that while foreign investment is important for filling the gaps in domestic resource, it cannot mean that the government should promote foreign investment at the expense of domestic investment, not the least because a healthy domestic economy is also a pre-condition for foreign investment. Moreover, an approach that prioritises foreign investment over domestic investment, may also cause imbalances in the economy and frustrate domestic investors, making them averse to foreign investment. Therefore, the issue of foreign investments is to be seen in conjunction with domestic; which is one of the areas where laws play a role in balancing possible conflicting interests in this area. The significance of the bilateral investment treaties may be seen in the context of lack of international law, including customary international law, which can provide resolution to conflicts arising in cases between private investors and host government. This was pointed out by the International Court of Justice (ICJ), where the court observed: “Considering the important developments of the last half-century, the growth of foreign investments and the expansion of the international activities of corporations, in particular of holding companies, which are often multinational, and considering the way in which the economic interests of states have proliferated, it may at first sight appear surprising that the evolution of law has not gone further and that no generally accepted rules in the matter have crystallized on the international plane. “ Although the observation of the court above comes in a dated case, the observations do remain true to an extent today, as countries have not been able to agree on any major multilateral trade related or investment related treaties. In the absence of such multilateral arrangements, countries have opted to enter into BITs, which provide frameworks for trade engagement between the parties, as well as identify rights of foreign investors and the remedies available against host nations. In that sense, BITs are an important aspect of international trade. Bilateral agreements may be thought necessary in terms of providing terms of reference for disputes as mentioned above; however, there is criticism of such treaties as they may be favouring developed countries and MNCs, sometimes to the detriment of the developing countries and their interests. In this chapter, the focus will be on the laws that are enacted in Bangladesh to provide security and protection to the foreign investment in Bangladesh. Focus will also be on the Bilateral Investment Treaties that Bangladesh has with other countries and any laws that have been made in response to these treaties.

Legislation for International Investments

The Foreign Private Investment Promotion and Protection Act 1980 is a legislation which was enacted for the express purpose of promotion and protection of foreign private investment in Bangladesh. This is the principle legislation in Bangladesh for foreign investment, although there are other relevant legislations as well that are applicable. Bangladesh laws offer certain incentives for foreign investors. These incentives include 100% foreign ownership in most sectors. Laws also allow tax holidays, reduced import duties on capital machinery and spare parts, and tax exemptions. A specific scheme offered for start-ups was started by the Government of Bangladesh in 2012, under which extended tax holiday scheme was provided. This scheme benefitted start-ups across many sectors, including agro-processing, steel, jute, textile, and telecom. Despite these schemes and policies, there is some criticism of Bangladesh laws, which allow to some extent discriminatory policies and regulations, which are principally used to promote local industries. The criticism from the US Department of State is based on the existence of some such discriminatory practices, for example, withholding of approvals for imported medicines that compete with local producers. However, this criticism by the US Department of State is also based on the difference between developed and developing country perspective on opening of markets. For the developing countries, that are not as industrially competent as developed countries, it is difficult for local manufacturers and producers to compete with the products of the western developed countries. It may be argued that some restriction is necessary for the local producers to be encouraged. On the whole, as the discussion below will show, the laws in Bangladesh are well disposed to protect the interests of the foreign investors. Before this discussion proceeds further in that direction, it will be useful to reiterate that there are a number of policies in place for encouraging foreign investors, such as, tax holidays. Therefore, it can be argued that the laws in Bangladesh are not overly restrictive with regard to foreign investment. It may also be noted that the laws in Bangladesh that exist today, are a culmination of a long process, since its independence, which was aimed at generating conditions that would lead to the attraction for foreign investors in Bangladesh. It would be pertinent to understand this background of the laws in Bangladesh to get a fair picture of how laws came to be formulated the way they did and how conditions led to the involvement of Bangladesh in BITs. To that end, the following is a brief discussion on this background of government policy and background to the laws. The first attempt by Bangladesh to create an industrial policy with respect to industrial policy and foreign investment was made in 1973, with the creation of the Industrial Investment Policy. The policy contained incentives for attracting the foreign investors, with incentives including full freedom of transfer of annual profit after payment of taxes, and repatriation of capital spread over a number of years. Additionally, the policy contained a guarantee that there would be no attempt to nationalise the concerns in the period within 10 years, and in case nationalisation is done after that period, the foreign investors would be entitled to fair and equitable compensation. It may be noted that these provisions were included for the specific purpose of attracting foreign investment in Bangladesh. However, despite these provisions in the new industrial policy, Bangladesh failed to attract investment from foreign countries as foreign investors may have considered the policy prescribing an unequal relationship with the government. This may be due to the mention of nationalisation, which was not guaranteed to be barred beyond the period of ten years. Investors may have considered a guarantee for ten years against nationalisation, as insufficient for the purpose of big investments in the country. Thus, in the periods of 1973-74 and 1974-75, foreign private investment constituted merely 0.04% and 0.02% respectively of the total investments in these periods. Therefore, the provisions included in the industrial policy of 1973 clearly were unable to draw foreign investors in Bangladesh.

The same situation remained in the revised policies devised by Bangladesh in the other years. Thus, the revised policy of 1974, despite permitting foreign private investment in collaboration with the public sector and local entrepreneurs failed to interest investors due to the limited access to industries, where investment was only permitted in industries with less technical know-how, and made complicated by high volume of investment. The 1974 policy also extended the period of moratorium on nationalisation from 10 to 15 years. The dismal response from foreign investors led to the shift towards more liberalisation from 1975 onwards, and the positive measures towards investor friendly policies, as well as more positive response from the foreign investors, led to the change in attitude towards policy making on industries and foreign investment, which culminated in the Second Five Year Plan (1980-85), in which two mileposts were set up for attracting foreign investment, one of which was the enactment of Foreign Private Investment (Promotion and Protection) Act 1980. The other milestone was the enactment of the Bangladesh Export Processing Zones Authority Act 1980. These two legislations were enacted for the specific purpose of improving foreign investment in Bangladesh by improving the relations between foreign investors and the government. Both legislations emphasised on providing a legal framework that responded to the goals of increasing foreign investment. Finally, the industrial policy of 1999 contains the most comprehensive policy of the government on foreign investment. Coming back to the Foreign Private Investment Promotion and Protection Act 1980, foreign private investment is defined in the Act as investment of foreign capital by a person who is not a citizen of Bangladesh or by a company incorporated outside Bangladesh. Foreign private investment does not include investment by a foreign Government or its agency. There are specific provisions in the Foreign Private Investment Promotion and Protection Act 1980, which seek to protect the interest of the investors. Section 4 of the Act provides that the Government shall ensure fair and equitable treatment and protection and security of the foreign private investment in Bangladesh. This provision is aimed at providing protection to foreign investors from the possibility of discriminatory and unfair treatment at the hands of the government. Section 5 provides that the government shall not unilaterally change any terms of sanction, permission or licence granted by it to an industrial undertaking having foreign private investment so as to adversely alter the conditions under which the undertaking was sanctioned. Section 5 also ensures that foreign private investment shall not be accorded a less favourable treatment in application of rules and regulations than what is accorded to similar private investment by citizens of Bangladesh. Section 6 provides that if there is a loss to foreign investment due to civil commotion, insurrection, or riot, the same treatment with regard to indemnification, compensation, restitution, or other settlement will be provided to foreign investment as it is accorded to investments by citizens.

Section 7 provides that there shall be no expropriation and nationalisation of foreign investment except for public purpose and even then with adequate compensation. Section 8 provides that the transfer of capital, returns from it and, proceeds from liquidation is guaranteed. There are other laws that are also relevant to the entry and regulation of foreign investment in Bangladesh, including the Investment Board Act 1989, Bangladesh Export Processing Zones Authority Act 1980, Bangladesh Small and Cottage Industries Corporation Act 1957, the Companies Act 1994, and the Acquisition and Requisition of Immovable Property Ordinance 1982. The Bangladesh Export Processing Zones Authority Act of 1980, is an important legislation relating to foreign investment under which Bangladesh established an Export Processing Zone (EPZ) in Chittagong, Bangladesh in 1983. Over the years, a number of other EPZs now have become operational in Dhaka, Mongla, Ishwardi, Comilla, and Uttara, while others are in the process of becoming operationalised. EPZs allow equal treatment to investments by 100% foreign-owned companies as well as joint ventures and Bangladeshi-owned companies. EPZs have proved to be successful in attracting foreign investments and major investments are from South Korea, Japan, Hong Kong, Singapore, the United Kingdom, Sweden, Thailand, and India. The Bangladesh Export Processing Zones Authority (BEPZA) is established under the Act as one of the two primary investment promotion agencies in Bangladesh, the other one being the Board of Investment or the Investment Board. The BEPZA aids companies by assisting them with tax inquiries, land acquisition, utility hook-ups, and incorporation within the EPZs. The Investment Board Act 1989 is particularly important in terms of foreign investment as it provides additional rules related to entry and establishment procedures for foreign investors, other than those provided in the principal legislation of Foreign Private Investment Promotion and Protection Act 1989. The Act establishes the Board of Investment and also puts in place regulatory requirements and mechanisms for the registration and approval of national and foreign investments in industrial undertakings. All companies have to register with the Investment Board, and the Board assists companies with tax inquiries, land acquisition, utility hook-ups, and incorporation. There are a number of incentives provided by Bangladesh to foreign investors, which are aimed at increasing foreign investments into Bangladesh. There are specific protections against nationalisation and expropriation, also enacted through legislation as discussed above. There is no ceiling on investment and equity share-holding by foreigners. Tax holidays are given for specific industries, for instance, private power-generation companies have up to 15 years of tax holidays. Multiple-entry visa for prospective new investors is provided and there are provisions facilitating citizenship by investing specific amount into the economy. Bangladesh does not levy double taxation with different countries on the basis of bilateral agreements. Facilities are made for repatriation of invested capital, profits, royalty, to name a few for the foreign investors. Foreign technicians are exempted from paying income tax up to 3 years in certain industries. Intellectual property rights are protected as per the bilateral agreements with different countries.

Despite the legislation for foreign investment security and protection, as well as many policy principles in place, Bangladesh has received some criticism regarding the way that it approaches legal and regulatory issues involved in foreign investment. For instance, the United Nations Conference on Trade and Development (UNCTAD) has criticised the lack of transparency in Bangladeshi laws and policy on foreign investment, writing: “The regime for entry of FDI is not so open or clear and simple as many in the country believe. A single modern law is needed to consolidate entry policy. Affected by several laws, FDI entry is further complicated by the implementation of industrial policy and licensing.” As per this brief critique of Bangladesh’s laws on foreign investment, the specific problems with the law is that there is lack of clarity and transparency in the law and processes. It may be noted that UNCTAD has also criticised the Foreign Private Investment Promotion and Protection Act 1980 on the grounds that its scope and coverage are too limited. Considering this critique, it may be important to review the laws in this area. While reviewing these laws and policies, it is also important to understand how the laws may be structured (on the basis of the BITs) to provide certain rights to the foreign investors and how this may impact Bangladesh. One of the areas of shortcomings of the investment laws in Bangladesh is that these laws have not evolved overtime, as may be noted in the sluggish pace of rule making under the Foreign Private Investment Promotion and Protection Act 1980. The first two decades of the law saw no rules being made by the government under the law. Such sluggishness comes in the way of operationalising the measures that are adopted in the law. There is also the problem of lack of changes in laws that may have become obsolete over time. For instance, the Export Processing Zones Authority Act 1980 may need to be revised as some of the clauses have become redundant while there is a need to incorporate new provisions that respond to the demands of present time.

Another shortcoming of the law, from the perspective of the investor is that there is a fear of nationalisation, which is resultant of the wordings of Section 7 of the Foreign Private Investment Promotion and Protection Act 1980, which provides: “Foreign Private investment shall not be expropriated or nationalised, or be subject to any measures having effect of expropriation or nationalisation, except for a public purpose against adequate compensation which shall be paid expeditiously and be freely transferable.” There is a proviso in the section above, which clearly allows the government to nationalise or expropriate foreign investment for public purpose. From the perspective of foreign investors, the requirement that in case of such nationalisation or expropriation, the government shall pay adequate and expeditious compensation, will hardly be enough to allay fears against such actions. As things stand, nationalisation and expropriation is possible. It will also be pertinent to note that there are indirect ways of nationalisation and expropriation of foreign investment, which may be equally inimical to foreign investment as direct nationalisation. Indirect nationalisation can happen through absence of a stable taxation policy, that may lead to uncertain investment returns in case of fluctuations in tax policy. Tariff policies may be abruptly and frequently changed, as has happened a number of times in Bangladesh, and which may worry foreign investors. Government may impose foreign exchange restrictions, which may lead to rationing of foreign exchange, and affect repatriation of dividends. Trade unions may be permitted abruptly in certain earlier restricted industries, and this change may impact the calculations of foreign investors, who may not have calculated the costs of trade unionism in their earlier calculations. In Bangladesh, these are some of the areas that are not clearly defined and may therefore, lead to investor fears and impact foreign investment. Due to these factors, BITs may become more relevant as these may make the investment environment more secure for the foreign investors by including terms in the treaty that are specifically related to providing investors protection.

Conclusion

Investment laws in Bangladesh evolved over a period of time and were responses by Bangladesh to a need to attract more foreign investments. Specific issues like possible nationalisation of investments of foreign investments, and expropriation, are barriers for foreign investors and some of these issues have been addressed by Bangladesh in its laws. The BITs that Bangladesh has signed with some of the other countries in the world are also relevant to how Bangladesh may attract foreign investors to invest in its economy. The next chapter discusses BITs with reference to Bangladesh.

Chapter 3 – BITs in Bangladesh

Introduction

The previous chapter discussed the laws in Bangladesh with reference to international investments. As discussed in the previous chapter, the laws were a response to the need for foreign investments in Bangladesh. This chapter delves into the BITs that Bangladesh entered into with some of the other countries, such as, the United States, Switzerland, and Denmark to name a few.

Bangladesh has about 29 bilateral investment treaties with different countries. These countries include Austria, China, Denmark, France, Germany, India, USA and UK, to name a few. With some countries, like the USA, Bangladesh may have more than one bilateral investment treaties. For instance, with the USA, Bangladesh has an additional treaty for the double taxation in 2004. Bangladesh has such similar avoidance of double taxation bilateral treaties with Britain, Canada, Sweden, Singapore, and South Korea.

The issue of how far foreign investments and presence of multinational companies is good for the developing countries is a hotly contested one. One of the major criticisms of the bilateral investment treaties is that these treaties are not necessarily relevant to increasing FDI in a country and they are not necessarily to the benefit of host countries that are low and middle income countries. Bilateral investment treaties do help to reduce the transaction costs for the investors by committing the host nation to a basic framework by providing clear and enforceable rules to protect foreign investment in the host country and by reducing the risk faced by investors. However, the criticism against such bilateral treaties is that these lead to division of profits favouring developed countries and increase the bargaining power of MNCs and may disfavour domestic investors. Even on the question of whether such treaties increase foreign direct investment in the developing countries, it is said that it is not clear whether such treaties fulfil this purpose and that there is very little evidence answering this question. On the other hand, there is an important argument made against bilateral investment treaties from the perspective of the developing countries that such agreements are more in favour of developed nations and their nationals and seek to supplant domestic laws and regulations by seeking to create international law that protects the interests of the capital providing country more than the one which provides place for investment. Another criticism in this area is that developed countries do not really negotiate with developing countries on the terms of bilateral investment treaties; rather, they have all developed prototypes or model treaties that are used in the negotiation process and usually accepted by developing countries like Bangladesh as these countries are looking for investment. Thus, it has been noted: “The movement to conclude BITs has been initiated and driven by Western, capital-exporting states. Their primary objective has been to create clear international legal rules and effective enforcement mechanisms to protect investment by their nationals in the territories of foreign states… These treaty rules and enforcement mechanisms are intended to supplant local legislation and institutions and also to avoid disputes over the content and applicability of customary international law. A secondary objective of industrialized countries has been to facilitate the entry of their investments by inducing other states to remove impediments in their regulatory systems.” As mentioned above, there are specific concerns about the way BITs have come to be negotiated with least scope for negotiation on the part of the developing countries. The tendency of developed countries to formulate model BITs, has the effect of declining the negotiating powers of the developing states. The developing states are also restricted in their ability to negotiate due to their need of investment from developed countries, which puts them in a less favourable position in context of negotiating powers. Therefore, it is seen that the developed countries draft BITs that are favourable to their nationals and protect the interests of their nationals vis a vis their investments in the host countries. This may mean that the developed countries are able to get the developing countries to provide less restrictive regulatory provisions to facilitate the entry of their nationals, at terms in BITs which the developing countries have been restricted for negotiating on. Yet another point brought out about bilateral investment treaties is that these treaties have made developing countries accept onerous conditions, and in the case of Bangladesh, literature indicates that it voluntarily accepted more onerous requirements for issuance of compulsory licenses under the bilateral investment treaties with developed countries, than what exists under the TRIPS agreement.

Are these criticisms of the BITs also made out in the case of Bangladesh? This is one of the central questions to be answered in this research. At this point, it may be noted that there are criticisms of the bilateral investment treaties, which need to be reconsidered in the context of Bangladesh. This chapter will first discuss BITs in general, including the advantages and disadvantages that are associated with BITs. Next, the chapter will discuss some of the BITs that Bangladesh is party to, with a view to ascertaining the provisions that generally spring from such BITs, especially when these are between Bangladesh and developed countries.

BITs: General

BITs are typically agreements made between a rich and poor country. It may be noted that most BITs till date are concluded between a developed country and a developing country, and there is no record of BIT between two developed countries. BIT establishes the rights and protections that are recognised for the investors as well as a system within which these rights are to be enforced. Due to a lack of multilateral treaty on international investment, BITs have come to be proliferated. Therefore, BITs are resultant of a fragmented international investment regime, wherein BITs allow countries to establish rights of the investors as well as a system within which the rights can be enforced. The multilateral international investment treaty regime has been traditionally seen with some suspicion by developing nations, which consider multilateral trade forums, such as, the World Trade Organization as ineffective in their ability to hammer out the terms of global trade liberalisation. On the other hand, bilateralism has been favoured by countries who consider this regime to be more appropriately situated for addressing their concerns. Bilateral agreements are easier to develop and negotiate, and they allow more space to both parties to raise important issues. Therefore, there is some leeway for developing countries in the bilateral agreements, which may also explain the growth of bilateral agreements. Bilateral agreements are also popular with developing countries because there is conventional wisdom involved in the use of the treaties that these treaties address the deficiencies in the local institutions in the host nations, which may deter investors from investing in the country. As the BITs are designed for the specific protection of foreign investors against expropriation and regulatory uncertainty, investors are attracted to the host nations that have entered into a treaty with their country of origin. Expropriation of foreign investments has been done time and again, especially with change in polity of the host nations, or a sudden change in the constitution or government of the host nation, as was seen after the American revolutionary war in the 18th century, and many Latin American political upheavals in the 19th century. Therefore, expropriation is not an uncommon issue for foreign investors and may be a strong reason why foreign investors refrain from investing in countries, especially developing countries with weaker political and constitutional systems, unless there are protective mechanisms adopted in arrangements such as BITs. ‘Calvo clause’ is also an important deterrent for foreign investors, as this clause provides that the foreign nationals should refrain from asking for state espousal of their claims until local remedies are finally and effectively exhausted. The Calvo clause was benefitting the developing countries as against the foreign investors as expropriation would be conducted by a local court. The standard of compensation on the other hand, was benefitting the developed countries, or more precisely, the investors belonging to the developed countries as against the developing host countries, as it demanded that these countries provide prompt, effective, and adequate compensation for any property expropriated by them. General Assembly Resolution 1803, on the other hand, provides that expropriating countries have the right to expropriate foreign property in the national interest as long as they give appropriate compensation to the foreign national. This resolution was a response to the longstanding argument of the developing countries that standard of compensation goes against their interest. However, it was also in the 1960s that developed countries started to enter into BITs with developing countries so as to ensure the continuation of the standard of compensation in the event of expropriation, which when agreed upon on a bilateral basis, provided a counter to the GA resolution. Not only that, by the 1980s, there was a single model for BITs that was being followed on the pattern set by the United States model BIT, which meant that there was no scope for negotiation on the terms of BITs, which were by and large set by the developed country party to the BITs. Therefore, it may be noted that the historicity of the BITs shows that these have been an important aspect of trade between developed and developing nations, with the bilateral agreement providing scope to the developed nations to ensure that terms of trade that are beneficial to its investors, especially in context of expropriation, will be included in the arrangements with the developing states.

Foreign investors can rely on the mechanisms provided by the BITs, wherein standards of treatment are specified and possible extra-jurisdictional dispute resolution and enforcement is also provided for. As one of the factors that may deter foreign investors from investing in the host country is the possible risk of bias in the local jurisdiction, the provision of extra-jurisdictional dispute resolution increases the attraction for the foreign investor in the host state. For this purpose, BITs do include the mechanisms of international arbitration that are widely recognised by the international law, allowing private investors to bring action against a sovereign state. In this, BITs are unique in international law. BITs include provisions on international arbitration instead of allowing local courts in host states to hear and decide disputes between the parties. BITs may be seen to be heavily inclined to protect the interest of the investor as against the host country. The United States Model BIT, for example, contains provisions of substantial liberalization, wherein parties are prohibited from imposing performance requirements including demands for technology transfer, and export requirements. Due to the inclusion of such provisions in the BITs, developing countries may be seen to be restricted from engaging in industrial policy. One of the economic impacts of the BITs is the restriction that can be placed against the host nation with relation to the imposition of performance requirements on investment, which can include technology transfer, purchase component parts from local firms, or export production. These restrictions are not in the benefit of developing countries as these prevent the host state and foreign firms from engaging in any trade-distorting activity and also prevent them from entering into a voluntary mutually beneficial agreement without negative externalities. Technology transfer is of benefit to the developing host nations, and it may be argued that developing countries should be able to bargain freely for technology transfer. However, model BITs agreements, such as the one that the United States uses, contain specific provisions that prevent imposition of performance requirements on investment. Model BITs also contain provisions that prevent host country from stopping capital from being freely repatriated from the country. Such provisions reduce the risk for the foreign investor and for that purpose these provisions are included in the BITs. However, the host nations that are developing countries are disadvantaged by the provisions. Host countries may legitimately want to avoid repatriation of capital because such repatriation can also lead to the disbursal of “hot money” based on herd behaviour, an example of which can be seen in the repatriation of money during the Asian financial crisis of 1997-98. Therefore, such a provision can lead to some problems for host countries at times when foreign investors repatriate money in a short period of time. On one hand, developing countries are disadvantaged by such provisions; while on the other hand, they enter into such provisions on their own free will. However, it may be that developing countries do not have much choice in the matter, as many developed countries have model BITs, which include these provisions on an ex ante basis, rather than being left to individual negotiation between host state and foreign investor. Such provisions do lead to distributional advantage for the foreign investors, and put the host countries at a disadvantage.

Therefore, from the brief discussion above, two economic aspects of the BITs can be identified, these being imposition of performance requirements on investment and prevention of capital from being freely repatriated from the host country. These provisions are to the advantage of the foreign investors, and to the disadvantage of the host countries. However, there are model BITs that include these provisions as matter of course, and in order to attract foreign investment from developed countries that have these model BITs, such as, the United States, the host developing country may at times not have a choice but to enter into the agreement, even if there are provisions that may not be to its advantage. With respect to the provision on international arbitration, third party dispute resolution is a key component of the BITs, which also has an economic aspect, which makes sense for the foreign investors as well as the host countries. One aspect of the international dispute resolution provision is that it allows the host country to commit itself to a contract, with a confidence that the possibility of the future governments expropriating, interfering with domestic courts, or violating promises embodied in the BIT, can be addressed through a third party dispute resolution. For many developing countries, with underdeveloped political and possibly judicial resolution systems, third party resolution provision provides a security against future governments breaking the present government’s promises, and violating the provisions of the BITs by expropriating foreign investment or preventing repatriation of capital. From the foreign investor’s perspective as well, such provisions act as security against a future government that may not respect the promises of the present government. In the context of the judicial systems of the developing host nations, the foreign investors may also fear future government’s interference with local courts. In this context, the provisions on third party resolution can provide mutual benefit to both the host country as well as the foreign investors. The inclusion of the provision on third party resolution allows the host country to make a credible promise to investors that it otherwise would not have been able to make. An important question that is raised with respect to BITs is whether these instruments actually have an impact on the foreign investments into a developing country. Traditional wisdom may suggest such an impact because there are benefits that are specifically given to the foreign investors under the BITs regime. However, research on this point has usually given to ambiguous results on this point. Irrespective of that, there is definitely an increase in BITs, which may also raise a question of why states would enter into BITs, instead of pushing for a multilateral mechanism under the World Trade Organisation, the United Nations, or the Organisation of Economic Cooperation and Development. One reason for this may be that bilateral regime offers more flexibility to the countries so that they can tailor agreements to their specific needs and conditions.

However, this may not be entirely accurate because there is a dominant role played by the rich countries in this respect who tend to dictate terms on the BITs and it is not necessary that developing countries get the opportunities to take advantage of the flexibility offered by the BITs to negotiate on the terms of the agreements. Why developing countries choose to sign BITs when multilateral settings have been used to demand a low level of protection for foreign investors and BITs comparatively give a high level of protection, has been a puzzle to many commentators. Guzman has explained this puzzle by noting that while developing countries are better off as a group in the multilateral setting that may provide expropriation to be cheaper, individual developing countries also have an incentive to attract the largest possible investment by agreeing to higher levels of investment protection. This may explain why the same countries that were demanding a low level of protection for foreign investments in multilateral setting such as in the World Trade Organisation, agreed to higher levels of protection in their bilateral engagements. In any case, it is not necessary that the bilateral regime of the BITs will provide more flexibility, and even if such flexibility is provided, it is not necessary that this will enable the developing countries to take advantage of the flexibility to negotiate more favourable terms for themselves vis a vis the foreign investors.

Bangladesh- US BIT

The BIT between Bangladesh and the United States (Bangladesh-US BIT), is a good example of such a BIT. Bangladesh-US BIT was signed in 1986, and entered into force in 1989. As discussed at some length in this chapter, developed countries have generally tried to ensure dominance in their BITs with developing countries, through model BITs developed by them. The Bangladesh-US BIT is a model BIT designed by the United States. The objective of the Bangladesh-US BIT is noted by President Ronald Reagan in the Letter of Transmittal to the Senate in 1986: “The Bilateral Investment Treaty (BIT) program; initiated in 1981, is designated to encourage and protect- U.S. investment in developing countries. This Treaty is an integral part to encourage Bangladesh and other governments to adopt macroeconomic and structural policies that will promote economic growth. It is also fully consistent with U.S. policy toward international investment. That policy holds that an open international investment system in which participants respond to market forces provides the best and most efficient mechanism to promote global economic development.” The opening words of the excerpt from the Letter of Transmittal above are significant as these note the primary purpose of American BIT programme, which is to protect American investments in developing countries. Therefore, the first priority for the American government was to protect and encourage American businesses, and to that end, the BIT programme expects that Bangladesh would adopt the macroeconomic and structural policies that would promote economic growth. At the same time, a perusal of the note that accompanies the Letter of Transmittal clarifies the negotiation process, which makes it clear that the Bangladesh government’s concerns with respect to some of the model BIT provisions were taken into account. For example, with respect to the transfers, Article V of the Bangladesh-US BIT makes a departure from the model BIT in that although allowing the investor to transfer freely funds associated with an investment in freely convertible currency, without delay, the Bangladesh-US BIT allows Bangladesh to restrict transfers in case of low levels foreign exchange reserves. In such cases, the Bangladesh-US BIT allows Bangladesh to temporarily delay transfers of sales or liquidation proceeds, as long as this is not less favourable than what is allowed to investors of third countries. The provisions of the Bangladesh-US BIT are generally in accord with the model BIT as well as conform to the usual conditions that are included in BITs in general. These provisions include the granting of favourable conditions in the same nature as these are granted to nationals and companies of third countries. At the same time, regard is had to the laws of the host states, be these United States or Bangladesh, with regard to the employment of foreign nationals. In this regard, the Bangladesh-US BIT provides that investors shall be permitted to engage top managerial personnel of their choice, and subject to laws and administrative regulations concerning the employment of foreign nationals, investors will be able to engage professional and technical personnel of their choice. There are provisions related to expropriation that are included in the Bangladesh-US BIT in Article III (1). The treaty provides that expropriation or nationalisation of the property is not to be done by either state, and for this purpose expropriation is explained as measures that include “levying of taxation, the compulsory sale of all or part of an investment, or the impairment or deprivation of its management, control or economic value).” However, it is also provided that expropriation can be done if it is for public purpose; accomplished under due process of law; and is not discriminatory. These provisions are the usual kind of provisions that are found in BITs in general. Interestingly, the treaty also contains the usual provisions on performance requirements, which has been criticised in a recent article, which points out that the absence of performance requirements obligations towards foreign investors has led a situation wherein foreign investors are operate as per their interests and pay little attention to the interests and the development goals of Bangladesh. It is argued that Bangladesh should include the performance requirements clause that is a part of the Private Investment Promotion and Protection Act in 1980. In contrast to countries that include performance requirements clause in their BITs, allowing them to ensure that their nationals are also part of the senior management in companies operating there, Bangladesh has not been able to include such provisions in their BITs.

Bangladesh-Switzerland BIT

The Agreement between the Swiss Confederation and the People’s Republic of Bangladesh on the Promotion and Reciprocal Protection of Investments (Bangladesh-Switzerland BIT), was signed in 2000, and it entered into force in 2001. The treaty contains some of the common features of BITs in general. Article 4 provides for protection and treatment of investors, which states that fair and equitable treatment shall be provided to the investors and that they shall enjoy full protection and security in the host state territory. Article 4 also provides that the states shall accord to the investors treatment that is not less favourable than that which it accords to investments or returns of its own or investors of third States. However, Article 4 also provides that if either Bangladesh or Switzerland provides special advantages to investors of third States under any free trade area treaty, or due to a customs union or a common market, or related to double taxation, then it shall not be obliged to provide these advantages to the other party to this treaty as well. Article 5 of the Bangladesh-Switzerland BIT relates to free transfers. This provision states that Bangladesh and Switzerland will allow investors to freely transfer the amounts related to their investments in these countries. These amounts could be related to royalties, returns, repayment of loans, proceeds of liquidation of any assets, or any other amounts. Article 6 of the Bangladesh-Switzerland BIT relates to dispossession and compensation. This provision relates to nationalisation and expropriation of investments. Article 6 provides: “Neither of the Contracting Parties shall take, either directly or indirectly, measures of expropriation, nationalization or any other measures having the same nature or the same effect against investments of investors of the other Contracting Party, unless the measures are taken in the public interest, on a non-discriminatory basis, and under due process of law, and provided that provisions be made for effective and adequate compensation. Such compensation shall amount to the market value of the investment expropriated immediately before the expropriatory action was taken or became public knowledge, whichever is earlier. The amount of compensation, interest included, shall be settled in the currency of the country of origin of the investment and paid without delay to the person entitled thereto without regard to its residence or domicile.” Article 6 is similar to the provision on nationalisation and expropriation in the Bangladesh-US BIT discussed in the previous section. In Bangladesh-Switzerland BIT, Article 6 goes on to say that direct or indirect nationalisation or expropriation shall not be permitted under the terms of the BIT. In this, there is a similarity with the Bangladesh-US BIT because Article III of this treaty also provides that direct or indirect nationalisation and expropriation is not allowed. However, the crucial difference between Bangladesh-US BIT and Bangladesh-Switzerland BIT is that the former provides a clear explanation of what indirect nationalisation or expropriation could mean, including levying of taxation, compulsory sale of all or part of investment, impairment of management, control or economic value. Under both the Bangladesh-US BIT and Bangladesh-Switzerland BIT, expropriation is allowed if it is in public interest, done for a public purpose, under due process of law, and is a non- discriminatory manner. In this context, both the treaties are on similar lines. Under Article 9 of the Bangladesh-Switzerland BIT, provisions related to disputes between contracting parties are made out. Article 9 provides that if there are any disputes relating to interpretation of the treaty provisions, then such disputes should first be resolved through diplomatic channels. In the event that the dispute is not resolved for six months from the commencement of dispute, then the dispute has to be resolved through arbitration. The process for appointing arbitrators is provided in Article 9 itself.

The Bangladesh-Switzerland BIT is similar to Bangladesh-US treaty in that both treaties do not include prohibition of performance requirements. This is one of the criticisms against BITs in general as discussed above. Due to the absence of prohibition of performance requirements, it is seen that foreign investors may employ non-Bangladeshis in top management of the companies. As discussed above, a recent article has criticised the absence of performance requirements obligations towards foreign investors, as this has led to a situation wherein foreign investors operate as per their interests and pay little attention to the interests and the development goals of Bangladesh. Due to this, it has been argued that Bangladesh should include the performance requirements clause that is a part of the Private Investment Promotion and Protection Act in 1980. In contrast to countries that include performance requirements clause in their BITs, allowing them to ensure that their nationals are also part of the senior management in companies operating there, Bangladesh has not been able to include such provisions in their BITs. Therefore, the absence of performance requirements in the Bangladesh-Switzerland BIT is an area that can be critiqued. In general however, the Bangladesh-Switzerland BIT contains the provisions that are generally included in such treaties. There are similarities between this treaty and the Bangladesh-US BIT.

Bangladesh-Denmark BIT

The Agreement on the Promotion and Reciprocal Protection of Investments between the Government of the Republic of Bangladesh and the Kingdom of Denmark (Bangladesh-Denmark BIT), was signed in 2009 and came into force in 2013. Article 2 of the treaty provides for protection and promotion of the investment. Interestingly, there is a different approach to this provision as compared to the BITs with the United States. Making a distinction from the other treaty, Article 2 (1) of the Bangladesh-Denmark provides: “Each Contracting Party shall admit investments by investors of the other Contracting Party in accordance with its legislation and administrative practice and encourage such investments, including facilitating the establishment of representative offices.” In the Bangladesh-US BIT, reference to legislation and administrative practice is not made out. Both the Bangladesh-Denmark and Bangladesh-Switzerland BIT do make such references however. The Bangladesh-US BIT takes a different approach and it provides in Article II that parties are to maintain favourable conditions for investment in their territories and permit and treat such investments, on a basis no less favourable than accorded in like situations to investments of its own nationals or companies, or of third parties. There is no mention of legislations in this context in the Bangladesh-US treaty. Furthermore, the Bangladesh-Denmark BIT, Article 2 (2) provides that investment objectives are to be achieved without relaxing health, safety and environmental measures of general application. This is an important difference between the Bangladesh-Denmark BIT and the other BITs studied in this chapter. The other treaties do not specifically mention health, safety and environmental measures. The Bangladesh-Denmark BIT is different in this respect and allows balancing of investment objectives with the interests of health, safety and environmental measures. This is important because one of the criticisms of the BITs in general has been that it is contradictory to the interests of the environmental protection of the developing countries. To this end, domestic laws are not made only to protect or encourage foreign trade and investment, and there are a host of other factors that need to be taken into account, such as, local business, and environment. Therefore, while laws should be made to respond to needs of trade, investment and economic growth, consideration needs to also be given to other important factors. Considering the significance of balancing environmental protection with foreign investment, Article 2 (2) is a welcome change. It may be added that if BITs in general contained such provisions that sought to protect the local business and environment of the host countries, some of the costs that are associated with BITs could be minimised. In such a case, BITs may even prove to be beneficial to the developing countries, as the major reason why BITs are critiqued in the context of developing countries is that these treaties seek to protect the interests of the foreign investors at the expense of the local businesses and the environment. Article 3 of the Bangladesh-Denmark BIT provides for treatment of investments. The provision is similar to the ones in the other BITs included in this chapter. This provision relates to fair and equitable treatment and treatment that is not less favourable than that given to the nationals and the third party nationals. This is a common clause in BITs, and in this chapter, similar clauses were considered for the Bangladesh-US BIT and Bangladesh-Switzerland BIT. Article 4 is a related provision to Article 3, in that it provides exceptions to the favourable treatment clause in Article 3. Article 4 provides two conditions in which Bangladesh and Denmark may provide less than favourable conditions to each other, as compared to any third countries. This may happen under their respective memberships of any existing or future Regional Economic Integration Organisation or customs union; and under any international agreement or arrangement on taxation or any domestic legislation on taxation.

Article 5 of the Bangladesh-Denmark BIT provides the expropriation and compensation clause. This is also a commonly provided for clause, that was considered in this chapter in the Bangladesh-US BIT and the Bangladesh-Switzerland BIT. Article 5(a) provides the general clause barring expropriation or nationalisation save for the matter of public interest, which is done under a non-discriminatory process, and guided by due process principles and for which compensation is provided. Interestingly, Article 5(1) provides that what is barred is the nationalisation, expropriation, or measures “having effect equivalent of nationalisation or expropriation.” This is interesting because similar provisions are made in the Bangladesh-US BIT, however, in that treaty, the measures that may be considered equivalent to expropriation or nationalisation are clearly provided. Thus, under the Bangladesh-US BIT these measures may include levying of taxation, compulsory sale of all or part of investment, impairment of management, control or economic value. The Bangladesh-Switzerland BIT only makes reference to direct and indirect expropriation and nationalisation; similarly, the Bangladesh-Denmark BIT makes reference to measures “having effect equivalent of nationalisation or expropriation.” In the absence of explanation in the treaty itself, it may be inferred that the measures are the same as or similar to the ones that are barred under the Bangladesh-US BIT. Article 5(2) of the Bangladesh-Denmark BIT provides for the compensation that will be payable by the expropriating country, on the basis of fair market value of the investment. Interestingly, any disputes relating to the compensation are to be referred under the law of the expropriating state and in the courts of the expropriating state as per the provision of Article 5(4). This means that disputes relating to market value compensation for expropriation and nationalisation are not to be resolved through international arbitration, but are to be referred to the courts of the expropriating state. Article 6 provides for the compensation payable to the investors for the losses incurred by them due to war or other armed conflict, revolution, national emergency, revolt, or riot in the territory of the state. Article 6 provides that losses incurred under these conditions are to be compensated by the state in the same manner as the losses of nationals and third state nationals are compensated. In case of the investor’s property or investment being requisitioned or destroyed by the forces of the state, the state shall freely transfer the compensation or restitution for the loss of the investor as per the provisions of Article 6(2). Article 9 provides for the settlement of disputes between the host state and the investor. The provision is that disputes are to be settled amicably and if not able to settle the dispute amicably within 6 months, then reference of the same may be made to the court of the state or to international arbitration. A choice is given to the parties that they may resolve the dispute through the domestic courts of the host state, or through international arbitration. However, if there is a dispute between Bangladesh and Demark relating to the interpretation of the treaty, then such disputes are to be resolved through negotiations, and failing resolution through negotiations, through international arbitration as per the provisions of Article 10 of the treaty. Therefore, there are different mechanisms for settlement of disputes that are recognised under the treaty. These mechanisms depend on the nature of dispute and the disputing parties. If the dispute is between the state and the investor, there is a choice for settlement of disputes by courts of the state, or by the means of international arbitration. If the dispute is between the contracting parties, then the resolution is through negotiation preferably, and failing resolution, through arbitration. With respect to resolution of disputes, there are differences between the three BITs considered in this chapter. There is more flexibility in the Bangladesh-Denmark BIT with respect to the provisions on resolution of disputes, as compared with the provisions in the Bangladesh-US and the Bangladesh-Switzerland BIT.

Impact of BITs: Arbitral Awards and Bangladesh

The impact of the BITs on the economy of Bangladesh has recently been studied from the perspective of FDI, that is, by exploring the link between BITs and increased FDI. While exploring this link, the study points that BITs come at a high cost for the developing economies and do not always deliver on the main objective for entering into such BITs, that is, increase in inward FDI into the economy. With respect to Bangladesh, the study finds that there is no evidence to suggest that BITs with countries like the United States, have led to increase in FDI. Rather, the study finds that there are high costs that are associated with the BITs in Bangladesh, which includes the restrictions on the country from making laws that are necessary in its interest if such laws will have the effect of breaching some provisions of the BITs. In such cases, the arbitral tribunals also do not consider the economic conditions that may have led to the making of such laws, because the emphasis is on the BIT. It is for such reasons that, writers point out, there has been a steep decrease in BITs since 2010, and fewer and fewer countries are entering into BITs. The economic costs for BITs is considered to be high for the reason that there may be restrictions on the host country with regard to making laws for protecting local businesses and environment, and prohibition of performance requirements. On the other hand, absence of BITs may deter foreign investors from investing in the developing countries for fear of losing their investments to nationalisation and expropriation by the host country and not having alternative judicial mechanisms to the ones in the host country, which may be riddled with issues of backlog of cases or absence of an independent judiciary. For this reason, it may become necessary for there to be some international investment laws that can provide a framework within which foreign investors’ interests may be protected. Therefore, the possible positive impact of BITs on the economy of Bangladesh cannot be ignored as the BITs may have been effective in ensuring that foreign investors feel safe to invest in Bangladesh. One perspective from where the impact of the BITs on the Bangladesh economy can be considered is that of claims by investors. Aisbett et al, note that while BITs stimulate bilateral FDI flows from partner countries, the positive impact of BITs last only so long as there is not a claim brought against the host country under the BIT treaty, and when the host country faces a claim in arbitration under the BIT, there is a fall in the FDI from sources with a BIT as compared to the sources without the protection of BIT. They also note that once the host country faces a claim in arbitration under a BIT, there is a decrease in the link between increased FDI flows and entry into force of new BITs. This may happen because once a host country has been subjected to an arbitration claim, it may hesitate to sign new BITs. In Bangladesh, one of the important arbitration claims have come in the case of Saipem, in which case the claim was that the courts of Bangladesh and its State-owned entity Petrobangla had allegedly attempted to sabotage an ICC commercial arbitration proceeding, and that Bangladesh had not enforced the arbitral award on the breach of a contract between the claimant foreign investor and Petrobangla for the construction of a long-distance gas pipeline. The claim was filed by Saipem, which is an Italian oil and gas company. It may also be noted that the project was delayed due to strong opposition by the local population where the construction of the pipeline was to be done. The issue was that the parties were not able to agree on the amount of compensation and the additional costs to be paid due to the delay of the project, which led to the arbitration claim by the Italian company. Saipen asked for outstanding payments under the original contract and the extension agreement that was entered into due to the delay in the project. However, Petrobangla brought procedural requests before the ICC tribunal, which were denied leading to Petrobangla bringing an action before the First Court of the Subordinate Judge of Dhaka seeking the revocation of the ICC Tribunal’s authority due to misconduct of the arbitrators and a breach of the parties’ procedural rights and an action before the Supreme Court of Bangladesh for staying the proceedings before the ICC. The Supreme Court passed an order staying the proceedings and Saipem refused to file an appeal against the decision, although it had the option to do so. On the other hand, ICC continued with the arbitration and gave a final order, which was not enforced in Bangladesh due to the order of the Supreme Court staying the proceedings. Saipem filed a claim in the International Centre for Settlement of Investment Disputes (ICSID). The ICSID found in favour of Saipem holding that while the Supreme Court order did not amount to direct expropriation of the investment, it did have the indirect effect of doing so, which conduct was barred under the BIT concluded between Bangladesh and Italy. Moreover, the orders passed by the Bangladeshi courts were found by the ICSID to be an abuse of their rights and an undue intervention in the process allowed by the BIT.

Post the award of the ICSID in the Saipem case, there has been some criticism of the award in the commentary coming out of Bangladesh, where it has been suggested that international arbitral forums are more keen to protect the interest of the foreign investors and not the legitimate interests of Bangladesh. The ICSID award in the point that there was an indirect expropriation of investment by the courts of Bangladesh has been considered as a dubious way of interpreting the BIT for giving effect to corporate interest, when the more appropriate approach would have been to consider the decisions of the Bangladeshi courts on the point of natural justice. By holding that the courts in Bangladesh had indirectly expropriated investment, even when the investment remained in control and management of Saipem, also went against an earlier decision of the ICSID itself in CMS Gas Transmission Co v Argentina, where the ICSID tribunal had rejected the claim of the existence of indirect expropriation as the investor had full control and ownership of the investment, holding that expropriation could occur only when an investor lost control over the entire FDI. This is in keeping with the general view on expropriation of investment as reflected in other arbitral awards in context of international investments. For instance, the Iran-US Claims Tribunal had decided that 'constructive expropriation' only occurred when the owner is deprived of ownership right. Similarly, the European Court of Human Rights held that expropriation can be said to have occurred only when the investor suffered the substantial deprivation of the right of ownership and benefit of the investment. In light of these decisions, it seems perverse for the ICSID to have decided that there was indirect expropriation by the Bangladeshi courts as Saipem continued to be in complete ownership and control over the assets and capital of the investment. By its own standards, as well as the standards of other arbitral awards, ICSID appears to have erred in its decision.

Conclusion

Bangladesh has entered into BITs with many countries, three of which were discussed in this chapter. The three BITs have many common provisions. These relate to nationalisation, expropriation, arbitration by international bodies, and absence of performance requirements. In some ways, the Bangladesh-Denmark BIT is different because it allows more scope to the host government to protect local business interests and environment. These provisions demonstrate that BITs can be made with provisions that are more balanced in their approach to the interests of the investors and the developing countries. That there is a possibility of tilt in the favour of investors is seen in the decision in Saipem. The Saipem case is a reflection on the impact of BITs on Bangladesh from the angle of the disputes that can arise under the BITs. In this case, the decision of the ICSID has been criticised as being investor friendly but disregarding of the interest of the host country.

Chapter 4: Recommendations and Conclusion

In the previous two chapters, this dissertation has discussed the laws in Bangladesh that are linked to foreign investments, and the BITs that Bangladesh has entered into with other countries. This chapter makes some recommendations based on the literature and its analysis discussed in the two previous chapters. These recommendations are made with the purpose of suggesting measures that can help improve the laws of international investment in Bangladesh. One of the important criticisms in literature with regard to international investment laws, in particular, BITs, is that these seek to provide more protection to investors as compared to the interests of the developing countries. This criticism has more relevance to the local businesses and environmental protection in developing countries. The Bangladesh-Denmark BIT shows that it is not necessary to always take this approach and that BITs can include provisions that are geared to balance the interests between the foreign investors and the local business and environmental protection in the developing countries. In the Bangladesh-Denmark BIT, such a provision is included in Article 2 (2), which provides that investment objectives are to be achieved without relaxing health, safety and environmental measures of general application. Similar provisions are not seen in the other BITs that were considered in this dissertation. Article 2 (2) demonstrates the possibility of including provisions that can be balancing. In light of the above, the first recommendation is that BITs should not impose restrictions on developing countries for giving some preference to the interests of the local businesses and the environmental protection needs. Instead, BITs should be more balanced in their approach to the interests of the investors and the developing countries. Another criticism against BITs is that these generally prohibit states from imposing performance requirements including demands for technology transfer, and export requirements. Due to the inclusion of such provisions in the BITs, developing countries may be seen to be restricted from engaging in industrial policy that can be more to their advantage as they may have to choose between such policy and the possibility of entering into BITs with developed countries. Due to the prohibition of performance requirements, developing countries often find that while they have international investors, these investors do not give opportunities to local talent and expertise to join the upper management of these companies in their offices in the developing countries. With regard to the above, the recommendation is that developing countries like Bangladesh must negotiate harder to ensure that their interests are protected by inclusion of performance requirements in the BITs. The international investment law in Bangladesh is also subject to some criticism. One of the specific problems is that there is lack of clarity and transparency in the law and processes. The Foreign Private Investment Promotion and Protection Act 1980 has been critiqued for having narrow scope and coverage.

Considering this critique, it may be important to review the laws in this area. Therefore, the third recommendation is that the existing laws in Bangladesh, particularly, the Foreign Private Investment Promotion and Protection Act 1980 should be reviewed with consideration to the critique of the laws in the literature. Another of the areas of shortcomings of the investment laws in Bangladesh is that these laws have not evolved overtime. There is a sluggish pace of rule making under the Foreign Private Investment Promotion and Protection Act 1980. The first two decades of the law saw no rules being made by the government under the law. Such sluggishness comes in the way of operationalising the measures that are adopted in the law. There is also the problem of lack of changes in laws that may have become obsolete over time. This dissertation reported this with reference to the Export Processing Zones Authority Act 1980, which may need to be revised as some of the clauses have become redundant while there is a need to incorporate new provisions that respond to the demands of present time. With regard to the above, the recommendation in the dissertation is that a serious review should be taken of the laws in Bangladesh and consideration should be given to the laws that are older. This dissertation found that there is no concrete evidence that links FDI to BITs in the developing countries. On the contrary, there is literature that indicates that developing countries may be compromising on their own interests in order to attract foreign investments. While it is understandable that developing countries may want to attract foreign investments, it is also important to consider how strengthening domestic businesses may be important to the development of the developing countries. Therefore, it is important that there is a balance between the desire to attract foreign investors and the need to develop local businesses and protect local businesses. This is one of the most important lessons that can be taken from the literature on international investment and Bangladesh laws on international investment. This does not mean that laws in Bangladesh should neglect the interests of the foreign investors; rather that while important is given to these interests, such importance does not come at the expense of domestic needs and interests. Related to this, it may be noted that Bangladesh should avoid entering into BITs that are based on the model BITs of other countries as this will take away the opportunity to negotiate on the part of Bangladesh. Losing the opportunity to negotiate on the international treaties is better avoided because this compromises the interests of the state. Therefore, this is an important requirement, which must be considered seriously by the establishment. To conclude, it may be noted that while international investments may be affected by international treaties on investment, it is not conclusively proved that such treaties definitely impact FDI into a state. However, it cannot be denied that there is conventional wisdom in supposing that such treaties will increase FDI because of the protection of interests of foreign investors. Therefore, it is important that until more research conclusively proves the link between international investment treaties and FDI, Bangladesh will continue to strengthen its domestic legislation and policy based on the investment treaties, while ensuring that domestic interests are also protected.

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