Logo of Phnom Penh Post newspaper Phnom Penh Post - Will policy reforms, new laws expose Cambodia to more treaty-based suits?

Will policy reforms, new laws expose Cambodia to more treaty-based suits?

Content image - Phnom Penh Post
Despite growing electricity demand, Cambodia has pledged to phase out coal-fired power plants. It is among major policy decisions made this year. Hong Menea

Will policy reforms, new laws expose Cambodia to more treaty-based suits?

As institutional reforms are underway, some investments that are used to the old system of doing things could be affected

In September this year, telco operator Kingtel Communications Ltd board chairman Qiong Ye and director Jianping Yang filed a legal case against Cambodia in the International Centre for Settlement of Investment Disputes (ICSID).

The little known suit, brought by Chinese nationals Ye and Yang, who invoked their rights under the ASEAN-China Investment Agreement 2009, set off Cambodia’s first-ever treaty-based Investor State Dispute Settlement (ISDS) case.

Details of the case including their claims have yet to be made public, however, it is believed to be linked to the revocation of Kingtel’s internet service provider (ISP) licence in October last year.

According to Chinese news portal Sohu.com, the basis of their arbitration is supported by Article 14 of the treaty, which is on ‘investment disputes between a party and an investor’.

The article describes six types of violations, consisting of national treatment, most favoured nation treatment, investment treatment, expropriation, compensation for loss and transfer and repatriation of profits.

So far, there is no guidance on the form of violation and remedies sought by the claimants. But the gravity of the case on the government can be deduced from its haste in setting up an inter-ministerial committee to study and compile legal, technical, financial and other documents linked to the dispute, vodenglish.news wrote.

Judgements and rewards in ISDS cases are often staggering and cause a huge impact on the losing party. For governments, it can be the inability to enact or enforce laws and policies that affect the investor, whereas the investor risks incurring massive losses.

Based on UN Conference on Trade and Development (UNCTAD) data, the number of tribunal decisions favouring either party are somewhat comparable.

Up to December 31, 2020, out of 1,104 known treaty-based ISDS cases, 274 cases were decided in favour of the state and 212 for investors by international tribunals.

There are more treaty-based cases stemming from bilateral investment treaties (BITs) but they are not reported, according to trade analysts.

However, Cambodia has some experience from international tribunals when it took Thailand to task in 1959 for allegedly occupying sovereign land where the ruins of an ancient temple in Preah Vihear is located.

In 2009, it was sued by US-owned Cambodia Power Company over a power purchase agreement. In both cases, the tribunals – ICSID and International Court of Justice – decided in favour of Cambodia.

In the latest case, the government has appointed UK-headquartered Allen & Overy LLP while Beijing-based Hui Zhong Law Firm and Arent Fox LLP in Washington D.C will act for Ye and Yang.

Both the claimants could not be reached for comment while Ministry of Justice spokesman Chin Malin did not respond to questions.

‘Right to revoke licence’

Previously known as Emaxx Telecom (Cambodia) Ltd, Kingtel had come up with a masterplan to construct some 3,000 5G base stations with Huawei Technologies Co Ltd. It had also tied up with Huawei in 2015 to develop Cambodia’s 4G network.

Throughout the period, it provided internet and Voice over Internet Protocol (VoIP) services.

Based on information found online, Ye founded Shenzhen-listed Shenzhen Asia Link Technology Development Co Ltd in 1999. He later sold his shares and resigned as its board chairman and CEO before leaving the company in 2015.

A year before that, Hong Kong-based KeyBridge International Holdings Co Ltd, a ex-affiliate of Shenzhen Asia, acquired 65 per cent stake in Cambodia-registered Emaxx, before taking over the remaining stake and changing the company’s name to Kingtel. By 2016, it had invested some $140 million, news reports stated.

In October 2020, the Ministry of Post and Telecommunications (MPT) revoked the licence of 17 operators for alleged “inactivity, non-compliance of their revenue share and other obligations as required under their licences, or failure to provide necessary technical documents”.

This was based on an audit to assess the status of their business operations, technical capacity and financial situation, UK-based Commsupdate.com said.

Local Khmer-language news portal Ramsei Kampuchea, quoting minister Chea Vandeth, wrote that the ministry found that Kingtel allegedly “owed over $2 million” in income tax since it started business in 2016 but “refused to pay” despite “six to seven reminders”.

Contending that the company has the right to sue, he said the government too possessed the right to revoke the licence.

“If he does business in Cambodia [and] does not pay, we have no choice but to cancel his licence. His license is clear.

“If you do not pay for a year, do not work for a year, we have the right to take it back. It is his right to sue but we have the right to sue any company that does not pay the state,” Vandeth told Rasmei Kampuchea in September.

His frank comment revealed the reinforcement of his no-nonsense plan, 18 months after taking on the ministerial job, to reform regulations, improve telecommunication service and initiate action against companies that “fail to provide good service to the people”.

Initial results of the institutional changes are already visible, not least the stringent audit of the sector which materialised in a lawsuit against former Smart Axiata Co Ltd CEO Thomas Hundt for the alleged illegal laying of fibre-optic cables in three rural areas, as reported by Nikkei Asia.

Reforms, arbitration

Though Kingtel’s case seems like an isolated event, it signals Cambodia’s inadvertent exposure to treaty-based ISDS lawsuits, particularly with policy reforms and new laws taking place.

The transformation of MPT is an example of that, as well as Cambodia’s strict enforcement of the taxation law, enactment of competition and investment laws, and new policies on energy, health and environment.

With impacts from the pandemic and climate change, governments are having to make changes in order to safeguard citizens, protect the environment and increase economic growth.

Policies such as the ban on coal-fired power plants, ban on beef and buffalo meat imports, and the requirement to change cigarette health warnings every two years, might have implications on some investments.

Content image - Phnom Penh Post
Source: UN Conference on Trade and Development

Ashutosh Ray, a Seoul-based lawyer who specialises in international commercial and investment arbitration, said climate change is a reality as much for the investors as it is for states.

The word “sustainable”, therefore gains prominence, he commented. However, in the end, arbitral tribunals are largely well placed and are able to decide who, between the state and the investors, have a stronger case.

“Both states and investors lose time, money, and resources in fighting a claim. [So] it only makes economic sense for investors to initiate only strong cases.

“As for safeguarding interests, it is important that both sides are always actively engaged in discussions and negotiations. This will ensure that an investor is able to maximise its profits, and the state is able to ensure its people’s wellbeing,” said Ashutosh.

That said, he contended that strengthening the legal system and governance is the “prerogative of a sovereign”.

Ideally, steps towards better governance through the development of laws and policies should not expose a state to legal challenges.

But, he cautioned that a state must be mindful of its commitments, especially under international treaties and conventions because it is the change in stance on those fronts that could lead to liability.

“In this instance, [it would be] the state officials’ claim that service providers whose licenses were cancelled were operationally inactive and failed to comply with legal requirements.

“It could be a valid argument on the state’s behalf that has to find support under the relevant treaty. Only detailed and complete facts will assist the arbitral tribunal to come to a sound conclusion,” he said.

‘Chilling effect’

While a lot of the policies are geared towards Cambodia’s goal of becoming a higher middle income nation by 2030 and its migration from least developed country status, they also address the evaporation of preferential treatment by the EU and US.

Since the Paris Peace Agreement in 1993, Cambodia has signed 26 BITs, with 16 in force. Out of that, 15 feature ISDS provisions.

Among the 16 plurilateral treaties or treaties with investment provisions (TIPs) it signed, only the ASEAN-China Investment Agreement 2009 possessed the ISDS provision.

A lot of governments over the years have been told that including ISDS in treaties would attract more foreign investment.

At times, governments are inclined to give political risk insurance to investors, which analysts say is not advisable, in order to lock in investments. Usually, investors are the ones who take up insurance to protect their investment, while passing on the cost to customers.

In any case, studies by UNCTAD and the World Bank in the past have shown that committing to BITs and free trade agreements (FTAs) does not necessarily pull investors.

Similarly, in 2010, the Australian government’s Productivity Commission concluded that ISDS provisions do not result in “any statistical variation in the pattern of foreign investment”, and advised against incorporating them in treaties.

Content image - Phnom Penh Post
After several years of strong FDI, investments dipped last year. Source: Cambodia Economic Update, June 2021 (World Bank)

“There is limited international empirical evidence to show that ISDS provisions materially affect FDI inflows,” Dr Jayant Menon, visiting senior fellow at the Institute of Southeast Asian Studies-Yusof Ishak Institute in Singapore, concurred.

There is also some concern that ISDS procedures could end up generating an “unintended chilling effect” on regulatory processes.

This occurs when countries have to start putting aside scarce fiscal resources to defend themselves from claims from investors looking to exploit the ISDS provision.

“They could also be reluctant to introduce new public policy measures that could be beneficial to consumers or the reform agenda. [Also] it [could] somehow increase the legal risk emanating from investors exploiting the ISDS mechanism,” Dr Jayant said.

Additionally, there is the argument that ISDS is necessary to ensure investors are protected from policy changes made by corrupt or weak governments, often involving developing nations.

However, based on UNCTAD’s data, that notion is somewhat debunked by the number of cases filed by investors against advanced nations.

For instance, Spain has 53 ISDS cases, mostly stemming from its financial crisis in the mid 2000s, Canada with 38 cases and the US with 20 cases.

In turn, investors from advanced nations have also pursued lawsuits against other governments with the highest being Americans, followed by Dutch investors.

Given the risk of ISDS and imbalanced agreements, several governments such as India, Brazil, Indonesia, South Africa and Bolivia have withdrawn from BITs.

Even the US has backtracked on ISDS, removing the provision from a revised North American Free Trade Agreement (NAFTA) and pulling out of the original Trans-Pacific Partnership Agreement (TPP) because of the provision.

Evidence has showed that despite withdrawal from international investment treaties or revision of their commitments under the treaties, the said countries have remained attractive to investors.

Studies by World Bank and UNCTAD note that it is because foreign direct investment (FDI) drivers are underpinned by the size of the market, natural resources like oil, gas, timber and minerals, peace and stability and human capital.

Content image - Phnom Penh Post
Source: National Bank of Cambodia

As such, Cambodia could be selective with investments and resort to investment contracts with investors, whilst offering the extra benefit, such as ISDS protection would only be accorded to genuinely beneficial investments.

Investment protection

In the past one year, Cambodia has signed FTAs with China and Korea, and the Regional Comprehensive Economic Partnership (RCEP).

While it is not known if the ISDS provision is included in the China and Korea-Cambodia FTAs, the RCEP’s investment chapter left out the clause but its inclusion will be reviewed and subject to consensus following majority ratification by governments.

“ISDS is usually a key provision in BITs and investment chapters in FTAs because it serves as a form of investment protection,” said Marisa Razeek, lawyer and treaty negotiator in Malaysia via email.

As for Cambodia’s bilateral FTAs with China and Korea, she opined that even if there is no specific ISDS provision in them, there is “still some ISDS coverage in the ASEAN-Korea FTA”, albeit limited to the commitments that were made under those regional FTAs.

“It is likely that the Cambodian negotiators have expressly identified the key areas that they will need full flexibility to develop key areas of their domestic economy. Thus, it may not be the case that Cambodia is automatically increasing their exposure to legal suits.

“However, it would be prudent for all authorities, be it from their central government, to local authorities, to be aware of commitments Cambodia has made in international treaties,” she said.

Perhaps, one way to avoid being dragged into ISDS litigations would be to focus on RCEP that comes into force on January 1, 2022, Dr Jayant suggested.

“There is no provision for the ISDS in RCEP. Instead of expending scarce domestic human resources in negotiating more and more BITs, which generally contain the ISDS, and other bilateral FTAs, Cambodia should shift its focus away from these instruments and towards implementing RCEP,” he said.

‘Will not use ISDS often’

Noting that there are a variety of BITs globally, international trade expert Deborah Elms pointed out that “not all are quite the same”.

Older ones tend to have “looser criteria” whereas newer agreements, such as the Comprehensive and Progressive TPP (CPTPP) have investment provisions and ISDS rules that “run for up to 30 pages”.

She stressed that the point is to provide more clarification on the terms and conditions that apply to investment expropriation, while reminding that not all investments are covered.

“Foreign firms can certainly lose money and may have no right to access ISDS provisions. The basic point is to ensure that when the government feels the need to expropriate or seize investments for legitimate public purposes and fails to deliver adequate compensation for the loss of the investment, foreign firms have a way to respond,” said Elms, the founder and executive director of Singapore-based Asian Trade Centre Pte Ltd.

Like any firm in a market, foreign firms can also use the local court system, she said.

However, in circumstances where the government has seized an asset and failed to compensate, it is also possible or likely that the local court system “may not take a fair” view of the case, as it would have to rule against its own government.

“[Thus] having ISDS or another investment court system helps protect foreign investors. I think ISDS should be thought of as an insurance policy for investors. It does not provide certainty, but reduces the risk that governments will seize assets unfairly and, or pay out unfair compensation.

“ISDS does not mean that government cannot change rules or seize assets, but it also ensures that governments think carefully about whether such actions are for legitimate public purposes and whether they have provided fair compensation in return for the assets,” she explained.

Elms is of the opinion that investors “have not and will not use ISDS tools very often”, and that it can be “difficult and expensive” to build a case. As a result, the provision would not be used for minor asset seizures.

And, once a foreign firm has sued a government, it is highly unlikely that the foreign firm will ever work in the country again, as governments tend to take a dim view of firms that sue it, she said.

“It is therefore an expensive insurance policy, to be used especially to protect expensive assets, like capital intensive industries that cannot be easily moved.

“What ISDS really does is signal to investors that the government has committed to upholding certain standards. It is therefore associated with more inward FDI,” Elms said.

Echoing Elms, treaty negotiator Marisa said thorough regulatory impact assessments, which builds in Cambodia’s international commitments would be ideal in ensuring that all parties’ interests are protected.

“FTAs and BITs [and ISDS] are not inherently bad … because ISDS provisions also serve as protection of Cambodian investments abroad [in their FTA partners’ territories],” she said.

MOST VIEWED

  • Prince Norodom Ranariddh passes away at 77

    Prince Norodom Ranariddh, the second son of the late King Father Norodom Sihanouk and former First Prime Minister of Cambodia, has passed away in France at the age of 77. “Samdech Krom Preah Norodom Ranariddh has passed away this morning in France just after 9am Paris-time,”

  • General’s gun smuggling ring busted

    The Military Police sent six military officers to court on November 22 to face prosecution for possession of 105 illegal rifles and arms smuggling, while investigators say they are still hunting down additional accomplices. Sao Sokha, deputy commander of the Royal Cambodian Armed Forces and commander of

  • Cambodia, Thailand to discuss border reopening

    Cambodian authorities from provinces along the Cambodia-Thailand border will meet with Thai counterparts to discuss reopening border checkpoints to facilitate travel, transfer of products and cross-border trade between the two countries. Banteay Meanchey provincial deputy governor Ly Sary said on November 22 that the provincial administration

  • More Cambodians studying in US

    The number of Cambodian students studying at US colleges and universities in 2020-21 increased by 14.3 per cent over the previous year despite the Covid-19 pandemic, according to a recent US government report. The 2021 Open Doors report on International Educational Exchange showed that 848 Cambodian students studied

  • Banteay Meanchey gunfight sees 15 Thais arrested, three officers injured

    The Banteay Meanchey Military Police have arrested 15 Thai suspects and their accomplices after a gun battle between two Thai groups caused injuries to three police officers in the early hours of November 21, local authorities said. National Military Police spokesman Eng Hy said that according to

  • PM: Do not defile Tonle Sap swamp forest or else

    Prime Minister Hun Sen ordered police to arrest anyone – including government officials – involved with the deforestation of the flooded forests surrounding the Tonle Sap Lake because it is an area important to the spawning of many species of fish, among other reasons. Speaking in a