Must Investments Contribute to the Development of the Host State? The Salini Test Scrutinised

Abstract

The Salini test, established in the Salini case, is composed of four conditions for identifying what constitutes an investment under Article 25(1) of the ICSID Convention. This test, however, is among the most controversial topics in investor-State arbitration, as it has been accepted by many tribunals, whilst, at the same time, has been widely criticised by many other tribunals. Among the four conditions, the most criticised is the fourth; namely, the contribution of a transaction to the economic development of the host State. Post-Salini tribunals have been divided into two camps: one, which accepts the Salini test per se, and another, which criticises, modifies, or outright rejects any such economic development condition. So far, these two trends in the arbitral jurisprudence have yet to be reconciled and, thus, it would be premature to identify a definitive conclusion as to whether the Salini test holds as it is, or has been modified or entirely rejected by post-Salini tribunals. That said, the Salini test, particularly the development condition, presents a precious opportunity to reconsider the relationship between investment and development, both of which, at varying degrees, represent key aspects of the international legal system pertaining to the resolution of investment disputes. At the same time, through the prism of this relationship, there is scope to introduce variations to the notion of development, namely, that of sustainable development. This contribution aims at outlining the principal contours of the argumentation that seeks to introduce this notion in international investment law and arbitration.

6.1 Introduction

In investor-State arbitration, a seemingly simple question that has been posed and which remains widely debated is whether foreign investment must contribute to the development of the host State. Needless to say, the notion of investment is pivotal in international investment agreements (IIAs) and investor-State arbitration, since their main purpose is the protection of investment. However, what constitutes an investment is not always clearly defined in IIAs or the ICSID Convention. First, States may freely define the notion of investment in their IIAs. However, IIAs normally contain non-exhaustive lists as to what constitutes investment, including all manner of assets. Against this broad definition, or lack of definition per se, scholars have long attempted to limit the scope of investment, by excluding, for example, types of assets such as portfolio investments and indirect investment.¹ In actual investment cases, in any event, the definition issue may be resolved pursuant to the definition provision specific to each IIA and the specific context of each IIA. Second, to the contrary, the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) contains no definition of investment and, as a result, should an investor attempt recourse to an ICSID tribunal, it would have to inevitably address the definition issue, should this be posed. In that sense, the definition issue under the ICSID Convention is of broader significance than that of IIAs. In addition, this issue appears as that of jurisdiction ratione materiae, since Article 25(1) of the ICSID Convention allows tribunals to establish jurisdiction solely on investment, as follows:

The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally (emphasis added).

The definitional issue has been raised in terms of objections to the jurisdiction of the ICSID tribunals. In response to this, the tribunal in the Salini case formulated the so-called Salini test, composed of four conditions for the purposes of determining whether a transaction amounts to an investment within the context of the ICSID Convention. This chapter focuses on the content of the Salini test, with particular attention to its fourth condition, which requires that for a positive finding of investment that it ought to contribute to the development of the host State. In other words, unless an asset or operation contributes to the host State’s development, it cannot constitute investment under the ICSID Convention, and, consequently, cannot justify the jurisdiction ratione materiae of the ICSID tribunal. Inevitably, this leads one to consider and re-analyse the relationship between investment and development. As the drafting history of the ICSID Convention lends little support for clarifying the integrity of the Salini test, including its fourth condition,² the analysis takes arbitral practice as its starting point, hence the focus on the pre- and post-Salini cases, and the Salini case itself in subsequent sections.

6.2 The Salini Test: Background, Implications and Acceptance

6.2.1 Pre-Salini Cases Relating to the Definition of Investment

It would be incorrect to claim that the Salini tribunal clarified, for the first time in the history of the ICSID Convention, the conditions of investment.³ The tribunal in Fedax v. Venezuela (1997)⁴ had already shown certain criteria of investment, where the issue before the tribunal had been whether an acquisition of promissory notes, issued by the Venezuelan state in connection with the contract, constitutes investment.⁵ The tribunal stated as follows:

The basic features of an investment have been described as involving a certain duration, a certain regularity of profit and return, assumption of risk, a substantial commitment and a significance for the host State’s development. […] And most importantly, there is clearly a significant relationship between the transaction and the development of the host State, as specifically required under the Law for issuing the pertinent financial instrument. It follows that, given the particular facts of the case, the transaction meets the basic features of an investment (emphasis added).⁶

This finding is worth being analysed from several perspectives. First, the Fedax formula is based on the scholarly opinion of Professor Schreuer,⁷ and is composed of five elements, which are almost identical to the Salini test, apart from the element of ‘regularity of profit and return’. Several tribunals in the pre-⁸ and post-Salini cases followed the Fedax formula, rather than the Salini test in relation to the post-Salini cases. Second, according to the Fedax tribunal, the promissory notes satisfy the condition of ‘significance of the host State’s development’, even though the financial instrument—in that case, the promissory notes—was generally regarded as borderline. Third, crucially, the Fedax formula does not express the conditions under the ICSID Convention Article 25(1), since it regarded Article 25(1) as only requiring consent of the contracting States, which is expressed in a particular IIA.⁹ Consequently, the jurisdictional requirements under the ICSID Convention and under a particular IIA are integrated into one whole, and this is why the Fedax formula should be understood as containing the criteria of investment under both instruments.¹⁰

A further pre-Salini case is CSOB v. Slovakia (1999)¹¹ in which a near-identical issue was raised to the tribunal, and identical reasoning was advanced by the tribunal. First, the tribunal had to address whether a loan constitutes investment under the ICSID Convention and the BIT. The tribunal answered affirmatively that ‘[t]his is so, if only because under certain circumstances a loan may contribute substantially to a State’s economic development’.¹² Second, as to the definition of investment, the tribunal integrated the ICSID Convention and the BIT as a whole, in the same ways as the Fedax tribunal. As shall be addressed in subsequent sections of this chapter, the Salini tribunal isolated the ICSID investment from the BIT investment for the first time,¹³ which is the reason that the Salini case is regarded as the leading case on the definition of investment under the ICSID Convention. Third, notably, the CSOB tribunal relied on the preamble of the ICSID Convention to deduce the development condition.¹⁴

6.2.2 The Salini Test

In Salini v. Morocco (2001),¹⁵ the tribunal had to consider whether a construction contract with regard to a highway qualified as investment under the ICSID Convention. On this, the tribunal stated as follows:

The doctrine generally considers that investment infers: contributions, a certain duration of performance of the contract and a participation in the risks of the transaction (cf. commentary by E. Gaillard, cited above, p. 292). In reading the Convention’s preamble, one may add the contribution to the economic development of the host State of the investment as an additional condition.¹⁶

This part of the decision contains the Salini test, composed of four conditions of investment, namely: the contribution of money or assets; a certain duration; the element of risk; and a contribution to the economic development of the host State. Several points should be mentioned to facilitate an understanding of the Salini test. First, the Salini test is applicable only within the context of the interpretation and application of the ICSID Convention. Consequently, non-ICSID tribunals are not necessarily required to apply the Salini test as a question of law.¹⁷ Second, the Salini test is based on an objective approach,¹⁸ independent from the subjective perception of investment by the contracting Parties as may be expressed in individual IIAs. Therefore, different to the situation in the pre-Salini cases, the Salini test concentrates on the definition of investment only under the ICSID Convention, setting aside the definition under any IIA. Third, it seems that the development condition was transplanted from the preamble of the ICSID Convention.¹⁹ However, this was inspired more directly by an academic opinion of Georges Delaume, who had suggested a flexible test of investment by proposing a definition of investment based on ‘the expected—if not always actual—contribution of the investment to the economic development of the country in question’.²⁰ Fourth, the tribunal indicates some flexibility on the development condition, by stating that ‘one may add’ it to other three conditions. This suggests that it is not a mandatory, but an optional condition, depending on the tribunal’s evaluation in each case. In addition, the Salini tribunal did not make clear whether the four conditions must be examined individually or in combination. The tribunal seems to have chosen the latter, by stating that ‘these various criteria should be assessed globally even if, for the sake of reasoning, the Tribunal considers them individually here’ (emphasis added).²¹ Consequently, the development condition should not be examined independently from the other three conditions. Fifth, what is important is how to apply the development condition in actual cases. In the Salini case, that condition was not seriously discussed by the tribunal, which simply concluded that:

[…] the contribution of the contract to the economic development of the Moroccan State cannot seriously be questioned. In most countries, the construction of infrastructure falls under the tasks to be carried out by the State or by other public authorities. It cannot be seriously contested that the highway in question shall serve the public interest. Finally, the Italian companies were also able to provide the host State of the investment with know-how in relation to the work to be accomplished (emphasis added).²²

The Salini tribunal makes it clear that the contract on the construction of infrastructure serves the public interest of the host State and, because of this, satisfies the development condition. This reasoning is reminiscent of Consortium R.F.C.C. v. Morocco (2001), in which the tribunal admitted the existence of a contribution in entirely identical words to those stated in the Salini case,²³ namely that:

[s]’agissant enfin de la contribution du marché au développement économique de l’Etat marocain, celle-ci ne peut sérieusement être discutée. La construction des infrastructures relève, dans la plupart des pays, des tâches de l’Etat ou d’autres collectivités publiques. Il ne peut être sérieusement contesté que l’autoroute en cause servira l’intérêt public. Enfin, le Consortium était également à même d’apporter à l’Etat d’accueil de l’investissement un savoir-faire en relation avec l’ouvrage à réaliser (emphasis added).²⁴

This reasoning, identical to that in the Salini case, suggests that, insofar as an operation serves the public interest, it can be deemed to contribute to the development of the host State.

6.2.3 Post-Salini Cases that Espouse the Development Condition

The Salini test has been widely accepted and applied as a four-prong test that includes the development condition in the following post-Salini cases: Joy Mining v. Egypt (2004),²⁵ Bayindir v. Pakistan (2005),²⁶ Jan de Nul v. Egypt (2006),²⁷ Helnan v. Egypt (2006),²⁸ Saipem v. Bangladesh (2007),²⁹ Kardassopoulos v. Georgia (2007),³⁰ and Millicom v. Senegal (2010).³¹ In Joy Mining v. Egypt (2004), for example, the tribunal adopted almost the same conditions as the Salini test, where it stated that:

Summarizing the elements that an activity must have in order to qualify as an investment, both the ICSID decisions mentioned above and the commentators thereon have indicated that the project in question should have a certain duration, a regularity of profit and return, an element of risk, a substantial commitment and that it should constitute a significant contribution to the host State’s development. To what extent these criteria are met is of course specific to each particular case as they will normally depend on the circumstances of each case (emphasis added).³²

In the above decision, the tribunal adopted five conditions, relying on the opinion of Professor Christoph Schreuer.³³ One added condition was ‘a regularity of profit and return’, which had already appeared in the Fedax formula. As to the development condition, the qualification significant was added to the contribution that requires a quantitatively considerable amount of contribution, which was lacking in the Salini test.³⁴ Following Joy Mining v. Egypt, the Salini test was further accepted, with slight modifications, by other tribunals. In Helnan v. Egypt (2006), the tribunal followed the Salini test and, with regard to the development condition, stated that ‘[a]s for the contribution to the development of the EGYPT’s [sic] development, the importance of the tourism industry in the Egyptian economy makes it obvious’.³⁵ In Saipem v. Bangladesh (2007), in the same sense, the tribunal relied on the Salini test, but referred to it as the four ‘elements’.³⁶ Having applied the four conditions to the case, the tribunal concluded that ‘Saipem has made an investment within the meaning of Article 25 of the ICSID Convention’,³⁷ although it is not clear whether the tribunal applied the development condition to this case disjunctively yet along with the other condition.³⁸

6.2.4 Interim Evaluation

The Salini test, composed of four conditions, was invented for the purpose of identifying whether a transaction amounts to an investment within the context of Article 25(1) of the ICSID Convention. It has been accepted and applied widely in several post-Salini cases. Consequently, it is possible to provisionally conclude that ‘the case law is progressively evolving towards a greater recognition of the Salini criteria’ (emphasis added),³⁹ and, more simply, that the Salini test constitutes ‘un courant jurisprudential’⁴⁰ within the context of ICSID dispute resolution. Moreover, it should be pointed out that, in many of the cases mentioned earlier, there was little need for tribunals to examine severely or individually whether the development condition had been met, since the operation or property in question was easily categorised as investment.

6.3 Criticism of the Salini Test

Most crucially, it should be noted that the Salini test, particularly in connection to the development condition, has been criticised and rejected by several tribunals. For example, although the Saipem tribunal adopted and applied the Salini test, as mentioned earlier, it observed that ‘[t]he need for the last element [contribution to the host State’s development] is sometimes put in doubt’.⁴¹ It is thus necessary to analyse the reasons behind the criticism that the development condition has attracted.

6.3.1 Text Takes Priority Over the Preamble

Initial criticism is based on the interpretation methodology in the Salini test, which gives undue weight to the preamble of a treaty. The preamble of the ICSID Convention provides, in its first sentence, that the Contracting States consider ‘the need for international cooperation for economic development, and the role of private international investment therein’ (emphasis added) and, as mentioned earlier, the term economic development in the Salini test has been inducted from this preamble.⁴²

According to this criticism, even though the preamble refers to economic development, this cannot be directly incorporated into the interpretation of a treaty term or provision, namely Article 25(1) of the Convention.⁴³ The customary rule of treaty interpretation, as reflected in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (VCLT), dictate that the ordinary meaning of the terms of the text itself is the starting point of the interpretative exercise, and this takes priority over the general object and purpose of a treaty.⁴⁴ In Saba Fakes v. Turkey (2010),⁴⁵ for example, the tribunal stated that ‘the criteria of (i) a contribution (ii) a certain duration, and (iii) an element of risk, are both necessary and sufficient to define an investment within the framework of the ICSID Convention. […] These three criteria derive from the ordinary meaning of the word “investment”’.⁴⁶ As to the economic development condition, then, the tribunal observed that it was:

not convinced […] that a contribution to the host State’s economic development constitutes a criterion of an investment within the framework of the ICSID Convention. Those tribunals that have considered this element as a separate requirement for the definition of an investment, such as the Salini Tribunal, have mainly relied on the preamble to the ICSID Convention to support their conclusions. The present Tribunal observes that while the preamble refers to the “need for international cooperation for economic development,” it would be excessive to attribute to this reference a meaning and function that is not obviously apparent from its wording. In the Tribunal’s opinion, while the economic development of a host State is one of the proclaimed objectives of the ICSID Convention, this objective is not in and of itself an independent criterion for the definition of an investment (emphasis added).⁴⁷

This understanding was accepted by another tribunal in Quiborax v. Bolivia (2012).⁴⁸

6.3.2 Redundant Due to the Other Three Conditions?

The development condition is criticised because it can be fully covered by the previous three conditions. In LESI-Dipenta v. Algeria (2005),⁴⁹ for example, the tribunal omitted the development condition and applied the remaining three conditions to the case, by stating that:

(iv) [i]t would seem consistent with the objective of the Convention that a contract, in order to be considered an investment within the meaning of the provision, should fulfill the following three conditions:

(a) the contracting party has made contributions in the host country;

(b) those contributions had a certain duration; and

(c) they involved some risks for the contributor.

On the other hand, it is not necessary that the investment contribute more specifically to the host country’s economic development, something that is difficult to ascertain and that is implicitly covered by the other three criteria (emphasis added).⁵⁰

Similar reasoning was advanced by other tribunals, including LESI-Astaldi v. Algeria (2006)⁵¹ and RSM v. Central African Republic (2010).⁵² According to those tribunals, it is difficult to establish that the development condition was met and, furthermore, it is covered by the previous three conditions. The details of such reasoning will be discussed in subsequent sections.

6.3.3 Development as an Expected Consequence of Successful Investment

The most substantive criticism against the Salini test, and, in particular against the development condition, is based on the view that the contribution to the economic development of the host State is a consequence of investment, not an a priori requirement for qualifying as investment. This understanding was rapidly espoused by several tribunals around 2010, while its origin may be located earlier in Pey Casado v. Chile (2008),⁵³ in which the tribunal had stated that:

L’exigence d’une contribution au développement de l’Etat d’accueil, difficile à établir, lui paraît en effet relever davantage du fond du litige que de la compétence du Centre. Un investissement peut s’avérer utile ou non pour l’Etat d’accueil sans perdre cette qualité. Il est exact que le préambule de la Convention CIRDI évoque la contribution au développement économique de l’Etat d’accueil. Cette référence est cependant présentée comme une conséquence, non comme une condition de l’investissement: en protégeant les investissements, la Convention favorise le développement de l’Etat d’accueil. Cela ne signifie pas que le développement de l’Etat d’accueil soit un élément constitutif de la notion d’investissement. C’est la raison pour laquelle, comme l’ont relevé certains tribunaux arbitraux, cette quatrième condition est en réalité englobée dans les trois premières (emphasis added).⁵⁴

It is stated here that the contribution to the host State’s economic development is a consequence of investment, not a condition for investment. This means that, even if, at the early stage of investment, an operation cannot bring any benefit to the host State, it nonetheless constitutes investment within the context of ICSID Convention proceedings. This basic understanding has been accepted, albeit with some variation as to the underlying reasoning.

6.3.3.1 Successful Investment

First, at the outset of an investment, there is only an expectation of future success and, thus, any possible contribution to the economic development of the host State is not yet certain. The tribunal in Quiborax v. Bolivia (2012)—adopting the first three conditions approach and eschewing the development condition—explained this as follows:

The Tribunal appreciates that the element of contribution to the development of the host State is generally regarded as part of the well-known four-prong Salini test. Yet, such contribution may well be the consequence of a successful investment; it does not appear as a requirement. If the investment fails, it may end up having made no contribution to the host State’s development. This does not mean that it is not an investment. For this reason and others, tribunals have excluded this element from the definition of investment (emphasis added).⁵⁵

Furthermore, the tribunal in KT Asia v. Kazakhstan (2012) adopted this reasoning in denying the development condition.⁵⁶ This is predicated on the simple assumption that only when an investment is successful, can there be some contribution to the development of the host State. However, even when an investment was not successful, thus not productive, there must be an investment, independent of whether its operation had been successful.

6.3.3.2 Expected Contribution or Desirable Consequence?

According to the foregoing, the key factor in establishing whether a transaction constitutes an investment should be found in its expectation of a successful result. It should be recalled, in this context, that the development condition, included in the Salini test, had originally been inspired by a scholarly opinion of Georges Delaume, according to which an investment should be identified on ‘the expected—if not always actual—contribution of the investment to the economic development of the country in question’ (emphasis added).⁵⁷ This means that, if there is an expectation of contribution this is enough for qualifying as an investment, even if it does not result in any actual benefit or merit to the host State. For example, if an investment contract for the drilling of several potential oil fields was concluded and the project had commenced, there must already be an investment at this moment, even if it will not successfully result in a finding of a productive oil field in the host State. In line with this argument, the tribunal in Saba Fakes v. Turkey (2010) held that:

[t]he promotion and protection of investments in host States is expected to contribute to their economic development. Such development is an expected consequence, not a separate requirement, of the investment projects carried out by a number of investors in the aggregate. Taken in isolation, certain individual investments might be useful to the State and to the investor itself; certain might not. Certain investments expected to be fruitful may turn out to be economic disasters. They do not fall, for that reason alone, outside the ambit of the concept of investment (emphasis added).⁵⁸

Such reasoning was also adopted by the tribunal in Electrabel v. Hungary (2012),⁵⁹ which, with regard to the development condition, observed that: ‘the economic development of the host State is one of the objectives of the ICSID Convention and a desirable consequence of the investment, but it is not necessarily an element of an investment’ (emphasis added).⁶⁰

6.3.3.3 The Expectation Approach

According to the above expectation-related approach, the existence of investment must be admitted only where there is expected contribution to or a desirable consequence of the development of the host State. In other words, a presumption of contribution suffices for identifying an investment. This understanding gives rise to further issues. First, that there is an accurate manner by which to identify, characterise or consider the expectation seems doubtful. In Electrabel v. Hungary (2012), the tribunal explains the nature of expectation by stating that ‘[t]he expectation of profit and return which is sometimes viewed as a separate component of an investment must rather be considered as included in the element of risk, since every investment runs the risk of reaping no profit at all’.⁶¹ Thus, the expectation approach results in a conclusion that the development condition may be subsumed by the risk condition. Second, the tribunal’s examination of expectation must be based on a presumption. If we require an actual/existing consequence of investment, in the forms of benefit, merit, or advantage, this leads to a ‘post hoc evaluation’ of investment activities.⁶² The expected contribution suggests, on the contrary, that the tribunal is not completely required to identify the existence of a contribution, but it will be sufficient to determine that an investment aims at contributing, or is expected to contribute, to the economic development of the host State. Third, based on the above understanding, it appears reasonable to think that the development condition, if applicable, should be examined, not at the jurisdictional phase, but at the merits phase. It should be recalled that the Salini test was elaborated as a jurisdictional test, by which ICSID tribunals are required to examine the existence of jurisdiction ratione materiae. Against this presupposition, the expectation approach appears to require the application of the development condition at the merits phase. In Pey Casado v. Chile (2008), in fact, the tribunal pointed out that:

L’exigence d’une contribution au développement de l’Etat d’accueil, difficile à établir, lui paraît en effet relever davantage du fond du litige que de la compétence du Centre (emphasis added).⁶³

6.3.4 Vagueness and Broadness of the Notion of Development

It is undeniable that, even if one were to reject the expectation approach, the terms contribution and development/economic development are too vague and extremely broad, possibly allowing the term investment to extend to any kind of asset or operation. In other words, if the development condition is not applied strictly, it may not serve the function of setting an outer-limit of the scope of the term investment.

6.3.4.1 Flexible Condition

Even if one were to maintain the development condition, it may not have any significance in the actual case of application, since its threshold is too low to exclude certain categories of investments. In Patrick Mitchell v. Congo (2006), for example, the annulment tribunal took the position that the development condition, if accepted, requires only a quite small amount of contribution, by stating as follows:

The ad hoc Committee wishes nevertheless to specify that, in its view, the existence of a contribution to the economic development of the host State as an essential – although not sufficient – characteristic or unquestionable criterion of the investment, does not mean that this contribution must always be sizable or successful; and, of course, ICSID tribunals do not have to evaluate the real contribution of the operation in question. It suffices for the operation to contribute in one way or another to the economic development of the host State, and this concept of economic development is, in any event, extremely broad but also variable depending on the case (emphasis added).⁶⁴

This understanding corresponds to the arbitral practice in which ICSID tribunals quite flexibly applied the development condition. For example, the nature of investment was admitted not only with regard to construction contracts (Salini v. Morocco), but also to promissory notes (Fedax v. Venezuela) and loans (CSOB v. Slovakia). As is clear here, the pre-Salini tribunals adopted a loose criterion of ‘contribution’ and, consequently, the development condition was applied as a low threshold.

Conversely, however, some tribunals have strictly applied the development condition. In MHS v. Malaysia (2007), for example, the tribunal examined whether a contract on the cargo salvage operation contributes to the development of Malaysia, by using the significant contribution criterion.⁶⁵ Based on this, the tribunal concluded that the contract does not satisfy the development condition, since ‘the Contract did not benefit the Malaysian public interest in a material way or serve to benefit the Malaysian economy in the sense developed by ICSID jurisprudence, namely that the contributions were significant’ (emphasis added).⁶⁶ This finding should be considered exceptional,⁶⁷ since the tribunal itself emphasised the ‘unusual’ character of the case.⁶⁸ In that case, an interesting issue was raised—namely, whether there could be a contribution to the historical and cultural development of Malaysia, had the salvage operation been successful. On this issue, however, the tribunal denied the significant contribution to the economic development of the host State, stating that:

[t]o the extent that the Claimant had provided gainful employment to these Malaysians, the Tribunal accepts that the Contract did benefit the Malaysian public interest and economy to some extent. However, this benefit is not of the same quality or quantity envisaged in previous ICSID jurisprudence. The benefits which the Contract brought to the Respondent are largely cultural and historical. These benefits, and any other direct financial benefits to the Respondent, have not been shown to have led to significant contributions to the Respondent’s economy in the sense envisaged in ICSID jurisprudence (emphasis added).⁶⁹

Here, the tribunal understood the development condition as requiring significant contribution to the economic development of the host State,⁷⁰ excluding contributions of ‘cultural and historical’ significance alone. Pursuant to this qualification, it may be said that the investment arbitral jurisprudence is progressively evolving towards requiring an economic, as opposed to a purely legal, concept of investment.⁷¹

6.3.4.2 Subjective Condition

Second, as a consequence of its vagueness, the development condition is deemed as being substantially ‘subjective’, depending on the tribunal’s case-by-case evaluation.⁷² To respond to this issue, some tribunals considered alternatives. In RSM v. Central African Republic (2010), for example, the tribunal observed that ‘the criterion of the contribution to the development is too subjective and it must be replaced by the criterion of the contribution to the economy, which itself is considered as presumed included in the three other criteria’ (emphasis added).⁷³ Here, the tribunal proposes to replace the term development with the term economy. Similarly, the tribunal in Phoenix v. Czech Republic (2009)⁷⁴ highlighted the difficulties stemming from the subjectivity of the development condition:

[t]he contribution of an international investment to the development of the host State is impossible to ascertain […]. A less ambitious approach should therefore be adopted, centered on the contribution of an international investment to the economy of the host State, which is indeed normally inherent in the mere concept of investment as shaped by elements of contribution/duration/risk, and should therefore in principle be presumed (emphasis added).⁷⁵

Even if we replace the term development with that of economy, the problem is not necessarily resolved, since the latter is arguably wider in scope, and does not seem to shed more light on what kind of asset or operation would produce at least some benefits or merits to the host State’s economy. For example, any kind of transaction or operation may bring know-how, development of human capital, and other benefits to the host State and its population. In this sense, any investment is possibly presumed to contribute to the host State’s economy in one way or another.

6.3.5 Other Conditions Have Been Added

Several tribunals have added further conditions to the Salini test, thus increasing it to five or six conditions. These additional conditions pertain to the investor’s good faith establishment of investment, and the legality of investment under the host State’s domestic law. In Electrabel v. Hungary (2012), for example, the tribunal had stated that:

subject to the wording of the provision in the treaty for dispute resolution, the legality of the investment and the investor’s good faith may be relevant as elements of the definition of an investment or as a bar to the exercise of jurisdiction or to investment protection on the merits (emphasis added).⁷⁶

6.3.6 Interim Evaluation

Provisionally, it can be concluded that the Salini test has attracted much criticism, particularly with regard to the development condition. Overall, this could be seen as an attempt of arbitral tribunals to depart from the Salini test in its original formula. This tendency and its implications can be summarised as follows: First, some tribunals totally neglected the development condition, and did not apply it in cases before them. Others, however, attempted to modify it by requiring—more onerously insofar as the investor is concerned—that there be significant contribution to the economic development of the host State for a transaction to be considered an investment for the purposes of redress under the ICSID Convention. Second, the essential question is not whether the development condition in the Salini test should be maintained. As discussed in the foregoing, even if one were to maintain it as a low threshold for the determination of an investment under the ICSID Convention, it would appear useless and meaningless in any such exercise. Third, criticism against the development condition appear rather technical, than substantive, in the sense that they do not touch upon the essential problem of how one is to conceive development, or, alternatively, economy, under the ICSID Convention and, more broadly, under international norms relating to investment. This shall be analysed in the following section.

6.4 Development-Friendly Definition of Investment

6.4.1 IDI Resolution (2013)

Although the development condition in the Salini test has been criticised, this condition is still supported by those who seek to emphasise the importance of the notion of development in the field of international law relating to investment. A 2013 Resolution of the Institut de droit international (IDI),⁷⁷ for instance, provides in Article 10 that:

The definition of investment is determined according to the applicable international instruments, in compliance with the rules of interpretation mentioned in Articles 1-2 and 4 above.

Given the fact that investment arbitration can be initiated by investors solely on the basis of a treaty, special weight must be given to the requirement that the investment contribute to the development of the host State, as may appear in the relevant instrument (emphasis added).

It is evident that IDI espouses a development-friendly definition of investment,⁷⁸ thus accepting the development condition of the Salini test. It is necessary, however, to evaluate IDI’s intention carefully. First, IDI in referring to the validity of recourse to a development element, states that this is so to the extent ‘as may appear in the relevant instrument’. This suggests that IDI regards the development element not as a universal mandatory condition applicable from the outset, but as potentially being applicable where such an element has previously been incorporated in the IIA applicable to the parties. Second, the Resolution requires States only to give ‘special weight’ to the development element, leaving unclear whether States shall accept it when they conclude IIAs.

6.4.2 Vestige of Droit International du Développement

Some have argued that the International Centre for Settlement of Investment Disputes (ICSID), given its institutional frame and general purpose, should function in a way that addresses the issue of poverty, by promoting the economic development of the poorest countries.⁷⁹ Were one to see the World Bank and ICSID as mechanisms to promote the development of the poorest countries, it would appear entirely appropriate to understand that investments, in order to benefit from the protection of ICSID, ought to positively contribute to the economic development of host States.⁸⁰

However, there are some issues to be addressed before espousing a development-friendly approach. First, international investment law and arbitration do not maintain a distinction between developed countries (home State) and the developing countries (host State) in the protection of investment. In the current situation, however, ICSID tribunals are faced with different situations, namely North-North and South-South relations of investment, in which the traditional differentiation between the developing countries and the developed countries has decreased in significance.⁸¹ Second, the above development-friendly approach to investment protection is reminiscent of the New International Economic Order (NIEO), which, through resolutions of the UN General Assembly, purported to modify international investment law at that time, particularly with regard to expectations of compensation in cases of expropriation. The ultimate purpose was to bring some economic in the relationship between developing countries (the ‘Global South’) and developed countries (the ‘Global North’). In the event, however, this one-sided movement, supported only by the developing countries, could not succeed. This suggests that the healthy development of international investment law must be based on a win-win basis between both sides; the capital-exporting countries and the capital-importing countries. If one insists only on the development-friendly side of the ICSID Convention, through the development condition of the Salini test, it must fail, because of the imbalance of interests.

6.4.3 Intersection with the Sustainable Development Concept

As arbitral trends remain fluid, it is too early to identify an emerging trend in arbitral jurisprudence, and generally in international investment law, that emphasises the importance of the sustainable development. It seems useful, however, to briefly look at what is argued, and to evaluate whether there is room for incorporating it into the definition of investment. First, most importantly in relation to our analysis, some authors promote the sustainable development concept by changing interpretations of existing IIAs,⁸² irrespective of any modification of the treaty text itself.⁸³ In this respect, this line of argument can be intersected and addressed with the discussion surrounding the Salini test, since it relates only to the interpretation of the term investment. Second, as mentioned earlier, when the Salini tribunal applied the development condition in that case, it relied on the notion of public interest, by observing simply that ‘the highway in question shall serve the public interest’ (emphasis added). This reasoning allows us to consider the possibility of opening the door, through the notion of ‘public interest’, to the adoption of the sustainable development-friendly definition of investment. According to some, the sustainable development concept, in the context of investor-State arbitration, takes the form of the principle of good governance,⁸⁴ which is composed of the notions of transparency, anti-corruption,⁸⁵ due process and the rule of law. Needless to say, these all are reconcilable with the notion of public interest⁸⁶ and thus will be easily incorporated into the notion of development in the Salini test.

6.5 Conclusions

From around 2010, the arbitral jurisprudence tends to slowly depart from the Salini test, by criticising, modifying, or rejecting the development condition.⁸⁷ On the one hand, it might be possible to say that, setting aside this condition, there remains consensus among arbitrators and scholars to accept the Salini test. In that sense, the Salini test is possibly still alive and will be applied in future cases as a prototype of the notion of investment.⁸⁸ On the other hand, however, there is inconsistency in tribunal practice with regard to the notion of investment, which indicates a ‘drifting’ notion of investment.⁸⁹ One should understand, from the above, the presence of difficulties in defining the notion of investment, particularly when one is to take into consideration the element of development.

A crucial point to be resolved is whether the development condition in the Salini test should be maintained, and, if so, in which form and to what effect. Unfortunately, arbitral tribunals have not yet been harmonised into a solid consistent jurisprudence in this regard. It is noteworthy, however, that the development condition in the Salini test relies on the notion of public interest which leaves for us—jurists, practitioners, and so on—the possibility to discuss the scope of development under the ICSID Convention and, more widely, the scope and significance of sustainable development in international investment law.