In 2014, Union Fenosa Gas (UFG), a Spanish company, filed an international arbitration case against the Government of Egypt at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). After four years of arbitration, the government was asked to pay the investors more than USD2 billion in compensation—plus interest and associated legal and arbitration costs.

What allowed UFG to file an arbitration claim against Egypt is a bilateral investment treaty (BIT) signed between Egypt and Spain in 1992. The BITs are some of the most potent international legal instruments. There are more than 2,600 of them, and most contain investor-state dispute-settlement (ISDS) provisions that allow investors to seek compensations in one of a few secretive arbitral tribunals—should they deem their investment to have been expropriated by a host government. One of such tribunal systems is administered by the World Bank-linked ICSID.

Provisions under ISDS are non-reciprocal: states cannot file claims against investors. States also cannot ignore claims filed against them or refuse to ignore rulings of arbitral tribunals. If they do, the investor could get an arbitral court decision that allows it to seize the state’s commercial assets in almost any jurisdiction. The costs to states are more than just the compensations; the cost of participation in an arbitration process under the ICSID tribunal system is on the average almost USD5 million for respondents (states).

Although African states have been on the receiving end of an increasing number of investor claims (more than 15% in the ICSID system), Africans make up only 2% of arbitrators, conciliators and ad-hoc committee members. Tribunals are constituted ad-hoc, which adds to the unpredictable nature and the high fees the few specialists who can serve on them are able to charge.

The fear of arbitration claims has resulted in “regulatory chill,” where governments are afraid to make policy changes for fear that they might be deemed as expropriation if the changes adversely affect an investor. This fear came up, for example, at the beginning of the COVID-19 pandemic. In addition to the emergency measures needed to address health, economic and financial implications triggered by the pandemic, governments are afraid that they might end up with expensive investor ISDS claims—as the emergency measures might be considered as expropriation. This might explain the muted policy response to the pandemic across many jurisdictions.