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President Pedro Castillo on Monday reversed course and again raised the possibility of nationalizing Peru’s natural gas sector. (Photo: Peruvian Government.)
Wednesday, October 27, 2021

Will Peru Pull Out of ICSID?

Will President Castillo fulfill campaign promise to pull Peru out of ICSID?

Inter-American Dialogue

Before winning Peru’s presidency in June, Pedro Castillo vowed to withdraw the country from the World Bank’s International Centre for Settlement of Investment Disputes, or ICSID. The platform of his Perú Libre party argues that current arbitration panels, including ICSID, are partial to multinational companies and calls for a new dispute resolution center that would be part of the Union of South American Nations, or Unasur. Will Castillo follow through on withdrawing Peru from ICSID, and what would that mean for companies that have already invested in projects there? How would Peru’s withdrawal from ICSID affect future investments in the country, and which sectors would be most affected? How likely is a new dispute resolution center under Unasur to be created, and what reason is there to believe it would function better than ICSID?

Caroline Richard, partner at Freshfields Bruckhaus Deringer: President Castillo’s campaign statements aren’t novel. They echo the positions of other populist leaders, namely Hugo Chávez, Evo Morales and Rafael Correa, who withdrew from ICSID between 2007-2012. Even the proposal for a Unasur arbitration center is a decade old. Not only is Castillo’s position not novel, it is also deeply flawed. First, the statistics disprove his claims of bias: ICSID tribunals rule, more often than not, in favor of states, not multilaterals (53 percent of the time to be exact). More importantly, ICSID, the institution, makes no substantive decisions or rules. It merely provides procedural rules and administrative support for arbitrations. Investment claims are decided by tribunals composed of arbitrators freely chosen by the parties to each arbitration, that is, by the investor and the state. Each appoint one arbitrator and agree on the third, presiding, arbitrator. This is no different from the proposed Unasur mechanism. As for the substantive rules that these tribunals apply, they are set out in treaties that states voluntarily sign. President Castillo is not proposing to withdraw from those treaties, but rather to use them to create separate arbitral institutions.

In sum, withdrawing from ICSID, and turning toward different arbitral institutions, will not address perceived problems with ICSID arbitration. But it might spook investors. Peru has stood out in Latin America as a stable jurisdiction that embraces neutral investment dispute resolution through ICSID. A U-turn on that policy may do more harm than good. Indeed, Ecuador recently announced that it is rejoining ICSID in order to attract foreign investment.

Mariana Zepeda, Latin America analyst at FrontierView: Pedro Castillo’s recent cabinet

reshuffle seems to signal a commitment toward moderation, distancing himself from the Perú Libre priorities that most alarmed investors, such as clearing the path toward pursuing nationalizations or expropriations in key industries. Still, investors should remain cautious, as the president will remain under significant political pressure to take on more of a far-left agenda. For Peru, exiting ICSID itself would be far from catastrophic, but it would certainly raise investor concerns by challenging the perception that Castillo has opted to moderate his policy agenda. ICSID has a rocky history in Latin America; Bolivia famously withdrew from it in 2007, followed by Ecuador and Venezuela, while Argentina has long threatened its own exit. But it is not only Latin America’s more closed economies that express suspicion toward ICSID; Brazil, for instance, never signed on to the convention, but it continues to retain the highest volume of foreign investors in the region. Even if Peru did withdraw from ICSID, multinationals already investing in local projects would still have avenues to pursue dispute resolution options, particularly through Peru’s many bilateral trade agreements. Therefore, in a high commodity price environment, Peru will likely still see foreign investment trickle in even if it withdrew from ICSID, particularly in the mining sector. It is overall regulatory uncertainty and Peru’s current political environment that are more likely deter foreign investment than an ICSID withdrawal itself.

Augusto Álvarez-Rodrich, daily columnist on political affairs at La República: President Pedro Castillo’s government plan was prepared by the secretary general of the Perú Libre Party, Vladimir Cerrón. The plan called for the establishment of a communist society. This plan, however, has not been implemented, although it has also so far not been replaced by any other public document.

The technical team in charge of economic affairs, headed by Pedro Francke, has opted for a different path and is desperately trying to build confidence for private investment, which is practically paralyzed due to the government’s confusing signals, given the existence of multiple and contradictory leaderships. Confidence in private investment in Peru is currently at its lowest historical level, while regulatory risk for companies is at the highest point in the last three decades. The recent change of the ministerial cabinet that included Mirtha Vásquez as prime minister has been received in the business community with a moderate and cautious optimism, but it is very insufficient to recover the confidence lost in the first 90 days of Castillo in office. A decision such as Peru’s withdrawal from ICSID would, at this point, mark a rainy day and greatly aggravate the outlook for investments and growth. However, as long as Francke remains minister of economy and finance, a decision like that will not come.

[Editor’s note: The commentaries above were submitted before President Castillo this week reversed course and again called for Peru’s Congress to nationalize the gas sector.]


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor



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