An interview with Alejandro Faya-Rodriguez, special legal advisor, Mexican Ministry of Economy

17 July 2008

Alejandro Faya-Rodriguez was the Deputy Director-General for International Affairs of the Directorate-General of Foreign Investment at the Mexican Ministry of Economy until last March, where he negotiated ten bilateral investment treaties and one investment chapter within a free trade agreement. He recently moved to a new post as a senior legal advisor to the Ministry of Economy, at the “Proceso MARCO”, a project aimed at crafting proposals that foster competition or improve the regulation in key sectors. He still regularly advises the Ministry on matters of foreign investment. ITN reached Mr. Faya-Rodriguez by phone at his office in Mexico City.

ITN: As a negotiator of investment treaties, how would you describe your fundamental responsibility?

AFR: The task is to deliver a good legal instrument. It’s a major responsibility, and one that not all negotiators handle well. Many negotiators try to finish negotiations too quickly in order to please a boss or leader. No matter how understandable this might be, it is highly irresponsible. The duty of a negotiator lays in capturing a proper balance between establishing legal protection to investments, in order to fulfill the treaty´s objective, and, at the same time, provide well-defined rules and standards, of both substance and procedure, which give legal certainty and prevent, to a reasonable extent, frivolous claims. This is not always easy and it may take some time.

ITN: The tendency to rush an agreement, I imagine can come from political pressures. How can negotiators work to shield themselves from the pressure to make concessions, or rush the process, which may result in a treaty that is detrimental to the interests of the country?

AFR: It’s important to understand that negotiators are technicians, not politicians. The negotiator needs to clearly articulate his opinion, put it in writing and circulate it. If he disagrees with something, he has to have the ability to communicate his concerns and put them at the discretion of the higher ranks. A negotiator fulfills his role as long he gives his opinion, and is not afraid of doing so, even it that implies delaying a negotiation. Of course, this requires an ability to distinguish critical issues and priorities. 

ITN: What are some of the most difficult investment treaties negotiations that you have been a part of?

AFR: There are a couple negotiations that stand out. One was our most recently concluded negotiation for a BIT with China, which may be signed shortly. That negotiation took more than three years and involved six negotiating rounds, as well as many more conference calls and other exchanges. There was a big gap in terms of culture and legal perspective. For China, it was the first major departure from their BIT model, which is far more basic and general. For instance, it was hard and it took intensive persuasive work to convince China of the need to include certain content in the procedural section.  Our model contains provisions that relate to the scope and legal standing for the submission of claims, the establishment of an arbitral tribunal, applicable law, consolidation, characteristics of the awards and enforcement conditions, among other things. Our model is also explicitly clear that it only covers disputes that arise from alleged breaches of the treaty, and not for breaches of domestic law or investment agreements. Fortunately, we faced very good negotiators on the other side of the table, and, in the end, we were both convinced on the quality of the final text.

Even more time-intensive was our BIT negotiations with the UK. That BIT, which has been in force since last July 2007, took 10 years to conclude. From the very beginning, the UK was asking for formulas that were not acceptable to Mexico. For the UK, also, this BIT marked a departure of their traditional model. Bear in mind that the Mexican model follows the NAFTA approach, and is far more elaborate. It was not easy, for example, to convince the UK on the importance of tying the fair and equitable treatment standard expressly to customary international law.

These two negotiations are very good examples of the fact that patience and hard work, at the end, render a good outcome. In both cases, the atmosphere between the negotiators was very positive and constructive, which also helps matters. Negotiators should try to encourage these conditions as much as possible.

ITN: What lessons have you learned from your treaty negotiations that you would pass on to other negotiators?

AFR: I would recommend patience, and learning how to say ‘no’ sometimes. It is better to not have a treaty then to have a bad one. Rushing should not be an option. The other advice is to learn and study as much as possible. Negotiators need to have solid technical expertise if they are going to have a strong negotiating position. I have encountered poorly prepared negotiators, and they are not in a position to struggle back against demands which may not be in their best interest, or to discuss specific wordings or approaches. In other cases, they are insecure and not ready to move forward in a constructive manner. 

ITN: There is evidence supporting the argument that FDI is an important element in a country’s overall economic development. Yet there is no conclusive evidence that bilateral investment treaties actually lead to an increase in FDI. In your opinion, what are the best arguments in favour of a country entering into BITs?

AFR: I don’t think that the evidence can even be called inconclusive. It is clear that BITs alone will not attract FDI. No matter how many BITs a country has, if it doesn’t have a good business environment, it will not attract FDI.  Far more important are features like macroeconomic conditions, the domestic regulatory framework, sound public institutions, and good infrastructure and education. This is not to say BITs do not have a function. I devoted four years of my life negotiating them and I believe they are quite positive. BITs play a supplementary role within an overall package that is conducive to attracting FDI. When I had to explain to our senators why they should ratify an investment treaty, I never said that it would attract investment per se; instead, I explained that BITs send a positive signal to investors and complement other policies. 

However, not all countries should negotiate BITs. For instance, those whose policy objectives are in contradiction with the BIT itself, or some very small countries without a strong domestic institutional infrastructure, or countries that could not  afford the cost of an eventual award. BITs are like credit cards: they are positive as long as they are in the correct hands. They may trigger liabilities, and there is nothing wrong with that, as that is part of the concept, so long as these liabilities are under control and can be administered properly. 

ITN: You commented recently on the functioning of the Most Favoured Nation (MFN) provision in an article in the Journal of International Arbitration.   What’s your take on how the MFN provision should be interpreted in BITs?

AFR: Essentially, I argue that the MFN clause, as a matter of principle, should not be used as a tool for treaty shopping. This goes for most MFN clauses, which are worded in very general terms. That is not the original intention of the clause, and in my experience as a negotiator, that is certainly not the intended effect.  Its function is to eliminate distortions in terms of competitive conditions, such as preventing differentiated treatment among two foreign investors with respect to matters like taxation, real estate, and commercial regulation, to name a few.  Apart from a few exceptions, such as pre-establishment rights and transfers, investment treaties are not concerned with competitive conditions, but rather establish legal standards of protection. Competitive conditions are established at the domestic level.  Therefore, unless clear working indicates otherwise – something I have not seen -the MFN provision should not be read as applying to clauses of third treaties.

ITN: Where do you see the legal regime governing international investment headed in the next decade? 

AFR: I don’t see a multilateral approach any time soon. There are still some countries that are not sure about the benefits of FDI, and even among those countries that are, they are not sure about the proper legal regime that should govern FDI internationally. I don’t think we are in a better scenario than when the MAI was frustrated in the late 1990’s, and we may even be in a worse scenario. So we will continue to see investment treaties signed at the bilateral level, although at a slower pace, given the fact that so many BITs have already been concluded. I also think in the future we will also see the number of arbitrations that arise out of BITs decrease.

ITN: Why do you forecast fewer investment arbitrations?

AFR: We’ve been witnessing a bubble with respect to investment treaty-based arbitrations.  For a long time, no one paid much attention to these treaties. It was only after the first cases arose, especially those of NAFTA, that lawyers and investors realized that these were legal instruments that could be operated and which could lead to pecuniary awards.  But there has been an overreaction, in my opinion.  Over time I think this overreaction will correct itself for a number of reasons. First, as patterns of interpretation emerge the limits to both the State and investors are becoming clearer. It’s now quite hard, for example, to prove an indirect expropriation case. Under the NAFTA, the same goes for the fair and equitable treatment standard. Second, there are consequences for submitting a frivolous claim. It is costly, and it may grow more expensive, as some losing investors have been condemned to pay the totality or majority of the legal fees of the arbitral proceedings. Finally, transparency would do much for the legitimacy of the system and the quality of decisions. Arbitrators must know their awards will be assessed by a circle that is growing. 

Of course, there are currently discussions and debate on issues such as the umbrella clause, MFN, and fair and equitable treatment and full protection and security outside the NAFTA. There have been, in my opinion, some quite expansive interpretations of these provisions. Personally I do not favor interpretations that impose unreasonable obligations upon States or deviate from well-recognized concepts of international law, or pro-State views that do not condemn arbitrary acts against investors. At the end, the best scenario is a balance, and if the system ever deviates too far in either direction, it may well break down. This is not in the interest of those countries which are both exporters and receivers of investments.