Defining an ICSID Investment: Why Economic Development Should be the Core Element

A dispute will only fall within the jurisdiction of the International Centre for Settlement of Investment Disputes (ICSID) if it directly arises out of an ‘investment’, as is provided by Article 25(1) of the Convention for the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).[1] However, not only does the ICSID Convention fail to provide any definition of what constitutes an ‘investment’, the drafters of the ICSID Convention, in fact, made an express decision not to include such a definition.  This absence has given rise to interesting issues of interpretation as ICSID tribunals have sought to arrive at an understanding of how the term ‘investment’ should be properly understood for the purposes of the ICSID Convention.

Various elements have been proposed in defining what is and what is not an ICSID investment. This brief essay argues that the most important element is the aim of furthering the economic development of the host state.

Intentions of states in international investment law

The regime for the international protection of foreign investment is sustained by two streams. On the one hand, foreign investors and their investments are granted international protection through International Investment Agreements (IIAs). On the other hand, the regime is informed by principles of customary international law and general principles of law that have evolved over time. Differing somewhat from the formation-process of customary international law and general principles of law, IIAs embody the express manifestation of states’ intentions.

There are, however, unspoken assumptions contained within these agreements. For example, it is clear that states enter into IIAs with the expectation that this will enhance the chances of attracting capital, and that this will, in turn, promote their economic development.

Indeed, development – generally understood as the general welfare of a people[2] – is a key goal of states, and capital is but a means of financing it. Traditionally, the development trajectories of many states have been self-financed through revenues obtained from either direct exploitation of each country’s resources or by collecting duties from those that have conducted business within their boundaries. Over time, the sources of capital have expanded to include the obtaining of credit and the provision of international aid. And more recently, countries have rightly appreciated that foreign investment could also be a significant means of financing and promoting the welfare of their peoples.

Bearing this in mind, it becomes clear that it is important to consider in the interpretation of IIAs the intention of states when entering into those agreements. In some cases, that interpretation is relatively straightforward as the IIA itself identifies the intentions of the state parties, and sets out the object and purpose of the agreement. But in other instances, the states’ intentions are not expressly stated. Where this is the case, it is suggested that the approach adopted by the arbitrators should be one of looking at all the surrounding circumstances, not only at the preamble and preparatory work, but also at the raison d’être of the states themselves and the reasons for entering into the agreement — in other words, the promotion of the welfare and development of communities within the host state.

Economic development as a goal of relevant international instruments

The International Centre for Settlement of Investment Disputes

Support for this position can be drawn from a number of international instruments. In particular, the ICSID Convention has addressed the question of the purpose of IIAs by means of textual reference to economic development in its preamble where it states: “Considering the need for international cooperation for economic development, and the role of private international investment therein.”[3]

While the report from the Executive Directors states that the primary purpose of the Convention is to stimulate international investment flows, it underlines the body’s desire to address the interests of both investors and states:

‘12. … [a]dherence to the Convention by a country would provide additional inducement and stimulate a larger flow of private international investment into its territories, which is the primary purpose of the Convention.

13. … [t]he provisions of the Convention maintain a careful balance between the interests of investors and those of host States.’[4]

There is also a clear link between ICSID and the World Bank, which has strong developmental goals in its lending practices. For example, the purpose of the International Bank for Reconstruction and Development (IBRD), one of the entities that comprise the World Bank, is, among others, to facilitate and encourage international investment for: (a) productive purposes; (b) for the development of the productive resources of countries to increase productivity, standards of living and conditions of labor.[5]

Furthermore, ICSID is, of course, part of the World Bank Group, together with the IBRD and other multilateral institutions.  As portrayed by the World Bank Group on its website, ICSID complements the overall mission of the group by helping “[p]eople help themselves and their environment by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sectors.”[6]

The level of cooperation between ICSID and the World Bank Group exceeds that of merely sharing premises. For one, there is a financial linkage, as any excess in expenditure which the Centre cannot meet shall be borne by the Bank.[7] There is also an operational linkage as the President of the Bank is also the Chairman of the Administrative Council of ICSID,[8] and has the authority, among other things, to appoint arbitrators in given circumstances.[9] More importantly, perhaps, there is also a shared cultural approach. Embedding ICSID within the World Bank framework inherently places it within a context of framing capital flows as a means to an end, rather than as the goal themselves. In particular, this contextual setting necessarily requires an emphasis on the developmental benefits of investment in-flows for recipient states.

In sum, ICSID is not just another arbitration centre. It is a unique arbitration facility with a purpose that goes beyond the resolution of disputes between investors and states. It has an institutional role designed by the parties to the ICSID Convention, but it also has a mission that needs to be consistent with the multilateral entities with which it is associated — and that purpose cannot be detached from the promotion of the economic development of host states.

International Investment Agreements

The preamble to the Energy Charter Treaty,[10] a multilateral treaty which includes provisions on the promotion and protection of investments, expressly states that the Charter’s measures to liberalize the energy sector are meant to spur economic development likened to economic growth: “Wishing to implement the basic concept of the European Energy Charter initiative which is to catalyse economic growth by means of measures to liberalize investment and trade in energy.”[11]

In contrast to the ECT, however, the majority of IIAs contain either no reference to economic development, use ambiguous language in defining their object and purpose, or limit their purpose to the promotion and protection of foreign investment, requiring those seeking to interpret them to engage in a deeper teleological interpretation.

The issue of interpretation is often further complicated in the case of investment provisions within free trade agreements. For example, Chapter 11 of the North America Free Trade Agreement (NAFTA) deals with investments but does not mention economic development.[12] For this reason, it is suggested that the purpose, objective and preambular statements of NAFTA as a whole should be applicable to the investment chapter. In particular, several statements in the Preamble indicate that the treaty’s obligations are to be considered in a broader context. This is evidenced by the state parties resolving to:

‘CONTRIBUTE to the harmonious development and expansion of world trade and provide a catalyst to broader international cooperation; …

ENSURE a predictable commercial framework for business planning and investment; …

UNDERTAKE each of the preceding in a manner consistent with environmental protection and conservation;

PRESERVE their flexibility to safeguard the public welfare;

PROMOTE sustainable development;

STRENGTHEN the development and enforcement of environmental laws and regulations; and

PROTECT, enhance and enforce basic workers’ rights’.[13]

Taken together, these statements point to an overarching approach, intended to inform the implementation of NAFTA, which has a broader focus than solely that of trade and investment promotion.

Similarly, the 2004 US Model BIT also emphasizes the implicit bargain between capital-exporting and host states, recognizing that “agreement on the treatment to be accorded such investment will stimulate the flow of private capital and the economic development of the parties” and states that signatories agree that “a stable framework for investment will maximize effective utilization of economic resources and improve living standards.”[14] The interdependence between the provision of protective treatment for investment and the stimulation of economic development has, perhaps, not been spelled out in the clearest of ways, and this lack of express linkage within the operative text of the treaty could give rise to different interpretations.  However, the fact that the preamble of the Model BIT refers specifically to economic development should be taken to indicate that the purpose of agreements following this model is to protect foreign investments so as to attract capital and foster the economic development of the state parties involved.

Other BITs also include references to the promotion of economic growth in the economies of the states parties. The BIT between Cuba and the United Kingdom, for instance, highlights the desire of the parties to create favorable conditions for foreign investment while recognizing that the agreement will “contribute to the stimulation of business initiative and will increase prosperity in both States.”[15]Another objective common to many IIAs is the enhancement of economic cooperation. For instance, the stated purpose of the Sweden-Venezuela BIT is the intensification of economic cooperation for the mutual benefit of both countries and for the creation of conditions conducive to investment.

Overall, however, the manner in which IIAs tend to define their purpose leaves significant room for interpretation contrary to the interests and unstated objectives of party states when protecting foreign investments. This is clearly unsatisfactory, but with arbitral interpretations of IIAs that accurately reflect the implicit intentions of host states, the potential negative impact on their economic development could be lessened.

Economic development as considered in the jurisprudence of arbitral tribunals

Most cases on the relevance of economic development in international investment law have dealt with it in the context of an ICSID protected investment. As the ICSID Convention does not define the term ‘investment’, tribunals have considered whether there are criteria that can be read into its provisions to determine when an investment has been made for the purposes of the ICSID Convention; this being an issue that, in principle, is very important for jurisdictional reasons.

To date, the most emblematic case has been that of Salini, which gave rise to what is now known as the ‘Salini test’. In Salini Costruttori SpA and Italstrade SpA v. Morocco,[16] the tribunal considered the criteria generally identified by the Convention’s commentators, indicating that those were: “contributions, a certain duration of performance of the contract, and a participation in the risks of the transaction.”[17] The tribunal also noted, after considering the treaty’s preamble, that “one may add the contribution to the economic development of the host State of the investment as an added condition.”[18] The tribunal went on to identify at least two of the criteria needed for an investment to contribute to the economic development of the host state: (a) the investment should be beneficial to the public interest; and (b) there should be some transfer of know-how.[19]

The Salini test has been followed by tribunals in many subsequent disputes, some in whole, some in part and some with subtle changes.[20]  Others have taken a different approach in connection with the fourth criterion. One such case of significance is Malaysian Historical Salvors Sdn Bhd v Malaysia (‘MHS’).[21] In this award, subsequently annulled by an ad hoc Annulment Committee, the sole arbitrator found that a positive and significant contribution to the economic development of the host country was a requirement for the investment to come under the protection of the ICSID Convention.  Significantly, the tribunal held that enhancing the Gross Domestic Product (GDP) of the local economy was the factor that determined the criterion of economic development.[22] The tribunal then qualified this, and stated that the enhancement of GDP would have to be by more than a small amount in order for the investment to be protected by the ICSID Convention.

In an earlier case, Ceskoslovenska obchodni banka, a.s. v Slovak Republic (CSOB),[23] it was also concluded that the investment had to have a positive impact on the host state’s development. The tribunal considered that the ICSID Convention’s preamble “permits an inference that an international transaction which contributes to cooperation designed to promote the economic development of a Contracting State may be deemed to be an investment as that term is understood in the Convention.”[24]

Thus, if one combines the criteria for determining a contribution to economic development as applied by the ICSID Tribunals in Salini, MHS and CSOB, it can be concluded that the investment must: (a) be made for the public interest; (b) transfer know-how; (c) enhance the GDP of the host state; and (d) have a positive impact on the host state’s development.

In direct contrast, other tribunals considering the term ‘investment’ within the meaning of the ICSID Convention have taken a markedly different approach to the element of a contribution to economic development.  Most significantly, the majority of these cases have one element in common — they have rejected or downplayed the criterion of economic development due to the perceived difficulty or impossibility of ascertaining its scope.

At one end of the spectrum, the ad hoc Annulment Committee in Patrick Mitchell v. Democratic Republic of Congo watered down the importance of the criterion, stating that:

‘[t]he 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 and also variable depending on the case.’[25]

A more explicit dismissal of the criterion can be found in L.E.S.I. S.p.A. et ASTALDI S.p.A. v. Algeria.  In this award, the tribunal took the view that it did not seem necessary that the investment contribute to the economic development of the country; this was a condition that the tribunal considered to be difficult to establish, and one that was implicitly covered by the other three elements of an ‘investment.’[26]

Other tribunals have looked at the purpose of IIAs, not so much to constrain explorations into the definition of economic development, but to consider the goal of protecting the interests of the investors. For example, in Siemens, A.G. v. Argentina,[27] the tribunal analysed the purpose of the Germany-Argentina BIT to find that the agreement was meant to promote investment and create conditions favorable to investors. The tribunal ruled that the BIT should be interpreted in this way, stating that: “The Tribunal shall be guided by the purpose of the Treaty as expressed in its title and preamble.  It is a Treaty ‘to protect’ and ‘to promote’ investments … The intention of the parties is clear.  It is to create favorable conditions for investments and to stimulate private initiative.”[28]

Where investor-state disputes are determined in fora other than ICSID, the so-called economic development defence to object to the jurisdiction of a tribunal is probably not possible, unless the relevant IIA has made references to economic development as the reason for the parties to grant international protection to foreign investments.  But in such a hypothetical situation, tribunals would most likely consider the defence on the merits.  For now, it seems that cases under ICSID will dominate the discussion on the analysis of economic development as an outer limit of a protected investment.

Economic development: A measurable concept

The divergence of opinion on the extent to which contribution to economic development is determinative of an investment’s entitlement to protection under IIAs seems to stem from the difficulties associated with how to define and measure economic development and in ascertaining what constitutes relevant contributions towards it. However, rather than failing to give effect to this important criterion by placing it in the ‘too hard basket,’ as several tribunals appear to have done, further intellectual engagement with the concept is, in fact, what is required.

In particular, it is suggested that future tribunals should seek to provide a comprehensive analysis of questions such as: (i) how economic development should be defined within the context of IIAs; (ii) what amounts to a contribution to economic development; (iii) how a positive contribution to economic development can be measured; and (iv) whether any ‘negative’ factors related to the investment or conduct of the investor (such as breaches of human rights, corruption or harm to the environment) are relevant.

Economic development is certainly a concept that can be very broad and can, potentially, encompass many disparate elements. However, through a review of the relevant documents and cases, several factors have emerged that point to certain non–exclusive criteria for determining when an investment has made a contribution to the economic development of the host country.  The jurisprudence indicates that an assessment will be made of the following: (a) the extent to which the investment benefits the public interest; (b) whether any transfer of technological knowledge or ‘know-how’ from investor to the host state has taken place; (c) the degree to which the investment has enhanced the GDP of the host country; and (d) whether the investment has had a positive impact on the host state’s development. A hermeneutic analysis of the ICSID Convention and the World Bank’s constitutive instruments also reinforces this approach, emphasising that investments are to be made for: (a) productive purposes as opposed to speculative purposes; and (b) for the development of the resources of countries so as to increase productivity, standards of living and conditions of labor.

The wording of World Bank documents should also be of assistance in delineating what is meant by ‘economic development’ in the context of IIAs, and in particular the 1992 Guidelines for Treatment of Foreign Investors. Although, not a binding document, it does provide a set of recommendations intended to be incorporated into states’ domestic regulations on the treatment of foreign investment. In its preamble, it states that it is recognized that: ‘[a] greater flow of foreign direct investment brings substantial benefits to … the economies of developing countries … through greater competition, transfer of capital, technology and managerial skills and enhancement of market access and in terms of the expansion of international trade’.[29] This statement provides a useful indication of factors to take into account when assessing the extent to which an investment has contributed to or encouraged the creation of such conditions within the host state.

There are, of course, already very specific tools that can be utilised to assess contributions to the local economy.  For example, the impact of the investment on the host state’s GDP is one indicator that can be easily measured by comparing the value of the goods or services produced by the transaction with reliable data on the overall value of goods and services produced in the given country in a given period of time (as may be provided by, e.g., the World Bank).  It must be borne in mind, however, that economic growth is distinct from economic development. Focusing solely on the positive impact of an investment on GDP cannot in itself be conclusive in determining whether an investment has contributed to the economic development of a country. It is, of course, a prima facie indicator of positive contribution. However, an investment might enhance the GDP and yet be detrimental to the economic development of a country as when, for example, human rights standards are violated. It is to take account of such circumstances that a more sophisticated approach needs to be developed to the relationship between contribution to economic development and availability of protection under the treaty — one in which the contribution is assessed per se and then, if it suffices on this prima facie basis, is examined for any negative factors that may cancel out its apparent positive impact on the economic development of the host state. If, upon analyzing the facts, it is concluded that the investment has not contributed to the economic development of the host state, it should also follow that the investment falls outside the limits of the protection granted by ICSID.


Although this is still very much a contentious area of international investment law, it is clear that several factors need to be satisfied under the test of whether an ‘investment’ has contributed to the economic development of the host state. If an investment is contrary to the public interest, has not generated any knowledge transfer to the host state, has not enhanced the economy or its productivity, has not increased the standards of living of the host country or the labor conditions, it almost certainly has not made a contribution to the economic development of that country.

Arbitrators and judges have an important task on defining the economic development of foreign investment and its relevance. Of course, they cannot go beyond the purpose of the agreements as mentioned in the texts, the preambles and the travaux preparatoire — that is to the point where negotiators have left the IIAs. Hence, negotiators of IIAs need to be more diligent and understand how important it is to expressly state the real purpose that their countries have entered into IIAs. An expressed purpose that neglects to indicate that foreign investments are protected because they are a means to economic development will only allow arbitrators to see IIAs as a means to protect foreign investments.

Author: Omar García-Bolívar is an international lawyer, public policy consultant and arbitrator. He is President of BG Consulting inWashington,D.C., specializing in law and development consultancy.

This essay is based on a longer article entitled “Economic Development at the Core of the International Investment Regime”, published in Evolution in Investment Treaty Law and Arbitration, Cambridge University Press (2011)

[1] Convention for the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966) (‘ICSID Convention’).

[2] See, e.g., Amartya Sen, Development as Freedom (1999) xii: ‘Development consists of the removal of various types of unfreedoms that leave people with little choice and little opportunity of exercising their reasoned agency.  The removal of substantial unfreedoms, it is argued here, is constitutive of development.’

[3] The full text of the ICSID Convention, Regulations and Rules are available on the World Bank website: <> (last accessed 5 November 2010).

[4] Report of the Executive Directors of the International Bank for Reconstruction and Development on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, available at <> (last accessed 5 November 2010).

[5] IBRD Articles of Agreement, Article I, available at,,contentMDK:20049563~pagePK:43912~menuPK:58863~piPK:36602,00.html#I1 (last accessed on December 6, 2010).

[6] See the website of the World Bank at: <,,pagePK:50004410~piPK:36602~theSitePK:29708,00.html> (last accessed 5 November 2010).

[7]  ICSID Convention, Article 17.

[8] Ibid. Art 5.

[9] Ibid, Art 38.

[10] Energy Charter Treaty, opened for signature 17 December 1994, (1995) 34 ILM 360 (entered into force 16 April 1998) (‘ECT’).

[11] Ibid. preamble.  Article 2 of the ECT reinforces the economic development objective by referring to the Charter’s general objectives, stating, ‘This Treaty establishes a legal framework in order to promote long-term cooperation in the energy field, based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter.’

[12] North American Free Trade Agreement, signed 17 December 1992, United States-Canada-Mexico, 32 ILM 289 (entered into force 1 January 1994) (‘NAFTA’), available at <> (last accessed 5 November 2010).

[13] Ibid. preamble.

[14] Treaty Between the Government of The United States Of America And The Government Of [Country] Concerning The Encouragement And Reciprocal Protection Of Investment (U.S. BIT Model (2004)), <> (last accessed 5 November 2010).

[15] Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Cuba for the Promotion and Protection of Investments, signed on 30 January 1995 (entered into force 11 May 1995), available at <> (last accessed 5 November 2010).

[16]  Salini Costruttori SpA and Italstrade SpA v. Morocco (ICSID Case No ARB/00/4, Decision on Jurisdiction of 23 July 2001).

[17] Ibid. para 52.

[18] Ibid.  See also Christoph Schreuer et al, The ICSID Convention: A Commentary (Cambridge University Press, 2nd ed, 2009), Article 25, paras. 153-174.

[19] The Tribunal said: ‘It cannot be seriously contested that the highway shall serve the public interest.  Finally, the Italian companies were also able to provide the host State of the investment with know-how…’: ibid. para 57.

[20] E.g., Joy Mining Machinery Limited v. Egypt (ICSID Case No. ARB/03/11, Decision on Jurisdiction of 23 July 2001), para 53; Jan de Nul N.V. v. Egypt (ICSID Case No. ARB/04/13, Decision on Jurisdiction of 16 June 2006), para 91; Helnan International Hotels A/S v. Egypt (ICSID Case No. ARB/05/19, Decision on Jurisdiction of 17 October 2006), para 77; Malaysian Historical Salvors Sdn Bhd v. Malaysia (ICSID Case No. ARB/05/10, Award on Jurisdiction of 17 May 2007), paras 73-74.

[21] Malaysian Historical Salvors Sdn Bhd v. Malaysia (ICSID Case No. ARB/05/10, Award on Jurisdiction of 17 May 2007).

[22] Ibid. para 123.

[23] Ceskoslovenska obchodni banka, a.s. v Slovak Republic (ICSID Case No. ARB/97/4, Decision on Jurisdiction of 24 May 1999).

[24] Ibid. para. 64.

[25] Patrick Mitchell v. Democratic Republic of Congo (ICSID Case No. ARB/99/7, Decision on Annulment of 1 November 2006), para 33.

[26] L.E.S.I. S.p.A. et ASTALDI S.p.A. v. Algeria (ICSID Case No. ARB/05/3, Decision of 12 July 2006) para 73(iv).

[27] Siemens, A.G. v. Argentina (ICSID Case No ARB/02/8, Decision on Jurisdiction of 3 August 2004).

[28] Ibid. para 81.

[29] Guidelines on Treatment of Foreign Investments, World Bank (1992), available at <> (last visited 5 November 2010).