Imagine a state-owned energy company building a wind farm abroad. The project relies on permits and long-term regulatory commitments, but the host State later withdraws the permits or terminates the subsidies. A private company could initiate investment treaty proceedings in such circumstances. But can a state-owned enterprise do the same, or does the dispute in reality become a conflict between two States?
The question is of considerable practical significance. State-owned enterprises are major actors in energy, infrastructure, finance and technology investments, meaning that their legal status affects both project risk and bankability. For host States, the legal consequences of their measures are at stake, while for private market participants, the issue is one of competitive neutrality.
The central argument of this article is that state ownership, in itself, neither establishes nor excludes the possibility of bringing an investment treaty claim. The decisive factors are the wording of the applicable treaty, the actual relationship between the enterprise and the State, and whether the company acted in a commercial or governmental capacity.
1. The Treaty Text Comes First
When determining whether a state-owned enterprise may initiate proceedings, the first step is to examine the definition of investor contained in the applicable investment treaty or free trade agreement.
Some treaties expressly qualify state-owned or state-controlled enterprises as investors and may, in certain cases, also include government agencies, development funds or States themselves. This approach is adopted, for example, by the United States–Korea Free Trade Agreement, the China–Mexico Bilateral Investment Treaty, the ASEAN–Korea Agreement and the Trilateral Investment Agreement between Japan, Korea and China.
Other treaties refer only generally to “legal persons”, while some agreements may expressly exclude state-owned enterprises. There is therefore no uniform answer applicable to every treaty: investor status must always be derived from the particular agreement in question.
Where the treaty is silent on state-owned enterprises, Article 31 of the Vienna Convention requires the treaty to be interpreted in good faith in accordance with the ordinary meaning of its terms, in their context and in light of the treaty’s object and purpose. If the enterprise satisfies the general requirements and is not expressly excluded, this may constitute a strong argument in favour of investor status. The treaty must nevertheless be considered as a whole, including its preamble, substantive protection provisions and dispute settlement clauses.
One of the purposes of investment treaties is to separate investment disputes from inter-State diplomatic conflicts. If, however, the claimant acts as an instrument through which another State exercises governmental authority, the dispute may, in substance, become an inter-State conflict. The differences between treaty formulations must therefore be given genuine legal significance.
2. Ownership and Control
A company may be wholly state-owned while nevertheless making its business decisions independently. Conversely, a State may exercise effective control despite holding only a minority shareholding, for example through special voting rights, appointment powers or management rights.
Under the rules of State responsibility, the threshold for establishing control is high, meaning that the mere existence of an ownership relationship will generally be insufficient. In White Industries v. India, the arbitral tribunal similarly emphasised that the standard for establishing State direction or control is particularly stringent.
The classification of an entity as a “state-owned enterprise” therefore does not, in itself, reveal how independent the company is, who determines its strategy or in whose interests it carries out the investment. The analysis must extend beyond the ownership structure to the enterprise’s actual decision-making and the particular transaction at issue.
3. Commercial Investment or Governmental Function?
The central question is whether the enterprise acted in a commercial or governmental capacity. A state-owned bank, energy company or infrastructure enterprise may pursue profit, compete in the market and assume economic risks in the same way as a private company. In such circumstances, State ownership alone does not justify excluding the enterprise from investment protection.
The situation is different where the company acts pursuant to governmental instructions, implements State policy or exercises governmental authority. According to Aron Broches, one of the principal architects of the ICSID Convention, a state-owned enterprise may, as a general rule, participate in ICSID proceedings unless it acts as an agent of the State or performs an essentially governmental function.
Factors indicating commercial activity may include independent management, an investment decision based on expected market returns, contracts concluded under competitive conditions, self-financing, separate accounting and independent assumption of risk. Indicators of governmental character may include direct governmental instructions, the decisive involvement of State officials, the implementation of public-policy objectives, the performance of regulatory or public-service functions, sectoral regulatory authority, a statutory monopoly, or profits guaranteed and losses absorbed by the State.
It may also be significant if the enterprise invokes State immunity before a foreign court while presenting itself as a private investor before an arbitral tribunal. No single factor is necessarily decisive: the same enterprise may act commercially in one transaction and in a governmental capacity in another.
4. Attribution to the State as a Supplementary Criterion
The rules of State responsibility may provide guidance in distinguishing commercial conduct from governmental conduct. Under Article 5 of the International Law Commission’s Articles on State Responsibility, the conduct of an entity may be attributed to the State where the entity is empowered to exercise elements of governmental authority and acts in that capacity in the particular instance. Under Article 8, conduct is attributable to the State where the entity acts on the instructions of, or under the direction or control of, the State.
These considerations closely resemble the Broches test, although attribution and investor status are not identical legal questions. There is an ongoing debate in legal scholarship as to whether the rules of attribution can be directly applied in determining investor status. Some authors regard them as providing an appropriate framework for distinguishing governmental from commercial activity, while others argue that they cannot override the definition of investor contained in the applicable treaty.
The most persuasive approach is therefore to treat the treaty text as primary, while using the rules of State responsibility as a supplementary tool for examining the actual relationship between the enterprise and the State.
Arbitral practice also reflects this fact-specific approach. In Československá obchodní banka v. Slovakia, the state-owned bank had for a long period carried out State-supported international banking and foreign trade operations and, in certain circumstances, fulfilled expectations imposed upon it by the State. The case demonstrates that the activities of a state-owned enterprise may simultaneously display economic and public-policy characteristics, making the nature of the particular investment decisive.
5. The Definition of Investor and State Immunity
Where a treaty expressly qualifies the State or a State-controlled company as an investor, this provides a strong argument that links to the State should not, by themselves, exclude the possibility of bringing a claim.
The situation is less straightforward where a treaty refers only to “state-owned” companies, since ownership does not necessarily amount to effective control. Where the treaty merely refers to legal persons, the claimant may rely on its formal compliance with the treaty wording and the absence of an express exclusion, while the host State may argue that the system should not serve as a forum for compensation claims brought by an instrument through which another State exercises governmental authority.
State immunity creates an additional difficulty. International law distinguishes between sovereign and commercial acts. State entities may enjoy immunity where they exercise governmental authority. The United Nations Convention on Jurisdictional Immunities of States and Their Property includes within the concept of the State entities that are entitled to exercise governmental authority and actually act in that capacity. It is worth recalling that the Convention has not yet entered into force, although it nevertheless provides an important illustration of how the concept of the State may be defined.
Immunity does not necessarily determine investor status, but it may provide a strong indication of the governmental character of the activity concerned. The question must nevertheless be resolved in each case on the basis of the applicable treaty.
6. What Makes the ICSID Convention Special?
The ICSID Convention is an international treaty that established the International Centre for Settlement of Investment Disputes and provides a framework for the peaceful settlement of disputes between foreign investors and States, thereby laying the foundations for independent investment arbitration.
Article 25 of the ICSID Convention applies to legal disputes between a Contracting State and a national or juridical person of another Contracting State. The system is therefore designed for investor–State, rather than State–State, dispute settlement.
The Convention was designed in large part to encourage international private investment, and its drafters deliberately excluded claims brought by States against one another. They even rejected a proposal that would have allowed a State, by way of subrogation, to step into the shoes of an investor.
This does not exclude state-owned enterprises from the ICSID system. According to Broches, the private or public origin of capital is no longer, in itself, an appropriate criterion for distinguishing private from public investment. A state-owned enterprise may also make a genuinely market-based investment. It is nevertheless necessary to examine whether the company acted as an investor or as a representative of its home State. If the latter is established, the dispute may, in substance, become an inter-State dispute falling outside the scope of the Convention.
According to Feldman, whenever a claim brought by a state-owned enterprise appears governmental in nature, the true character of the conflict should be examined, with the rules of attribution providing supplementary guidance. This does not override Article 25, but rather fills a gap left by the provision in relation to an issue it does not expressly regulate. Arbitral tribunals have also relied on general principles of international law in other cases to fill gaps in treaties, as illustrated by National Grid v. Argentina.
7. Economic Policy and Practical Implications
Many foreign investments made by state-owned enterprises are commercial in nature. A state-owned company may assume long-term obligations, financial risks and regulatory uncertainty in the same way as a private company, and it should therefore not be deprived of investment protection solely because of its ownership structure.
The difficulty arises where the enterprise operates as an instrument for implementing State strategy, since this could allow a State, through its own entity, to initiate proceedings that it could not bring directly.
State-owned enterprises mobilise significant amounts of capital and may also play a key role in the green transition. Their complete exclusion would increase legal uncertainty and financing costs. At the same time, concerns may arise where an enterprise benefiting from State support or special advantages invokes the same protections as a private investor risking its own capital. Arbitral tribunals must therefore proceed on the basis of the treaty and the specific facts of the case.
State-owned enterprises would be well advised to document the commercial rationale for their investments, the independence of their decision-making, the separation between governmental and corporate roles, their own financing arrangements and their market-return calculations. Host States, in turn, should examine who initiated and financed the project, what role the home State played, whether the enterprise exercised governmental functions and whether it invoked immunity in other proceedings.
A predictable approach is also important from the perspective of competitive neutrality: automatic exclusion may create an unjustified disadvantage, while unrestricted inclusion may create an unjustified advantage.
Conclusion
There is no single answer applicable to every investment treaty claim brought by a state-owned enterprise. State ownership does not automatically turn a company into an organ of the State, but separate legal personality does not necessarily prove independence either.
1. What Does the Applicable Treaty Say?
It must be determined whether the definition of investor extends to state-owned or State-controlled enterprises, or even to States themselves.
2. In What Capacity Did the Enterprise Act?
Market-based and independently conducted investments are more closely aligned with the objectives of investment protection, whereas activities undertaken pursuant to governmental instructions or as part of the exercise of governmental authority may cast doubt on investor status.
3. Does the Dispute in Reality Become an Inter-State Conflict?
This is particularly significant under the ICSID Convention, which does not extend to disputes between States.
The principal conclusion is that it is not the identity of the owner alone, but rather the wording of the treaty, the actual degree of State influence and the nature of the particular investment that determine whether a state-owned enterprise may act as an investor.
The author of this article is Igor Márk Beznoszka.
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This document has been prepared by Gránit Alapkezelő Zrt. (registered office: 1134 Budapest, Váci út 17; company registration number: 01-10-046307) for marketing and informational purposes. Accordingly, it has not been produced in accordance with legal requirements designed to promote the independence of investment research. Nor is it subject to any prohibition on dealing ahead of the dissemination of investment research. This document does not constitute investment research or investment advice. Any data presented refers to past performance, and past performance is not a reliable indicator of future results. Each investor must make investment decisions at their own discretion and responsibility.
