The use of the discounted cash flow method for calculating compensation in investment disputes

The issue of determining the amount of compensation in the settlement of investment disputes between foreign investors and the states receiving investment is caused by the sharp increase in the amounts awarded to investors based on the results of dispute resolution in the last decade, as well as the lack of predictability and consistency in the calculation methods used by arbitrators. Often, the need to pay compensation to an investor places a heavy burden on the budget of the respondent states, having a significant impact on their finances, as well as exacerbating the overall debt of developing and least developed countries. A detailed analysis of this trend in the overall inflation of arbitration awards shows that this is a multifactorial process that cannot be explained solely by global inflation, an increase in the average size of investment projects, or growing amount of damages claimed by investors. The rapid increase in the amount of compensation, in our opinion, is largely due to the use by the arbitrators of the discounted cash flow — a valuation method that estimates the value of an investment based on its expected future cash flows (as a result of the company’s activities during full implementation of the investment project). It is the most popular method among the applicants and arbitration tribunals. This trend, in turn, also encourages the applicants to make excessive demands with the help of new methods of calculating income and discount rates that are difficult for most arbitrators to comprehend. At the same time, it is noted that the methods of damage assessment applied by the arbitration tribunals in investment disputed differ from those used in other branches of international law, and the discounted cash flow method itself remains the most difficult to use, since it requires forecasting and, consequently, making numerous assumptions. The current situation has put the states in front of the need to adequately assess it and develop a response to this approach of the arbitral tribunals. The UNCITRAL Working Group III on the Investor-State Dispute Settlement Reform served as such a platform, where attempts were being made to limit the use of the discounted cash flow method by arbitrators, despite the fact that the practical implementation of these proposals remains problematic.