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International Rules on FDI

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1 International Rules on FDI
Workshop on economic and legal aspects of International Investment Agreements Kampala, Uganda 10-14 November 2008 International Rules on FDI Thomas Westcott Legal Advisor UNCTAD

2 Topics for discussion I. International framework on investment
II. Trends in IIAs 2

3 I. The international framework on investment
Now we come to the structures, and institutions and laws that facilitate and govern these global flows of capital. Legal framework. Governance of investment flows.

4 Interface between national and international FDI policies
20 years ago or more, many countries had reservations about FDI and excluded or restricted FDI inflow Today, every single country seeks to attract FDI Unilateral efforts in FDI liberalization and promotion are complemented by efforts at 3 levels: bilateral - eg. BITs, FTAs regional – eg. COMESA multilateral – eg. GATS, TRIMs IIAs have different purposes or objectives: investment protection Investment promotion Investment liberalisation. First thing – to make sure everyone understands what I mean by IIAs …. BITs + FTA investment provisions. 6

5 Network of international investment rules
National laws and regulations, investment codes State contracts, investment agreements, stabilization agreements Bilateral investment treaties (BITs) for the promotion and protection of investment Double taxation treaties (DTTs) Preferential trade and investment agreements Regional (COMESA, OECD, APEC) and sectoral agreements (Energy Charter Treaty) Multilateral disciplines and specific agreements (WTO GATS, TRIMs, TRIPs; ICSID, NY Convention, MIGA) Hierarchy of norms Focus today is on 2 of these: BITs and investment provisions in preferential trade agreements (such as FTAs) – together they are IIAs.

6 Investment contracts are not IIAs
State contracts and investment agreements between individual investors and the host State set rules, rights and obligations for both parties These investment agreements are not treaties! (i.e. BITs) Focus is on a specific investment project e.g. concession

7 Recent trends in IIAs - highlights
Rapid proliferation at all levels International investment rules are increasingly being formulated as part of agreements that encompass a broader range of issues (FTAs) Investment provisions in the new agreements tend to be increasingly sophisticated and complex in content South-South cooperation on international investment policy is intensifying Increasing activity in international investment treaty-making has been paralleled by a rise in investor-State disputes. What’s happening in the area of international investment law and international investment treaties?? Why do we see it as so important? Why is UNCTAD devoting time and resources to studying it and assisting developing countries in this area? Well, first a few points which I’ll elaborate on through this presentation. […from slide] Some highlights…

8 The international investment legal framework: role and objectives
International investment agreements (IIAs): Contribute to the creation of a stable, predictable and transparent regulatory framework for international investment Facilitate the coordination of investment relations (relations between host States, home States, international investors and other development stakeholders) through internationally agreed common denominators Complement national laws on investment (interface between national and international investment policies) Impact of IIAs on FDI flows? Diverging views Re point 1: IIAs strengthen the enabling framework for FDI (promotion, protection, liberalization)

9 Objectives of the legal Standards of treatment
investment framework Standards of treatment & protection Restrictions - Entry and establishment - Ownership and control - Operational restrictions - Authorization and reporting Etc.. Transparency Treatment (NT, MFN) Expropriation & compensation Transfer of funds Dispute settlement Etc. REDUCING BUILDING These objectives can be achieved through: National policies Investment contracts/State contracts International investment agreements (IIAs)

10 Regional establishment agreements
The international framework for investment IIAs have several possible objectives: Promotion BITs Regional establishment agreements Protection Liberalization US-CAN-JAP BITS FTAS NAFTA

11 Many IIAs cover more or less the same issues differs substantially
Scope and definition of foreign investment Admission of investment or pre-establishment NT and MFN Treatment of investment, i.e. national treatment, MFN FET Guarantees and compensation in respect of expropriation Transfer of funds and repatriation of capital and profits Dispute settlement, both State-State and investor-State Now I’ll introduce to you some of the issues covered by IIAs. Scope and definitions. Admission of investment – does the treaty apply only once an investment has been made? Or does the treaty also provide rights to investors that extends to before the investment has been made…that is, in the establishment of the investment. …but the concrete way in which they are addressed differs substantially 12

12 II. Global trends in IIAs
Recent trends in international investment rule-making

13 The spaghetti bowl of IIAs
The universe of international investment rules is growing by the day. On average, about three treaties were signed per week in 2006. The proliferation in the international agreements has resulted in an increasingly complicated framework of multi-layered and multi-faceted investment rules. Altogether, there are over 5,500 such international investment agreements (IIAs). Implications: Coherence concerns Complexity Implementation challenges How to address the issue

14 A. Bilateral Investment Treaties

15 What are bilateral investment treaties (BITs) ?
Bilateral reciprocal agreements (between two States) aimed at protecting and promoting foreign investment through legally-binding rights and obligations. Let me start by breifly explaining what are bilateral investment treaties (BITs), and what are their main provisions. Bilateral investment treaties (BITs) are one of the policy tools used by countries in their efforts to attract foreign direct investment (FDI). By signing these treaties – which provide protection for investment under international law – signatory countries send a signal of their commitment to providing a stable, transparent and predictable investment climate. I will now quickly go through the main provisions of bilateral investment treaties one by one.

16 Why do countries sign BITs?
For host countries (traditionally developing) To improve their investment climate and to attract foreign investors To portray a positive international image of ‘openness’ For home countries (traditionally developed) To protect their investments abroad Some countries are both capital importing and exporting (both home and host) - twin objectives: investment attraction and investment protection. From the prespective of developing countries, BITs are beleived to improve the domestic investment climate through the legal predictability and transparency these treaties entail. Developing countries need and want the capital that investment brings, concluding BITs provide for an important positive signal to attract foreign investors. Developed countries, who are also the capital exporting countries, conclude BITs to open international markets to their investors and to provide for their favourable treatment and for their protection under international law. Some countries are both capital importing and capital exporting (for example: China, India, Singapore), for these countries, BITs have two objectives: to attract investments, but also to protect their investments abroad. It is important to realize that BITs are agreements with substantive obligations and commitments on the parties. They are not friendship agreements or cooperation agreements. Countries should therfore sign these agreements based on the expectation of real economic benefits, and not for political reasons.

17 The network of BITs continues to grow rapidly, there are now over 2500 BITs
In 2006, 73 BITs were concluded – taking the total to 2,573 In 2007, a further 50 BITs were concluded. Note that the number of BITs concluded per year has been steadily declining.

18 BITs concluded by country group, end 2007
In terms of country group participation, 40 per cent of the BITs concluded as of the end of 2005 were between developing and developed countries, 10 per cent were concluded between developing and transition economies 25 per cent were concluded among developing countries That is, in total, developing countries were involved in 75 per cent of all BITs. Developed countries were part to 21 per cent.

19 The top ten signatories of BITs, end 2007
Developed countries seeking to protect their investments abroad continue to be the largest concluders of BITs. Seven of the top 10 countries with the most BITs signed are developed countries. However, China is the country with the second highest number of BITs concluded, and Egypt ranks 6th.

20 BITs signed by 11 African countries
Botswana 9 Cameroon 14 Central African Republic 4 Ethiopia 22 Kenya 6 Lesotho 3 Mauritius 34 Rwanda 3 Sudan 26 Tanzania 11 Uganda 15 Intra-region BITs: Botswana – Mauritius 2005 Cameroon – Mauritius 2001 Ethiopia – Sudan 2000 Rwanda – Mauritius 2001

21 Trend towards renegotiating BITs
109 BITs have been renegotiated 13 renegotiated in 2006 Albania and Romania renegotiated two BITs each in 2006. There is a trend towards renegotiation of BITs. 21

22 A new generation of BITs since 2004: innovations
A new generation of BITs follows the trend set by some of the recent FTAs These contain four main innovations: A comprehensive, but finite definition of ‘investment’ (such as in the Canadian model). Revisions to the wording of various substantive provisions. A broader set of issues is addressed, including health, the environment, safety and labour rights. Innovations regarding investor-State dispute settlement procedures.

23 B. Free Trade Agreements

24 Economic integration agreements (EIAs) with investment provisions (eg FTAs)
International investment rules are increasingly being included in agreements that cover a broader range of issues including: trade, services, competition, intellectual property Free trade agreements, economic partnerhsip agreements, regional integration agreements,or economic cooperation agreements… Coverage of investment varies. - in today’s group activity we will explore this further! Another tool to attract and protect investments are free trade agreements, the new FTAs – that is those negotiated in the last years - increasingly encompass investment provisions and are therefore counted as investment instruments. They cover not only trade and investment but also services, IPRs and other disciplines. The most active countries in the negotiation of these comprehensive FTAs are the U.S., Japan, Chile, Singapore and Australia. The scope of these agreements varies substantially from comprehensive FTAs with substantive provisions on investment liberalization and protection to framework agreements that only establish a framework for cooperation between the parties and set up an institutional framework to follow up on investment issues. EU treaties are limited in the investment protection provisions they can include by the rules of the EU.

25 Over 250 EIAs with investment provisions by end 2007
By the end of 2007, at least 250 such economic agreements with investment provisions had been concluded.

26 EIAs with investment provisions by country group, end 2007
Another interesting trend is that more and more investment agreements are being concluded between developing countries (36% of the total).

27 Recent FTAs with investment chapters
Free Trade Agreement between the United States of America and Peru Free Trade Agreement between Singapore and Panama Association Agreement between the European Community and Albania Free Trade Agreement between Turkey and Morocco Free Trade Agreement between the Hashemite Kingdom Jordan and the Republic of Singapore Economic Partnership Agreement between Japan and Philippines Economic Partnership Agreement between Japan and Chile Economic Partnership Agreement between Japan and Thailand

28 South-South cooperation: developing countries active in IIAs
Many developing countries are active participants in negotiating IIAs BITs between developing countries leaped from 47 in 1990 to over 650 by the end of 2006 Over 90 EIAs among developing countries had been signed by end of 2006. 3rd Salient feature: The recent increase in developing countries BITs and PTIAs reflects a greater emphasis in recent development strategies on South-South cooperation on investment, as well as an increase in the quantity of outward foreign direct investment flows from developing countries. Many developing countries are active participants in the process of concluding IIAs. For example, China has concluded 117 BITs and is the world’s second highest signatory after Germany. Further, a clear trend toward increased South-South cooperation is evident. For example, in 2004, the largest number of BITs signed was between developing countries. Within South-South BITs, China, Egypt, the Republic of Korea, and Malaysia have each signed more than 40 BITs with other developing countries. In fact, each of these four countries has signed more agreements with other developing countries than with developed countries. The trend toward greater South-South cooperation in investment matters is also evident in the conclusion of PTIAs. By end 2005, at least 80 PTIAs among developing countries had been signed.

29 South-South cooperation through IIAs is intensifying
This reflects in part their desire to attract foreign investment, but also their emerging status as sources of outward investment. In parallel to the marked increase in developing-country BITs and DTTs, outward FDI from developing countries is rising (from about $129 billion outward FDI stock in 1990 to nearly $950 billion in 2005).

30 Interregional agreements
The EU is negotiationing Economic Promotion Agreements (EPA) with all of the Africa Caribbean Pacific (ACP) regions. EU-CARIFORUM EPA was signed in October 2008 It contains a chapter on commercial presence (investment) ESA-EU EPA interim agreement SADC-EU EPA interim agreement Interregional agreements – between 2 regions. EU on one hand. ACP regionsn on the other.

31 African regional agreements – no investment protection provisions
Common Market for Eastern and Southern Africa (COMESA), (1993) contains framework provisions on investment promotion, with some general principles on investment protection. The Treaty establishing the African Economic Community (AEC) (1991) contains provisions under which the parties agree to ensure the free movement of capital within the Community trough the elimination of restrictions on capital transfers. Treaty for the Establishment of the East African Community (EAC) (1999) contains commitments by which States parties agreed to adopt measures to achieve the free movement of persons and services. The South African Development Community (SADC, 1992), aims at the progressive establishment of free movement of goods, services, capital and persons. Plurilateral or regional agreements.

32 Plurilateral agreements: Investment Agreement for the COMESA Common Investment Area
CCIA signed in 2007 Not yet fully implemented? Contains provisions that depart from standard provisions in BITs Includes detailed language on some issues in light of recent arbitral decisions Aims to find balance between the rights of investors and the state’s right to regulate. One of these now has substantive investment provisions…the CCIA. 32 32

33 Investment in the multilateral context
Historical overview: Havana Charter, World Bank Guidelines, UN Code of Conduct, OECD MAI Investment in the WTO: a missed opportunity? Investment-specific agreements: dispute settlement (ICSID, NY Convention,..), insurance (MIGA) Limited membership: OECD rules, APEC Limited scope: Energy Charter Treaty, GATS, TRIMS, TRIPs. Efforts failled to conclude a multilateral agreement on investment. Several attempts: 1948 Havana Charter failed – GATT was born WB Guidelines 1992 and UN code of coduct for TNC: non-binding instruments OECD multilateral invetsment agreement: again a failure 1996: WTO conference in Singapore. Investment on the table of the negotiations. Creation of the WG on trade and investment Doha mandate: pursuit of the discussions July 2004: General Council: WTO members decided to drop investment from the negotiation agenda APEc and OECD non-binding There are however agreements that deal directly or indirectly with investment issues. The most important is the WTO GATS agreement that covers commercial presence (wich is investment). 33 33

34 The increase in IIAs has been paralleled by an increase in investor-State disputes
250 known claims by end 2006 (cumulative number of treaty-based cases) Awards given in these proceedings have helped to clarify the meaning and content of individual treaty provisions, some contradictory decisions have also created uncertainty.

35 Known investment treaty arbitrations
(cumulative and newly instituted cases, )

36 Thank you.

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