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THIRD WORLD ECONOMICS

“Investment facilitation” could intrude on policy space, cautions paper

Measures taken to promote “investment facilitation”, a subject of discussion in various national and international fora, should not impinge on states’ regulatory and policymaking flexibility, says a new paper published by a developing-country think-tank.

by Kanaga Raja

GENEVA: Regulations related to investment comprise a very broad category of measures that are closely intertwined with the development levels of a country as well as the sector concerned, and addressing such a broad category of regulations through rules that are designed at the multilateral level to fit various countries and sectors under a “one-size-fits-all” approach would be intrusive on regulatory space.

This is one of the main conclusions highlighted in a policy brief published by the South Centre in March titled “Reflections on the Discussion of Investment Facilitation”. The paper was written by Kinda Mohamadieh, Senior Researcher with the Centre’s Global Governance for Development Programme.

According to the policy brief, while “investment facilitation” requires progress towards better linkages between investment flows and development and industrialization objectives, the answer does not lie in hard rules that establish additional pressures on policy and regulatory space.

Dialogue and exchange at the multilateral level, with the aim of clarifying the concept of investment facilitation and enhancing exchange of experiences among countries, could feed more effectively into national processes and, where appropriate, regional-level processes, in order to boost institutional and policymaking frameworks.

“Consequently, it is not advisable to proceed towards a rule-making process on ‘investment facilitation’, such as at the World Trade Organization,” said the South Centre paper.

Meanwhile multilateral discussions on investment facilitation in other fora ought to preserve a flexible approach that guards the ability of countries to adapt proposed actions in accordance with national development frameworks and needs.

Broad concept

According to the policy brief, the concept of investment facilitation is broad and could cover a variety of approaches and suggestions made by countries and multilateral institutions. Conceptually, it covers a broad set of regulatory actions, institutional roles and administrative procedures that are usually closely interlinked with policies and regulations that shape national developmental processes.

As proposed in different fora, the investment facilitation concept covers principles of “predictability and consistency”, “transparency” of processes and engagement with stakeholders, including establishing a mechanism to provide “interested parties” with an opportunity to comment on proposed new laws, regulations and policies or changes to existing ones prior to their implementation.

“Emphasizing ‘predictability’ in the regulatory environment without recognizing the need for differentiated approaches in the regulatory processes among countries and the dynamism that may be required in the regulatory process in order to attend to changes at the national, regional and global levels, could result in making such regulatory processes unable to respond to the regulatory needs posed by a highly globalized and dynamically changing economic context,” said the policy brief.

Embedding a deep transparency model, which includes an obligation of prior consultation with “interested parties”, under the umbrella of investment facilitation could amplify existing problematic aspects of investment treaties, especially those pertaining to the ability of private investors to influence domestic policy and regulatory processes, leading to a situation of “regulatory chill” in some cases, said the paper.

While the narrative on investment facilitation draws links with mobilizing and channelling investment towards sustainable development, an investment facilitation model that adversely affects regulatory and policy space would run counter to national efforts directed towards building linkages between foreign direct investment (FDI) and sustainable development processes.

In the way forward in the discussion of investment facilitation, it is important to focus on the implications of the means by which action on investment facilitation is to be taken with respect to policy and regulatory space. Such implications are likely to significantly vary depending on the scenario chosen.

Multilateral convergence over voluntary guidelines that would be implemented as appropriate by developing countries, taking into account their national contexts in accordance with development, regulatory and institutional priorities, would carry significantly different implications compared with negotiating and having “one-size-fits-all” multilateral hard rules that would apply to both developing and developed countries across varying sectors.

The policy brief emphasized that ensuring that investment facilitation efforts are appropriate to and situated within the framework of a host state’s development policies and objectives is a key element to consider in pursuing more efforts in this area.

Investment facilitation, it said, is a concept repeated in discussions pertaining to investment policies and treaties, including those addressing the reform of investment treaties. The discussion on investment facilitation is taking place in various fora and contexts. Multilateral institutions such as the UN Conference on Trade and Development (UNCTAD), the Organization for Economic Cooperation and Development (OECD) and the World Bank have been engaged in this discussion.

Investment facilitation has been on the agenda of the G20 as well. At the regional level, some country blocs, like the Asia-Pacific Economic Cooperation (APEC), have developed their Investment Facilitation Action Plan. Moreover, selected countries have chosen to address this issue bilaterally, such as through investment treaties. For example, Brazil adopted the Investment Cooperation and Facilitation Model.

The term “investment facilitation”, as used in different fora, remains broad and unspecific, which allows it to encompass a variety of approaches and suggestions made by countries and multilateral institutions. This fluidity in the concept could provide space for discussing different approaches and thus for nurturing dialogue in regard to the concept.

However, the same conceptual fluidity could lead to lack of clarity or confusion, especially when participants are not on a level playing field in the discussion.

“While the term ‘facilitation’ holds an overall positive connotation, there may be multiple potential adverse implications for developing countries of the approaches and rules that could be developed in this area. Such implications are closely interlinked with the developmental context and institutional and regulatory frameworks existing in different countries,” said the paper.

Different approaches

The policy brief specifically discusses issues pertaining to whether there would be an added value from developing hard multilateral rules in the area of investment facilitation, and the potential implications of such rules on policy and regulatory space.

It noted that investment facilitation has been considered to encompass a broad set of regulatory actions, institutional roles and administrative procedures, and that different institutions and fora have chosen to focus on different angles and approaches to the concept.

For example, in its Policy Framework for Investment, the OECD includes under investment promotion and facilitation issues pertaining to the business environment and investment promotion, the role of investment promotion agencies and its performance and dialogue mechanisms, streamlining administrative procedures, the cost-benefit of investment incentives, issues pertaining to the promotion of investment linkages, drawing on international expertise, and information exchange networks in the area of investment.

UNCTAD’s Investment and Enterprise Division has developed a more detailed approach to investment facilitation under the Investment Facilitation Action Menu. It assesses that there is a systemic gap in both national and international investment policies when it comes to investment facilitation. UNCTAD points out that “[a]t the international level, in the overwhelming majority of the existing 3,300-plus international investment agreements (IIAs), concrete facilitation actions are either absent or weak”.

UNCTAD defines investment facilitation as encompassing transparent and predictable rules, efficient administrative procedures, efficient dispute prevention and resolution, effective stakeholder relations, and investor services to help deal with rules and procedures. It explicitly differentiates between investment promotion and facilitation. UNCTAD anchors promotion in actions of investment promotion agencies, image and marketing efforts, targeting of certain FDI projects and providing incentives.

The UNCTAD Investment Facilitation Action Menu includes 10 lines of action pertaining to transparency, regulatory process and policies, administrative procedures, relations with stakeholders, institutional framework, international cooperation and technical assistance.

According to the policy brief, UNCTAD does not specify a manner in which to advance the efforts pertaining to investment facilitation. It points out that the Action Menu, as an international policy instrument, reflects flexibility and options to pick and choose from, adapt and adopt for national and international policymaking. At the same time, UNCTAD proposes that “the package includes actions that countries can choose to implement unilaterally and options that can guide international collaboration or that can be incorporated in IIAs.”

In terms of the G20 major economies grouping, its 2016 ministerial meeting held in Shanghai had agreed a set of non-binding Guiding Principles for Global Investment Policy-making. The Principles also refer to investment facilitation, providing that “[p]olicies for investment promotion should, to maximize economic benefit, be effective and efficient, aimed at attracting and retaining investment, and matched by facilitation efforts that promote transparency and are conducive for investors to establish, conduct and expand their businesses”.

At a regional level, APEC had adopted an Investment Facilitation Action Plan, under which “investment facilitation refers to actions taken by governments designed to attract foreign investment and maximize the effectiveness and efficiency of its administration through all stages of the investment cycle ... Transparency, simplicity and predictability are among its most important principles”.

Investment facilitation has also been linked to facilitating trade, specifically efforts under the WTO-led Aid for Trade Initiative and the recently adopted WTO Trade Facilitation Agreement. Under this context, it is proposed that the Aid for Trade Initiative could be expanded to cover investment, or that the Trade Facilitation Agreement could be expanded into an Investment and Trade Facilitation Agreement.

The policy brief also highlighted the practices of selected developing countries such as Brazil and South Africa.

In the context of presenting an alternative to the traditional international investment treaty model, Brazil developed a model treaty entitled the Investment Cooperation and Facilitation Model. The model focuses on a best-endeavour approach to investment facilitation that is in line with domestic laws. For example, it provides for provisions on exchange of information between parties “whenever possible and relevant to reciprocal investments”.

It also anchors transparency requirements in best-endeavour language, whereby the provisions require the administering of “measures that affect investment” in a “reasonable, objective and impartial manner, in accordance with [Parties’] domestic law”.

The policy brief noted that the Brazilian model does not provide for a system of investor-state dispute settlement, but sets in place a system of focal points and joint committees to prevent, manage and resolve disputes, and a mechanism of arbitration between the states as a last resort if other means do not work.

In the South African experience, the investment framework includes sectoral programmes and investment facilitation as two core elements. This framework was developed after South Africa withdrew from its bilateral investment agreements and adopted a revised national investment law as an alternative.

Sectoral programmes are part of South Africa’s industrial policy, which creates an environment that will attract investors in particular sectors. South Africa coupled this with actions to facilitate the entry of targeted investors in the sectoral programmes and to facilitate investments in these sectors. A committee chaired by the President oversees the work of the investment agency. It coordinates with legislative bodies’ committees and sets targets for decision-making.

Principles of investment facilitation

The policy brief said the propositions pertaining to the investment facilitation concept encompass principles of “predictability and consistency”, “transparency” of processes and engagement with stakeholders, including establishing a mechanism to provide interested parties with an opportunity to comment on proposed new laws, regulations and policies or changes to existing ones prior to their implementation.

It noted that predictability and consistency are emphasized in the narrative on investment facilitation. These two principles could be evaluated in multiple ways.

For example, predictability and consistency could be required from the time of instituting a certain measure, whereby a consecutive change induced by new evidence, such as environmental or health assessments or an exogenous crisis such as a financial crisis, would be considered a retreat from maintaining “predictability and consistency”.

Another approach could be to evaluate the predictability of a country’s measures based on practices by other countries, irrespective of the domestic developmental context, including institutional framework, within a country.

Understanding “predictability” as the expectation that a certain country will follow the regulatory practice of other countries or follow international standards would impose a “one-size-fits-all” approach that carries tensions with developmental considerations. Indeed, said the paper, there is concern about the potential burden on developing countries when rules that require converging to a practice considered “best practice” at the international level are imposed.

“In developing countries, where regulatory frameworks and institutions are still in the process of evolving, and as the government’s capacity to regulate and the economy and society change, such requirements would put strong constraints on the right of the State to regulate. Overall, this approach would contradict the nature of regulations, which are supposed to evolve with the changing local, national, and global contexts.”

On the other hand, limiting the requirement of consistency to the application of investment regulations across relevant institutions, which is the approach adopted under the UNCTAD Action Menu, could be less intrusive on policy space if it does not require consistency over an unlimited timeframe.

Thus, emphasizing “predictability” in the regulatory environment without recognizing the differentiated approaches in the regulatory process among countries and the dynamic changes required in the regulatory process in order to attend to changes at the national, regional and global levels, such as an unexpected financial crisis or arising climate action, would be detached from the regulatory needs posed by a highly globalized and dynamically changing global economic context.

The investment facilitation narrative also includes broad approaches to transparency and stakeholder involvement. This encompasses publishing laws, regulations, judicial decisions and administrative rulings; setting a centralized registry of laws and regulations and single window or special enquiry points; allowing investors to choose their form of establishment within legislative and legal frameworks; providing investors with clear and up-to-date information and timely and relevant advice on changes in procedures, applicable standards, technical regulations and conformance requirements; providing advance notice of proposed changes to laws and regulations; and making available screening guidelines and clear definitions of criteria for assessing investment proposals.

Besides, it includes proposals for setting a requirement that “interested parties”, including the business community and investment stakeholders, be provided with an opportunity to comment on proposed new laws, regulations and policies or changes to existing ones prior to their implementation.

The category of “interested parties” is an undefined open-ended category, which could include private entities beyond the investors directly concerned with a specific investment in a specific country.

“Given the significant capacities of private entities, including multinational corporations, to organize lobbying strategies, such obligations of prior consultations could have an undue influence on national regulatory and legislative processes. It could skew the pressure on the regulatory and legislative processes towards interests defined primarily by private profit and away from the concerned public interest,” said the policy brief.

In this regard, it noted that a similar requirement was negotiated under the WTO Trade Facilitation Agreement (TFA). This was a contested issue; many developing countries were not supportive of inserting such obligations under the agreement. The negotiations ended with a best-endeavour provision.

The policy brief further underlined that the TFA category of “laws and regulations of general application related to the movement, release, and clearance of goods, including goods in transit” is more limited than the category of laws and regulations related to investment. Thus, such transparency requirement would potentially be more burdensome on the institutional capacities and regulatory processes of developing countries.

“Setting an obligation on countries to guarantee the participation of interested parties could potentially serve as another space for foreign investors to influence domestic policy making, besides their ability to challenge policy and regulatory steps through investor-State dispute settlement (ISDS) mechanisms,” the paper cautioned.

Investors already use the ISDS mechanism to bring or threaten to bring costly cases against states in an attempt to prevent new legislation and other measures from being adopted or applied, thus effectuating a “chilling effect” on the regulatory process.

“Embedding an intrusive transparency model that includes an obligation of prior consultation with ‘interested parties’ under the umbrella of investment facilitation would enhance existing problematic aspects of investment treaties in regard to investor-State relations and investor’s conduct.”

Investment and sustainable

development

Overall, said the policy brief, the narrative on investment facilitation seeks to link the concept to efforts in support of mobilizing and channelling investment towards sustainable development, including building of productive capacities and critical infrastructure.

However, building linkages between FDI and sustainable development processes is not a laissez faire endeavour, but requires active policy interventions by governments. An investment facilitation model that is intrusive on regulatory and policy space would run counter to efforts directed towards building such linkages.

“Moreover, investment facilitation interventions that are not associated with reform to the content of the existing investment protection treaties and investor-state dispute settlement mechanism would be futile in terms of spilling positively onto the sustainable development front.”

In the way forward in discussing investment facilitation, the policy brief said, it is important to delineate the potential implications of various means by which action in this regard could be taken. Indeed, the implications on policy and regulatory space would significantly vary depending on the scenario chosen for the way forward.

A scenario where multilateral dialogue seeks convergence over voluntary guidelines that would be implemented in national contexts in accordance with development, regulatory and institutional contexts would carry significantly different implications in comparison with “one-size-fits-all” multilaterally binding hard rules established to apply to both developing and developed countries across varying sectors. Indeed, turning non-binding principles into binding rules and commitments could become too intrusive on policy and regulatory space.

Regulations related to investment are a very broad category of measures that is closely intertwined with the development levels of a country as well as the sector concerned. Moreover, the difference in institutional capacities is a major determinant of the way countries design and implement regulations. “Accordingly, addressing such a broad category of regulations through rules that are designed on the multilateral level to fit various countries and sectors, across the board, under a ‘one-size-fits-all’ approach would be intrusive on regulatory space.”

Considering the diversity of the regulations related to investment, and which are embedded in a country’s development levels, focusing on prioritizing efficiency, predictability and consistency from an investor perspective and minimizing costs of the investor could imply shrinking the regulatory space that countries require in order to take into account developmental elements, including social, economic, and environmental and sustainability implications.

The policy brief said that the way forward in investment-related policy-making should focus on the nature of needed reforms that will help reshape investment law and policy to be more conducive to and supportive of development and industrialization prospects in developing countries. These reforms should help establish conditions where FDI could provide a stable source of support to industrialization and development, including through supplementing domestic resources, enhancing productive capacity, and supporting technological progress and industrial upgrading.

Ensuring an appropriate balance between the rights and obligations of investors, safeguarding the right to regulate, and ensuring that investment promotion and facilitation efforts are appropriate to and situated within the framework of a host state’s development policies and objectives are elements that form key aspects of such needed reforms, said the policy brief. (SUNS8421)                

The policy brief is available at: https://www.southcentre.int/investment-policy-brief-8-march-2017/

Third World Economics, Issue No. 634, 1-15 February 2017, pp9-12


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