INVESTMENT POLICY FRAMEWORK FOR SUSTAINABLE DEVELOPMENT CHAPTER IV

Mobilizing investment and ensuring that it contributes to sustainable development is a priority for all countries. A new generation of investment policies is emerging, as governments pursue a broader and more intricate development policy agenda, while building or maintaining a generally favourable investment climate. “New generation” investment policies place inclusive growth and sustainable development at the heart of efforts to attract and benefit from investment. This leads to specific investment policy challenges at the national and international levels. At the national level, these include integrating investment policy into development strategy, incorporating sustainable development objectives in investment policy and ensuring investment policy relevance and effectiveness. At the international level, there is a need to strengthen the development dimension of international investment agreements (IIAs), balance the rights and obligations of States and investors, and manage the systemic complexity of the IIA regime. To address these challenges, UNCTAD has formulated a comprehensive Investment Policy Framework for Sustainable Development (IPFSD), consisting of (i) Core Principles for investment policymaking, (ii) guidelines for national investment policies, and (iii) options for the design and use of IIAs. UNCTAD’s IPFSD can serve as a point of reference for policymakers in formulating national investment policies and in negotiating or reviewing IIAs. It provides a common language for discussion and cooperation on national and international investment policies. It has been designed as a “living document” and incorporates an online version that aims to establish an interactive, open-source platform, inviting the investment community to exchange views, suggestions and experiences related to the IPFSD for the inclusive and participative development of future investment policies. 98 World Investment Report 2012: Towards a New Generation of Investment Policies

A. INTRODUCTION

A dynamic phase in the The policy environment for by the financial system and policies) – by taking investment policy environ- cross-border investment a systemic approach that examines the universe ment provides a window of is subject to constant of national and international policies through the opportunity to strengthen change. At the national lens of today’s key investment policy challenges. It the sustainable develop- level, governments continue also aims explicitly to strengthen the development to adopt investment policy dimension of investment policies, and presents a ment dimension of national measures (at a rate of comprehensive Investment Policy Framework for and international invest- about 150 annually over Sustainable Development (IPFSD). ment policies. the past decade according Encouragement to pick up this gauntlet comes to UNCTAD’s monitoring of such measures, see from discussions with senior policymakers in chapter III), not to speak of countless measures numerous forums, including at UNCTAD’s biennial taken every year that influence the overall business World Investment Forum; at its Commission on environment for investors. At the international level, Investment, Enterprise and Development; and at its new investment agreements have been concluded regular intergovernmental expert group meetings at a rate of more than one per week for the past on investment and enterprise. It also stems from few years. At the level of “soft law”, the universe of discussions with academics and business advisors codes and standards that govern the behaviour of in UNCTAD’s round tables on investment policy, corporate investors also continues to expand. and from UNCTAD’s technical assistance work with Over the last two decades, as more and more developing countries. Further encouragement has governments have come to realize the crucial emerged from other important policy platforms, most role of private investment, including foreign direct notably the G-20, which in its Seoul Declaration in investment (FDI), in fuelling economic growth and 2010 and the accompanying Multi-Year Action Plan development, great strides have been made to for Development specifically refer to the need to improve both national and international investment strengthen the sustainable development dimension policies. Very significant efforts have been made by of national and international investment policies. governments in developing countries in particular, The IPFSD also comes at a time when many often aided by the international development other investment stakeholders are putting community through policy frameworks, model forward suggestions for the future of investment treaties and technical assistance (such as policymaking. At UNCTAD’s 2012 World Investment UNCTAD’s Investment Policy Reviews). A lot of Forum, the International Chamber of Commerce experience has been gained and documented that (ICC) launched its contribution in the form of now helps policymakers identify what measures (revised) Guidelines for International Investment. work well, or less well, under what circumstances The OECD has announced its intention to start and in what context. work on an update of its policy framework for Despite the progress made, and despite the investment. The recently adopted European Union- lessons learned, important questions remain United States Statement on Shared Principles for unanswered for policymakers. Some perceived or International Investment and the release of the new acknowledged shortcomings in investment policy United States’ model BIT are also testimony of regimes are addressed only partially, or not at all, policy dynamism. These developments appear to by existing models and frameworks intended to signal a window of opportunity to strengthen the support policymakers. sustainable development dimension of investment policies. This year’s WIR takes a fresh look at investment policymaking – focusing on direct private The remainder of this chapter first details the drivers investment in productive assets (i.e. excluding of change in the investment policy environment – other capital flows which should be addressed introducing a “new generation” of investment policies CHAPTER IV Investment Policy Framework for Sustainable Development 99

– and the challenges that need to be addressed in a Core Principles into options for the formulation and comprehensive IPFSD (section B). It then proposes negotiation of such instruments, with a particular a set of Core Principles for investment policymaking, focus on development-friendly options. The final which serve as “design criteria” for national and section looks at the way forward, suggesting how international investment policies (section C). Section policymakers and the international development D presents a framework for national investment community could make use of the IPFSD, and how policy. Section E focuses on IIAs and translates the it could be further improved.

B. A “NEW GENERATION” OF INVESTMENT POLICIES

1. The changing investment policy Trends in investment policy naturally mirror these environment developments. There have been fundamental changes in the Investment policy is not Changes in the global inves- investment and investor landscape. tor landscape, a stronger made in a vacuum. It is role for governments in the made in a political and Developing countries and economies in transition are now primary FDI destinations, and their economy, and a greater need economic context that, importance as FDI recipients continues to increase. for global coordination are at the global and regional In 2010, for the first time, developing countries giving rise to a new genera- levels, has been buffeted in recent years by a series received more than half of global FDI flows – in part tion of investment policies. of crises in the areas of as a result of the fall in investment in developed finance, food security and the environment, and countries. This increases the opportunities, but that faces persistent global imbalances and social also multiplies the stakes, for strategic investment challenges, especially with regard to poverty targeting, promotion and protection policies in alleviation. These crises and challenges are having developing countries. profound effects on the way policy is shaped at the Emerging economies have not only become global level. First, the economic and financial crisis important recipients of FDI, they are increasingly has accentuated a longer-term shift in economic large investors themselves, with their share in weight from developed countries to emerging world outflows approaching 30 per cent. Although markets. Global challenges such as food security these countries might previously have been more and climate change, where developing country concerned with the pressure they faced to provide engagement is an indispensable prerequisite for protection for investments made by others, they any viable solution, have further added to a greater now also consider the security and treatment of role for those countries in global policymaking. their own investors’ interests abroad. Second, the financial crisis in particular has boosted There are also new types of investors on the scene. the role of governments in the economy, in both State-owned enterprises (SOEs) are becoming the developed and the developing world. Third, important FDI players; UNCTAD counted some the nature of the challenges, which no country can 650 multinational SOEs in 2010, operating about address in isolation, makes better international 8,500 foreign affiliates WIR11( ). Although SOEs coordination imperative. And fourth, the global account for only 1 per cent of the total number of political and economic context and the challenges multinational enterprises, their overseas investments that need to be addressed – with social and amount to roughly 11 per cent of global FDI flows. environmental concerns taking center stage – are Sovereign wealth funds (SWFs), similarly, are leading policymakers to reflect on an emerging new gaining importance as FDI players. Their total FDI development paradigm that places inclusive and stock amounted to some $110 billion in 2011, and sustainable development goals on the same footing their overseas investments make up less than 1 per as economic growth and development goals. cent of global FDI flows. But with total assets under 100 World Investment Report 2012: Towards a New Generation of Investment Policies management of $4-5 trillion, the scope for further A stronger role of the State also manifests itself direct investment in productive assets is significant. with regard to other sustainability issues. New social and environmental regulations are being Clearly the patterns and types of investment of introduced or existing rules reinforced – all of these new players (in terms of home and host which has implications for investment. In addition countries and in terms of investors) are different, to regulatory activities, governments are increasing and so are their policy priorities. Furthermore, efforts to promote actively the move towards it is necessary to be vigilant concerning waning sustainable development, for example through the support for open investment climates in developed encouragement of low-carbon FDI. They are also market economies in the face of competition from placing more emphasis on corporate responsibility increasingly active developing-country investors. by promoting the adoption of private codes of Governments are playing a greater role in the corporate conduct. economy and are giving more direction to The trend for policymakers to intervene more in the investment policy. economy and, to an extent, to steer investment Governments have become decidedly less reticent activity, is visible in the constantly increasing in regulating and steering the economy. More share of regulatory and restrictive policies in total and more governments are moving away from investment policy measures over the last five years. the hands-off approach to economic growth and This trend reflects, in part, a renewed realism about development that prevailed previously.1 Industrial the economic and social costs of unregulated policies and industrial development strategies are market forces but it also gives rise to concerns proliferating in developing and developed countries that an accumulation of regulatory activities may alike (WIR11). These strategies often contain gradually increase the risk of over-regulation or elements of targeted investment promotion or investment protectionism that hinders inward and restriction, increasing the importance of integrated outward FDI (see box IV.1). and coherent development and investment policies. There is a greater need for global coordination on Governments are also becoming more active in their investment policy. efforts to integrate domestic companies into global The need to address common sustainable value chains (GVCs). They promote such integration development challenges and to respond effectively through local capacity-building, technological to global economic and financial turmoil to avoid upgrading and investment promotion activities, such future crises has instigated calls for new models as matchmaking or the establishment of special of global economic governance. In the area of economic zones. Expectations of governments’ investment, there are compelling reasons for such promotion efforts have become higher as they improved international coordination. It could help increasingly focus on the quality – and not only on keep protectionist tendencies and discriminatory the quantity – of investment. treatment of foreign investors in check. Further, in a Fears and, to some extent, evidence of a job-less world in which governments increasingly “compete” (or job-poor) recovery in many regions are also for their preferred types of investment it could help adding pressure on governments to look for “the avoid a “race to the bottom” in regulatory standards right types” of investment, and to adopt measures or a “race to the top” in incentives. to maximize the job-creation impact of investment. A number of specific investment issues accentuate In developed countries, such fears have at times the need for better global coordination on sparked debate on whether and how to discourage investment policy as, by their nature, they can be domestic companies from investing abroad or to addressed effectively only in a cooperative manner. promote the repatriation of foreign investment back For one, better international coordination would help home. In developing countries, the same fears overcome coherence problems posed by the highly are fuelling the debate on whether investment is atomized system of IIAs, which consists of more bringing enough jobs for the poor and is sufficiently than 3,100 core treaties (i.e. bilateral investment inclusive. treaties (BITs) and other agreements with investment CHAPTER IV Investment Policy Framework for Sustainable Development 101

Box IV.1. Defining investment protectionism

Despite the fact that international policy forums at the highest level (e.g. the G-202) frequently make reference to “investment protectionism”, there is no universally agreed definition of the term. Different schools of thought take different approaches. Broadly, protectionist measures related to investment would include: (1) measures directed at foreign investors that explicitly or “de facto” discriminate against them (i.e. treating them differently from domestic investors) and that are designed to prevent or discourage them from investing in, or staying in, the country. And (2) measures directed at domestic companies that require them to repatriate assets or operations to the home country or that discourage new investments abroad.3 In this context, “measures” refer to national regulatory measures, but also include the application of administrative procedures or, even less tangible, political pressure. The above reasoning ignores any possible justification of investment protectionism – i.e. measures may be motivated by legitimate policy concerns such as the protection of national security, public health or environmental objectives, or a desire to increase the contribution of FDI to economic development. It also does not refer to any assessment of proportionality of measures relative to such legitimate policy concerns. Nor does it attempt to assess the legality of relevant measures under any applicable international normative framework (whether investment-specific, i.e. international investment agreements; trade-related, e.g. WTO rules; or otherwise). Disregarding these considerations is analogous to the situation in trade, where a tariff may be applied to imports for legitimate policy reasons and may be legal under WTO rules, but is often still considered a protectionist measure. From a development perspective this approach is clearly unsatisfactory: measures taken for legitimate public policy objectives, relevant and proportional to those objectives and taken in compliance with relevant international instruments, should not be considered protectionist. The challenge lies in defining the boundaries of legitimacy, relevance and proportionality, in order to distinguish between measures taken in good faith for the public good and measures with underlying discriminatory objectives. For many policymakers the term “protectionism” has a negative connotation. The lack of a common language among policymakers and the investment community – one country’s protectionism is another country’s industrial policy – is not helpful to efforts to maintain an international investment policy environment that aims to balance openness and pursuit of the public good while minimizing potentially harmful distortionary effects on investment flows. Source: UNCTAD. provisions). Another issue on which policymakers with governments pursuing a broader and more are increasingly engaged in international dialogue is intricate development policy agenda within a international tax cooperation. Unsustainable levels framework that seeks to maintain a generally of public deficits and sovereign debt have made favourable investment climate. This new generation governments far more sensitive to tax avoidance, of investment policies has been in the making manipulative transfer pricing, tax havens and similar for some time, and is reflected in the dichotomy options available to multinational firms to unduly in policy directions over the last few years – with reduce their tax obligations in host and home simultaneous moves to further liberalize investment countries. regimes and promote foreign investment, on the one hand, and to regulate investment in Other, non-financial, global challenges also require pursuit of public policy objectives on the other. It better coordination on investment, as witnessed by reflects the recognition that liberalization, if it is to efforts to promote green investment in support of generate sustainable development outcomes, has environmentally friendly growth, and international to be accompanied – if not preceded – by the collaboration on investment in agriculture to help establishment of proper regulatory and institutional improve food security (WIR09, WIR10). frameworks. The key policy challenge is to strike A new generation of investment policies is the right balance between regulation and openness emerging. (Epilogue WIR10). As a result of the developments described above, a new generation of investment policies is emerging, 102 World Investment Report 2012: Towards a New Generation of Investment Policies

“New generation” investment policies place efforts to resolve, in a comprehensive manner, long- inclusive growth and sustainable development standing issues and shortcomings of investment at the heart of efforts to attract and benefit policy that may hamper policy effectiveness and from investment. Sustainable development risk causing uncertainty for investors. These three issues – including environmental, social and broad aspects of “new generation” investment poverty alleviation concerns – as well as investor policies translate into specific investment policy responsibility in these areas, are not “new” in and challenges at the national and international levels. by themselves. However, to date, the myriad of solutions and options developed over the years to 2. Key investment policy challenges address sustainable development concerns have not been part and parcel of mainstream investment At the national level, New generation investment policymaking, and the international consensus key investment policy policies aim to integrate on sustainable development is not reflected in challenges are (table IV.1): sustainable development it. “New generation” investment policies aim to • To connect the invest- and CSR into mainstream systematically integrate sustainable development ment policy framework investment policymaking and operationalize it in concrete measures and to an overall devel- at the national and mechanisms at the national and international levels, opment strategy or international levels, and in and at the level of policymaking and implementation. industrial development design and implementation. Broadly, “new generation” investment policies are policy that works in This poses new challenges characterized by (i) a recognition of the role of the context of national for policymakers. investment as a primary driver of economic growth economies, and to en- and development and the consequent realization sure coherence with other policy areas, includ- that investment policies are a central part of ing overall private sector or enterprise develop- development strategies; and (ii) a desire to pursue ment, and policies in support of technological sustainable development through responsible advancement, international trade and job investment, placing social and environmental goals creation. “New generation” investment policies on the same footing as economic growth and increasingly incorporate targeted objectives to development objectives. Furthermore, (iii) a shared channel investment to areas key for economic recognition of the need to promote responsible or industrial development and for the build-up, investment as a cornerstone of economic growth maintenance and improvement of productive and job creation is giving renewed impetus to capacity and international competitiveness.

Table IV.1. National investment policy challenges

• Channeling investment to areas key for the build-up of productive capacity and Integrating investment international competitiveness policy in development • Ensuring coherence with the host of policy areas geared towards overall development strategy objectives

Incorporating sustainable • Maximizing positive and minimizing negative impacts of investment development objectives in • Fostering responsible investor behaviour investment policy

Ensuring investment • Building stronger institutions to implement investment policy policy relevance and • Measuring the sustainable development impact of investment effectiveness CHAPTER IV Investment Policy Framework for Sustainable Development 103

• To ensure that investment supports sustainable effectiveness of their measures, especially development and inclusiveness objectives. where such measures imply restrictions on Investment policymaking will focus increasingly the freedom of economic actors or outlays of on qualitative aspects of investment. public funds (e.g. in the case of incentives or Because the behaviour of firms, including the establishment of special economic zones). international investors, with respect to social Similarly, at the international level, the changing and environmental issues is driven in part by investment policy environment is giving rise to three corporate responsibility standards developed broad challenges (table IV.2): outside the traditional regulatory realm, one aspect of this challenge is finding the right • To strengthen the development dimension of balance between regulatory and private sector the international investment policy regime. In initiatives. A focus on sustainable development the policy debate this development dimension objectives also implies that investment policy principally encompasses two aspects: puts increasing emphasis on the promotion −− Policymakers in some countries, especially of specifictypes of investment, e.g. “green those seeking to implement industrial investments” and “low-carbon investment” development strategies and targeted (WIR10). investment measures, have found that IIAs • To ensure continued investment policy can unduly constrain national economic relevance and effectiveness, by building development policymaking. stronger institutions to implement investment −− Many policymakers have observed that policy and to manage investment policy IIAs are focused almost exclusively on dynamically, especially by measuring protecting investors and do not do enough the sustainable development impact of to promote investment for development. policies and responding to changes in the policy environment. With the greater • To adjust the balance between the rights role that governments are assuming in and obligations of States and investors, steering investment to support sustainable making it more even. IIAs currently do not set development objectives, and with the selective out any obligations on the part of investors departure from an open and liberal approach in return for the protection rights they are to investment, comes greater responsibility granted. Negotiators could consider including on the part of policymakers to ensure the obligations for investors to comply with

Table IV.2. International investment policy challenges

Strengthening the • Safeguarding policy space for sustainable development needs development dimension • Making investment promotion provisions more concrete and consistent with sustainable of IIAs development objectives

Balancing rights and • Reflecting investor responsibilities in IIAs obligations of States and • Learning from and building on corporate social responsibility (CSR) principles investors

• Dealing with gaps, overlaps and inconsistencies in IIA coverage and content and resolving Managing the systemic institutional and dispute settlement issues complexity of the IIA • Ensuring effective interaction and coherence with other public policies (e.g. climate regime change, labour) and systems (e.g. trading, financial) 104 World Investment Report 2012: Towards a New Generation of Investment Policies

national laws of the host country. In addition, ambiguities in treaty interpretation by arbitral and parallel to the debate at the level of tribunals; onerous arbitration procedures and national policies, corporate responsibility unpredictability of arbitration awards. Also, initiatives, standards and guidelines for the the “interconnect” between international behaviour of international investors increasingly investment policies and other policy areas such shape the investment policy landscape. Such as trade, finance, competition or environmental standards could serve as an indirect way to (e.g. climate change) policies, is absent. add the sustainable development dimension to the international investment policy landscape, 3. Addressing the challenges: UNCTAD’s although there are concerns among developing Investment Policy Framework for countries that they may also act as barriers to Sustainable Development investment and trade. • To resolve issues stemming from the increasing To address the challenges UNCTAD’s Investment complexity of the international investment discussed in the previous Policy Framework for policy regime. The current regime is a system section, UNCTAD proposes Sustainable Develop- of thousands of treaties (mostly bilateral a comprehensive Investment ment addresses the investment treaties, free trade agreements Policy Framework for challenges posed by the with investment provisions, and regional Sustainable Development new investment policy agreements), many ongoing negotiations and (IPFSD), consisting of a agenda. multiple dispute-settlement mechanisms, set of Core Principles for which nevertheless offers protection to only investment policymaking, guidelines for national two-thirds of global FDI stock, and which investment policies, and guidance for policymakers covers only one-fifth of bilateral investment on how to engage in the international investment relationships (WIR11). Most governments policy regime, in the form of options for the design continue to participate in the process of and use of IIAs (figure IV.1 and box IV.2). These build adding ever more agreements to the system, on the experience and lessons learned of UNCTAD despite the fact that many are not fully satisfied and other organizations in designing investment with its overall design. It has a number of policies for development. By consolidating good systemic problems, including gaps, overlaps practices, the IPFSD also attempts to establish a and inconsistencies in coverage and content; benchmark for assessing the quality of a country’s

Figure IV.1. Structure and components of the IPFSD

Core Principles “Design criteria” for investment policies and for the other IPFSD components

National investment IIA elements: policy guidelines policy options

Concrete guidance for Clause-by-clause policymakers on how options for negotiators to to formulate investment strengthen the sustainable policies and regulations development dimension of and on how to ensure their IIAs effectiveness CHAPTER IV Investment Policy Framework for Sustainable Development 105

Box IV.2. Scope of the IPFSD

This box addresses a number of key questions relating to the scope, coverage and target audience of the IPFSD: What policies are covered by the IPFSD? The IPFSD is meant to provide guidance on investment policies, with a particular focus on FDI. This includes policies with regard to the establishment, treatment and promotion of investment. In addition, a comprehensive framework needs to look beyond investment policies per se and include investment-related aspects of other policy areas. Does the IPFSD deal with national and international investment policies? Investment policies and related policy areas covered by the IPFSD comprise national and international policies, as coherence between the two is fundamental. Does the IPFSD cover domestic and foreign investment? The IPFSD’s focus on FDI is evident in sections on, for example, the entry and establishment of investment, the promotion of outward investment and the section on international investment policies. However, many of the guidelines in the section on national investment policies have relevance for domestic investment as well. Does the IPFSD consider portfolio investment? The IPFSD focuses on direct investment in productive assets. Portfolio investment is considered only where explicitly stated in the context of IIAs, which in many cases extend coverage beyond direct investment. Is the IPFSD concerned with inward and outward investment? The IPFSD primarily offers policy advice for countries where the investment – domestic or foreign – is made, as this is typically the principal concern of investment policies. However, the IPFSD does not ignore the fact that policies with regard to outward investment may also be part of a country’s development strategy. Is the IPFSD addressed to policymakers from developing and developed countries? The addressees of the IPFSD are, in principle, both developing and developed countries. It has been designed with the particular objective to assist the former in the design of investment policies in support of sustainable development objectives, but is equally relevant for developed countries. Does the IPFSD focus on the attraction of investment or on its impact? The policy guidelines of the IPFSD serve a dual purpose. On the one hand, they intend to assist governments in improving the attractiveness of their countries as investment locations. To this end, they contain specific recommendations concerning the institutional set-up, the general business climate and the treatment of investors. On the other hand, they also provide guidance on how countries can maximize the sustainable development benefits from investment, in particular foreign investment. Source: UNCTAD.

policy environment for foreign investment – taking between foreign investment and sustainable into account that one single policy framework development, advocating a balanced approach cannot address the specific investment policy between the pursuit of purely economic growth challenges of individual countries (see boxes IV.4, objectives by means of investment liberalization IV.6 and IV.7 on the need for custom-designed and promotion, on the one hand, and the need investment policy advice). to protect people and the environment, on the Although there are a number of existing international other hand. Third, it underscores the interests of instruments that provide guidance to investment developing countries in investment policymaking. policymakers,4 UNCTAD’s IPFSD distinguishes itself Fourth, it is neither a legally binding text nor a in several ways. First, it is meant as a comprehensive voluntary undertaking between States, but expert instrument dealing with all aspects of national and guidance by an international organization, leaving international investment policymaking. Second, national policymakers free to “adapt and adopt” as it puts a particular emphasis on the relationship appropriate. 106 World Investment Report 2012: Towards a New Generation of Investment Policies

C. CORE PRINCIPLES FOR INVESTMENT POLICYMAKING

1. Scope and objectives of the Core set of policy guidelines for national investment Principles policymakers and for negotiators of IIAs (sections D and E). As such, they do not always follow the The Core Principles for The Core Principles for traditional “policy areas” of a national investment investment policymaking investment policymaking policy framework, nor the usual articles of IIAs. are the “design criteria” aim to guide the development The Core Principles are grouped as follows: of national and international for national and interna- • Principle 1 states the overarching objective of investment policies. To tional investment policies. investment policymaking. this end, they translate the challenges of investment policymaking into a set of • Principles 2, 3 and 4 relate to the general “design criteria” for investment policies. Taking the process of policy development and the challenges discussed in the previous section as the policymaking environment as relevant for starting point, they call for integrating investment investment policies. policy in overall development strategies, enhancing • Principles 5 through 10 address the specifics sustainable development as part of investment of investment policymaking. policies, balancing rights and obligations of States • Principle 11 refers to cooperation in investment- and investors in the context of investment protection related matters at the international level. and promotion, including CSR in investment The design of the Core Principles has been inspired policymaking, and encouraging international by various sources of international law and politics. cooperation on investment-related challenges. Some of these instruments have importance for The Core Principles are not a set of rules per se. the entire set of the Core Principles as they relate They are an integral part of the IPFSD, as set – to various degrees – to sustainable development. out in this chapter, which attempts to convert Several other international instruments relate to them, collectively and individually, into a concrete individual Core Principles (see box IV.3).

Box IV.3. The origins of the Core Principles in international law

The Core Principles can be traced back to a wide range of existing bodies of international law, treaties and declarations. The UN Charter (Article 55) promotes, inter alia, the goal of economic and social progress and development. The UN Millennium Development Goals call for a Global Partnership for Development. In particular, Goal 8 (Target 12) encourages the further development of an open, rule-based, predictable, non-discriminatory trading and financial system, which includes a commitment to good governance, development, and poverty reduction, both nationally and internationally – concepts that apply equally to the investment system. The “Monterrey Consensus” of the UN Conference on Financing for Development of 2002 acknowledges that countries need to continue their efforts to achieve a transparent, stable and predictable investment climate, with proper contract enforcement and respect for property rights, embedded in sound macroeconomic policies and institutions that allow businesses, both domestic and international, to operate efficiently and profitably and with maximum development impact. The UN Johannesburg Plan of Implementation of September 2002, following up on the “Rio Declaration”, calls for the formulation and elaboration of national strategies for sustainable development, which integrate economic, social and environmental aspects. The 4th UN Conference on LDCs in May 2011 adopted the Istanbul Programme of Action for the LDCs 2011-2020 with a strong focus on productive capacity-building and structural transformation as core elements to achieve more robust, balanced, equitable, and inclusive growth and sustainable development. Finally, the 2012 UNCTAD XIII Conference – as well as previous UNCTAD Conferences – recognized the role of FDI in the development process and called on countries to design policies aimed at enhancing the impact of foreign investment on sustainable development and inclusive growth, while underlining the importance of stable, predictable and enabling investment climates. /... CHAPTER IV Investment Policy Framework for Sustainable Development 107

Box IV.3. The origins of the Core Principles in international law (concluded)

Several other international instruments relate to individual Core Principles. They comprise, in particular, the Universal Declaration of Human Rights and the UN Guiding Principles on Business and Human Rights, the Convention on the Establishment of the Multilateral Investment Guarantee Agency, the World Bank Guidelines on the Treatment of Foreign Direct Investment, the UN Global Compact, the OECD Guidelines for Multinational Enterprises and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, and several WTO-related agreements, including the GATS, the TRIMs Agreement and the Agreement on Government Procurement. Source: UNCTAD.

2. Core Principles for investment policymaking for sustainable development

Area Core Principles

1 Investment for • The overarching objective of investment policymaking is to promote investment for sustainable development inclusive growth and sustainable development.

2 Policy coherence • Investment policies should be grounded in a country’s overall development strategy. All policies that impact on investment should be coherent and synergetic at both the national and international levels.

3 Public governance and • Investment policies should be developed involving all stakeholders, and embedded in an institutions institutional framework based on the rule of law that adheres to high standards of public governance and ensures predictable, efficient and transparent procedures for investors.

4 Dynamic policymaking • Investment policies should be regularly reviewed for effectiveness and relevance and adapted to changing development dynamics.

5 Balanced rights and • Investment policies should be balanced in setting out rights and obligations of States and obligations investors in the interest of development for all.

6 Right to regulate • Each country has the sovereign right to establish entry and operational conditions for foreign investment, subject to international commitments, in the interest of the public good and to minimize potential negative effects.

7 Openness to investment • In line with each country’s development strategy, investment policy should establish open, stable and predictable entry conditions for investment.

8 Investment protection • Investment policies should provide adequate protection to established investors. The and treatment treatment of established investors should be non-discriminatory.

9 Investment promotion • Policies for investment promotion and facilitation should be aligned with sustainable and facilitation development goals and designed to minimize the risk of harmful competition for investment.

10 Corporate governance • Investment policies should promote and facilitate the adoption of and compliance with best and responsibility international practices of corporate social responsibility and good corporate governance.

11 International • The international community should cooperate to address shared investment-for- cooperation development policy challenges, particularly in least developed countries. Collective efforts should also be made to avoid investment protectionism.

108 World Investment Report 2012: Towards a New Generation of Investment Policies

3. Annotations to the Core Principles ingredient of investment policies aimed at inclusive growth and fairness for all. The element Principle 1: Investment for sustainable of transparency is especially important, as development in and by itself it tends to facilitate dialogue This overarching principle defines the overall between public and private sector stakeholders, objective of the Investment Policy Framework for including companies, organized labour and non- Sustainable Development. It recognizes the need to governmental organizations (NGOs). promote investment not only for economic growth Principle 4: Dynamic policymaking as such, but for growth that benefits all, including the poorest. It also calls for the mainstreaming of This principle recognizes that national and sustainable development issues – i.e. development international investment policies need flexibility to that meets the needs of the present without adapt to changing circumstances, while recognizing compromising the ability of future generations to that a favourable investment climate requires meet theirs – in investment policymaking, at both stability and predictability. For one, different policies the national and international levels. are needed at different development stages. New factors may emerge on the domestic policy scene, Principle 2: Policy coherence including government changes, social pressures or This principle recognizes that investment is a means environmental degradation. International dynamics to an end, and that investment policy should thus be can have an impact on national investment policies integrated in an overarching development strategy. as well, including through regional integration or It also acknowledges that success in attracting through international competition for the attraction and benefiting from investment depends not only of specific types of foreign investment. The on investment policy “stricto sensu” (i.e. entry increasing role of emerging economies as outward and establishment rules, treatment and protection) investors and their corresponding desire better to but on a host of investment-related policy areas protect their companies abroad drives change in ranging from tax to trade to environmental and investment policies as well. labour market policies. It recognizes that these The dynamics of investment policies also imply policy areas interact with each other and that a need for countries continuously to assess the there is consequently a need for a coherent overall effectiveness of existing instruments. If these do not approach to make them conducive to sustainable achieve the desired results in terms of economic development and to achieve synergies. The same and social development, or do so at too high a considerations apply with respect to the interaction cost, they may need to be revised. between national investment policies and international investment rulemaking. Successful Principle 5: Balanced rights and obligations experiences with investment for development often Investment policies need to serve two potentially involved the establishment of special agencies conflicting purposes. On the one hand, they have with a specific mandate to coordinate the work of to create attractive conditions for foreign investors. different ministries, government units and policy To this end, investment policies include features of areas, including the negotiation of IIAs. investment liberalization, protection, promotion and Principle 3: Public governance and institutions facilitation. On the other hand, the overall regulatory framework of the host country has to ensure that The concept of good public governance refers any negative social or environmental effects are to the efficiency and effectiveness of government minimized. More regulation may also be warranted services, including such aspects as accountability, to find appropriate responses to crises (e.g. financial predictability, clarity, transparency, fairness, crisis, food crisis, climate change). rule of law, and the absence of corruption. This principle recognizes the importance of good Against this background, this core principle public governance as a key factor in creating an suggests that the investment climate and policies environment conducive to attracting investment. of a country should be “balanced” as regards the It also stresses the significance of a participatory overall treatment of foreign investors. Where and approach to policy development as a basic how to strike this balance is basically an issue for CHAPTER IV Investment Policy Framework for Sustainable Development 109 the domestic law of host countries and therefore openness can be of crucial importance, too; requires adequate local capacities. International in particular, when the investment significantly policies vis-à-vis foreign investors likewise play a depends on imports or exports. role and – if not carefully designed – might tilt the Principle 8: Investment protection balance in favour of those investors. The principle does not mean that each individual investment- This principle acknowledges that investment related regulation of a host country would have to protection, although only one among many be balanced. determinants of foreign investment, can be an important policy tool for the attraction of investment. Principle 6: Right to regulate It therefore closely interacts with the principle on The right to regulate is an expression of a country’s investment promotion and facilitation (Principle 9). sovereignty. Regulation includes both the general It has a national and an international component. legal and administrative framework of host countries Core elements of protection at the national level as well as sector- or industry-specific rules. It also include, inter alia, the rule of law, freedom of entails effective implementation of rules, including contract and access to courts. Key components the enforcement of rights. Regulation is not only of investment protection frequently found in IIAs a State right, but also a necessity. Without an comprise the principles of non-discrimination adequate regulatory framework, a country will not (national treatment and most-favoured-nation be attractive for foreign investors, because such treatment), fair and equitable treatment, protection investors seek clarity, stability and predictability of in case of expropriation, provisions on movement of investment conditions in the host country. capital and effective dispute settlement. The authority to regulate can, under certain Principle 9: Investment promotion and facilitation circumstances, be ceded to an international body to make rules for groups of states. It can be subject Most countries have set up promotion schemes to international obligations that countries undertake; to attract and facilitate foreign investment. with regard to the treatment of foreign investors this Promotion and facilitation measures often include often takes place at the bilateral or regional level. the granting of fiscal or financial incentives, and International commitments thus reduce “policy the establishment of special economic zones or space”. This principle advocates that countries “one-stop shops”. Many countries have also set maintain sufficient policy space to regulate for the up special investment promotion agencies (IPAs) to public good. target foreign investors, offer matchmaking services and provide aftercare. Principle 7: Openness to investment The principle contains two key components. This principle considers a welcoming investment First, it stipulates that in their efforts to improve climate, with transparent and predictable entry the investment climate, countries should not conditions and procedures, a precondition for compromise sustainable development goals, for attracting foreign investment conducive for instance by lowering regulatory standards on social sustainable development. The term “openness” is or environmental issues, or by offering incentives not limited to formal openness as expressed in a that annul a large part of the economic benefit of country’s investment framework and, possibly, in the investment for the host country. Second, the entry rights granted in IIAs. Equally important is principle acknowledges that, as more and more the absence of informal investment barriers, such countries seek to boost investment and target as burdensome, unclear and non-transparent specific types of investment, the risk of harmful administrative procedures. At the same time, the competition for investment increases; i.e. a race principle recognizes that countries have legitimate to the regulatory bottom or a race to the top of reasons to limit openness to foreign investment, for incentives (with negative social and environmental instance in the context of their national development consequences or escalating commitments of public strategies or for national security reasons. funds). Investment policies should be designed to In addition, the issue of “openness” reaches minimize this risk. This underlines the importance of beyond the establishment of an investment. Trade international coordination (see Principle 11 below). 110 World Investment Report 2012: Towards a New Generation of Investment Policies

Principle 10: Corporate governance and global race to the bottom in regulatory standards, responsibility or a race to the top in incentives, and to avoid a return of protectionist tendencies. This principle recognizes that corporate governance and CSR standards are increasingly More international coordination, in particular at the shaping investment policy at the national and regional level, can also help to create synergies international levels. This development is reflected so as to realize investment projects that would be in the proliferation of standards, including several too complex and expensive for one country alone. intergovernmental organization standards of the Another policy area that would benefit from more United Nations, the ILO, the IFC and the OECD, international cooperation is investment in sensitive providing guidance on fundamental CSR issues;5 sectors. For example, recent concerns about dozens of multi-stakeholder initiatives; hundreds possible land grabs and the crowding out of local of industry association codes; and thousands of farmers by foreign investors have resulted in the individual company codes (WIR11). Most recently, development by the FAO, UNCTAD, the World Bank the UN Human Rights Council adopted a resolution and IFAD of Principles for Responsible Investment endorsing the Report of the Special Representative in Agriculture (PRAI). of the Secretary-General on the issue of human rights and transnational corporations and other * * * business enterprises. CSR standards are voluntary in nature and so exist Some Core Principles relate to a specific investment as a unique dimension of “soft law”. The principle policy area (e.g. openness to investment, investment calls on governments to actively promote CSR protection and promotion, corporate governance standards and to monitor compliance with them. and social responsibility) and can therefore relatively Promotion also includes the option to adopt existing easily be traced to specific guidelines and options in CSR standards as part of regulatory initiatives, the national and international parts of the framework. turning voluntary standards into mandatory Other Core Principles (e.g. on public governance requirements. and institutions, balanced rights and obligations, Principle 11: International cooperation the right to regulate) are important for investment policymaking as a whole. As a consequence, they This principle considers that investment policies are reflected in guidelines dispersed across the touch upon a number of issues that would benefit entire range of relevant policy issues covered by from more international cooperation. The principle the framework. also advocates that particular efforts should be made to encourage foreign investment in LDCs. The Core Principles interact with each other. The individual principles and corresponding guidelines Home countries can support outward investment therefore must not be applied and interpreted conducive to sustainable development. For a in isolation. In particular, Principle 1 – as the long time, developed countries have provided overarching rule within the policy framework – has investment guarantees against certain political risks relevance for all subsequent principles. Integrating in host countries or offered loans to companies investment policies into sustainable development investing abroad. The Multilateral Investment strategies requires a coherent policy framework. Guarantee Agency (MIGA) provides investment Good public governance is needed in its design insurance at the international level. The principle and implementation. Sustainable development is an builds upon examples of countries that have started ongoing challenge, which underlines the importance to condition the granting of investment guarantees of policymaking dynamics. And an IPFSD needs on an assessment of social and environmental to comprise elements of investment regulation impacts. and corporate governance, on the one hand, The importance of international cooperation also and openness, protection and promotion, on the grows as more and more countries make use of other hand, thereby contributing to an investment targeted investment promotion policies. Better climate with balanced rights and obligations for international coordination is called for to avoid a investors. CHAPTER IV Investment Policy Framework for Sustainable Development 111

D. NATIONAL INVESTMENT POLICY GUIDELINES

This section translates the Core Principles for stage of development, their domestic endowments investment policymaking into concrete guidelines and individual preferences, and depending on at the national level, with a view to addressing the degree to which the political and economic the policy challenges discussed in section B. To system allows or requires the participation of the address these policy challenges – ensuring that State in economic planning. Because investment investment policy is coherent with other policy is a key driver of economic growth, a prerequisite areas supporting a country’s overall development for the build-up of productive capacity and an strategy; enhancing the sustainable development enabler of industrial development and upgrading, impact of investment and promoting responsible investment policy must be an integrated part of investment; and improving policy effectiveness, such development strategies (see box IV.4). while maintaining an attractive investment climate – Defining the role of public, private, domestic and this section, including the detailed policy guidelines foreign direct investment it contains, argues for policy action at three levels: 1. At the strategic level, policymakers should Mobilizing investment for sustainable development ground investment policy in a broad road remains a major challenge for developing countries, map for economic growth and sustainable particularly for LDCs. Given the often huge development – such as those set out in development financing gaps in these countries, formal economic or industrial development foreign investment can provide a necessary strategies in many countries. complement to domestic investment, and it can be particularly beneficial when it interacts in a 2. At the normative level, through the setting of synergetic way with domestic public and private rules and regulations, on investment and in investment. Agriculture, infrastructure and climate a range of other policy areas, policymakers change-related investments, among others, can promote and regulate investment that hold significant potential for mutually beneficial is geared towards sustainable development interaction between foreign and domestic, and goals. public and private investment. For example, 3. At the administrative level, through public-private partnerships (PPPs) have become appropriate implementation and institutional important avenues for infrastructure development mechanisms, policymakers can ensure in developing countries, although experience has continued relevance and effectiveness of shown that high-quality regulatory and institutional investment policies. settings are critical to ensure the development The following sections will look at each of these benefits of such infrastructure PPPs WIR08( ). levels in turn. Given the specific development contributions that 1. Grounding investment policy in can be expected from investment – private and development strategy public, domestic and foreign – policymakers should consider carefully what role each type can play in the Development strategy Many countries have context of their development strategies. In particular should define a clear role elaborated explicit develop- the opportunities and needs for foreign investment for private and foreign ment strategies that set out – intended as direct investment in productive investment in building an action plan to achieve assets (i.e. excluding portfolio investment) – differ productive capacity economic and social from country to country, as does the willingness to and ensure coherence objectives and to strengthen open sectors and industries to foreign investors. across all policy areas international competitiveness. Examples include the improvement of infrastructure, geared towards overall These strategies will vary by investment in skills and education, investments to development objectives. country, depending on their secure food supply, or investments in other specific 112 World Investment Report 2012: Towards a New Generation of Investment Policies

Box IV.4. Integrating investment policy in development Strategy: UNCTAD’s Investment Policy Reviews

UNCTAD’s Investment Policy Review (IPR) program was launched in 1999 in response to growing demand from member States for advice on FDI policy. The IPRs aim to provide an independent and objective evaluation of the policy, regulatory and institutional environment for FDI and to propose customized recommendations to governments to attract and benefit from increased flows of FDI. To date IPRs have been undertaken for 34 countries, including 17 developing countries, 4 transition economies and 13 LDCs, of which 5 in post-conflict situations (box table IV.4.1).

Box table IV.4.1. Beneficiaries of the UNCTAD IPR program, 1999–2011

Categories Countries

Developing countries Algeria, Botswana, Colombia, Dominican Republic, Ecuador, Egypt, El Salvador, Ghana, Guatemala, Kenya, Mauritius, Morocco, Mongolia, Nigeria, Peru, Sri Lanka, Viet Nam

Transition economies Belarus, the former Yugoslav Republic of Macedonia, Republic of Moldova, Uzbekistan

Least developed Benin, Burkina Faso, Burundi, Ethiopia, Lesotho, Mauritania, Mozambique, Nepal, Rwanda, countries Sierra Leone, United Republic of Tanzania, Uganda, Zambia

UNCTAD coordinates its IPR activities with the work of other development partners (including other UN agencies such as the UNDP and UNIDO, the OECD, the World Bank, national and regional development banks, local development institutions and NGOs) in order to create synergies. IPRs are carried out through a structured process, starting with (i) a formal request from the national government to UNCTAD expressing commitment to policy reforms; (ii) preparation of the IPR advisory report and its presentation at a national workshop where government and national stakeholders review findings; (iii) intergovernmental peer review and sharing of best practices in investment policy in Geneva; (iv) implementation and follow-up technical assistance and capacity-building; and (v) preparation of an implementation assessment and additional follow-up actions. Substantively, key areas of recommendations common to nearly all IPRs conducted to date include (i) Defining the strategic role of investment (and in particular FDI) in countries’ development strategies; (ii) Reforming investment laws and regulations; (iii) Designing policies and measures for attracting and benefitting from FDI; and (iv) Addressing institutional issues related to FDI promotion and facilitation. A number of case-specific areas for recommendations or themes have included privatizations, the promotion of investment in target industries, promotion and facilitation of infrastructure investment, private sector development initiatives and business linkages, skill building and technology transfer, and regional cooperation initiatives. Recently, the IPR approach has been strengthened further with the inclusion of sections on specific priority industries, containing a quantitative assessment of the potential for investment in those industries and the potential development impact of investment through such indicators as value added, employment generation, and export generation, with a view to helping governments attract and negotiate higher value added types of investment. Source: UNCTAD; www.unctad.org/diae/ipr. industries that are of crucial importance for a markets (or survival in case of troubled acquisition country. targets), but may also have negative effects (e.g. Even looking at the role of foreign investment per on employment in case of restructurings). Similarly, se, policymakers should be aware of different efficiency-seeking investments will have different types, each with distinct development impacts. development impacts than market-seeking Greenfield investment has different impacts than investments, both with potential positive and investment driven by mergers and acquisitions negative contributions. And foreign investment (M&As). The former will generally imply a greater also comes in different financial guises: FDI does immediate contribution to productive capacity and not always imply an influx of physical capital (e.g. job creation; the latter may bring benefits such as reinvested earnings), nor does it always translate technology upgrading or access to international into actual capital expenditures for the build-up of CHAPTER IV Investment Policy Framework for Sustainable Development 113 productive assets (e.g. retained earnings) and can seeking foreign investors. As such, education and sometimes behave in a manner not dissimilar to human resource development policy should be portfolio investment. considered a key complement to investment policy. Particular care should be given to matching skills Furthermore, the role of foreign investors and needs and skills development, including in terms of multinational firms in an economy is not limited vocational and technical training. Vocational training to FDI. They can also contribute to economic that prepares trainees for jobs involving manual development through non-equity modes of or practical activities related to a specific trade or international production (NEMs), such as contract occupation is a key policy tool, for instance, to manufacturing, services outsourcing, licensing, enhance the capacity of local suppliers. franchising or contract farming. Because this form of involvement is based on a contractual relation As economies develop, skills needs and job between the foreign company and domestic opportunities evolve, making constant adaptation business partners, it requires that the host country and upgrading of education and human has sufficiently qualified local entrepreneurs, which development policies a necessity. The latter are calls for coordinated policies on investment, essential not just to provide the necessary skills enterprise development and human resource to investors, but more crucially to ensure that development (WIR11). the population can gain access to decent work opportunities. A key aspect in defining the role of investment in economic growth and development strategies FDI – as well as NEMs – is particularly sensitive to is the need for calibrated policies to stimulate the availability of local skills, which can frequently job creation and to maximize the job content of be a “make or break” factor in investment location investment, both quantitatively and qualitatively. decisions. Where local skills are partially lacking, This has become especially urgent in light of the foreign and national investors may wish to rely cumulative employment losses during the global on expatriate workers to fill the gaps. Although financial crisis, and the relatively low job content particular care should be paid to promoting of economic growth since, leading to a global employment by nationals and to protecting national employment deficit estimated at over 200 million security, countries have a lot to gain from enabling workers.6 investors to tap foreign skills readily and easily where needed. Well-crafted immigration and labour Harnessing investment for productive policies have had demonstrated benefits in countries capacity-building and enhancing international that have allowed foreign skills to complement and competitiveness fertilize those created locally. Knowledge spillovers The potential contribution of foreign investment to also occur through international employees. An building or reinforcing local productive capacities adequate degree of openness in granting work should guide investment policy and targeting permits to skilled foreign workers is therefore efforts. This is particularly important where important not only to facilitate investments that may investment is intended to play a central role in otherwise not materialize for lack of skills, but also industrial upgrading and structural transformation to support and complement the national human in developing economies. The most crucial aspects resource development policy through education. of productive capacity-building include human Technology and know-how. An important policy task resources and skills development, technology is to encourage the dissemination of technology. For and know-how, infrastructure development, and example, governments can promote technology enterprise development. clusters that promote R&D in a particular industry Human resources and skills. Human resources and that can help upgrade industrial activities by development is a crucial determinant of a country’s bringing together technology firms, suppliers and long-term economic prospects. In addition, the research institutes. Disseminating and facilitating availability of skilled, trainable and productive labour the acquisition of technology can also improve the at competitive costs is a major magnet for efficiency- involvement of domestic producers in GVCs (e.g. 114 World Investment Report 2012: Towards a New Generation of Investment Policies call centers, business processing operations or related concerns with regard to the liberalization contract farming). of critical infrastructure can be taken care of by screening procedures. A clear vision of what is Appropriate protection of intellectual property rights doable and desirable socially, technically and is an important policy tool because it is often a from a business perspective is essential given the precondition for international investors to disclose dependence of economic growth on infrastructure technology to licensees in developing countries, development. especially in areas involving easily imitable technologies (e.g. software, pharmaceuticals), All too many developing countries have attempted and hence can affect chances of attracting to privatize infrastructure or public services only equity investments (e.g. joint ventures) or non- to fail or achieve less than optimal outcomes.7 equity modes of involvement (e.g. licensing). Governments need to develop not only a clear At the same time the level of protection should assessment of what can be achieved and at what be commensurate with the level of a country’s costs, but also a comprehensive understanding of development and conducive to the development the complex technicalities involved in infrastructure of its technological capacities. It can be a means investments and their long-term implications in of encouraging independent research activities by terms of cost, quality, availability and affordability local companies, because businesses are more of services. A sound legal framework to guide likely to invest resources in R&D and technological concessions, management contracts and all forms upgrading if their innovations are protected. of public-private partnerships is a key piece in the infrastructure development and investment Infrastructure. The development of domestic strategies (WIR08). infrastructure may necessitate investments of such magnitude that it is impossible for domestic Enterprise development. Domestic enterprise companies to undertake them alone. Infrastructure development is a key transfer mechanism for development may also require certain technological the development benefits of investment to skills and know-how, which domestic firms do not materialize. At the same time, especially for foreign have (e.g. telecommunication, energy, exploration investors, the presence of viable local enterprise of natural resources in remote areas). Likewise, is a crucial determinant for further investment the move to a low-carbon economy will often and for partnerships in NEMs. A comprehensive necessitate bringing in the technological capacities discussion of policy options to foster domestic of foreign investors. entrepreneurial development – including in areas such as the regulatory environment, access to Most developing countries, especially LDCs, finance, education and training, and technological continue to suffer from vast deficiencies development – can be found in UNCTAD’s in infrastructure, in particular electricity, Entrepreneurship Policy Framework (box IV.5). water and transport, and to a lesser extent telecommunications. Following technological Enterprise development policies aimed at progress and changes in regulatory attitudes, many enhancing the benefits from investment focus on countries have succeeded in introducing private building capacity to absorb and adapt technology (foreign) investment and competition in what and know-how, to cooperate with multinational used to be public sector monopolies, e.g. mobile firms, and to compete internationally. telecommunications or power generation. Another important policy task is the promotion Given the potential contribution of FDI to building of linkages and spillover effects between foreign high-quality infrastructure, countries should investment and domestic enterprises (WIR01). consider the extent to which certain sectors or Policy coordination is needed to ensure that sub-sectors could be opened to (foreign) private investment promotion is targeted to those investment, and under what conditions – balancing industries that could have the biggest impact in considerations of public service provision, terms of creating backward and forward linkages affordability and accessibility. National security- and contribute not just to direct, but also to CHAPTER IV Investment Policy Framework for Sustainable Development 115

Box IV.5. UNCTAD’s Entrepreneurship Policy Framework

Entrepreneurship is vital for economic growth and development. The creation of new business entities generates value added, fiscal revenues, employment and innovation, and is an essential ingredient for the development of a vibrant small and medium-sized business sector. It has the potential to contribute to specific sustainable development objectives, such as the employment of women, young people or disadvantaged groups. Entrepreneurship development can also contribute to structural transformation and building new industries, including the development of eco-friendly economic activities. UNCTAD’s Entrepreneurship Policy Framework (EPF) aims to support developing-country policymakers in the design of initiatives, measures and institutions to promote entrepreneurship. It sets out a structured framework of relevant policy areas, embedded in an overall entrepreneurship strategy, which helps guide policymakers through the process of creating an environment that facilitates the emergence of start-ups, as well as the growth and expansion of new enterprises. The EPF recognizes that in designing entrepreneurship policy “one size does not fit all”. Although the national economic and social context and the specific development challenges faced by a country will largely determine the overall approach to entrepreneurship development, UNCTAD has identified six priority areas that have a direct impact on entrepreneurial activity (box figure IV.5.1). In each area the EPF suggests policy options and recommended actions. Box figure IV.5.1. Key components of UNCTAD’s Entrepreneurship Policy Framework

1 Formulating national entrepreneurship strategy

2 3 4 5 6

Optimizing the Enhancing Facilitating Improving Promoting regulatory entrepreneurship technology access to awareness and environment education and exchange and finance networking skills innovation

The EPF further proposes checklists and numerous references in the form of good practices and case studies. The case studies are intended to equip policymakers with implementable options to create the most conducive and supportive environment for entrepreneurs. The EPF includes a user guide, a step-by-step approach to developing entrepreneurship policy, and contains a set of indicators that can measure progress. An on-line inventory of good practices in entrepreneurship development, available on UNCTAD’s web-site, completes the EPF. This online inventory will provide an opportunity for all stakeholders to contribute cases, examples, comments and suggestions, as a basis for the inclusive development of future entrepreneurship policies. Source: UNCTAD; www.unctad.org/diae/epf. indirect employment creation. At the same time, competitiveness. Promotion efforts should therefore policymakers in developing countries need to not be limited to low value added activities within address the risk of foreign investment impeding international value chains, but gradually seek to domestic enterprise development by crowding out move to higher value added segments. This is local firms, especially SMEs. Industrial policies may crucial for remaining competitive once developing play a role in protecting infant industries or other countries lose their low labour cost advantage. sensitive industries with respect to which host However, switching from labour-intensive low-value countries see a need to limit foreign access. activities to more capital-intensive, higher-value production methods may raise unemployment In the long run, enterprise development is essential in the transition phase and thus calls for vigilant if host countries are to improve international 116 World Investment Report 2012: Towards a New Generation of Investment Policies

labour market and social policies. This confirms the can have an important pro-poor dynamic to the important dynamic dimension of investment and extent that marginalized communities and small enterprise development strategies, calling for regular suppliers can integrate into global or regional value reviews and adaptation of policy instruments. chains as producers, suppliers or providers of goods and services. Ensuring coherence between investment policies and other policy areas geared towards overall These positive development impacts of FDI do development objectives not always materialize automatically. And the The interaction between investment policy and effect of FDI can also be negative in each of the other elements of a country’s overall economic impact areas listed above. For example, it can lead development and growth strategy – including to outflows of financial resources in the form of human resource development, infrastructure, repatriated earnings or fees; it can, under certain technology, enterprise development, and others – circumstances, crowd out domestic investment is complex. It is critical that government authorities and domestic enterprise (WIR97); it can at times work coherently towards the common national reduce employment by introducing more efficient objective of sustainable development and inclusive work practices or through restructurings (WIR94, growth, and seek to create synergies. This requires WIR00), or jobs created may be unstable due to coordination at the earliest stages of policy design, the footloose nature of some investment types; it as well as the involvement of relevant stakeholders, can increase imports more than exports (or yield including the investor community and civil society. limited net export gains), e.g. in case of investment operations requiring intermediate inputs or for 2. Designing policies for responsible market-seeking investments (WIR02, WIR11); investment and sustainable technology dissemination might not take place, development or only at high cost (e.g. through licensing fees) (WIR11), and local technological development may Maximizing positive From a development perspective, be slowed down; skills transfers may be limited and minimizing negative FDI is more than a flow of capital by the nature of jobs created; fiscal gains may impacts of investment that can stimulate economic be limited by tax avoidance schemes available to requires balancing growth. It comprises a package international investors, including transfer pricing; investment promotion of assets that includes long- and so forth. and regulation. CSR term capital, technology, The balance of potential positive and negative standards can comple- market access, skills and development contributions of FDI is proof that ment the regulatory know-how (WIR99). As such, investment policy matters in order to maximize framework. it can contribute to sustainable the positive and minimize the negative impacts. development by providing Reaping the development benefits from investment financial resources where such resources are requires not only an enabling policy framework often scarce; generating employment (WIR94); that combines elements of investment promotion strengthening export capacities (WIR02); and regulation and that provides clear, unequivocal transferring skills and disseminating technology; and transparent rules for the entry and operation adding to GDP through investment and value of foreign investors (see box IV.6), it also requires added, both directly and indirectly; and generating adequate regulation to minimize any risks fiscal revenues. In addition, FDI can support associated with investment. industrial diversification and upgrading, or the upgrading of agricultural productivity (WIR09) The host of different impact types listed above and the build up of productive capacity, including indicates that such regulations need to cover a infrastructure (WIR08). Importantly, it can contribute broad range of policy areas beyond investment to local enterprise development through linkages policies per se, such as trade, taxation, intellectual with suppliers (WIR01) and by providing access to property, competition, labour market regulation, GVCs (WIR11). The growing importance of GVCs environmental policies and access to land. The CHAPTER IV Investment Policy Framework for Sustainable Development 117 coverage of such a multitude of different policy for a nascent renewable energy sector, which may areas confirms the need for consistency and also require government assistance in the start-up coherence in policymaking across government. phase, be it through tax incentives or measures aimed at creating a market (WIR10). Encouraging Fostering sustainable development and inclusive investment in sectors that are crucial for the poor growth through investment requires a balance of may imply building sound regulatory frameworks promotion and regulation. On the promotion side, and facilitating responsible investment in agriculture attracting low-carbon investment, for example, may (including contract farming), as agriculture imply the need to set up new policy frameworks

Box IV.6. Designing sound investment rules and procedures: UNCTAD’s Investment Facilitation Compact

UNCTAD’s Investment Facilitation Compact combines a number of programmes aimed at assisting developing countries in strengthening their policy and institutional framework for attracting and retaining foreign investment, and in developing a regulatory climate in which investors can thrive. The UNCTAD-ICC Investment Guides aim to provide accurate and up-to-date information on regulatory conditions in participating countries (as well as on the investment climate and emerging investment opportunities). They are prepared in collaboration with governments, national chambers of commerce and investors and are distributed by investment promotion agencies, foreign missions and other government departments, as well as by the International Chamber of Commerce. The guides aim to provide a reliable source of third-party information for investors looking to invest in countries that are rarely covered by commercial publishers. They highlight often under-reported economic and investment policy reform efforts, including fiscal incentives, regional integration, easier access to land, establishment of alternative dispute settlement mechanisms, simplified border procedures, facilitation of permits and licenses and laws enabling private investment in power generation and infrastructure. Because the guides are produced through a collaborative process they also build capacities of governments to promote investment opportunities and understand investors’ needs. UNCTAD’s Business Facilitation program aims to help developing countries build a regulatory and institutional environment that facilitates investment and business start-ups. It works through a methodology that first provides full transparency on existing rules and procedures for investors; it does so by offering online detailed, practical and up-to-date descriptions of the steps investors have to follow for procedures such as business or investment registration, license and permit issuance, payment of taxes, or obtaining work permits. Once full transparency has been created, the program helps governments simplify procedures by identifying unnecessary steps or developing alternatives. The programme promotes good governance by increasing the awareness of administrative rules and procedures, establishing the conditions for a balanced dialogue between the users of the public services, including investors, and civil servants. It also sets a basis for regional or international harmonization of rules by facilitating the exchange of good practices among countries. Individual programmes within the Investment Facilitation Compact have to date been undertaken in more than 35 countries and regions, with a strong focus on LDCs (box table IV.6.1).

Box table IV.6.1. Beneficiaries of selected programs of UNCTAD’s Investment Facilitation Compact

Categories Countries/regions Investment Guides Bangladesh, Benin, Bhutan, Burkina Faso, Cambodia, Comoros, East African Community, Ethiopia, Kenya, Lao People’s Democratic Republic, Mali, Morocco, Oriental Region of Morocco, Mauritania, Mozambique, Nepal, Rwanda, United Republic of Tanzania, Silk Road Region, Uganda, Uzbekistan, Zambia Business Facilitation Benin, Burkina Faso, Cape Verde, Cameroon, Colombia, Comoros, Costa Rica, El Salvador, Guatemala, Mali, Nicaragua, Togo, Russian Federation (City of Moscow), Rwanda, Viet Nam

Source: UNCTAD; www.unctad.org; www.theiguides.org; www.eregulations.org. 118 World Investment Report 2012: Towards a New Generation of Investment Policies continues to be the main source of income in many 3. Implementation and institutional developing countries (WIR09). mechanisms for policy effectiveness At the same time, on the regulatory side, Investment policy and regulations Ensuring policy sustainability considerations should be a key must be adequately enforced consideration when deciding on the granting of effectiveness implies by impartial, competent and investment incentives. The short-term advantages building institutional efficient public institutions, of an investment need to be weighed against the capability, monitoring which is as important for policy potential long-term environmental effects. And the implementation, and effectiveness as policy design sensitive issue of access to land requires careful measuring results itself. Policies to address balancing of the rights and obligation of agricultural against objectives. implementation issues should investors. For many developing countries, it is a key be an integral part of the investment strategy challenge to strengthen such environmental and and should strive to achieve both integrity across social protection while maintaining an attractive government and regulatory institutions and a investment climate. service orientation where warranted. As a widely Sustainability issues should also be a main accepted best practice, regulatory agencies consideration in investment contracts between should be free of political pressure and have the host country and individual investors. Such significant independence, subject to clear reporting contracts can be a means to commit investors to guidelines and accountability to elected officials or environmental or social standards beyond the level representatives. These principles are particularly established by the host country’s general legislation, relevant for investors in institutions including courts taking into account international standards and and judiciary systems; sectoral regulators (e.g. best practices. electricity, transport, telecommunications, banking); customs; tax administration or revenue authorities; While laws and regulations are the basis of investment promotion agencies; and licensing investor responsibility, voluntary CSR initiatives and bodies. standards have proliferated in recent years, and they are increasingly influencing corporate practices, As stated in the fourth Core Principle, managing behaviour and investment decisions. Governments investment policy dynamically is of fundamental can build on them to complement the regulatory importance to ensure the continued relevance framework and maximize the development benefits and effectiveness of policy measures. Revisions of investment (WIR11). in investment policy may be driven by changes in strategy – itself caused by adaptations in the Because CSR initiatives and voluntary standards overall development strategy – or by external are a relatively new area that is developing quickly factors and changing circumstances. Countries and in many directions, the management of require different investment policies at different their policy implications is a challenge for many stages of development, policies may need to take developing countries. In particular, the potential into account those in neighbouring countries, and interactions between soft law and hard law can be cognizant of trade patterns or evolving relative be complex, and the value of standards difficult shares of sectors and industry in the economy. to extract for lack of monitoring capacity and Policy design and implementation is a continuous limited comparability. A number of areas can process of fine-tuning and adaptation to changing benefit from the encouragement of CSR initiatives needs and circumstances. and the voluntary dissemination of standards; for example, they can be used to promote responsible Beyond such adaptations, investment policy may investment and business behaviour (including the also need adjustment where individual measures, avoidance of corrupt business practices), and they entire policy areas, or the overall investment policy can play an important role in promoting low-carbon regime is deemed not to achieve the intended and environmentally sound investment. Care needs objectives, or to do so at a cost higher than to be taken to avoid these standards becoming intended. Understanding when this is the case, undue barriers to trade and investment flows. understanding it in time for corrective action to CHAPTER IV Investment Policy Framework for Sustainable Development 119 be taken, and understanding the reasons for the the objectives. These objectives should be failure of measures to have the desired effect, is the the principal yardstick for measuring policy essence of measuring policy effectiveness. effectiveness. A significant body of academic literature exists on • The detailed quantitative (and therefore methodologies for evaluating policy effectiveness. complex) measurement of the effectiveness Specifically in the area of investment policy, there of individual policy measures should focus are three objective difficulties associated with the principally on those measures that are most measurement of policy effectiveness: costly to implement, such as investment incentives. • It is often difficult to assess the effectiveness of discrete investment policy measures, such • Assessment of progress in policy as the provision of incentives, let alone the implementation and verification of the effectiveness of the overall investment policy application of rules and regulations at all framework. Many exogenous factors and administrative levels is at least as important investment determinants beyond policy drive as the measurement of policy effectiveness. the investment attraction performance of a A review process should be put in place to country – e.g. market size and growth, the ensure that policies are correctly implemented presence of natural resources, the quality as a part of the assessment of policy of basic infrastructure, labour productivity, effectiveness. and many others (see UNCTAD’s Investment Goals and objectives for investment policy, as Potential Index). set out in a formal investment strategy in many • Investment policy effectiveness measures countries, should be SMART:8 should also provide an indication of the extent • Specific: they should break down objectives to which policies help realize the benefits from for investment attraction and impact for priority investment and maximize its development industries or activities as identified in the impact. However, it is often difficult to find development strategy. solid evidence for the discrete impact on various dimensions of investment, let alone • Measurable: investment goals and objectives for the impact of the policies that led to that should identify a focused set of quantifiable investment or that guide the behaviour of indicators. investors. • Attainable: as part of investment policy • Much of the impact of investment policies development, policymakers should compare and thus their effectiveness depends on the investment attraction and investment impact way such policies are applied, and on the with peer countries to inform realistic target capabilities of institutions charged with the setting. implementation and enforcement of policies • Relevant: objectives (and relevant indicators) and measures, rules and regulations. should relate to impacts that can be ascribed Given these objective difficulties in measuring to investment (and by implication investment the effectiveness of investment policies, and to policy), to the greatest extent possible filtered ensure that potentially important policy changes for “general development strategy” impacts. are not delayed by complex analyses of the impact • Time-bound: objectives should fall within a of individual measures, policymakers may be variety of time frames. Even though broad guided by a few simplifying rules in evaluating the development and investment-related objectives effectiveness of their policies: are of a long-term nature (e.g. 10-20 years), • Investment policy should be based on a set of intermediate and specific objectives should explicitly formulated policy objectives with clear refer to managerially and politically relevant priorities, a time frame for achieving them, and time frames, e.g. 3-4 years. In addition, short- the principal measures intended to support term benchmarks should be set within shorter 120 World Investment Report 2012: Towards a New Generation of Investment Policies

time periods (a few quarters or a year) to more advanced stages, quality of employment and ensure effective progress and implementation. technology contributions may gain relevance. Objectives of investment policy should ideally include a number of quantifiable goals for both 4. The IPFSD’s national policy guidelines the attraction of investment and the impact of The national investment policy The national investment investment. To measure policy effectiveness for guidelines are organized in policy guidelines help the attraction of investment, UNCTAD’s Investment four sections, starting from the Potential and Attraction Matrix can be a useful tool. policymakers integrate strategic level, which aims to investment and deve- This matrix compares countries with their peers, ensure integration of investment lopment strategy, plotting investment inflows against potential based policy in overall development design investment- on a standardized set of economic determinants, strategy, moving to investment thereby providing a proxy for the effect of policy policy “stricto sensu”, to specific policies, determinants. Similarly, for the measurement of investment-related policy areas ensure coherence with policy effectiveness in terms of impact, UNCTAD’s such as trade, taxation, labour other policy areas, Investment Contribution Index may be a starting and environmental regulations, and improve policy point. and intellectual property effectiveness. Also important is the choice of impact indicators. policies, to conclude with a section on investment Policymakers should use a focused set of key policy effectiveness (table IV.4). indicators that are the most direct expression of While the national guidelines in the IPFSD are the core development contributions of private meant to establish a generally applicable setting investments, including direct contributions to GDP for investment-related policymaking, they growth through additional value added, capital cannot provide a “one-size-fits-all” solution for all formation and export generation; entrepreneurial economies. Countries have different development development and development of the formal sector strategies and any policy guide must acknowledge and tax base; and job creation. The indicators these divergences. Governments may have could also address labour, social, environmental different perceptions about which industries to and development sustainability aspects. promote and in what manner, and what role The impact indicator methodology developed foreign investors should play in this context. Social, for the G-20 Development Working Group by cultural, geographical and historical differences play UNCTAD, in collaboration with other agencies, may a role as well. Furthermore, the investment climate provide guidance to policymakers on the choice of of each country has its individual strengths and indicators of investment impact and, by extension, weaknesses; therefore, policies aimed at building of investment policy effectiveness (see table IV.3). upon existing strengths and reducing perceived The indicator framework, which has been tested deficiencies will differ. Thus investment policies in a number of developing countries, is meant need to be fine-tuned on the basis of specific to serve as a tool that countries can adapt and economic contexts, sectoral investment priorities adopt in accordance with their national economic and development issues faced by individual development priorities and strategies. At early countries. The IPFSD’s national investment policy stages of development, pure GDP contribution guidelines establish a basic framework. Other tools and job creation impacts may be more relevant; at are available to complement the basic framework with customized best practice advice (box IV.7). CHAPTER IV Investment Policy Framework for Sustainable Development 121

Table IV.3. Possible indicators for the definition of investment impact objectives and the measurement of policy effectiveness

Areas Indicators Details and examples Economic 1. Total value added • Gross output (GDP contribution) of the new/additional economic activity resulting from the value added investment (direct and induced) 2. Value of capital formation • Contribution to gross fixed capital formation 3. Total and net export generation • Total export generation; to some extent, net export generation (net of imports) is also captured by the local value added indicator 4. Number of formal business entities • Number of businesses in the value chain supported by the investment; this is a proxy for entrepreneurial development and expansion of the formal (tax-paying) economy 5. Total fiscal revenues • Total fiscal take from the economic activity resulting from the investment, through all forms of taxation Job creation 6. Employment (number) • Total number of jobs generated by the investment, both direct and induced (value chain view), dependent and self-employed 7. Wages • Total household income generated, direct and induced 8. Typologies of employee skill levels • Number of jobs generated, by ILO job type, as a proxy for job quality and technology levels (including technology dissemination) Sustainable 9. Labour impact indicators • Employment of women (and comparable pay) and of disadvantaged groups development • Skills upgrading, training provided • Health and safety effects, occupational injuries 10. Social impact indicators • Number of families lifted out of poverty, wages above subsistence level • Expansion of goods and services offered, access to and affordability of basic goods and services 11. Environmental impact indicators • Greenhouse gas emissions, carbon offset/credits, carbon credit revenues • Energy and water consumption/efficiency hazardous materials • Enterprise development in eco-sectors 12. Development impact indicators • Development of local resources • Technology dissemination Source: “Indicators for measuring and maximizing economic value added and job creation arising from private sector investment in value chains”, Report to the G-20 Cannes Summit, November 2011; produced by an inter-agency working group coordinated by UNCTAD. UNCTAD has included this methodology in its technical assistance work on investment policy, see box IV.4.

Table IV.4. Structure of the National Investment Policy Guidelines

Investment and • Integrating investment policy in sustainable development strategy sustainable • Maximizing the contribution of investment to productive capacity-building and international development strategy competitiveness

• Designing investment-specific policies regarding: – Establishment and operations Investment regulation – Treatment and protection of investments and promotion – Investor responsibilities – Investment promotion and facilitation

• Ensuring coherence with other policy areas, including trade, taxation, intellectual property, Investment-related competition, labour market regulation, access to land, corporate responsibility and policy areas governance, environmental protection, and infrastructure and public-private partnerships

• Building effective public institutions to implement investment policy Investment policy • Measuring investment policy effectiveness and feeding back lessons learned into new rounds effectiveness of policymaking 122 World Investment Report 2012: Towards a New Generation of Investment Policies

Box IV.7. Investment policy advice to “adapt and adopt”: UNCTAD’s Series on Best Practices in Investment for Development

As with UNCTAD’s IPR approach (see box IV.4), in which each IPR is custom-designed for relevance in the specific context of individual countries, the UNCTAD work program on Best Practices in Investment for Development acknowledges that one size does not fit all. The program consists of a series of studies on investment policies tailored to: – specific sectors of the economy (e.g. infrastructure, natural resources); – specific development situations (e.g. small economies, post-conflict economies); – specific development issues (e.g. capacity-building, linkages). The program aims to build an inventory of best policy practices in order to provide a reference framework for policymakers in developing countries through concrete examples that can be adapted to their national context. Each study therefore looks at one or two specific country case studies from which lessons can be drawn on good investment policy practices related to the theme of the study. The following studies are currently available: – How to Utilize FDI to Improve Transport Infrastructure: Roads – Lessons from Australia and Peru; – How to Utilize FDI to Improve Transport Infrastructure: Ports – Lessons from Nigeria; – How to Utilize FDI to Improve Infrastructure: Electricity – Lessons from Chile and New Zealand; – How to Attract and Benefit from FDI in Mining – Lessons from Canada and Chile; – How to Attract and Benefit from FDI in Small Countries – Lessons from Estonia and Jamaica; – How Post-Conflict Countries Can Attract and Benefit from FDI – Lessons from Croatia and Mozambique; – How to Integrate FDI and Skill Development – Lessons from Canada and Singapore; – How to Create and Benefit from FDI-SME Linkages – Lessons from Malaysia and Singapore; – How to Prevent and Manage Investor-State Disputes – Lessons from Peru. Source: UNCTAD; www.unctad.org. CHAPTER IV Investment Policy Framework for Sustainable Development 123 Investment in specific economic activities, e.g. as an integral part of industrial development strategy. of public and private investment (including a framework for public-private partnerships). for mutual reinforcement Areas decent work opportunities, enhancing sustainability, Investment that makes a significant development contribution by creating capacity (see 1.2) and international productive competitiveness. Investment and/or by expanding and qualitatively improving comparative advantages and development challenges analysis of the country’s policy priorities should be based on a thorough key bottlenecks for attracting FDI. and opportunities, should address - - - Policy Guidelines a in grounded and goals development sustainable national of realization the towards geared be should policy Investment It should set out strategic priorities, including: overall development strategy. country’s formalized in a published document (e.g. investment strategy), making Strategic investment policy priorities may be effectively sustainable development strategy and investment in the country’s of private and foreign explicit the intended role a clear signal to both investors and stakeholders involved in investment policymaking. priorities, and providing into and skills transfer should be one of the criteria for determining investment priorities. Taking The potential for job creation development (HRD) and investment, investment policy should link between human resource account the mutually reinforcing crucial for development priorities, whether technical, vocational, managerial inform HRD policy to prioritize skill building in areas skills. or entrepreneurial technologies and the dissemination of know-how should be one criteria for The potential for the transfer of appropriate policies, including taxation and adequate investment-related through determining investment priorities, and should be promoted intellectual property. FDI, in particular under PPPs, should be an integral part of investment development through The potential for infrastructure crucial for the building of areas development policies should give due consideration to basic infrastructure Infrastructure policy. sea- and airports or industrial parks, in line with investment priorities. capacities, including utilities, roads, productive partnerships serve the public interest that investor-State regulatory framework for PPPs should be in place to ensure A specific (see also section 3.9 below). The potential for FDI to generate business linkages and stimulate local enterprise development should be a key criterion in defining investment policy and priorities for FDI attraction. Enterprise development business facilitation policies (including through such activity yields particularly significant benefits activity where entrepreneurial access to finance) should promote investments. linkages and acts as a crucial locational determinant for targeted foreign the international a clear message towards business community on FDI (e.g. in country’s Investment policy benefits from these exist). Attracting high levels of diverse and beneficial FDI calls investment, where investment strategy or law on foreign restrictions subject to qualifications and selective for a general policy of openness and avoidance investment protectionism, of public goods or the the provision country-specific development needs and policy concerns,regarding to address such as over strategic industries and critical infrastructure. control 1.1.1 1.1.2 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 2.1.1 Human resource Human resource development and Technology know-how Infrastructure Enterprise development Policy statement on of FDI and degree openness Sub-sections Strategic investment policy priorities Investment policy coherence for productive capacity-building Entry, establishment and operations of investors foreign 1.1 1.2 2.1 Sections Investment and sustainable development strategy Investment regulation and promotion 1 2 UNCTAD Investment Policy Framework for Sustainable Development UNCTAD National investment policy guidelines 124 World Investment Report 2012: Towards a New Generation of Investment Policies to regulate, regulatory changes should take into account regulatory to regulate, duty but the right protecting the national interest, national security, control over natural resources, critical infrastructure, public health, the environment; or public health, the environment; critical infrastructure, over natural resources, control national security, the national interest, protecting Policy Guidelines should with countries’ right to regulate, investment, in full accordance or limitations on the entry of foreign Ownership restrictions a to limited best are They interests. special by influenced be not should and policy objectives national legitimate by justified be few explicitly stated aims, including: - with a published development strategy or investment strategy. national development objectives in accordance - promoting need to be in conformity with international Such restrictions commitments. ownership in specific industries or economic activities should be clearly specified; a list of Restrictions on foreign a limitations) apply has the advantage of achieving such clarity while preserving (e.g. prohibitions, restrictions industries where policy of general openness to FDI. and of the level ownership caps to evaluate whether they should take place of any ownership restrictions A periodic review achievement of these objectives. method to ensure and cost-effective the most appropriate remain pre-established following conducted be should applicable, where establishment, and entry investment for procedures Screening objective criteria. timely, and effectively securely, property of forms other and land to titles or of ownership register to able be should Investors also (see regard this in challenges development specific mind in bearing finance, debt to access facilitate to order in including 3.6 below). of operations the freedom in business management and respect intrusions or indirect Governmentsshould avoid direct of investors to decide whether they private companies, subject to compliance with domestic laws. This includes the freedom want to invest at home or abroad. operational constraints should be used sparingly and only to the extent that they are and related Performance requirements necessary to achieve legitimate public policy purposes. They need be in compliance with international obligations and would typically be imposed principally as conditions for special privileges, including fiscal or financial incentives. that is based on the rule of law. or domestic, should be granted treatment Established investors and investments, foreign should not be discriminated against vis-à-vis national investors in the investors and investments As a general principle, foreign policies that development objectives require post-establishment phase and in the conduct of their business operations. Where for efficacy and periodically reviewed and domestic investment, these should be limited, transparent distinguish between foreign against those objectives. They need to be in line with international commitments, including REIOs. that countries have not only the While recognizing of the investment climate. stability and predictability the need to ensure on the transfer of capital, countries considerations warrant restrictions the level of development or macro-economic Where other (particularly short-term) capital account transactions. from transactions differently FDI-related should seek to treat assets, subject to to investments in productive capital related to transfer and repatriate Countries should guarantee the freedom (including to fight money laundering) and prior compliance with tax obligations, subject potential requirements reporting should be periodically Controls due to balance of payment crises and in compliance with international temporary restrictions law. for efficacy. reviewed 2.1.2 2.1.3 2.1.4 2.1.5 2.1.6 2.1.7 2.1.8 2.2.1 2.2.2 2.2.3 2.2.4 Screening and entry Screening restrictions registration Property of Freedom operations Performance requirements under the Treatment rule of law of standards Core treatment of funds Transfer Sub-sections and Treatment of protection investors 2.2 Sections Investment regulation and promotion (continued) CHAPTER IV Investment Policy Framework for Sustainable Development 125 Policy Guidelines account transactions, including FDI-related for current convertibility of their currency Countries should guarantee the free account transactions should to convertibility for current and others. Any restriction earnings royalties and dividends, interests, with existing international be in accordance obligations and flexibilities, particular the IMF Articles of Agreement. for the of contracts. Mechanisms and proceedings in the enforcement All investors should be entitled to equal treatment and available to all investors so as duly operate under the and effective, efficient of contracts should be timely, enforcement rule of law. fundamental a invoke can they unless investors, with contracts investment from deriving obligations their honour should States with national and international in accordance law. or other legitimate reasons change of circumstances or nationalization should be undertaken in a non- When warranted for legitimate public policy purposes, expropriations Decisions and compensation should be provided. of law, discriminatory manner and conform to the principle of due process to avoid arbitrariness. and reviews should be open to recourse of measures Governments and accountability for the implementation periodic review should assign explicit responsibility be can mechanisms (ADR) alternative resolution dispute Strong IIAs. under commitments with compliance effective ensure to means to avoid international effective arbitration of disputes. regulations. This obligation should apply and laws and obligation is to comply with a host country’s Investors’ first and foremost investors, as should sanctions for non-compliance. indiscriminately to national and foreign be enforced investment and codes of conduct by Governments to internationalof responsible should encourage adherence standards Declaration, the OECD Guidelines for include the ILO Tri-partite which may serve as reference investors. Standards foreign the UN Investment, Responsible Agricultural Bank Principles for and World IFAD FAO the UNCTAD, Enterprises, Multinational Guiding Principles on Business and Human Rights others. In addition, countries may wish to translate soft rules into national legislation. investment encourage to (IPA) agency promotion an investment to assigned be should accountability and responsibility Explicit their facilitating towards view a with requirements procedural and administrative with complying in investors assist to and establishment, operation and development. in national investment policy objectives and regularly should be grounded of the IPA The mission, objectives and structure and advocacy. should include image building, targeting, facilitation, aftercare functions of IPAs The core reviewed. the general business climate to improve should support efforts As the prime interface between Government and investors, IPAs tape. and eliminate red and accountability for such procedures investors, responsibility is imposed on foreign approval or preliminary screening Where to avoid potential conflicts of interest. and facilitation functions in order investment promotion should be clearly separate from and communication, of channels informal and formal its through issues cross-ministerial resolve to position a in be should IPAs that board operational an Government. of level high through governance Its sufficiently a at ensured be should reporting by the private sector. ministries and from relevant includes members from against investment policy objectives. The in attracting investment should be periodically reviewed of the IPA The effectiveness reviewed in light of international and its working methods should also be best practice. of the IPA efficiency 2.2.5 2.2.6 2.2.7 2.2.8 2.2.9 2.3.1 2.3.2 2.4.1 2.4.2 2.4.3 2.4.4 2.4.5 2.4.6 Contract and enforcement dispute settlement Investment contracts Expropriation International commitments Responsible investment Standards Investment authority and investment agency promotion Sub-sections Investor obligations Promotion and Promotion facilitation of investment 2.3 2.4 Sections Investment and regulation promotion (continued) 126 World Investment Report 2012: Towards a New Generation of Investment Policies Policy Guidelines investment in special economic zones, as well that of authorities promoting The work of national and sub-national IPAs, and effectiveness. maximum efficiency to ensure should be closely coordinated should establish close working relationships and facilitate investment, the IPA of Governmentto promote Being at the core efforts a with investors. It should seek to promote agencies dealing directly with regulatory secondment of staff) (including through efforts. overseas promotion client-oriented attitude in public administration. It may enlist the diplomatic service to strengthen assessed in terms of long-term costs and Investment incentives, in whatever form (fiscal, financial or other), should be carefully of incentives benefits costs and The effects. distortion potential to due consideration giving to implementation, prior benefits evaluated. objectives thoroughly in achieving the desired and their effectiveness should be periodically reviewed granted to support nascent industries, self-sustained viability (i.e. without the need for investment incentives are Where incentives) should be the ultimate goal so as to avoid subsidizing non-viable industries at expense of economy to permanent tax measures is good practice, without precluding a whole. A phase-out period built in the incentive structure positive or negative externalities. address development the country’s and explicitly derived from The rationale and justification for investment incentives should be directly international adoption, including through for achieving the objectives should be fully assessed before Their effectiveness strategy. comparability. of an independent entity or ministry that does not have The granting and administration of incentives should be the responsibility conflicting objectives or performance targets for investment attraction. as a means to attract investment, or compete should not be lowered standards labour and other regulatory Environmental, race to the bottom”. for investment in a “regulatory criteria. They objective, clear and transparent Investment incentives should be granted on the basis of a set pre-determined, criteria (performance the Compliance with criteria. these fulfilling to projects basis non-discriminatory on a be offered should the incentives. basis as a condition to benefit from on a regular should be monitored requirements) incentives must be shown to make an exceptional contribution development Investment incentives over and above pre-defined should be attached, including with a view to avoiding “race the top of incentives”. objectives, and additional requirements to grant incentives over and above the pre- by sub-national entities which have the discretion Investment incentives offered by a central investment authority to avoid investors “shopping around”. defined limits, should be coordinated Governments and IPAs investors and national companies do not always develop naturally, As business linkages between foreign and facilitate them. Undue intrusion in business partnerships should be avoided as mutually beneficial should actively nurture and sustainable linkages cannot be mandated. intermediation between national and foreign that Governmentslinkages include: (1) direct Measures should consider to promote or technology upgrading; investors to close information gaps; (2) support (financial and other) national companies for process along the lines of international (3) selective FDI targeting; (4) establishment of national norms and standards, ones (e.g ISO of entrepreneurship. investors to assist in upgrading of local SMEs and promotion and (5) incentives for foreign standards); considered carefully and sparingly used be should requirements, as joint-venture such linkages, promote practices to Mandatory to avoid unintended adverse effects. business and promote to nurture and accountability should be assigned to the investment authority or IPA Explicit responsibility mandate. investors as part of its aftercare linkages established by foreign policy country’s the in crucial deemed areas skill in employees to training offer to businesses encourage should policies Specific linked to investment incentives. performance requirements development, including through on human resource 2.4.7 2.4.8 2.4.9 2.4.10 2.4.11 2.4.12 2.4.13 2.4.14 2.4.15 2.4.16 2.4.17 2.4.18 2.4.19 2.4.20 2.4.21 Investment incentives and guarantees of Promotion business linkages and spillovers Sub-sections Sections Investment regulation and promotion (continued) CHAPTER IV Investment Policy Framework for Sustainable Development 127 Policy Guidelines investors, and the size of local/regional foreign and efficiency-seeking Access to global markets is essential for resource- the particular (in internationalin participation Active investors. market-seeking for important equally is markets agreements trade an integral part of development strategy and a key level should be considered WTO) and enhanced integration at the regional investment. factor in promoting (e.g. export finance, import measures barriers, and trade promotion/facilitation and non-tariff policies, including tariffs Trade or discourage insurance schemes, support to obtain compliance with internationaland norms) can selectively promote standards investment in specific industries. They should be defined line with (industrial) development objectives and policy. should be periodically benchmarked against international best practice procedures of border Compliance costs and efficiency and should avoid as much possible forming an obstacle to the attraction of export-oriented investment or that on imports of intermediate goods. relies including internationalcosts and benchmarking, of corporate taxation (and fiscal incentives) for effectiveness, A periodic review, regime, of the tax Reviews should consider costs linked to the structure benefits should be an integral part of investment policy. including (1) administrative and compliance costs for investors, (2) monitoring the tax authorities, linked to tax evasion and/or engineering. and (3) forgone revenue should be avoided and they accompanied by clear guidelines, Undue complexity of income tax law and regulations and national alike. essential for all investors, foreign are and impartiality of the tax regime predictability as transparency, investors. of domestic and foreign The tax system should tend to neutrality in its treatment incentives can be used for the encouragement of investment in specific industries development strategy, In line with a country’s skills upgrading, technology dissemination). regional development, job creation, to achieve specific objectives (e.g. or in order general tax regime. seek to compensate for an unattractive or inappropriate Fiscal incentives for investors should not by nature be should incentives tax of proliferation and exception the not and norm the be should regime tax income corporate general The create to monitor, avoided as they quickly lead to distortions, generate unintended tax avoidance opportunities, become difficult at the expense of general public. special interests administrative costs and may end up protecting essential to minimize tax engineering and evasion. Developing and clearly defined transfer pricing rules are Well-established internationalon build can countries Internationalpractices. best manipulative fight to key is authorities tax between cooperation transfer pricing practices. negotiate FDI. Developing countries should carefully and outward inward tool to promote an effective are Double taxation treaties prevails. that the principle of “taxation at source” to ensure such treaties internationalnetwork should focus on major countries of origin for the types investment prioritized in tax treaty A country’s its investment policy. should meet the rights and mechanisms for their enforcement of intellectual property for the protection Laws and regulations and industries) IP-sensitive in investment attract to policy aims investment where (especially investors of prospective need for sanctions against the abuse by IPR firms, while providing encourage innovation and investment by domestic foreign the emergence of legitimate competing designs or of IP rights in a manner that prevents holders of IP rights (e.g. the exercise of their IP rights less aware frequently technologies) and allowing for the pursuit of public good. As national investors are they should be educated on the issue. 3.1.1 3.1.2 3.1.3 3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.2.6 3.2.7 3.2.8 3.3.1 International trade agreements and restriction Trade promotion Customs and border procedures Corporate taxation Fiscal incentives pricing Transfer and international cooperation Double taxation treaties Sub-sections policy Trade policy Tax Intellectual property 3.1 3.2 3.3 Sections Investment- related policies 3 128 World Investment Report 2012: Towards a New Generation of Investment Policies Policy Guidelines granted under internationalincluding encouraged to integrate the flexibilities in IP protection treaties, Developing countries are opportunities into national legislation and consider the extent to which these flexibilities can create TRIPS agreement, the WTO’s of pharmaceuticals). for investment attraction (e.g. in the production of competition, abuse market power and economic covering practices in restraint Competition laws and regulations, the benefits from essential to reap mechanisms, are monitoring and enforcement concentration together with effective and domestic. fair rules and a level playing field for all investors, foreign investment and should provide any anti-competitive Investment policymakers should cooperate closely with competition authorities, a view to addressing and industries priority to paid be should attention Particular investment. inhibit may that enterprises incumbent by practices investment types. to fall under a public services obligation or for investment policy pursues objectives for sectors that may be considered Where sectors (e.g. public transport, utilities, telecommunications), competition authorities should be actively involved in regulated closely with sectoral regulators. coordinating policies and measures, shaping relevant to M&As, as well the policy framework for privatizations, should support development Competition laws and decisions related sector for further continued attractiveness of the relevant strategy and investment policy objectives, should ensure abuse of dominant market power. investment by avoiding market exclusivity and preventing M&As, between competition authorities in neighbouring countries should be pursued case of cross-border Close coordination particularly in small economies. degree an appropriate including through objectives in investment policy, should support job creation Labour market regulations abusive labour practices. from At the same time, employees should be protected of labour market flexibility. the right for child labour, in particular regarding labour standards, Countries need to guarantee internationallycore recognized as guaranteed by the ILO conventions country is a party to. Effective protections and other core collective representation and domestic firms. should be put in place and applied equally to foreign labour standards core mechanisms to promote industries capacity and employment to priority investment areas, Adjustment costs or friction caused by shifting productive social (e.g. re-training, labour market policies both in should be addressed investment policy with in accordance or activities support) and in investment policy (e.g. encouraging investors to help ease transition costs). Labour policy and/or immigration can at times be critical to the success of individual investment projects. Expatriate staff personnel, including in skilled trades/artisan jobs, by or delaying the employment of foreign should avoid unduly restricting At the same time, employment opportunities for nationals in capacity. not to hinder the build-up of productive investors in order jobs they can adequately fill should be promoted. technical and vocational to nationals should be actively encouraged, including through expatriate staff of skills from Transfer employees in skilled trades/ employed. The use of foreign at the company level whenever expatriates are training requirements invested firms to establish local linkages. to encourage foreign artisan jobs may be time-bound in order 3.3.2 3.4.1 3.4.2 3.4.3 3.4.4 3.4.5 3.5.1 3.5.2 3.5.3 3.5.4 3.5.5 - Balancing labour market flexibility and of employees protection labour Core standards Adjustment costs of investment policy Hiring of international staff Competition laws and regulations of invest Coordination ment and competition authorities M&As and privatizations Sub-sections Competition policy Labour market regulation 3.4 3.5 nvestment- Sections I related policies (continued) CHAPTER IV Investment Policy Framework for Sustainable Development 129 Policy Guidelines and security are rights or other), predictability long-term lease, land-use land titles (full ownership, of than the nature More them, and paramount for investors. Governmentsand protect should aim to ease access land titles, adequately register tool to encourage system can be an effective administering a national cadastre Developing and properly guarantee stability. investment. financing for investment, as land can be used Full ownership of land or tradable titles can help companies secure this option. do not prevent specific country circumstances titles should be encouraged where collateral. Transferable those with ownership or user titles over agricultural land is particularly sensitive in most countries, particular Foreign food security is an issue. Governmentsin putting place and large rural populations and where should pay particular care it for short-term gains by special interest and not compromise the long-term national interest to protect regulations enforcing Bank Principles for Responsible Agricultural Investment should be and World IFAD, FAO, to the UNCTAD, Adherence groups. encouraged. The development of industrial, technology or services parks as public-private partnerships has worked well in a number investors. tool to facilitate access fully-serviced land by (foreign) countries and can be an effective including behaviour, corporate and investment responsible of Governmentsstandards high compliance with should encourage work or markets access to ability their improve to industry local to assistance technical and capacity-building (1) through: into criteria; (3) incorporating existing standards (2) public procurement certified products; or require with investors that prefer law). (hard initiatives, and/or turning(soft law) into regulation regulatory voluntary standards Countries should aim to adopt internationalof corporate governance standards for large formal businesses under their company a timely, on and disclosure transparency (2) shareholders; of minority (1) protection particular: in code, commercial or law basis; (3) externaland codes of good practices on and relevant auditing of accounts; (4) adoption high standards reliable Guidance and safety issues. The OECD Principles of Corporate Governance corruption, health, environment, and the UNCTAD on Good Practices in Corporate Governancemay serve as guidance. Disclosure firms on local ownership and control by foreign-controlled for disclosure should provide standards Corporate reporting impacts, following international social and environmental best practice. finances and operations, health, safety, structures, of Experts on InternationalAccounting and IntergovernmentalGroup Standards Working Recommendations by the UNCTAD Reporting (ISAR) may serve as guidance. based on a number impact assessments (EIA) should be part of investment policies; it is useful to classify projects Environmental on requirements stringent or less size and location to place more nature, criteria, including sector, of pre-defined impact assessments (or absence thereof). environmental preliminary investors, non-discriminatory vis-à-vis foreign should be transparent, norms, including EIA requirements, Environmental conducted without undue are licensing procedures and stable; Governmentsthat environmental predictable should ensure delay and in full technical objectivity. not committed and protection of environmental international to standards to adhere encouraged be should investors Foreign dumping; in specific cases (e.g. mining or oil extraction), Governmentsrequire to engage in environmental may wish legally international to. best practices (including the use of technologies) to be strictly adhered 3.6.1 3.6.2 3.6.3 3.6.4 3.7.1 3.7.2 3.7.3 3.8.1 3.8.2 3.8.3 - Titles Agricultural land Industrial land and industrial parks CSR standards Corporate governance Reporting standards Environmental impact of investment Environmental dumping Sub-sections Access to land Corporate responsi bility and governance policy Environmental 3.6 3.7 3.8 Sections Investment- related policies (continued) 130 World Investment Report 2012: Towards a New Generation of Investment Policies Policy Guidelines extent the consider should countries infrastructure, high-quality building to investment private of contribution potential the Given private investment, and under what conditions. sectors can be opened to domestic and foreign to which basic infrastructure to be taken up by private should go into identifying specific projects efforts In sectors opened to private investment, careful of and Governmentstool, useful a projects on focus initially should are concessioning for projects of Shortlists investors. clearly the socio-economic gains are for investors, and where easier to realize gains are commercial where moderate complexity, measurable. Following strategic decisions on which sectors to open private investment, Governments should put in place a carefully of concession crafted legal framework for concession contracts and public-private partnerships. Given the long-term nature regarding significant assurances to investors, including the legal framework should provide in infrastructure, agreements rights. and property contractual terms and their enforcement, consumers, and interest national long-term the protect adequately to needs contracts concession for framework legal The ensuring adequate sharing of risks between the private and public partners. a public competition so as not to replace possible, concessioning to private investors should aim introduce Wherever it increases monopoly with a private one. Placing natural monopolies under concession should be limited to cases where regulations should be considered competition and sectoral and the delivery of services. Putting in place appropriate efficiency services. for the successful concessioning of infrastructure a pre-requisite institutions need to be put in concessions, strong Given the complexity of contractual terms involved in large infrastructure regulators, countries should consider sectoral to achieve desirable outcomes; in addition strengthening place first in order the establishment of a dedicated PPP unit. In the implementation of investment policies Governments should strive to achieve: (1) integrity and impartiality across lines and accountability to elected officials; Government institutions, subject to clear reporting and independence of regulatory warranted. investors, where for investors; (3) a service-orientation towards and predictability (2) transparency Close cooperation and formal communication channels should be in place between institutions agencies dealing with investors. perspective on issues confronting given its comprehensive role should play a coordinating investors. The IPA administrative, institutional Governments anti-corruption legislation and fight corruption with appropriate should adopt effective and judicial means, for which international best practices should serve as guidance. Investors be held to good corporate paying bribes and denouncing corrupt practices. governance from principles, which include refraining 3.9.1 3.9.2 3.9.3 3.9.4 3.9.5 3.9.6 4.1.1 4.1.2 4.1.3 Opening sectors infrastructure to investors Concessioning rules and regulations Competitive outcomes Institutional framework for concessioning and PPPs From framework to From implementation Inter-agency cooperation Anti-corruption efforts Sub-sections Infrastructure, concessioning and PPP policies Public governance and institutions 3.9 4.1 nvestment- Sections I related policies (continued) Investment policy effectiveness 4 CHAPTER IV Investment Policy Framework for Sustainable Development 131

”. may include: may include: ”. attraction of investment impact of investment Investment Potential and Attraction Matrix Investment Contribution Matrix Policy Guidelines and needs changing to adaptation and fine-tuning of process a continuous is implementation and design Policy (every 3-4 years) of performance against objectives should take place, with a view to: Periodic review circumstances. of investment policy with overall development strategy - verifying continued coherence a focused set of indicators against objectives through - assessing investment policy effectiveness underlying causes of underperformance - identifying and addressing (e.g. incentives). costly investment policy measures - evaluating return on investment of the more countries have a (Where of policy effectiveness. for measurement Objectives for investment policy should be the yard-stick down objectives for investment formal investment strategy it should set out such objectives, see 1.1 above.) They break attraction and development impact, set clear priorities. Performance (especially in terms of investment attraction) should be benchmarked against peers. to the Indicators for objectives related activity) - investment inflows (e.g. total, by industry, activity) output and capital formation (e.g. total, by industry, of gross - investment flows as a share of total investment investment as a share - greenfield “ - positioning on UNCTAD’s to the Indicators for objectives related - value added of investment activity - value of capital formation - export generation of formal business entities - contribution to the creation revenues - fiscal - employment generation and wage contribution the skill-types of jobs created) through - technology and skills contribution (e.g. as measured measures - social and environmental “ - positioning on UNCTAD’s 4.2.1 4.3.1 4.3.2 4.3.3 Sub-sections Dynamic policy development Measuring investment policy effectiveness 4.2 4.3 Sections Investment policy effectiveness (continued) 132 World Investment Report 2012: Towards a New Generation of Investment Policies

E. ELEMENTS OF INTERNATIONAL INVESTMENT AGREEMENTS: POLICY OPTIONS

Countries can address The guidance on international 2. In the detailed design of provisions in international investment investment policies set investment agreements between countries, policy challenges in their out in this section aims to policymakers need to incorporate sustainable development considerations, addressing strategic approach to IIAs, translate the Core Principles concerns related to policy space (e.g., in the negotiation of IIAs into concrete options for policymakers, with a view through reservations and exceptions), and the design of specific to addressing today’s balanced rights and obligations of States clauses, and through multi- investment policy challenges. and investors (e.g., through encouraging lateral consensus building. While national investment compliance with CSR standards), and policymakers address these challenges through effective investment promotion (e.g., through rules, regulations, institutions and initiatives, at home-country measures). the international level policy is translated through 3. Multilateral consensus building on investment a complex web of treaties (including, principally, policy, in turn, can help address some of bilateral investment treaties, free trade agreements the systemic challenges stemming from the with investment provisions, economic partnership multi-layered and multi-faceted nature of the agreements and regional agreements).9 As IIA regime, including the gaps, overlaps and discussed in section B, the complexity of that web, inconsistencies in the system, its multiple which leads to gaps, overlaps and inconsistencies dispute resolution mechanisms, and its in the system of IIAs, is itself one of the challenges to piecemeal and erratic expansion. be addressed. The other is the need to strengthen This section, therefore, first discusses how the development dimension of IIAs, balancing the policymakers can strategically engage in the rights and obligations of States and investors, international investment regime at different levels ensuring sufficient policy space for sustainable and in different ways in the interest of sustainable development policies and making investment development. It then provides a set of options promotion provisions more concrete and aligned for the detailed design of IIAs. The final section with sustainable development objectives. of this chapter suggests an avenue for further International investment policy challenges must be consensus building and international cooperation addressed at three levels: on investment policy. 1. When formulating their strategic approach UNCTAD’s proposed options for addressing to international engagement on investment, the challenges described above come at a time policymakers need to embed international when a multitude of investment stakeholders investment policymaking into their countries’ are putting forward suggestions for the future development strategies. This involves of IIA policymaking. With the recently adopted managing the interaction between IIAs and European Union–United States Statement on national policies (e.g. ensuring that IIAs Shared Principles for International Investment, the support industrial policies (WIR11)) and that revision of the International Chamber of Commerce between IIAs and other international policies (ICC) Guidelines for International Investment, or agreements (e.g. ensuring that IIAs do and the release of the new United States not contradict international environmental model BIT, IIA policymaking is in one of its more agreements (WIR10) or human rights dynamic evolutionary stages, providing a window obligations). The overall objective is to ensure of opportunity to strengthen the sustainable coherence between IIAs and sustainable development dimension of IIAs. development needs. CHAPTER IV Investment Policy Framework for Sustainable Development 133

1. Defining the role of IIAs in countries’ countries with unfavourable country-risk development strategy and investment ratings. policy • IIAs can promote investment in other ways beyond granting investor protection. Some When engaging in IIAs, International investment ins- IIAs include commitments on the part of home truments are an integral part of policymakers should be countries to promote outward investment or investment policymaking that aware of what IIAs can to engage in collaborative initiatives for this supports investment promotion and cannot do for their purpose (although this is currently a small objectives but that can also national development, minority of treaties).11 constrain investment and and set clear priorities. development policymaking. As • IIAs can help to build and advertise a more a promotion tool, IIAs complement national rules attractive investment climate. By establishing and regulations by offering additional assurances to international commitments, they can foster foreign investors concerning the protection of their good governance and facilitate or support investments and the stability, transparency and domestic reforms. predictability of the national policy framework. As • By contrast, IIAs alone cannot turn a bad to the constraints, these could take many forms: domestic investment climate into a good they could limit options for developing countries one and they cannot guarantee the inflow of in the formulation of development strategies that foreign investment. There is no mono-causal might call for differential treatment of investors, e.g. link between the conclusion of an IIA and FDI industrial policies (see WIR11); or they could hinder inflows; IIAs play a complementary role among policymaking in general, including for sustainable many determinants that drive firms’ investment development objectives, if investors perceive new decisions.12 Most importantly, IIAs cannot be a measures as unfavourable to their interests and substitute for domestic policies and a sound resort to IIA-defined dispute settlement procedures national regulatory framework for investment. outside the normal domestic legal process. Host countries’ engagement in the current IIA Given such potential constraints on policymaking, system may not be driven solely by a clear and it is important to ensure the coherence of IIAs with explicit design that grounds their treaties in a solid other economic policies (e.g. trade, industrial, development purpose, but rather influenced by technology, infrastructure or enterprise policies the negotiation goals of their treaty partners or that aim at building productive capacity and other non-economic considerations.13 As such, strengthening countries’ competitiveness) as well there is a risk that IIAs, in number and substance, as with non-economic policies (e.g. environmental, may become largely a vehicle for the protection of social, health or cultural policies).10 Policymakers interests of investors and home countries without should carefully set out an agenda for international giving due consideration to the development engagement and negotiation on investment concerns of developing countries. Not surprisingly, a (including the revision and renegotiation of existing detailed analysis of the substance of model treaties agreements). of major outward investing countries shows that, When considering the pros and cons of engaging on average, treaty provisions are heavily skewed in IIAs, policymakers should have a clear towards providing a high level of protection, with understanding of what IIAs can and cannot achieve. limited concessions to development aspects that can be a trade-off against investor protection (i.e. • IIAs can, by adding an international dimension leaving countries more policy space generally to investment protection and by fostering implies granting less protection to investors). stability, predictability and transparency, This trade-off suggests that there may be an reinforce investor confidence and thus promote inherent development challenge in IIAs: developing investment. From an investor’s perspective, countries with the most unfavourable risk ratings IIAs essentially act as an insurance policy, are most in need of the protecting qualities of IIAs especially important for investments in 134 World Investment Report 2012: Towards a New Generation of Investment Policies to attract investment, but they are generally also the limited potential to attract market-seeking countries most in need of flexibility (or policy space) investment in their own right, opportunities for specific development policies. for regional integration and collaboration on investment policy, particularly when combined Moreover, not only low-income developing countries with potentially FDI-inducing regional trade may experience IIAs as a straightjacket, but also integration (UNCTAD 2009), may well take higher income countries, and even developed priority over other types of investment market economies, are sometimes faced with agreements. The benefits of this approach unexpected consequences of their own treaties. As may be largest when combined with technical more and more countries with sound and credible assistance and efforts towards regulatory domestic legal systems and stable investment cooperation and institution building. climates continue to conclude IIAs granting high levels of investor protection, they risk being • Set priorities – where countries pursue bilateral confronted themselves with investor-State dispute collaboration on investment – in terms of treaty settlement (ISDS) rules originally intended to shield partners (i.e. prioritize the most important their investors abroad. This risk is exacerbated by home countries of international investors the changing investor landscape, in which more and in sectors that are key to the country’s more developing countries, against whose policies development strategy and where foreign the IIA protective shield was originally directed, are involvement is desired). becoming important outward investors in their own Furthermore, international engagement on right, turning the tables on the original developed investment policy should recognize that international country IIA demandeurs. Spelling out the underlying agreements interact with each other and with other drivers and objectives of a country’s approach to bodies of international law. Policymakers should IIAs thus becomes important not only for developing be aware, for example, that commitments made countries, but also for developed ones. to some treaty partners may easily filter through In addition to taking into account the development to others through most-favoured-nation (MFN) purpose of IIAs, in defining their agenda for clauses, with possibly unintended consequences. international engagement and negotiation on Commitments may clash, or hard-won concessions investment, IIA policymakers should: in a negotiation (e.g. on policy space for performance requirements) may be undone through prior or • Consider the type of agreements to subsequent treaties. prioritize, and whether to pursue dedicated agreements on investment or investment Finally, a particularly sensitive policy issue is provisions integrated in broader agreements, whether to include liberalization commitments in e.g. covering also trade, competition and/ IIAs by granting pre-establishment rights to foreign or other policy areas. The latter option investors. Most IIAs grant protection to investments provides for comprehensive treatment of from the moment they are established in the host inter-related issues in different policy areas. State; the host country thus retains discretion with It also recognizes the strong interaction respect to the admission of foreign investors to between trade and investment and the its market. However, in recent years an increasing blurring boundaries between the two (due number of IIAs include provisions that apply to the phenomenon of non-equity modes in the pre-establishment phase of investment, of international production; see WIR11), as contributing to a more open environment for well as the FDI and trade inducing effect of investment, at the cost of a lower degree of enlarged markets. discretion in regulating entry matters domestically. When granting pre-establishment rights, managing • Consider whether to pursue international the interaction between international and national engagement on investment policy in the policies is particularly crucial: policymakers can context of regional economic cooperation or use IIAs to bind – at the international level – the integration or through bilateral agreements. degree of openness granted in domestic laws; or For smaller developing countries, with CHAPTER IV Investment Policy Framework for Sustainable Development 135

they can use IIA negotiations as a driving force for forums), outward investment promotion change, fostering greater openness at the national schemes (insurance and guarantees), level (WIR04).14 Granting pre-establishment rights technical assistance and capacity-building also adds new complexities to the interaction initiatives targeted at sustainable investment, between agreements. For example, a question may supported by appropriate institutional arise whether an unqualified MFN clause of a pre- arrangements for long-term cooperation. establishment IIA could allow investors to enforce 2. Balancing State commitments with investor host countries’ obligations under the WTO GATS obligations and promoting responsible agreement through ISDS.15 investment: Most IIAs currently provide for The following section, which discusses how today’s State obligations but do not specify investor investment policy challenges can be addressed in the obligations or responsibilities. Legally content and detailed provisions of IIAs, covers both binding obligations on companies and pre- and post-establishment issues. Policymakers individuals are stipulated by national law but have so far mostly opted for agreements limited to are absent in international treaties, which the post-establishment phase of investment; where traditionally do not apply to private parties they opt for pre-establishment coverage, numerous directly.16 However, there are examples of tools are available to calibrate obligations in line IIAs that impose obligations on investors with their countries’ specific needs. (e.g. COMESA Investment Agreement of 200717) or of international conventions that 2. Negotiating sustainable-development- establish criminal responsibility of individuals friendly IIAs (e.g. the Rome Statute of the International Sustainable-development- Addressing sustainable Criminal Court). These examples, together with the changes in the understanding of friendly IIAs incorporate development challenges the nature and functions of international law, stronger provisions to through the detailed design would suggest that international treaties can, promote responsible of provisions in investment agreements principally in principle, impose obligations on private investment, to balance 18 implies four areas of parties. While stopping short of framing State and investor obliga- evolution in treaty-making IIAs so as to impose outright obligations tions, and to safeguard practice. Such change on investors, a few options may merit regulatory space. can be promoted either consideration. by including new elements and clauses in IIAs, or For example, IIAs could include a requirement by taking a fresh approach to existing, traditional for investors to comply with investment- elements. related national laws of the host State when 1. Incorporating concrete commitments making and operating an investment, and to promote and facilitate investment for even at the post-operations stage (e.g. sustainable development: Currently, IIAs environmental clean-up), provided that mostly promote foreign investment only such laws conform to the host country’s indirectly through the granting of investment international obligations, including those in 19 protection – i.e. obligations on the part of host the IIA. Such an investor obligation could countries – and do not contain commitments be the basis for further stipulating in the IIA by home countries to promote responsible the consequences of an investor’s failure to investment. Most treaties include hortatory comply with domestic laws, such as the right language on encouraging investment in of host States to make a counterclaim in ISDS preambles or non-binding provisions on proceedings with the investor. investment promotion. Options to improve In addition, IIAs could refer to commonly the investment promotion aspect of treaties recognized international standards (e.g. the include concrete facilitation mechanisms United Nations Guidelines on Business and (information sharing, investment promotion Human Rights). This would not only help 136 World Investment Report 2012: Towards a New Generation of Investment Policies

balance State commitments with investor 4. Shielding host countries from unjustified obligations but also support the spread of liabilities and high procedural costs: Most CSR standards – which are becoming an IIAs reinforce their investment protection ever more important feature of the investment provisions by allowing investors directly to policy landscape (WIR11). Options for treaty pursue relief through investor-State dispute language in this regard could range from settlement (ISDS). The strength of IIAs in commitments to promote best international granting protection to foreign investors CSR standards to ensuring that tribunals has become increasingly evident through consider an investor’s compliance with CSR the number of ISDS cases brought over standards when deciding an ISDS case. the last decade, most of which have been directed at developing countries. Host 3. Ensuring an appropriate balance between countries have faced claims of up to $114 protection commitments and regulatory billion20 and awards of up to $867 million.21 space for development: IIAs protect Added to these financial liabilities are the foreign investment by committing host costs of procedures, all together putting a country governments to grant certain significant burden on defending countries and standards of treatment and protection to exacerbating the concerns related to policy foreign investors; it is the very nature of space. Host countries – both developed an IIA’s standards of protection, and the and developing – have experienced that the attendant stabilizing effect, to place limits possibility of bringing ISDS claims can be on government regulatory freedom. For used by foreign investors in unanticipated example, where host governments aim to ways. A number of recent cases have differentiate between domestic and foreign challenged measures adopted in the public investors, or require specific corporate interest (e.g. measures to promote social behaviour, they would be constrained by equity, foster environmental protection or IIA provisions on non-discrimination or on protect public health), and show that the performance requirements. In addition, to borderline between protection from political the extent that foreign investors perceive risk and undue interference with legitimate domestic policy changes to negatively affect domestic polices is becoming increasingly their expectations, they may challenge them blurred. Shielding countries from unjustified under IIAs by starting arbitration proceedings liabilities and excessive procedural costs against host States. Countries can safeguard through treaty design thus involves looking at some policy space by carefully crafting the options both in ISDS provisions themselves structure of IIAs, and by clarifying the scope and in the scope and application of and meaning of particularly vague treaty substantive clauses (see below). provisions such as the fair and equitable treatment standard and expropriation as well These areas of evolution are also relevant for as by using specific flexibility mechanisms “pre-establishment IIAs”, i.e. agreements that – such as general or national security in addition to protecting established investors – exceptions and reservations. More recent contain binding rules regarding the establishment IIA models, such as the one adopted by the of new investments. While a growing number of United States in 2004, offer examples in this countries opt for the pre-establishment approach, it regard. The right balance between protecting is crucial to ensure that any market opening through foreign investment and maintaining policy IIAs is in line with host countries’ development space for domestic regulation should flow strategies. Relevant provisions opt for selective from each country’s development strategy, liberalization, containing numerous exceptions and ensuring that flexibility mechanisms do not reservations designed to protect a country from erode a principal objective of IIAs – their over-committing and/or ensuring flexibilities in the potential investment-enhancing effect. relevant treaty obligations (see box IV.8). CHAPTER IV Investment Policy Framework for Sustainable Development 137

Box IV.8. Pre-establishment commitments in IIAs

Pre-establishment IIAs signal that a country is generally committed to an open investment environment, although the fact that a country only concludes post-establishment IIAs does not necessarily mean that it follows a restrictive FDI policy. Also, pre-establishment commitments in IIAs do not necessarily have to mirror the actual degree of openness of an economy. Establishment rights in IIAs can remain below this level or go beyond it, i.e. IIAs can be used to open hitherto closed industries to foreign investors. Pre-establishment IIAs typically operate by extending national treatment and MFN treatment to the “establishment, acquisition and expansion” of investments. This prevents each contracting party from treating investors from the other contracting party less favourably than it treats its own investors and/or investors from other countries in these matters. Properly defining the scope of pre-establishment commitments is key. The two main mechanisms are the positive and negative listing of sectors/industries. Under the latter, investors benefit from pre-establishment commitments in all industries except in those that are explicitly excluded. The negative-list approach is more demanding in terms of resources: it requires a thorough audit of existing domestic policies. In addition, under a negative-list approach and in the absence of specific reservations, a country commits to openness also in those sectors/activities, which, at the time the IIA is signed, may not yet exist in the country, or where regulatory frameworks are still evolving. In contrast, a positive-list approach offers selective liberalization by way of drawing up a list of industries in which investors will enjoy pre-establishment rights. Another, more limited method is to include a positive list of “committed” industries and complement it with a list of reservations preserving certain measures or aspects in those industries (“hybrid”, or GATS-type approach). Pre-establishment treaties display a range of options – typically through country-specific reservations – for preserving policy flexibility even in “committed” industries (see the IPFSD IIA-elements table, Part B, on pre-establishment options). Source: UNCTAD.

These four types of evolution in current treaty appropriate to safeguard policy space and practice filter through to specific clauses in different exclude some types of financial transactions ways. The following are examples of how this would (e.g. portfolio investment or short-term, work, focusing on some of the key provisions of speculative financial flows) from a treaty’s current treaty practice – scope and definition, scope and to focus application of the treaty on national treatment, most-favoured nation treatment, those types of investment that the contracting fair and equitable treatment, expropriation and parties wish to attract (e.g. direct investment in ISDS. In addition to shaping specific clauses, productive assets). sustainable development concerns can also be Whether IIAs should exclude portfolio addressed individually, e.g. through special and investment is a policy choice that has been differential treatment (SDT), a key aspect of the subject to intense debate. Portfolio investment multilateral trading system but largely unknown in can make a contribution to development IIA practice (see box IV.9). by providing financial capital. However, • Scope and Definition: An IIA’s coverage the sometimes volatile nature of portfolio determines the investments/investors that investment flows can be damaging. At the benefit from the protection offered by the practical level, portfolio and direct investment IIA. Past disputes have demonstrated the are often difficult to differentiate, both in potential for broad interpretation of IIAs, so terms of identifying relevant financial flows as to apply to types of transactions that were of either type, and in terms of targeted policy originally not envisaged to benefit from the IIA instruments. (such as government debt securities).22 When It may also be appropriate to exclude from a negotiating an IIA with a stronger sustainable treaty’s scope specific areas of public policy development dimension, it may thus be or specific (sensitive) economic sectors. Or, 138 World Investment Report 2012: Towards a New Generation of Investment Policies

Box IV.9. Special and differential treatment (SDT) and IIAs

A large number of IIAs are concluded between developed and developing countries. SDT gives legal expression to the special needs and concerns of developing countries and/or least developed countries in international (economic) agreements. It is based on the notion that treaty parties at different stages of development should not necessarily be bound by the same obligations. Expression of the principle can be found in a multilateral context in over 145 provisions of WTO agreements23 essentially i) granting less onerous obligations to developing countries – either permanently or temporarily; and/or ii) imposing special obligations on developed countries vis-à-vis developing countries.24 Over time, SDT has found its way into other aspects of international relations, most prominently international environmental law, including the climate change framework. Thus far, SDT has largely been absent from IIAs. Despite incorporating the general concepts of policy space and flexibility for development, IIAs – being mostly of a bilateral nature – are based on legal symmetry and reciprocity, meaning that the rights and obligations of the parties are generally the same. Moreover, IIAs typically do not deal with pre-establishment/market access issues, for which SDT considerations are particularly relevant. Exceptionally, however, the COMESA Investment Agreement contains an SDT clarification with respect to the fair and equitable treatment standard: “For greater certainty, Member States understand that different Member States have different forms of administrative, legislative and judicial systems and that Member States at different levels of development may not achieve the same standards at the same time.”25 Reinvigorating SDT with a view to making IIAs work better for sustainable development could take a number of forms. For example, lower levels of obligations for developing countries could be achieved through i) development- focused exceptions from obligations/commitments; ii) best endeavour commitments for developing countries; iii) asymmetrically phased implementation timetables with longer time frames for developing countries; or iv) a development-oriented interpretation of treaty obligations by arbitral tribunals. Best endeavour commitments by more advanced countries could, for example, relate to: i) technical assistance and training (e.g. assisting in the handling of ISDS cases or when putting in place appropriate domestic regulatory systems to ensure compliance with obligations); ii) promotion of the transfer/dissemination of technology; iii) support and advice for companies from developing countries (e.g. to become outward investors or adopt CSR standards); iv) investment promotion (e.g. provide outward investment incentives such as investment guarantees, tax breaks). While SDT remains largely absent from IIAs, negotiators could consider adding SDT elements, offering a further promising tool for making IIAs more sustainable-development-friendly, particularly for least-developed and low- income countries. Source: UNCTAD.

in order to limit liability and to avoid “treaty treatment is provided under domestic shopping” and “roundtrip investment”, it legislation, countries may be reluctant to “lock may be appropriate to confine application to in” all aspects of their domestic regulatory genuine investors from the contracting parties, framework at the international level (e.g. excluding investments that are only channelled private sector development initiatives, including through legal entities based in the contracting regulatory, financial or fiscal incentives) and, parties. depending on their development strategy, States may wish to afford preferential treatment • National Treatment (NT): National treatment to national investors/investments as part of protects foreign investors against industrial development policies or for other discrimination vis-à-vis comparable domestic reasons. In such cases, negotiators could investors, with a view to ensuring a “level circumscribe the scope of national treatment playing field”. Non-discriminatory treatment clauses and/or allow for derogations (e.g. is generally considered conducive to good through the lodging of reservations excluding governance and is, in principle, enshrined sectors, policy areas or specific measures from in many countries’ domestic regulatory its application (see WIR11)). frameworks. Nevertheless, even if national CHAPTER IV Investment Policy Framework for Sustainable Development 139

• Most-Favoured-Nation (MFN) Treatment: MFN introduce new policies – including those for the clauses aim to prevent discrimination between public good – that may have a negative impact comparable investors of different foreign on individual foreign investors. Options to nationality. The meaning of such treatment has reduce uncertainty regarding States’ liabilities been subject to diverging and unanticipated and to preserve policy space include qualifying interpretations by tribunals. Several arbitral or clarifying the FET clause, including by way decisions have interpreted MFN as allowing of an exhaustive list of State obligations under investors to invoke more investor-friendly FET, or even considering omitting it. language from treaties between the respondent • Expropriation: An expropriation provision State and a third country, thereby effectively protects foreign investors/investments against sidelining the “base” treaty (i.e. the treaty dispossession or confiscation of their property between the investor’s home and host country by the host country without compensation. As on the basis of which the case was brought). most IIAs also prohibit indirect expropriation This practice can be seen in a positive light (i.e. apply to regulatory takings), and as some as “upward harmonization” of IIA standards arbitral tribunals have tended to interpret this or in a negative one as “cherry picking” best broadly (i.e. including legitimate regulatory clauses from different treaties, endangering measures in the pursuit of the public interest), individual treaty bargains. MFN treatment the expropriation clause has the potential needs to be carefully considered, particularly to impose undue constraints on a State’s in light of countries’ growing networks of IIAs regulatory capacity. To avoid this, policymakers with different obligations and agreements could clarify the notion of indirect expropriation including pre-establishment issues. To avoid and introduce criteria to distinguish between misinterpretation, IIAs have started explicitly indirect expropriation and legitimate regulation excluding dispute settlement issues as well that does not require compensation. as obligations undertaken in treaties with third States from the scope of the MFN obligation. • Investor–State Dispute Settlement (ISDS): Other options include limiting the clause’s Originally, the system of international investor- reach through country-specific reservations. State arbitration was conceived as an effective tool to enforce foreign investors’ rights. It • Fair and Equitable Treatment (FET): The offered direct access to international arbitration obligation to accord fair and equitable for investors to avoid national courts of host treatment to foreign investments appears in the countries and to solve disputes in a neutral great majority of IIAs. Investors (claimants) have forum that was expected to be cheap, frequently – and with considerable success fast, and flexible. It was meant to provide – invoked it in ISDS. There is a great deal of finality and enforceability, and to depoliticize uncertainty concerning the precise meaning of disputes. While some of these advantages the concept, because the notions of “fairness” remain valid, the ISDS system has more and “equity” do not connote a clear set of recently displayed serious shortcomings (e.g. legal prescriptions in international investment inconsistent and unintended interpretations of law and allow for a significant degree of clauses, unanticipated uses of the system by subjective judgment. Some tribunals have investors, challenges against policy measures read an extensive list of disciplines into the taken in the public interest, costly and lengthy FET clause, which are taxing on any State, but procedures, limited or no transparency), especially on developing and least-developed undermining its legitimacy. While some countries; lack of clarity persists regarding the ISDS concerns can be addressed effectively appropriate threshold of liability. The use of FET only through a broader approach requiring to protect investors’ legitimate expectations international collaboration, negotiators can can indirectly restrict countries’ ability to go some way to improving the institutional change investment-related policies or to and procedural aspects of ISDS and to 140 World Investment Report 2012: Towards a New Generation of Investment Policies

limiting liability and the risk of becoming the various drafting possibilities with regard to each embroiled in costly procedures. They can do IIA provision and highlights – where appropriate so by qualifying the scope of consent given – their implications for sustainable development. to ISDS, promoting the use of alternative It is hoped that these explanations will help IIA dispute resolution (ADR) methods, increasing negotiators identify those drafting options that transparency of procedures, encouraging best suit their countries’ needs, preferences and arbitral tribunals to take into account objectives. standards of investor behaviour when settling The IPFSD IIA-elements table includes various investor-State disputes, limiting resort to options that could be particularly supportive of ISDS and increasing the role of domestic sustainable development. Examples are: judicial systems, providing for the possibility of counterclaims by States, or even refraining • Including a carefully crafted scope and from offering ISDS.26 definitions clause that excludes portfolio, short- term or speculative investments from treaty 3. IIA elements: policy options coverage. Options to craft more The IPFSD table on IIA- • Formulating an FET clause as an exhaustive list of State obligations (e.g. not to (i) deny justice sustainable-development- elements (see pages in judicial or administrative procedures, (ii) treat friendly IIAs include 143–159) contains a com­ prehensive compilation of investors in a manifestly arbitrary manner, (iii) adjusting existing provi- flagrantly violate due process, etc.). sions in IIAs, adding new policy options available to IIA negotiators, including • Clarifying – to the extent possible – the ones, or introducing the options to operationalize distinction between legitimate regulatory concept of Special and sustainable development activity and regulatory takings (indirect Differential Treatment. objectives (also see table expropriations) giving rise to compensation. IV.5). The options include both mainstream IIA • Limiting the Full Protection and Security (FPS) provisions as well as more idiosyncratic treaty provision to “physical” security and protection language used by fewer countries. In some only and specifying that protection shall be instances, the IPFSD IIA-elements table contains commensurate with the country’s level of new suggestions by UNCTAD.27 development. As a comprehensive set of policy options, the • Limiting the scope of a transfer of funds clause IPFSD IIA-elements table aims to represent two by providing an exhaustive list of covered different approaches on the design of IIAs. At one payments/transfers; including exceptions end of the spectrum is the school of thought that in case of serious balance-of-payments prefers IIAs with straightforward provisions focusing difficulties; and conditioning the transfer right on investment protection and limiting clarifications on the investor’s compliance with its fiscal and and qualifications to the minimum. At the other other transfer-related obligations in the host end, a comprehensive approach to investment country. policymaking adds a host of considerations – • Including carefully crafted exceptions to protect including on sustainable development – in the human rights, health, core labour standards wording of IIA clauses. and the environment, with well-functioning The objective of the IPFSD IIA -elements table is to checks and balances, so as to guarantee provide policymakers with an overview of options policy space while avoiding abuse. for designing an IIA. It offers a broad menu from • Considering, in light of the quality of the host which IIA negotiators can pick and choose. This country’s administrative and judicial system, table is not meant to identify preferred options the option of “no ISDS” or of designing the for IIA negotiators or to go so far as to suggest a dispute settlement clause to make ISDS model IIA. However, the table briefly comments on CHAPTER IV Investment Policy Framework for Sustainable Development 141

Table IV.5. Policy options to operationalize sustainable development objectives in IIAs

Options Mechanisms Examples

Adjusting Hortatory - Preamble: stating that attracting responsible foreign investment existing/common language that fosters sustainable development is one of the key objectives provisions of the treaty. to make them more sustainable- Clarifications - Expropriation: specifying that non-discriminatory good faith development- regulations pursuing public policy objectives do not constitute friendly through indirect expropriation. clauses that: - FET: including an exhaustive list of State obligations. • safeguard policy space Qualifications/ - Scope and definition: requiring covered investments to fulfill limitations specific characteristics, e.g., positive development impact on the • limit State liability host country.

Reservations/ - Country-specific reservations to NT, MFN or pre-establishment carve-outs obligations, carving out policy measures (e.g. subsidies), policy areas (e.g. policies on minorities, indigenous communities) or sectors (e.g. social services).

Exclusions - Scope and definition: excluding portfolio, short-term or speculative from coverage/ investments from treaty coverage. exceptions - General exception for domestic regulatory measures that aim to pursue legitimate public policy objectives.

Omissions - Omit FET, umbrella clause.

Adding new Investor - Requirement that investors comply with host State laws at both provisions obligations and the entry and the post-entry stage of an investment. or new, stronger responsibilities - Encouragement to investors to comply with universal principles or paragraphs to observe applicable CSR standards. within provisions for sustainable Institutional - Institutional set-up under which State parties cooperate to e.g. development set-up for review the functioning of the IIA or issue interpretations of IIA purposes to: sustainable clauses. • balance investor development - Call for cooperation between the Parties to promote observance rights and impact of applicable CSR standards. responsibilities Home-country Encouragement to offer incentives for sustainable-development- • promote - responsible measures friendly outward investment; investor compliance with applicable investment to promote CSR standards may be an additional condition. responsible Technical assistance provisions to facilitate the implementation • strengthen - home-country investment of the IIA and to maximize its sustainable development impact, support including through capacity-building on investment promotion and facilitation.

Introducing Lower levels of - Pre-establishment commitments that cover fewer economic Special and obligations activities. Differential Treatment Development- - Reservations, carving out sensitive development related areas, for the less focused issues or measures. developed Party – exceptions from with effect on both obligations/ existing and new commitments provisions – to: • calibrate Best endeavour - FET, NT commitments that are not legally binding. the level of commitments obligations to the Asymmetric - Phase-in of obligations, including pre-establishment, NT, MFN, country’s level of implementation performance requirements, transfer of funds and transparency. development timetables Source: UNCTAD. 142 World Investment Report 2012: Towards a New Generation of Investment Policies

the last resort (e.g. after exhaustion of local • Interaction between a treaty’s scope/definitions remedies and ADR). and the obligations it establishes for the contracting parties: An agreement’s “protective • Establishing an institutional set-up that strength” stems not only from the substantive makes the IIA adaptable to changing development contexts and major unanticipated and procedural standards of protection it developments (e.g. ad hoc committees to offers to investors, but also from the breadth assess the effectiveness of the agreement and and variety of categories of investors and to further improve its implementation through investments it covers (i.e. that benefit from amendments or interpretations). the standards of protection offered by the IIA). Hence, when designing a particular IIA and The IPFSD IIA-elements table recognizes that calibrating the degree of protection it grants, specific policy objectives can be pursued by negotiators can use different combinations different treaty elements, thereby inviting treaty of the two. For example, (i) a broad open- drafters to choose their “best-fit” combination. ended definition of investment could be For example, a country that wishes to preserve combined with few substantive obligations, regulatory space for policies aimed at ensuring or with obligations formulated in a manner access to essential services can opt for (i) excluding reducing their “bite”; or (ii) a narrow definition of investments in essential services from the scope of investment (e.g. covering direct investments in the treaty; (ii) excluding essential services policies a few priority sectors only) could be combined from the scope of specific provisions (e.g. national with more expansive protections such as an treatment); (iii) scheduling reservations (for national unqualified FET standard or the prohibition of treatment or the prohibition of performance numerous performance requirements. requirements) for specific (existing and/or future) essential services policies; (iv) including access to • Interaction between protection-oriented essential services as a legitimate policy objective in clauses: Some IIAs combine narrowly the IIA’s general exceptions; or (v) referring to the drafted clauses in some areas with broad importance of ensuring access to essential services provisions in others. An example is the in the preamble of the agreement. combination between a carefully circumscribed expropriation clause and an unqualified FET The IPFSD IIA-elements table likewise reflects that provision. Another option is to limit the impact negotiators can determine the normative intensity of ISDS by either formulating substantive of IIA provisions: they can ensure the legally binding standards of protection as best endeavour and enforceable nature of some obligations while (i.e. hortatory) clauses, or by precluding the at the same time resorting to hortatory, best use of ISDS for particularly vague treaty endeavour language for others. These choices can articles, such as the FET standard.28 Under help negotiators design a level of protection best such scenarios, protective standards may still suited to the specific circumstances of negotiating have a good-governance-enhancing effect partners and in line with the need for proper on host countries’ regulatory framework, balancing between investment protection and while reducing the risk of being drawn into policy space for sustainable development. ISDS. Consideration also has to be given The ultimate shape of an IIA is the result of a specific to the interaction with the MFN provision: combination of options that exist in respect of each with the inclusion of a “broad” MFN clause, IIA provision. It is this blend that determines where investors may be tempted to circumvent on a spectrum between utmost investor protection “weak” protection clauses by relying on more and maximum policy flexibility a particular IIA is protective (i.e. “stronger”) clauses in treaties located. The same holds true for the IIA’s impact with third parties. on sustainable development. Combinations of • Interaction between protection and exceptions: and interactions between IIA provisions can take a Strong protection clauses and effective number of forms: CHAPTER IV Investment Policy Framework for Sustainable Development 143

UNCTAD’s Investment Policy Framework for Sustainable Development Elements of International Investment Agreements: Policy Options Summary of contents

Sections Description

Part A. Post-establishment

1 Preamble … sets out objectives of the treaty and the intentions of the Contracting Parties

… defines the investment and investors protected under the treaty and its temporal 2 Treaty scope application

3 Admission … governs entry of investments into the host State

Standards of treatment and … prescribe the treatment, protection and rights which host States are required to accord 4 protection foreign investors/investments

... permit public policy measures, otherwise inconsistent with the treaty, to be taken under 5 Public policy exceptions specified, exceptional circumstances

… governs settlement of disputes between the Contracting Parties and those between 6 Dispute settlement foreign investors and host States

Investor obligations and … promote compliance by investors with domestic and/or international norms at the entry 7 responsibilities and operation stage

Relationship to other 8 … establishes a hierarchy in case of competing international norms agreements

Not lowering of standards … discourages Contracting Parties from attracting investment through the relaxation of 9 clause labour or environmental standards

… aims to encourage foreign investment through additional means beyond investment 10 Investment promotion protection provisions in IIAs

11 Institutional set-up … establishes an institutional platform for collaboration between the Contracting Parties

12 Final provisions … define the duration of the treaty, including its possible prolongation

Part B. Pre-establishment

1 Pre-establishment obligations … govern establishment of foreign investments in the host State

Part C. Special and Differential Treatment (SDT)

1 Asymmetrical obligations … enable imposition of less onerous obligations on a less developed Contracting Party

2 Additional tools … encourage positive contributions by a more developed Contracting Party 144 World Investment Report 2012: Towards a New Generation of Investment Policies (e.g. portfolio investment – which can include short- ” investment “ A traditional open-ended definition of “investment” grants protection to all A traditional open-ended definition of “investment” grants protection but can end attraction effect types of assets. It may have the strongest up covering economic transactions not contemplated by the Parties or investments/assets with questionable SD contribution. It may also expose States to unexpected liabilities. States may want to tailor their definition of investment target assets bring that investments to only protection granting by SD conducive to e.g. long-term capital commitment, benefits to the host country, concrete the Parties may wish to develop that effect, employment generation etc. To criteria for development-friendly investments. the may further specifically exclude certain types of assets from A treaty definition of Sustainable development (SD) implications does not set out binding obligations but plays a preamble The treaty substantive IIA provisions. role in interpreting significant for framework stable “a of creation the to refers preamble a When investments” or “favourable conditions for as the sole aim of to those objectives), tribunals will tend (i.e. if the IIA only refers the treaty a uncertainties in favour of investors. In contrast, where interpretive resolve objectives with and protection complements investment promotion preamble other objectives such as SD, the Millennium Development Goals (MDGs) or balanced this can lead to more the Contracting Parties’ right to regulate, policy objectives/ between different and foster coherence interpretations bodies of law. not rights that are term and speculative investments – intellectual property under domestic legislation). protected

” tangible and intangible assets in the host State (through an tangible and intangible assets in the host State (through accordance with host country laws and regulations accordance any “ illustrative/open-ended list), directly or indirectly owned/controlled by covered investors. by covered owned/controlled or indirectly illustrative/open-ended list), directly Refer to the objective of creating and maintaining favourable conditions for investment Refer to the objective of creating and intensifying economic cooperation between the Parties. Clarify that the Parties conclude this IIA with a view to investment that foreign and outward inward - attracting and fostering responsible contributes to SD good governance - promoting . objectives shall not override States’ right to regulate Clarify that the investor protection to certain important policy goals, such as: as well with respect in the public interest - SD of human rights - protection standards - maintenance of health, labour and/or environmental and good corporate governance. - corporate social responsibility pursued in should be investments of protection and promotion the Indicate that compliance with the Parties’ obligations under international law including in particular their of the environment. to human rights, labour rights and protection obligations with respect coverage of Offer investments and/or exclude specific types of assets covered an exhaustive list of Compile coverage, e.g.: from - portfolio investment debt instruments - sovereign contracts for the sale of goods or services - commercial - assets for non-business purposes under domestic law. rights not protected - intellectual property investments to fulfil specific characteristics, e.g. that the investment: Require and assumption of risk - involves commitment of capital, expectation profit for the purpose of establishing lasting economic relations - involves assets acquired - must be made in - delivers a positive development impact on the host country (i.e. Parties could list specific to their needs and expectations). criteria according 1.1.0 1.1.1 1.1.2 1.1.3 2.1.0 2.1.1 2.1.2 Policy options for IIAs

Preamble … sets out objectives of and the treaty the intentions of the Contracting Parties scope Treaty Definition of investment … sets out the types of investment by the covered treaty 1 2 art A. Post-establishment 2.1 UNCTAD’s Investment Policy Framework for Sustainable Development UNCTAD’s Policy options for IIAs P possible, the policy options are of articles as commonly found in IIAs. Where follow the order and closing with the final provisions, sections of the table, starting with preamble The different In some sections, two or flexibility to the State, balance and/or legal precision. more to ii) the options providing or most protective i) the most investor-friendly organized along a scale ranging from policy options can be combined. more Sections CHAPTER IV Investment Policy Framework for Sustainable Development 145

” old “ investments. ” new “ and ” investors but at the same ” old “ old (i.e. pre-treaty) investments: it (i.e. pre-treaty) “ ” attracted “ A broad definition of “investor” can result in unanticipated or unintended definition of “investor” can A broad determines the coverage of persons (natural or legal). For example, if a treaty nationality of a legal entity solely on the basis place incorporation, riding by investors not shopping or free opportunities for treaty it creates investor may conceived to be beneficiaries (e.g. a third-country/host-country territory the in established company a “mailbox” through investment channel its set of issues arises A related protection). to obtain treaty in order of a Party, one nationality is that of the host State. to dual nationals where with respect persons. For the range of covered various options to narrow are There predictability, legal enhance and abuse of risk the eliminate to example, in the its seat must have that a company a requirement may add a treaty An alternative economic activities there. is to home State and carry out real nationality determining to approach country-of-incorporation the supplement of a company with denial-of-benefits clause. and its effect protective its wider scope, the a treaty’s broader The However, investment. foreign of attraction the to potential contribution policy space and flexibility a host State’s also reduces treaty a broad to investors’ claims. States can and ultimately heightens its exposure SD agenda. to meet the country’s tailor the scope of agreement treaty and sectors/industries from By carving out specific policy areas flexibility to implement national policies, such as coverage, States preserve to domestic investors treatment industrial policies (e.g. to grant preferential access to essential/ or to ensure or to impose performance requirements), public services. scope will be widest if its application is extended to all investments, The treaty’s Another State. host the in establishment their of time the of regardless is to exclude already approach by free-riding could be seen as preventing in discrimination between time would result by to re-investments uncertainty with respect this can create Moreover, investors. on State acts, adopted of the treaty Policymakers should consider the effect «continuing» but with a lasting effect: entry into force, prior to the treaty’s which comes (e.g. maintenance of an earlier legislative provision breaches continue whose effects individual acts obligations), treaty conflict with into on the former owner of expropriation of a direct over time (e.g. effect asset) and “composite” acts, i.e. a series of actions or omissions which, taken clarify additional language to provide to useful It is wrongful. are together, would cover or exclude such lasting acts effects. whether the treaty Sustainable development (SD) implications

“mailbox” companies) “mailbox” entities that do not have their seat or any real economic activity in the home country. entities that do not have their seat or any real Offer coverage of any natural and legal persons originating from the other Contracting coverage of any natural and legal persons originating from Offer With to legal entities, cover all those established in the other Contracting respect Party. Party. coverage, e.g.: treaty Exclude certain categories of natural or legal persons from - investors with double nationality (of which one is the host country nationality) of the host country - permanent residents - legal protection Include a denial-of-benefits clause that enables the host State to deny treaty to: nationals or host State by third-country owned/controlled - legal entities that are ( Party home the of the in activity economic real have not that do and countries with which the host country from investors by entities owned/controlled - legal subject to an economic or those countries that are does not have diplomatic relations embargo. No exclusions. coverage, e.g.: treaty from Exclude specific policy areas - subsidies and grants - public procurement - taxation. coverage, e.g.: treaty Exclude specific sectors and industries from - essential social services (e.g. health, education) defence - specific sensitive industries (e.g. cultural industries, fisheries, nuclear energy, natural resources). industry, and after the treaty’s scope to investments established both before Extend the treaty entry into force. of the Limit temporal scope to investments made after the conclusion/entry into force treaty. shall not allow IIA claims arising out of any State acts which ceased Clarify that the treaty even though it may still have an ongoing effect entry into force, to exist prior the IIA’s on the investor. adopted prior to shall not allow IIA claims based on measures Clarify that the treaty conclusion of the treaty. 2.2.0 2.2.1 2.2.2 2.3.0 2.3.1 2.3.2 2.4.0 2.4.1 2.4.2 2.4.3 Policy options for IIAs

Definition of investor … sets out the types of investors protected under the treaty Exclusions the from scope … carve out specific policy and/or areas industries from the scope of the treaty Temporal scope … determines whether the applies treaty to investments and/or measures the pre-dating treaty 2.2 2.3 2.4 Sections 146 World Investment Report 2012: Towards a New Generation of Investment Policies subject to their domestic laws and “ type, in this case States do not give any international ” . This approach gives full flexibility to grant preferential (e.g. gives full flexibility to grant preferential . This approach ” pre-establishment NT guarantees foreign investors a level-playing field vis-à-vis comparable NT guarantees foreign conducive to good domestic investors and is generally considered governance. with their SD strategies, and in accordance under some circumstances, Yet to national treatment preferential States may want to be able accord temporary grants or subsidies) without investors/investments (e.g. through companies. In this case, NT extending the same benefits to foreign-owned regulate for SD goals. need to allow flexibility provisions framework For example, countries with a nascent/emerging regulatory the right to discriminate in favour of domestic to rescind reluctant that are investors can make the NT obligation hand, one the on freedom, policy full between ground middle a be can There For example, States and a rigid guarantee of non-discrimination, on the other. as well sensitive or vital or measures may exempt specific policy areas to meet the scope of obligation in order economic sectors/industries from or public-policy needs such as addressing regulatory and future both current (this can be done either as an exception applicable to both market failures reservation). Contracting Parties or as a country-specific An express provision that precludes application of the treaty to acts that application of the treaty that precludes provision An express would enhance legal entry into force the treaty’s ceased to exist before to the period between date of especially with regard certainty, would nevertheless This approach and its entry into force. signature treaty’s that come into keep open to challenge those prior laws and regulations An alternative once it enters into force. is contradiction with the new treaty adopted after the treaty’s that are only to those measures to apply the treaty earlier all of the State’s this would automatically preclude entry into force: treatment being challenged (e.g., preferential from non-conforming measures to domestic investors in a particular industry violation of the National obligation), eliminating the need to identify and schedule such Treatment individually. measures with the for admission of investments in accordance Most IIAs provide that belong to the national laws. Thus, unlike in the treaties host State’s “ domestic laws as they guarantees of admission and can change relevant to admit investments in accordance the promise However, deem appropriate. to investors protection with domestic law still has a certain value as it affords its disregarding by or contradiction in admission refuses State host a case in internal laws. regulations to domestic investors as long this is in accordance treatment differentiated) such a significant limitation to the NT legislation. However, with the country’s investors. Even more as a disincentive to foreign obligation may be perceived may significantly undermine its the treaty so, omitting the NT clause from value. protective Sustainable development (SD) implications Prohibit less favourable treatment of covered foreign investors/investments vis-à-vis foreign of covered less favourable treatment Prohibit or qualifications. comparable domestic investors/investments, without restrictions the scope of NT clause (for both/all Contracting Parties), noting that Circumscribe it, e.g.: domestic laws the right of NT to a host country’s - subordinates NT from the right of each Party to derogate - reserves (e.g. subsidies, government - does not apply to certain policy areas procurement). e.g. carve-out: reservations to NT, Include country-specific (e.g. subsidies and grants, government - certain policies/measures procurement, government bonds) regarding measures the right to favour the host countries wish to preserve - specific sectors/industries where domestic investors to minorities, rural populations, marginalized or (e.g. issues related - certain policy areas indigenous communities) to companies of a specific size (e.g. SMEs). related - measures Provide that investments are admitted in accordance with domestic laws of the admitted in accordance that investments are Provide host State. No clause. Omit NT clause. 3.1.0 3.1.1 4.1.0 4.1.1 4.1.2 4.1.3 Policy options for IIAs ”)

Part B: Pre- Standards of treatment and protection of treatment Standards National treatment (NT) … protects foreign investors/ investments against discrimination vis-à-vis domestic investors Admission … govern entry investments into the host State (see also “ establisment 4 3 4.1 Sections CHAPTER IV Investment Policy Framework for Sustainable Development 147 , a ” FET standard, FET standard, do not connote ” fairly and equitably equity “ “ unqualified and ” , which may restrict the ability of , which may restrict ” fairness “ promise to treat investors to treat promise legitimate expectations “ unqualified Sustainable development (SD) implications country provides maximum protection for investors but also risks posing maximum protection country provides investors’ claims and to foreign limits on its policy space, raising exposure the fact financial liabilities. Some of these implications stem from resulting deal of uncertainty concerningmeaning is a great the precise that there the concept, because notions of interpretations. to subjective open and are legal prescriptions of clear set a issue concernsto A particularly problematic the use of FET standard investors protect new policies that - while pursuing countries to change policies or introduce investors. SD objectives - may have a negative impact on foreign the deficiencies of Several options exist to address to customary international law and cons. The reference each with its pros States’ ability preserve and help to of State liability may raise the threshold to adapt public policies in light of changing objectives (except when these egregious to amounts that conduct arbitrary manifestly constitute measures investors), but the exact contours of MST/CIL remain of foreign mistreatment to States’ exposure elusive. An omission of the FET clause would reduce the country as not offering investors may perceive investor claims, but foreign investment climate. Another solution would be to replace a sound and reliable specific obligations. the general FET clause with an exhaustive list of more on such a list may turn While agreeing out to be a challenging endeavour, far-reaching and unanticipated avoid help would nature exhaustive its by tribunals. interpretations The MFN provision ensures a level-playing field between investors from the a level-playing field between investors from ensures The MFN provision However, country. any third IIA home country and comparable investors from competing objectives and implications may come into play when designing upward an MFN clause. While clause may be used to ensure in the unanticipated it can also result standards, harmonization of IIA treaty countries and IIAs with third investor rights from incorporation of stronger design. This is particularly the case if MFN complicate conscious treaty includes issues or when the treaty clause extends to pre-establishment by an overly ineffective that could be rendered balanced provisions carefully MFN clause. broad the MFN arbitral decisions that have read recent An example of the latter are from provisions investor-friendly obligation as allowing investors to invoke more to not included in the base treaty, e.g. to incorporate standards treaties, third to the ones found in compared standards higher protection benefit from in the requirements (ISDS-related) procedural or to circumvent base treaty base treaty. applying to any the MFN clause from Should a country wish to preclude internationalit can do so by excluding specific types relevant agreement, in the scope of MFN clause (see section 4.2.1) or, of instruments from domestic to clause MFN the scope of the restricting by manner, broader a policy out certain sectors/industries or Carving section 4.2.2). (see treatment and reservations, catering for both current country-specific through measures needs, is an additional tool that allows managing the scope regulatory future of the MFN clause in a manner targeted to specific needs individual IIA Parties. to help attract while it is considered of treatment: FET is a critical standard investors and foster good governance foreign in the host State, almost all to date by investors against States have included an allegation claims brought of protection. of this all-encompassing standard of the breach an Through fairly and “ . ” Qualify the FET standard by reference to: by reference Qualify the FET standard of aliens under customary international of treatment law (MST/CIL) - minimum standard - international law or principles of international law. e.g. obligation not to Include an exhaustive list of State obligations under FET, - deny justice in judicial or administrative proceedings investors in a manifestly arbitrary manner - treat - flagrantly violate due process or involving continuous, unjustified coercion - engage in manifestly abusive treatment harassment - infringe investors’ legitimate expectations based on investment-inducing representa- tions or measures. guidance to arbitral tribunals) that: Clarify (with a view to giving interpretative or other adopting good faith regulatory States from - the FET clause does not preclude that pursue legitimate policy objectives measures standards, conduct (including the observance of universally recognized - the investor’s has been breached in determining whether the FET standard see section 7) is relevant in determining whether the FET standard level of development is relevant - the country’s has been breached of the IIA or another internationalcannot of another provision agreement - a breach of the clause. establish a claim for breach Omit FET clause. Prohibit less favourable treatment of covered investors/investments vis-à-vis comparable of covered less favourable treatment Prohibit country. investors/investments of any third to more not apply MFN does that clause, noting the application of MFN Limit e.g.: investors under, granted to third-country favourable treatment - Economic integration agreements - Double taxation treaties - IIAs concluded prior to (and/or after) the conclusion of IIA in question (e.g. if latter to earlier IIAs) less favourable to investors, as compared contains rules that are rights. - ISDS clauses / procedural investors under to foreign accorded Limit the application of MFN clause to treatment administrative practices and de facto treatment. domestic laws, regulations, reservations to MFN, e.g. carve out: Include country-specific (e.g. subsidies, etc.) - certain policies/measures - specific sectors/industries to minorities, rural populations, marginalized or (e.g. issues related - certain policy areas indigenous communities) investors/investments foreign Give an unqualified commitment to treat equitably 4.3.1 4.3.2 4.3.3 4.3.4 4.2.0 4.2.1 4.2.2 4.2.3 4.3.0 Policy options for IIAs

Most- favoured nation (MFN) treatment … protects foreign investors/ investments against discrimination vis-à-vis other foreign investors Fair and equitable treatment (FET) ... protects foreign investors/ investments against, e.g. denial of justice, arbitrary and abusive treatment 4.2 4.3 Sections 148 World Investment Report 2012: Towards a New Generation of Investment Policies equivalent “ in relation to in relation ” or ” fair “ or ” just “ , ” tantamount to “ situations. Such a broad approach approach situations. Such a broad expropriation, which refers to regulatory to regulatory which refers expropriation, ” appropriate “ indirect “ force majeure expropriation. Such provisions have been used to challenge general Such provisions expropriation. ” IIAs often contain a clause on compensation for losses incurred under IIAs often contain a clause on compensation for losses incurred such as armed conflict or civil strife. Some countries specific circumstances, have expanded the coverage of such a clause by including compensation in case of natural disasters or the risk for a State to face financial liabilities arising out of ISDS increases control. claims for events outside of the State’s investors, right to compensation on foreign Most IIAs only confer a relative investors in meaning that a host country undertakes to compensate covered a manner at least equivalent to comparable host State nationals or investors compensation to right absolute an provide IIAs Some countries. third from or pay for certain types of losses (e.g. those obliging a State to restitute by governmentor of their property forces caused by the requisitioning for host States but burdensome is more authorities). The latter approach to investors. a higher level of protection provides Most IIAs include a guarantee of full protection and security (FPS), which Most IIAs include a guarantee of full protection as codifying customary international law obligations is generally regarded However, and physical security. to grant a certain level of police protection than just the FPS obligation so as to cover more some tribunals may interpret if FPS is understood to include economic, legal and other police protection: it can constrain governmentprerogatives, regulatory and security, protection including for SD objectives. by to qualify the FPS standard trend Policymakers may follow a recent explicitly linking it to customary international law or including a definition of the This would provide clarifying that it is limited to “physical” security. standard that would constrain expansive interpretations and prevent predictability prerogatives. regulatory is a fundamental element of an IIA. IIAs with provision An expropriation property, clauses do not take away States’ right to expropriate expropriation investors against arbitrary or uncompensated expropriations, but protect legal framework, conducive to foreign contributing to a stable and predictable investment. typically cover IIA provisions and acts expropriation takings, creeping to on the value of an investment. with an alleged negative effect regulations between expropriation borderline This raises the question of proper social or health and legitimate public policymaking (e.g. environmental, regulations). in the public to regulate prerogative avoid undue constraints on a State’s To not) may acts that may (or State criteria for general may set out IIA an interest, While this does not exclude liability expropriation. an indirect be considered it allows for better balancing of investor and State interests. risks altogether, is another important of compensation for lawful expropriation The standard aspect. The use of terms such as of compensation. the calculation for flexibility in room compensation gives provide further guidance to arbitrators on States may find it beneficial to how to calculate compensation and clarify what factors should be taken into account. Sustainable development (SD) implications conditions security and protection

” , natural disasters or force majeure. , natural disasters or force ” physical “ acts of God “ ”). Hull formula “ Specify the compensation to be paid in case of lawful expropriation: Specify the compensation to be paid in case of lawful expropriation: just or equitable compensation - appropriate, the investment compensation, i.e. full market value of and effective adequate - prompt, ( substantive violating any of the three Clarify that only expropriations to restitution/compen- with respect MFN) treatment Grant non-discriminatory (i.e. NT, sation in case of armed conflict or civil strife. as – compensation in case of losses incurred Guarantee – under certain circumstances reasonable requiring by (e.g. absolute right an or civil strife as conflict of armed result a compensation). Define civil strife as not including clause. Omit protection-from-strife Include a guarantee to provide investors/investments full protection and security. investors/investments full protection Include a guarantee to provide Clarify the FPS clause by: to refers - specifying that the standard - linking it to customary international law (e.g. specifying that this obligation does not go by CIL) beyond what is required should be commensurate with the that the expected level of police protection - providing police and security forces. level of development the country’s Omit FPS clause. four conditions: public purpose, must comply with/respect that an expropriation Provide and payment of compensation. non-discrimination, due process taking) by (regulatory expropriation in case of indirect Limit protection to be found expropriation - establishing criteria that need to be met for indirect (non- expropriation do not constitute indirect - defining in general terms what measures of the protection to public health and safety, relating discriminatory good faith regulations etc.) environment, (e.g. expropriation do not constitute an indirect - clarifying that certain specific measures compulsory licensing in compliance with WTO rules). entail full reparation. (public purpose, non-discrimination, due process), 4.6.2 4.6.3 4.5.1 4.5.2 4.5.3 4.6.0 4.6.1 4.4.0 4.4.1 4.4.2 4.5.0 Policy options for IIAs

Full protection and security (FPS) …requires host States to exercise due diligence in protecting foreign investments Expropriation … protects foreign investors in case of dispossession of their investments by the host country Protection strife from … protects investors in case of losses as a incurred of armed result conflict or civil strife 4.6 4.4 4.5 Sections CHAPTER IV Investment Policy Framework for Sustainable Development 149

- - - - require an require ” prior-comment procedures prior-comment “ . ” to the extent possible “ Sustainable development (SD) implications IIAs virtually always contain a clause regarding investment-related transfers. investment-related IIAs virtually always contain a clause regarding use of investor can make free that a foreign The objective is to ensure to the invested capital, returns on investment and other payments related establishment, operation or disposal of an investment. reduces a significantly provision an unqualified transfer-of-funds However, inflows or outflows massive and sudden with deal to ability country’s host and other macroeconomic of capital, balance-of-payments (BoP) difficulties IIAs allows States to found in recent An exception increasingly problems. transfer of funds in specific circumstances, on the free impose restrictions misuse. to prevent usually qualified by checks and balances (safeguards) is if this transfers restrict to their right to reserve need also Countries may fraud on laws (e.g. to prevent of the Party’s for the enforcement required abuse. etc.), again with checks and balances to prevent creditors and laws publish promptly countries to a clause requiring include IIAs Some and established ones) with investors (prospective Providing regulations. This climate. investment country’s a improves information such to access for some countries that also pose administrative difficulties might, however, required. and technological infrastructure do not have the human resources technical assistance to may incorporate commitments to provide The treaty burden administrative The implementation. support to countries developing obligations could be lessened by using phrases imposed by transparency such as The few IIAs that contain so-called even higher level of action by governments and may expose States to lob of developing those laws. in the process bying and pressure the scope of ISDS (see often excluded from obligations are Transparency can be dis problems 6.2.4). They can still be useful, given that any related technical assistance. through cussed on a State-State level and addressed to transpa generally do not include any reference provisions Transparency the perception This contributes to investors. obligations applicable to rency that IIAs lack i) corporate governanceand ii) balance in enhancing features; domes strengthen to States encourage could IIAs and obligations. rights the (e.g. including mechanisms for due diligence requirements tic transparency procedures). Require countries to publish in advance measures that they propose to adopt regarding to adopt regarding that they propose countries to publish in advance measures Require opportunity for affected a reasonable by the IIA and to provide matters covered procedures). stakeholders (investors) to comment (prior-comment host States’ rights and/or encourage State Parties Explicitly reserve on investors requirements and disclosure - to implement policies placing transparency established) investor or its home State a potential (or already - to seek information from information available to the public - to make relevant confidential information. Qualify with an obligation upon the State to protect No clause. Grant foreign investors the right to freely transfer any investment-related funds (e.g. transfer any investment-related investors the right to freely Grant foreign open ended list) into and out of the host country. an exhaustive list of types qualifying transfers. Provide Include exceptions (e.g. temporary derogations): - in the event of serious balance-of-payments and externalor threat financial difficulties thereof in macro- to cause serious difficulties movements of funds cause or threaten - where to monetary and exchange rate policies. related economic management, in particular, their abuse (e.g. application in line with IMF rules Condition these exceptions to prevent non-discrimination, good faith and equity, conditions of temporality, and respecting proportionality). connection in funds of transfer investor’s an restrict to States host of right the Reserve and good faith application of its) laws, (equitable, non-discriminatory, with the country’s to, e.g.: relating - fiscal obligations of the investor/investment in host country transfers to currency in relation requirements - reporting of the rights creditors or the protection insolvency, - bankruptcy, options, or derivatives - issuing, trading, or dealing in securities, futures, (e.g. imposing criminal penalties) - criminal or penal offences of money laundering - prevention or judgments in judicial administrative proceedings. - compliance with orders covered which may affect publish documents Contracting Parties to promptly Require investments, including e.g. - laws and regulations rulings of general application - procedures/administrative - IIAs. information upon request. countries to grant investment-related Require 4.7.0 4.7.1 4.7.2 4.7.3 4.8.0 4.8.1 4.8.2 4.8.3 4.8.4 Policy options for IIAs

Transfer of Transfer funds … grants the right to free movement of investment- related financial flows into and out of the host country Transparency … fosters access to information 4.7 4.8 Sections 150 World Investment Report 2012: Towards a New Generation of Investment Policies clause from their IIAs. This means that an investor an that means This IIAs. their from clause ” umbrella “ Sustainable development (SD) implications Performance requirements (PRs) refer to the imposition of conditions on (PRs) refer Performance requirements (e.g. businesses limiting their economic choices and managerial discretion inputs or to export a certain percentage to use locally produced requirements economic as creating While PRs may be considered of production). they can also be a potentially important tool for industrial or inefficiencies, the transfer of technology to other economic development policies. From spill-over expected materialize help can PRs workers, local of employment investment. foreign from effects investment and to align the full benefits of foreign Thus, to reap consider the need policy with SD objectives, policymakers need to carefully for policy flexibility when devising clauses on PRs. This is important, even if (because even though this to the WTO TRIMs Agreement the IIA simply refers also WTO members, the does not add any new obligations on States who are directly to opportunity the investors gives IIA an into TRIMs of incorporation ISDS). It is particularly important when challenge a TRIMs violation through of an extensive list PRs beyond TRIMs (e.g. considering the prohibition to transfer technology or employ local workers). The relevant requirements the point of view from should be considered exceptions and reservations even if the IIA does not needs. Finally, regulatory and future of both current the contain a clause explicitly ruling out PRs, the NT would prohibit investors only. discriminatory imposition of PRs on foreign any obligation assumed a host State to respect clause requires An “umbrella” to a specific investment (for example, in an by it with regard contract). The clause thus brings contractual and other individual obligations through of the IIA, making them potentially enforceable under the “umbrella” ISDS. By subjecting contractual vitolations to IIA arbitration an umbrella important for countries to have the makes it even more clause therefore arrangements contractual respective the craft carefully to capacity technical (e.g. when they enter into investment or concession contracts). that they (1) effectively clauses are with “umbrella” The main difficulties obligations of the expand the scope of IIA by incorporating non-treaty faced with being of the risk increase may which the treaty, into State host interpretations rise to conflicting and (2) have given costly legal proceedings, of unpredictability. in a high degree tribunals resulting by investor-State – followed by many countries would One way of solving these problems the omit to be of an party to an investment contract would always have show a breach a country may of the contract. Alternatively, IIA obligation, and not a breach clause and the competent dispute settlement clarify the scope of umbrella is an option to make there Finally, forum to avoid conflicting interpretations. clause work both ways, that is, to use it incorporate into the the umbrella which would obligations but also those of an investor, IIA not only a State’s against investors in the give States an opportunity to bring counterclaims ISDS proceedings. relevant clause may only result from an exercise of an exercise from clause may only result ” umbrella “ umbrella clause that requires both the State and the investor to the State and both requires clause that umbrella ” clause. two-way ” “ umbrella “ Preclude Contracting Parties from placing trade-related performance requirements (e.g. performance requirements placing trade-related Contracting Parties from Preclude on investments operating in the goods sector (in accordance local content requirements) with/incorporating the WTO TRIMs Agreement). on investments, placing performance requirements Contracting Parties from Preclude to achieve a certain to transfer technology, ones, e.g. requirements beyond trade-related of local personnel (TRIMs +). level of R&D operations or to employ a certain percentage unless they are imposing performance requirements Contracting Parties from Preclude linked to the granting of incentives (usually in combination with above TRIMs + option). reservations to the TRIMs+ obligation, e.g. carving out: Include country-specific (e.g. subsidies) - certain policies/measures transport, - specific sectors/industries (e.g. banking, defence, fisheries, forestry, social services) infrastructure, to minorities, rural populations, marginalized or (e.g. issues related - certain policy areas indigenous communities) to companies of a specific size (e.g. SMEs). related - measures imposition of performance requirements No clause prohibiting contractual) (e.g. obligation any observe to Party each requires that clause a Include investor. to an investment of a covered which it has assumed with respect of the Clarify that a breach of contract by the State) powers by a governmentbreach sovereign (i.e. not an ordinary by shall be settled in the forum prescribed such breaches and that disputes arising from the contract. a Introduce related to the investment. observe their specific obligations No 4.9.0 4.9.1 4.9.2 4.9.3 4.9.4 4.10.0 4.10.1 4.10.2 4.10.3 Policy options for IIAs

”

Umbrella Performance requirements … regulate the extent to which host States can impose certain operational conditions on foreign investors/ investments “ clause … establishes a commitment on the part of the host State its to respect obligations regarding specific investments (including in investment contracts) 4.9 4.10 Sections CHAPTER IV Investment Policy Framework for Sustainable Development 151 to the policy objective. ” related “ measures must be applied in a non-arbitrary manner and not measures ” exceptional Sustainable development (SD) implications Facilitating the entry and sojourn of foreign employees and the right to hire Facilitating the entry and sojournemployees right to hire of foreign expatriate personnel (including senior management and members of the investment. can help to attract foreign of directors) board immigration laws interact with host State’s At the same time these provisions of policymaking. It is important that host States - a particularly sensitive area between coherence over their immigration policies or ensure control retain international relevant and national regulations. spill-overs such as States may wish to encourage SD-related Moreover, employment for domestic or indigenous workers and trickle-down effects investments foreign requiring by (e.g. knowledge technological to respect with to employ indigenous personnel or by limiting the number of expatriate personnel working for the investor). choosing the right normative intensity (e.g. opting for a best-efforts Carefully flexibility (e.g. ensuring the and other mechanisms for preserving approach), key. priority of national laws) are recent more date few IIAs include public policy exceptions. However, To by regulate in the public interest States’ right to reaffirm increasingly treaties conducive to make IIAs more general exceptions. Such provisions introducing between IIAs and other public policy objectives, SD goals, foster coherence any conflict that may to claims arising from States’ exposure and reduce and investor and the promotion of a foreign occur between the interests objectives. of legitimate public-interest protection be to agreement, the by prohibited otherwise measures, for allow Exceptions General exceptions identify the policy taken under specified circumstances. for which flexibility is to be preserved. areas it is for a State to determine how easy or difficult A number of features by a court or measure of the relevant avoid review use an exception. To tribunal, the general exception can be made self-judging (i.e. necessity/ is judged only by the invoking State of the measure appropriateness to States, reduces gives a wide margin of discretion itself). This approach legal certainty for investors and potentially opens possibilities abuse. In contrast, exceptions designed as not self-judging imply that in case of a in dispute, a court or tribunal will be able to determine whether the measure question is allowed by the exception. may adjust provision the States, by exceptions of the use to facilitate order In and the alleged policy objective link between the measure the required that the measure For example, instead of providing pursued by this measure. that must be “necessary” to achieve the policy objective, IIA could require be the measure abuse of exceptions, it is useful to clarify that to prevent in order Finally, “ as disguised investment protectionism. cultural “ ). ” - formulate the exception as self-judging. economic by clarifying that national security may encompass the exception Broaden security. Limit the exception by specifying: to e.g. those relating to certain types of measures, - that the exception only relates or taken in pursuance of States’ obligations in arms or nuclear non-proliferation; trafficking under the UN Charter for maintenance of international peace and security - that it only applies in times of war or armed conflict an emergency international relations. that aim to pursue legitimate public measures Include exceptions for domestic regulatory policy objectives, e.g. to: human rights - protect public health - protect climate change) (e.g. biodiversity, the environment - preserve public morals or maintain order - protect cultural and/or linguistic diversity - preserve not inconsistent with the treaty that are compliance with laws and regulations - ensure the integrity and stability of financial (e.g. to preserve - allow for prudential measures system) of essential social services (e.g. health, education, water supply) the provision - ensure host (to address including on developmental grounds safeguards, - allow for broader countries’ trade, financial and developmental needs) tax evasion - prevent value (or of artistic, historic or archaeological national treasures - protect heritage Provide for the facilitation of entry, sojourn and issuing of work permits for nationals for the facilitation of entry, Provide of nationality) into the territory other Party one Party (or individuals regardless other laws, national immigration and subject to investment, to an for purposes relating covering: - all personnel, including families - only senior management and key personnel. the right of investors to make appointments senior management positions Ensure to nationality. without regard (section obligation senior-management reservations to the Include country-specific 4.11.1), e.g. carve out: - certain policies/measures - specific sectors/industries (minorities, indigenous communities) - certain policy areas to companies of a specific size. related - measures No clause. No public policy exceptions. to the related and/or measures Include exceptions for national security measures maintenance of international peace and security: - formulate the exception as not self-judging (can be subject to arbitral review) 5.1.0 5.1.1 5.1.2 5.1.3 5.1.4 4.11.0 4.11.1 4.11.2 4.11.3 Policy options for IIAs

Personnel and staffing … facilitates the entry, sojourn and employment of foreign personnel Public policy exceptions ... permit public policy measures, otherwise inconsistent with the to be treaty, taken under specified, exceptional circumstances 5 4.11 Sections 152 World Investment Report 2012: Towards a New Generation of Investment Policies ad 3-person tribunal, most often at ICSID or under the UNCITRAL arbitration Sustainable development (SD) implications To date, State-State arbitrations under IIAs have been very rare. This is a is This rare. very been have IIAs under arbitrations State-State date, To natural consequence of including ISDS into IIAs (and investors themselves the system of diplomatic taking host States to arbitration) complement protection. if a question about the meaning of specific IIA obligation arises, and However, consultations, a the uncertainty through the Contracting Parties fail to resolve State-State arbitration can be a useful mechanism to clarify it. In this sense, their “supportive” function for ISDS. retain State-State procedures investors to sue a host State if the latter violates its IIA ISDS allows foreign host of courts domestic bypass to investors allow IIAs Most obligations. States and bring international(e.g. to constitute an arbitration proceedings hoc ensure to sphere, the domestic of out dispute take the to is The goal rules). of independence and impartiality of the arbitrators, speed effectiveness of arbitral awards. and finality enforceability the process questions have arisen with regard As the number of ISDS cases increases, and the SD implications of ISDS. Many ISDS procedures to the effectiveness cases ISDS resolve. to years several take often and expensive very are implemented for measures challenge domestic regulatory increasingly down of public policy objectives. Almost all ISDS cases lead to the break between the investor and host State. Due to lack the relationship tribunals have issued divergent of a single, unified mechanism, different in contradictory resulting provisions, treaty of similarly worded interpretations language. outcomes of cases involving identical/similar facts and/or treaty which has raised conducted confidentially, are Many ISDS proceedings concerns matters of public policy. when tribunals address If the available to deal with these problems. A number of policy options are and effective to be systems judicial each other’s consider Parties Contracting The Parties may also their IIA altogether. ISDS can be omitted from efficient, to ISDS (e.g. the choose to subject only the most fundamental IIA protections the right to give reserve against uncompensated expropriation), protection basis or minimize States’ exposure consent to arbitration on a case-by-case its purview, from certain areas to ISDS by other means (e.g. removing limitation periods). introducing the use of alternative Parties may also consider promoting dispute resolution (ADR) methods, such as conciliation and mediation. If employed at the early escalation of the conflict, stages of a dispute, ADR can help to prevent no “ measure must meet, e.g. the measure ” or undertakes to discontinue ( ”), exceptional “ fork-in-the-road “ , the same case in another forum ”) Promote the use of alternative(ADR) methods Promote dispute resolution to conciliation (e.g. ICSID or UNCITRAL rules) mediation - encourage resort mechanisms (including by creating to cooperate in developing dispute prevention - agree investment ombudsmen or “ombuds” offices). to international Clarify that investors can only resort arbitration domestic of ineffectiveness/bias manifest a or exhausted been have remedies local after - courts has been demonstrated not to bring ( - if the investor agrees U-turn (e.g. «old» measures from claims resulting to prevent - within a limitation period, in order years) within three claim has to be brought (see section 2.4). entry into force after the treaty’s to claims that arose - with respect to ISDS, e.g.: Limit States’ exposure ISDS, e.g. excluded from are and/or sensitive areas provisions - clarify that certain treaty protect to measures investments; incoming of review including issues, security national to relating measures health and human rights; prudential measures; the environment, to amount not that do measures tax provisions); IIA (or respective transfer of funds on transparency IIA provisions expropriation; to which ISDS should apply (e.g. only the - specify only those issues/provisions provision). expropriation Prevent abuse of the exceptions by host States: Prevent shall not be applied in a manner that that «exceptional» measures - provide would constitute arbitrary or unjustifiable discrimination between investments on international investors, or a disguised restriction trade investment which an threshold - choose the appropriate must be “necessary” (indispensable) to achieve the alleged policy objective, or measure (making a contribution) to this policy objective. be “related” disputes can be submitted to State-State IIA-related Establish that any unresolved dispute settlement (arbitration). that the States engage in prior consultations and negotiations an option or require Provide to conciliation or mediation. and/or resort dispute with the host country to Grant investors the right to bring any investment-related international arbitration. Define the range of disputes that can be subject to ISDS: of the legal basis for a claim, be it IIA, disputes (regardless - any investment-related contract, domestic law or other) specifically listed instruments (e.g. IIAs, contracts, investment - disputes arising from authorisations/licenses) IIA violations only - disputes regarding - States’ counterclaims. 5.1.5 6.1.0 6.1.1 6.2.0 6.2.1 6.2.2 6.2.3 6.2.4 Policy options for IIAs

Dispute settlement State-State ... governs dispute settlement between the Contracting Parties Investor- State … provides foreign investors with access to international arbitration to resolve investment- related disputes with the host State 6 6.1 6.2 Sections CHAPTER IV Investment Policy Framework for Sustainable Development 153 Sustainable development (SD) implications preserve the investment relationship, and find a workable common- the investment relationship, preserve As part of flexible manner. cheaper and more sense solution in a faster, to the possibility of States bringing may refer a treaty the IIA rebalancing, national State’s host the with non-compliance investors’ for counterclaims specific obligations undertaken in of investor’s laws (section 7.1.1) or breach to its investment (section 4.10.3). relation concerns The institutional set-up of the ISDS system is cause numerous or inconsistent decisions, secrecy lack of legitimacy, including perceived participatory challenges for developing countries. in the treaty. the institutional set-up of ISDS improve can policymakers IIA interpretation coherent more to contribute could mechanism appellate An claims could ISDS of Enhanced transparency system. in the trust foster and adequate and informed public debate as well a more enable broader deals and non-transparent prevent of stakeholder interests, representation arbitral decisions. stimulate balanced and well-reasoned such as simplified disposals of «frivolous» claims, improvements Procedural the consolidation of claims and caps on arbitrator fees, could help streamline A reference effective. and make it less expensive more arbitral process of the IIA, coupled to customary internationalinterpretation law as controlling would with a possibility for the State Parties to issue joint interpretations, framework and the ability of contracting a common interpretative ensure of arbitrators. limiting the discretion thereby States to influence this process, and compensation. In theory silent on the issue of remedies Most IIAs are they deem appropriate, this permits arbitral tribunals to apply any remedy to the country modify or annul its law including, for example, an order Remedies of the latter type could unduly intrude into sovereign regulation. of a State and impede its policymaking powers; thus, Parties to an sphere to monetary compensation and IIA may consider limiting available remedies (or compensation only). of property restitution international breach, law the amount of compensation for a treaty As regards compensation to be “full”, which may include moral damages, loss requires and consequential damages. profits of future applicable on arbitrators to guidance provide to beneficial it find may States above, on calculation of and, similar to the case of expropriation remedies compensation. If the Contracting Parties believe that certain types of damages by investors (e.g. punitive or moral damages), they should not be recoverable of recoverability restrict can also They IIA. their in them out rule explicitly can direct that compensation should cover a claimant’s and provide profits future such rules However, losses and not exceed the capital invested plus interest. quality of the IIA. may be seen as undermining the protective

claims ” frivolous “ Reserve State’s consent to arbitration, so that it would be given separately for each Reserve State’s specific dispute. arbitration in the arbitration (i.e. do not consent to investor-State Omit investor-State forum. domestic courts as the appropriate and nominate host State’s treaty) the institutional set-up of ISDS, e.g.: Improve - consider a system with permanent or quasi-permanent arbitrators and/or an appellate mechanism - foster accessibility of documents (e.g. information about the case, party submissions, documents) decisions and other relevant - foster public participation (e.g. amicus curiae and hearings) - specify that disputes concerningsuch as tax and/or certain sensitive policy areas, shall be submitted to the competent authorities of Parties for a prudential measures, of the treaty in breach joint determination of whether they are preliminary in - consider cooperation on training and assistance for adequate State representation establishing an investment advisory centre. disputes, including through investor-State e.g.: the arbitral process, that would improve Add features disposal of - mechanism for prompt/simplified - mechanism for consolidation of claims with customary international the IIA in accordance law (as to interpret - requirement Treaties) codified in the Vienna Convention on the Law of by the Parties in case of ambiguities of the treaty - mechanism for joint interpretation - caps on arbitrator fees. No clause. (or to of property to monetary compensation and restitution Limit available remedies compensation only). of that the amount of compensation shall be equitable in light circumstances Provide e.g.: breach, the case and set out specific rules on compensation for a treaty of punitive and/or moral damages - exclude recoverability (up to the date of award) of lost profits - limit recoverability level of development. that the amount is commensurate with country’s - ensure 6.2.5 6.2.6 6.3.0 6.3.1 6.4.0 6.4.1 6.4.2 Policy options for IIAs

ISDS institutions and procedures … propose improvements of an institutional and procedural nature Remedies and compensation … determines remedies available in case of breach treaty and gives guidance on compensation 6.3 6.4 Sections 154 World Investment Report 2012: Towards a New Generation of Investment Policies specifying that

Sustainable development (SD) implications IIAs usually provide that more favourable treatment of investors granted favourable treatment that more IIAs usually provide both which to treaty multilateral a (e.g. internationalunder another treaty It is much less usual Parties) would take precedence. IIAs signatories are that governs between an IIA and a treaty a relationship to address human rights, etc.). of environment, (e.g. protection policy area different this issue would help arbitral tribunals to take into account these Addressing as much possible, other internationalto ensure, commitments in order and see them as part of general of IIA provisions harmonious interpretation international law. Most IIAs only set out obligations for States. To correct this asymmetry, an this asymmetry, correct Most IIAs only set out obligations for States. To Noting the evolving IIA could also set out investor obligations/responsibilities. views on the capacity of international law to impose obligations on private parties, IIA policymakers could consider a number of options, each with its advantages and disadvantages. upon certain investor protection These IPFSD options (i) condition treaty behaviour; (ii) raise the obligation to comply with domestic laws in arbitration); and (iii) take a best- international its relevance level (increasing CSR applicable or standards recognised universally to approach endeavour standards. option is to include an obligation for investors comply with A far-reaching of the host State at both, entry and post-entry stage. laws and regulations While investors’ observance of domestic laws can generally be enforced national courts, including this obligation in an IIA could further improve through to non- protection compliance (e.g. by way of denying treaty means to ensure ISDS in counterclaims bring to right a States giving or investors complying are laws domestic that fact the from arise may Challenges proceedings). at local enterprises as opposed to those who own or control usually directed not should violations minor/technical that ensure to need the from and them level benefits. Also, the elevation to a treaty lead to complete denial of treaty the general of the obligation to comply with domestic law should not affect international principle that domestic laws must not be contrary to a country’s obligations - this can be made explicit in option 7.1.1 (e.g. by domestic laws must not be inconsistent with the IIA and international relevant law). IIA language investment through responsible Another option is to promote universal principles or that encourages investors to comply with relevant be would best-endeavour clause Such a CSR standards. applicable with instructs tribunals to take into account given additional weight if the treaty when deciding principles and standards investors’ compliance with relevant it may investors’ ISDS claims. Given the multitude of existing CSR standards, to specific documents such as the UN Global Compact. be useful to refer violation of those host State laws that

violation of the host State law made in operating in reflect international legally binding obligations (e.g. core labour standards, anti-corruption, internationallabour standards, reflect legally binding obligations (e.g. core conventions) and other laws as identified by the Contracting Parties environment investors’ violations in ISDS arising from for States’ right to bring counterclaims - provide of host State law. such as the ILO standards Encourage investors to comply with universally recognized MNE Declaration and the UN Guiding Principles on Business Human Tripartite to economic development, social Rights, and to carry out corporate due diligence relating risks. and environmental and by a tribunal when interpreting that non-compliance may be considered Provide (e.g. FET) or determining the amount of compensation due protections applying treaty to the investor. Encourage investors to observe applicable CSR standards: CSR standards - without specifying the relevant (e.g. in an annex) CSR standards - by giving a list of relevant (e.g. as best endeavour clauses). CSR standards - by spelling out the content of relevant and by a tribunal when interpreting that non-observance may be considered Provide (e.g. FET) or determining the amount of compensation due protections applying treaty to the investor. observance of applicable CSR Call for cooperation between the Parties to promote e.g. by standards, - supporting the development of voluntary standards - building local industries’ capacity for the uptake of voluntary standards when engaging - considering investors’ adoption/compliance with voluntary standards in public procurement - conditioning the granting of incentives on observance CSR standards (e.g. in the context of stock exchange reporting the uptake of CSR-related - promoting listing rules). investment promotion to condition the granting of outward Encourage home countries sustainable behaviour (see also socially and environmentally incentives on an investor’s 10.1.1 on investment promotion). No clause. parties, to which the contracting States are Stipulate that if another international treaty, shall of investors/investments, that other treaty favourable treatment for more provides part. in the relevant prevail international Stipulate that in case of a conflict between the IIA and host State’s with customary resolved in accordance commitments, such conflicts should be to the Vienna Convention on the Law of Treaties. including with reference international law, international Stipulate that in case of a conflict between the IIA and host State’s such as environment in another policy area, commitments under a multilateral agreement and public health, the latter shall prevail. No clause. that investors comply with host State laws at both the entry and post-entry Require stage of an investment. Establish sanctions for non-compliance: to investments protection - deny treaty to investments protection - deny treaty 7.1.0 7.1.2 7.1.3 7.1.4 7.1.5 8.1.0 8.1.1 8.2.0 8.2.1 7.1.1 Policy options for IIAs

Relationship to other agreements … establishes a hierarchy in case of competing international norms Investor obligations and res- ponsibilities … promote compliance by investors with domestic and/ or international norms at the entry and operation stage 7 8 Sections CHAPTER IV Investment Policy Framework for Sustainable Development 155

clauses from ISDS clauses from ” not lowering standards “ Sustainable development (SD) implications There is a concern There that internationalinvestment may competition for foreign human rights and labour lead some countries to lower their environmental, and that this could lead to a “race the bottom” in terms of standards standards. regulatory this concern. IIAs include language to address “Not lowering Some recent or discourage host States to for example, prohibit provisions, standards” for the purpose of and labour protection on environmental compromise investment. In doing so, the IIA goes beyond its traditional attracting foreign and pursues the goal of maintaining a regulatory of investment protection role framework that would be conducive to SD. IIAs often exclude While current or dispute settlement as such, it may be beneficial to foster consultations on that institutional mechanisms, so as to ensure this issue, including through be implemented. the clause will effectively While host States conclude IIAs to attract development-enhancing of IIAs is mostly indirect investment, the investment enhancing effect investors). Only a few IIAs to foreign offered the protection (through to encourage investment flows provisions include special promotional of investment opportunities (e.g. investors’ awareness and increase activities). by exchanging information or joint investment-promotion may help to for investment promotion a joint committee responsible Creating these committees, the Parties Through provisions. operationalize the relevant activities and take can set up an agenda, organize and monitor the agreed “soft” are provisions “promotional” The necessary. if measures corrective and their ultimate usefulness largely depends on the will (unenforceable), action of the Parties. by ensuring supports investment promotion The mechanism of subrogation functioning of investment insurance schemes maintained by the effective FDI. If the agencies, to support their outward home States, or their respective acquires it State, host the in investor an by suffered losses the covers insurer it to the same extent as, right to bring a claim and may exercise the investor’s a be to insurer the for possible it makes Subrogation investor. the previously, beneficiary of any compensation by the host State to which investor direct would have been entitled. No clause. Include environmental, human rights and labour clauses that Include environmental, and labour domestic environmental relaxing from - include a commitment to refrain law soft a as or obligation binding a as (expressed investment encourage to legislation clause) regard or with e.g. internationalagreements environmental commitments under, - reaffirm to internationalinternationallylabour rights or human rights. health standards, recognized enhanced environmental, Parties to provide Encourage cooperation between treaty and hold expert consultations on such matters. human rights and labour protection No clause. encouraging investment flows, with a special emphasis on Establish provisions Possible development strategy. most beneficial in light of a country’s those which are mechanisms include, e.g.: investment incentives, e.g. outward - encourage home countries to provide of the investment and guarantees, possibly conditioned on the SD enhancing effect investors’ compliance with universal principles and applicable CSR standards activities such as exhibitions, conferences, - organise joint investment promotion programmes seminars and outreach - exchange information on investment opportunities agencies consultations between investment promotion regular - ensure to developing host countries facilitate FDI technical assistance programmes - provide flows IIAs’ institutional set up (see 11.1.1 below). activities through promotion - strengthen clause. Include a subrogation 9.1.0 9.1.1 9.1.2 Policy options for IIAs 10.1.0 10.1.2 10.1.1

Not lowering of standards clause … discourages Contracting Parties from attracting investment the through relaxation of labour or environmental standards Investment promotion … aims to encourage foreign investment through additional means beyond investment protection in provisions IIAs 9 10 Sections 156 World Investment Report 2012: Towards a New Generation of Investment Policies Sustainable development (SD) implications While countries have concluded numerous IIAs, generally, there has been little there IIAs, generally, While countries have concluded numerous implemented and kept up-to-date. properly that IIAs are follow-up to ensure for permanent institutional IIAs have started to include provisions Recent arrangements that perform a number of specific functions. For example, Similarly, consistency in arbitral awards. can help ensure interpretation agreed informed decision making on further investment deliberations can ensure or amending IIAs. All of this can help maximize liberalization, or prolonging the contribution of IIAs to SD, for example, by monitoring development activities and CSR implications of IIAs and by engaging in dispute prevention promotion. mandate facilitates the implementation of listed activities. A clear treaty investment out to other relevant a forum to reach it provides Furthermore, and stakeholders including investors, local community representatives academia. is an emerging concernnetworks that may eventually There about aging treaty novel or emerging forms of be unsuitable for changing economic realities, the fact from challenges. This partly results investment and new regulatory for a fixed period of duration and quasi-automatic that IIAs often provide a stable investment regime). (in an attempt to provide renewal if both Parties explicitly agree An alternativefor renewal would be to provide and an assessment of its impact of the treaty to it in writing after a joint review on FDI flows and any attendant development implications. This exercise is still needed and whether any would help to assess whether the treaty required. amendments are termination. Another issue concernsof investors after the IIA’s the protection locks in treaty An IIA may include a “survival” clause, which effectively it While terminated. is treaty the after years of number a for standards legal security for investors, which may be necessary longer-term provides involving substantial commitment of for investors with long-term projects capital (e.g. in the extractive industries), it may limit States’ ability to regulate (especially if the treaty’s with new realities their economies in accordance policy flexibility). Negotiators may opt for do not grant sufficient provisions a balanced solution by ensuring that the “survival” clause is not overly long. clause which guarantees that in case of unilateral termination of the of termination unilateral of case in that guarantees which clause ” survival “ No clause. other IIA relevant, Set up an institutional framework under which the Parties (and, where etc.) shall cooperate stakeholders such as investors, local community representatives time to time, foster the implementation of agreement and hold meetings from this can include a specifically, with a view to maximising its contribution SD. More commitment to: of IIA clauses - issue interpretations the functioning of IIA - review upon modification of commitments (in line with special procedures) - discuss and agree and facilitate adaptation of IIAs to the evolving SD policies State Parties, e.g. through renegotiation activities, including by involving investment investment promotion - organize and review agencies, exchanging information on investment opportunities, organizing promotion seminars on investment promotion specific including by addressing - discuss the implementation of agreement, of investment disputes tape and resolution bottlenecks, informal barriers, red not-lowering standards Parties’ compliance with the agreement’s review - regularly clauses technical assistance to developing Contracting Parties enable them - provide engage in the institutionalized follow-up to treaty their and organize activities to promote CSR standards - identify/update relevant observance. quasi-automatic (e.g. 10 or 20 years) with of the treaty Specify the temporal application unless one of the Parties notifies other(s) its intention is renewed (the treaty renewal to terminate). renewal is based on a written but stipulate that State a specific duration of the treaty of the IIA. of both Parties on the basis a (joint) informed review agreement Include a (e.g. for a number of years after the termination treaty in effect it will remain treaty, to investments, made prior the termination. for another 5, 10 or 15 years) with respect at Do not specify minimum initial temporal duration but allow for termination of the treaty any time upon the notification of either Party. Policy options for IIAs 11.1.0 11.1.1 12.1.0 12.1.1 12.1.2 12.1.3

international Institutional set-up …establishes an platform collaboration between the Contracting Parties Final provisions … define the duration of and the treaty its possible prolongation 11 12 Sections CHAPTER IV Investment Policy Framework for Sustainable Development 157 Sustainable development (SD) implications to investors and their investments Most IIAs grant protection only after their establishment in the host State; country of the admission as regards freedom full regulatory thus retains For example, it can impose limits investors to its territory. foreign ownership of domestic companies or assets, apply on foreign and block acquisitions for industrial or other procedures screening (e.g. national security). policy reasons number of IIAs include years an increasing in recent However, phase of investment, that apply at the pre-establishment provisions the other Party. with the aim of liberalizing access for investors from countries to impose certain This is usually achieved by (i) prohibiting on market access (quotas, monopolies, exclusive restrictions countries to discriminate against rights and others), (ii) prohibiting investors at the stage of establishment and acquisition covered concurrently. investments, or (iii) using both approaches It is an important policy choice to decide whether extend the matters and, if so, to find a right balance IIA to pre-establishment between binding international commitments and domestic policy The first step is to choose between the positive- and flexibility. to identifying industries in which the pre- negative-list approach selective establishment rights will be granted. The former offers liberalization by way of drawing up a “positive list” industries rights. Under the in which investors will enjoy pre-establishment commitments in all pre-establishment investors benefit from latter, explicitly excluded. industries except in those that are

) ” committed negative list “ subject to the establishment, “ “ domestic investors domestic . ” vis-à-vis Country-specific reservations may carve out, as necessary, e.g.: reservations may carve out, as necessary, Country-specific of investments, i.e. prohibit discrimination prohibit i.e. investments, of ” ) or to all sectors/industries except those specifically excluded ( “hybrid”). positive list affect the overall level of commitments that Party under Agreement” affect “ Grant the right of establishment, subject to restrictions on public policy grounds (EU Treaty (EU Treaty on public policy grounds Grant the right of establishment, subject to restrictions approach). on restrictions, including of a non-discriminatory nature, imposing specific from Undertake to refrain such as: approach), market (GATS the establishment in host State’s limits on foreign capital in terms of maximum percentage - limitations on the participation of foreign shareholding - limitations on the number of establishments (quotas, monopolies, exclusive rights) - limitations on the total value of transactions or assets. to respect with investors foreign to treatment MFN and/or treatment national Extend expansion and acquisition (sections 1.1.3 and countries, subject to exceptions and reservations third and/or investors from 1.1.4 below). to sectors/industries specifically commitments only with respect Undertake pre-establishment mentioned ( or combining the two ( rights of establishment to domestic investors preferential that provide - existing measures trade and investment countries (e.g. on the basis of preferential certain third or investors from agreements) that would otherwise be inconsistent with the newly concluded treaty - existing measures/laws (grandfathering) on establishment, including full discretion the Party wishes to retain - sectors/industries where measures restrictive future or an economic needs test (ENT). such as investment screening - specific procedures Preserve additional policy flexibility on pre-establishment issues, with respect to issues, with additional policy flexibility on pre-establishment Preserve (locked-in) sectors e.g.: as long they in the future, new non-conforming measures of a Party to adopt the right - preserve do not into the schedule, e.g. that establishment is - include a wide “catch-all” reservation of national economy is made that no objection for reasons requirement 1.1.0 1.1.1 1.1.2 1.1.3 1.1.4 Policy options for IIAs

Pre-estab- lishment obligations … govern establishment of foreign investments in the host State 1 art B. Pre-establishment Sections UNCTAD’s Investment Policy Framework for Sustainable Development UNCTAD’s Policy options for IIAs P most organized from matters. As in Part A, policy options are supplementary to those in Part A and can be used by countries that wish extend their IIA pre-establishment Policy options in Part B are host State. flexibility to the prospective fewer establishment rights and more (i.e. highest level of liberalization) to those providing investor-friendly 158 World Investment Report 2012: Towards a New Generation of Investment Policies approach). ” hybrid “ Sustainable development (SD) implications The negative-list approach is more demanding in terms of is more The negative-list approach audit of existing domestic policies. a thorough it requires resources: and in the absence In addition, under a negative-list approach reservations, a country commits to openness also in of specific those sectors/activities, which, at the time an IIA is signed, do still evolving. frameworks are the regulatory not yet exist or where space, making regulatory when aiming to preserve Generally, to be safer. commitments on a positive-list basis is considered countries to requires managing a negative-list approach Properly and ii) sufficient regime have i) a sophisticated domestic regulatory the negotiating and designing properly for capacity institutional scheduling of liberalization commitments. In either case most IIAs specific non-conforming preserving include a list of reservations ( measures and «safety valves» is arguably greatest The need for reservations it perspective, SD a From list. negative the for opts country a if may be prudent to consider excluding certain sub-industries or reserving grandfathering specific non-conforming measures, commitments under specified the right to change country’s conditions or choose the right level of normative intensity commitments.

, as opposed to legally binding, language. ” best efforts “ Reduce normative intensity of pre-establishment commitments e.g.: Reduce normative intensity of pre-establishment obligations until the date when Parties of pre-establishment - postpone the entry into force sectors/measures on covered agree date at a future to undertake negotiations on pre-establishment - agree or subject them to dispute settlement provisions disciplines from - exclude pre-establishment State-State dispute settlement only - use relevant general provisions crafting issues by carefully policy flexibility on pre-establishment Preserve of the IIA, e.g.: (see section 2.3 of Part A) - specifying the scope and coverage of treaty - including general and national security exceptions (see section 5 of Part A). with domestic laws of the host State. that admission of investments is in accordance Provide 1.1.5 1.1.6 1.1.7 Policy options for IIAs Sections CHAPTER IV Investment Policy Framework for Sustainable Development 159 Sustainable development (SD) implications to the special needs and concerns give expression of SDT provisions developing and particularly least-developed countries (LDCs). Largely in numerous IIAs, this principle is expressed existing absent from and has found its way into other of the WTO agreements provisions aspects of international law such as the international climate change that a less to ensure framework. SDT may be necessary in order does not undertake obligations that would developed Party to a treaty to comply with or contrary its development be too burdensome strategy. ways to make an IIA asymmetrical and reflect different are There options several SDT special needs of less developed Parties; moreover, For example, it can establish can be combined in the same treaty. obligations, country- pre-establishment longer phase-in periods for requirements, of performance the prohibition specific carve-outs from and account to transparency, best-endeavour obligations with respect for the level of development in FET provision. SDT can also manifest itself in special obligations for the more SDT can also manifest itself in special obligations for the more meant to operationalize the These are developed Contracting Party. function and, if necessary, IIA, so that it performs its FDI-promoting to help the less developed Party implement certain IIA obligations. even in a non-binding manner, in the treaty, Including such provisions place in put to partner developed more the to mandate a provide would activities. technical-assistance and promotion relevant Delayed implementation of obligations a for time-frames longer with commitments IIA of implementation for timetable a Introduce e.g.: Could be used for, less developed Party. obligations - pre-establishment - national treatment - transfer of funds - performance requirements - transparency dispute settlement. - investor-State Reduced normative intensity Replace binding obligations with best-endeavour obligations for a less developed Party. Replace binding obligations with best-endeavour for a less developed Party. e.g.: Could be used for, obligations - pre-establishment - national treatment - performance requirements - transparency. Reservations general obligations, e.g. carving out sensitive reservations from Include country-specific e.g.: or enterprises of specific size (e.g. SMEs). Could be used for, sectors, policy areas obligations - pre-establishment - national treatment - MFN treatment - performance requirements (senior management). - personnel and staffing Development-friendly interpretation level that takes into account States’ different standards of protection interpretation Promote e.g.: of development. Could be used for, - fair and equitable treatment and security - full protection - amount of compensation awarded. assistance Technical technical assistance to implement IIA Undertake a (best-endeavour) obligation to provide obligations and facilitate FDI flows. Investment promotion FDI such as investment guarantees. investment incentives to outward Provide 1.1.0 Policy options for IIAs 1.1.1 1.1.2 1.1.3 2.1.0 2.1.1

Asymmetrical obligations … enable imposition of less onerous obligations on a less developed Party Additional tools … encourage positive contributions by a more developed Party olicy options for IIAs art C. Special and Differential (SDT) Treatment 1 2 SDT provisions could be an option where Contracting Parties to an IIA have significantly different levels of development, especially when one of the Parties is a least-developed country. SDT levels of development, especially when one the Parties is a least-developed country. Contracting Parties to an IIA have significantly different could be an option where SDT provisions between the Contracting Parties. obligations may differ i.e. treaty can be built asymmetrically, that a treaty presupposes Sections UNCTAD’s Investment Policy Framework for Sustainable Development UNCTAD’s P P 160 World Investment Report 2012: Towards a New Generation of Investment Policies

flexibilities for contracting parties are not any other international treaty, care needs to mutually exclusive; rather, the combination of be taken that the international obligations the two helps achieve a balanced agreement arising from the IIA are properly translated that meets the needs of different investment into national laws and regulations, and stakeholders. For example, an IIA can combine depending on the scope of the IIA, e.g. with “strong” substantive protection (e.g. non- regard to transparency obligations, also into discrimination, capital transfer guarantees) the administrative practices of the countries with “strong” exceptions (e.g. national security involved. exceptions or general exceptions to protect • Disseminating information about IIA essential public policy objectives).29 obligations. Informing and training ministries, The policy options presented in the IPFSD IIA- government agencies and local authorities on the implications of IIAs for their conduct elements table are grounded in the Core Principles. in regulatory and administrative processes For example, (i) the principle of investment protection is important so as to avoid other arms of the directly manifests itself in IIA clauses on FET, non- government causing conflicts with treaty discrimination, capital transfer, protection in case commitments and thus giving rise to investor of expropriation or protection from strife; (ii) the grievances, which if unresolved could lead to principle of good governance is reflected, amongst arbitral disputes. others, in IIA clauses that aim at increasing host State’s transparency regarding laws and regulations • Preventing disputes, including through or in IIA clauses that foster transparency by the ADR mechanisms. This may involve the foreign investor vis-à-vis the host State; (iii) the right establishment of adequate institutional to regulate principle is reflected, amongst others, in mechanisms to prevent disputes from emerging and avoid the breach of contracts IIA clauses stating that investments need to be in and treaties on the part of government accordance with the host country’s laws, allowing agencies. This involves ensuring that the countries to lodge reservations (including for future State and various government agencies take policies); clarifying and circumscribing the content account of the legal obligations made under of indirect expropriation or general exceptions. investment agreements when enacting laws and implementing policy measures, and 4. Implementation and institutional establishing a system to identify more easily mechanisms for policy effectiveness potential areas where disputes with investors Implementation of IIAs at the national level entails: can arise, and to respond to the disputes • Completing the ratification process. This may where and when they emerge. vary from a few months to several years, • Managing disputes that may arise under depending on the countries involved and IIAs. If dispute prevention efforts fail, States Capacity-building in the concrete issues at stake. need to be prepared to engage effectively developing countries The distinction between the and efficiently in managing the disputes from is key to ensuring conclusion of an agreement beginning to end. This involves setting up and its entry into force is their effective the required mechanisms to take action in important, because the legal case of the receipt of a notice of arbitration, engagement in IIAs. rights and obligations deriving to handle the case, and ultimately to bring it from it do not become effective before the to a conclusion, including possibly through treaty has entered into force. The time lag settlement. between the conclusion of an IIA and its entry • Establishing a review mechanism to verify into force may therefore have implications, for periodically the extent to which the IIA both foreign investors and their host countries. contributes to achieving expected results in • Bringing national laws and practices into terms of investment attraction and enhancing conformity with treaty commitments. As with sustainable development – while keeping CHAPTER IV Investment Policy Framework for Sustainable Development 161

in mind that there is no mono-causal link when it comes to analyzing ex ante the scope of between concluding an IIA and investment obligations into which they are entering when they flows. conclude an IIA, and the economic and social implications of the commitments contained in IIAs. Moreover, because national and international investment policies must be considered in an This underlines the importance of capacity-building integrated manner, and both need to evolve with a technical cooperation to help developing countries country’s changing circumstances, countries have in assessing various policy options before entering to assess continuously the suitability of their policy into new agreements and subsequently to assist choices with regard to key elements of investment them in implementing their commitments. IIAs can protection and promotion, updating model treaties include relevant provisions to this end, including and renegotiating existing IIAs. setting up institutional frameworks under which the contracting parties (and, where appropriate Undertaking these implementation and follow-up and relevant, other IIA stakeholders such as efforts effectively and efficiently can be burdensome investors or civil society) can review progress in for developing countries, especially the least the implementation of IIA commitments, with a developed, because they often lack the required view to maximizing their contribution to sustainable institutional capabilities or financial and human development. International organizations can also resources. Similarly, they often face challenges play an important capacity-building role.

F. THE WAY FORWARD

The IPFSD aims to A new generation of investment integration of investment policy with development provide a common policies is emerging, pursuing strategy, how to ensure policy coherence language and point of a broader and more intricate and design investment policies in support of reference for policy- development policy agenda sustainable development, and how to improve makers and invest- within a framework that policy effectiveness. The policy options for key seeks to maintain a generally elements of IIAs provide guidance to IIA negotiators ment stakeholders favourable investment climate. for the drafting of sustainable-development-friendly for the participative “New generation” investment agreements; they form the first comprehensive development of future policies recognize that overview of the myriad of options available to them investment policies. investment is a primary driver in this respect. of economic growth and development, and seek In developing the IPFSD, UNCTAD has had the to give investment policy a more prominent place benefit of a significant body of existing work and in development strategy. They recognize that experience on the topic. UNCTAD itself has carried investment must be responsible, as a prerequisite out more than 30 investment policy reviews (IPRs) for inclusive and sustainable development. And in developing countries over the years (box IV.4), in the design of “new generation” investment analyzed in detail investment regulations in numerous policies policymakers seek to address long- countries for the purpose of investment facilitation standing shortcomings of investment policy in a (box IV.6), and produced many publications on best comprehensive manner in order to ensure policy practices in investment policy (box IV.7), including effectiveness and build a stable investment climate. in the WIR series. Other agencies have a similar This chapter has painted the contours of a new track record, notably the OECD and the World investment policy framework for sustainable Bank, various regional organizations, and a number development. The Core Principles set out the of NGOs. In defining an IPFSD, this chapter has design criteria for investment policies. The national attempted to harness the best of existing work on investment policy guidelines suggest how to ensure investment policies, investment policy frameworks, 162 Investment Policy Framework for Sustainable Development

guidelines and models, and to build on experience UNCTAD will add the infrastructure for such in the field in their implementation. cooperation, not only through its numerous policy forums on investment, but also by providing a The IPFSD is not a negotiated text or an undertaking platform for “open sourcing” of best practice between States. It is an initiative by the UNCTAD investment policies through its website, as a basis secretariat, representing expert guidance for for the inclusive development of future investment policymakers by an international organization, policies with the participation of all.30 leaving national policymakers free to “adapt and adopt” as appropriate. Notes It is hoped that the IPFSD may serve as a key point of reference for policymakers in formulating national 1 Many successful developing countries maintained a significant level of government influence over the direction investment policies and in negotiating or reviewing of economic growth and development throughout the IIAs. It may also serve as a reference for policymakers period; see Development-led globalization: Towards sustainable and inclusive development paths, Report of the in areas as diverse as trade, competition, industrial Secretary-General of UNCTAD to UNCTAD XIII. policy, environmental policy, or any other field where 2 The G-20, in its 2010 Seoul declaration, asked investment plays an important role. The IPFSD can international organizations (specifically, UNCTAD, WTO and OECD) to monitor the phenomenon of investment also serve as the basis for capacity-building on protectionism. investment policy. And it may come to act as a 3 See Sauvant, K.P. (2009). “FDI Protectionism Is on the point of convergence for international cooperation Rise.” World Bank Policy Research Working Paper 5052. on investment issues. 4 For example, the World Bank’s Guidelines on the Treatment of Foreign Direct Investment, the OECD’s In its current form the IPFSD has gone through Policy Framework for Investment (PFI), and instruments developed by various regional organizations and NGOs. numerous consultations, comprehensively and 5 These include, inter alia, the UN Global Compact, the UN by individual parts, with expert academics and Guiding Principles on Business and Human Rights, the practitioners. It is UNCTAD’s intention to provide ILO Declaration on Fundamental Principles and Rights at Work, the IFC’s Sustainability Framework and the OECD a platform for further consultation and discussion Guidelines for Multinational Enterprises. with all investment stakeholders, including 6 See ILO Global Employment Trends 2012, available on policymakers, the international development www.ilo.org. 7 See, for example, “Promoting investment for development: community, investors, business associations, labour Best practices in strengthening investment in basic unions, and relevant NGOs and interest groups. To infrastructure in developing countries,” note by the allow for further improvements resulting from such UNCTAD secretariat to the Investment, Enterprise and Development Commission, May 2011, TD/B/C.II/14, www. consultations, the IPFSD has been designed as a unctad.org. “living document”. 8 Based on Doran, G. T. (1981). “There’s a S.M.A.R.T. way to write management’s goals and objectives.” Management The dynamic nature of investment policymaking Review, 70 (11 AMA FORUM); 35-36. adds to the rationale for such an approach, 9 The universe of “core IIAs” principally consists of BITs and other agreements that contain provisions on investment, in particular for the specific investment policy so-called “other IIAs”. Examples of the latter include guidelines. The continuous need to respond to free trade agreements (FTAs) or economic partnership agreements (EPAs). As regards their substantive newly emerging challenges with regard to foreign obligations, “other IIAs” usually fall into one of three investment makes it mandatory to review and, categories: IIAs including obligations commonly found where necessary, modify these guidelines from time in BITs; agreements with limited investment-related provisions; and IIAs focusing on investment cooperation to time. Thus, from UNCTAD’s perspective, while and/or providing for future negotiating mandates on the IPFSD will serve to inform the investment policy investment. In addition to “core IIAs”, numerous other legal instruments matter for foreign investment, including double debate and to guide technical assistance work in taxation treaties. the field, new insights from that work will feed back 10 Examples include the interaction between IIAs and into it. other bodies of international law or policy in the field of public health (e.g. the World Health Organization The IPFSD thus provides a point of reference and Framework Convention on Tobacco Control, WHO FCTC), environment (e.g. the Basel Convention on the Control a common language for debate and cooperation of Transboundary Movements of Hazardous Wastes) or on national and international investment policies. human rights (e.g. International Covenant on Economic, Social and Cultural Rights), to name a few. In the context CHAPTER IV Investment Policy Framework for Sustainable Development 163

of ensuring coherence between investment protection No. AA 226; Yukos Universal Limited (Isle of Man) v. The and climate change, WIR10 suggested a “multilateral Russian Federation, PCA Case No. AA 227; Veteran declaration” clarifying that IIAs do not constrain climate Petroleum Limited (Cyprus) v. The Russian Federation, change measures enacted in good faith. PCA Case No. AA 228. 11 In some countries the existence of an IIA is a prerequisite 21 Ceskoslovenska Obchodni Banka (CSOB) v. The Slovak for the granting of investment guarantees. Republic, ICSID Case No. ARB/97/4, Final Award, 29 12 This impact is generally stronger in the case of preferential December 2004. The case was brought by CSOB on the trade and investment agreements than with regards basis of consent to arbitration contained in the 1992 BIT to BITs. See “The Role of International Investment between the Czech Republic and the Slovak Republic. Agreements in Attracting Foreign Direct Investment to The findings on liability and damages were based on the Developing Countries,” UNCTAD Series on International underlying contract and Czech law. For more information Investment Policies for Development, December 2009; on ISDS consult http://www.unctad.org/iia-dbcases/cases. www.unctad.org. For a full discussion of FDI determinants, aspx. see WIR98. 22 For details, see UNCTAD (2011) “Sovereign Debt 13 See also Skovgaard Poulsen, Lauge N. and Aisbett, Restructuring and International Investment Agreements.” Emma (2011) “When the Claim Hits: Bilateral Investment IIA Issues Note, No.2, www.unctad.org, Abaclat and Treaties and Bounded Rational Learning.” Crawford School others v. Argentine Republic, ICSID Case No. ARB/07/5, Research Paper No. 5. Decision on Jurisdiction and Admissibility, 4 August 2011. 23 14 As discussed in WIR04, interaction can be either Nottage, Hunter (2003), Trade and Competition in the autonomous-liberalization-led or IIA-driven, or anywhere in- WTO: Pondering the Applicability of Special and Differential between. Treatment, Journal of International Economic Law, 6(1), p.28. 15 Related are questions of forum-choice, double 24 incorporation, dual liability and re-litigation of issues, all of Based on six categories as identified in WTO (2000) which call for a careful consideration of how to manage the “Implementation of Special and Differential Treatment overlaps between agreements. See also Babette Ancery Provisions in WTO Agreements and Decisions,” Note by (2011), “Applying Provisions of Outside Trade Agreements Secretariat, WT/COMTD/W/77, 25 October 2000, available in Investor-State Arbitration through the MFN-clause.” at www.wto.org. More recently, also the Doha Ministerial TDB, 8 (3). Declaration (2001) reaffirmed SDT as an integral part of the multilateral trade regime. 16 This is in line with the traditional view of international law, 25 as governing relations between its subjects, primarily COMESA Investment Agreement (2007), Article 14(3). between States. Accordingly, it is impossible for an 26 Any comprehensive effort to reform the ISDS regime international treaty to impose obligations on private actors would also have to go beyond IIA clauses, and address (investors), which are not parties to the treaty (even though other rules, including those for conducting international they are under the jurisdiction of the respective contracting arbitrations (e.g. ICSID or UNCITRAL). parties). 27 Experience with ISDS has revealed numerous instances of 17 Article 13 “Investor Obligation” provides: “COMESA unclear or ambiguous clauses that risk being interpreted investors and their investments shall comply with all in an unanticipated and broad manner. Therefore the table applicable domestic measures of the Member State in includes options to clarify. However, these clarifications which their investment is made.” should not be used by arbitrators to interpret earlier 18 In fact, in the course of the past century, international law clauses that lack clarifications in broad and open-ended has been moving away from the traditional, strict view manner. towards including, where appropriate, non-State actors 28 Absence of ISDS – and hence of the possibility to be into its sphere. See, e.g., A. Bianchi (ed.) (2009), “Non- subject to financial liabilities arising from ISDS – may make State Actors and International Law.” (Ashgate, Dartmouth). it easier for countries to agree to certain standards of 19 Also the 2012 Revision of the International Chamber of protections. Commerce (ICC) Guidelines for International Investment 29 Similarly, one can combine far-reaching liberalization or refer to investors’ obligations to comply with the laws and protection clauses with a possibility to lodge reservations regulations of the host State at all times and, in particular, (e.g. for pre- and post-establishment clauses, and for to their obligation to comply with national and international existing and future measures). See “Preserving Flexibility labour laws, even where these are not effectively enforced in IIAs: The Use of Reservations”, UNCTAD Series on by the host State. International Investment Policies for Development, June 20 The aggregate amount of compensation sought by the 2006; www.unctad.org. three claimants constituting the majority shareholders of 30 Interested stakeholders and experts are invited to provide the former Yukos Oil Company in the ongoing arbitration feedback and suggestions through the dedicated UNCTAD proceedings against Russia. See Hulley Enterprises IPFSD website, at www.unctad.org/DIAE/IPFSD. Limited (Cyprus) v. The Russian Federation, PCA Case 164 World Investment Report 2012: Towards a New Generation of Investment Policies