UNCTAD United Nations Conference on Trade And Development i nvestment p olicy

f ramework F O r s ustainable d evelopment Investment P olicy Framework FOr S ustainable D evelopment UNITED NATIONS

Join us at: www.unctad.org/ipfsd ii Investment Policy Framework for Sustainable Development

Note

The Division on Investment and Enterprise of UNCTAD is a global centre of excellence dealing with issues related to investment and enterprise development in the United Nations System. It builds on three-and-a-half decades of experience and international expertise in research and policy analysis, fosters intergovernmental consensus-building, and provides technical assistance to developing countries. The terms country/economy as used in this Report also refer, as appropriate, to territories or areas; the designations employed and the presentation of the material do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. In addition, the designations of country groups are intended solely for statistical or analytical convenience and do not necessarily express a judgment about the stage of development reached by a particular country or area in the development process. The major country groupings used in this Report follow the classification of the United Nations Statistical Office. These are: Developed countries: the member countries of the OECD (other than Chile, Mexico, the Republic of Korea and Turkey), plus the new European Union member countries which are not OECD members (Bulgaria, Cyprus, Latvia, Lithuania, Malta and Romania), plus Andorra, Bermuda, Liechtenstein, Monaco and San Marino. Transition economies: South-East Europe and the Commonwealth of Independent States. Developing economies: in general all economies not specified above. For statistical purposes, the data for China do not include those for Hong Kong Special Administrative Region (Hong Kong SAR), Macao Special Administrative Region (Macao SAR) and Taiwan Province of China. Reference to companies and their activities should not be construed as an endorsement by UNCTAD of those companies or their activities. The boundaries and names shown and designations used on the maps presented in this publication do not imply official endorsement or acceptance by the United Nations. The following symbols have been used in the tables: • Two dots (..) indicate that data are not available or are not separately reported. Rows in tables have been omitted in those cases where no data are available for any of the elements in the row. • A dash (–) indicates that the item is equal to zero or its value is negligible. • A blank in a table indicates that the item is not applicable, unless otherwise indicated. • A slash (/) between dates representing years, e.g., 1994/95, indicates a financial year. • Use of a dash (–) between dates representing years, e.g. 1994–1995, signifies the full period involved, including the beginning and end years. • Reference to “dollars” ($) means United States dollars, unless otherwise indicated. • Annual rates of growth or change, unless otherwise stated, refer to annual compound rates. Details and percentages in tables do not necessarily add to totals because of rounding. The material contained in this study may be freely quoted with appropriate acknowledgement. iii

Preface

Towards a New Generation of Investment Policies

At a time of persistent crises and pressing social and To help policymakers address the challenges posed environmental challenges, harnessing economic by this new agenda, this report takes a fresh look growth for sustainable and inclusive development at investment policymaking, and does so by taking is more important than ever. Investment is a primary a systemic approach, examining the universe of driver of such growth. Mobilizing investment national and international policies through the lens and ensuring that it contributes to sustainable of today’s key investment policy challenges. It development objectives is therefore a priority for all explicitly focuses on the development dimension, countries and for developing countries in particular. and presents a comprehensive Investment Policy Framework for Sustainable Development (IPFSD). Against this background, a new generation of investment policies is emerging, pursuing a The IPFSD consists of a set of Core Principles for broader and more intricate development policy investment policymaking, guidelines for national agenda, while building or maintaining a generally investment policies, and guidance for policymakers favourable investment climate. “New generation” on how to engage in the international investment investment policies place inclusive growth and policy regime, in the form of options for the design sustainable development at the heart of efforts and use of international investment agreements to attract and benefit from investment. Although (IIAs). these concepts are not new in and by themselves, The IPFSD is built on the experience of UNCTAD and to date they have not been systematically other organizations in designing investment policies integrated in mainstream investment policymaking. for development, and it incorporates lessons learned “New generation” investment policies aim to on what policies and measures work well, or not operationalize sustainable development in concrete so well, under what circumstances. It represents measures and mechanisms at the national and the best endeavour by the UNCTAD secretariat, in international level, and at the level of policy making collaboration with numerous international experts and implementation. and investment stakeholders. It is the result of Broadly, “new generation” investment policies strive collective wisdom. to: It is hoped that the IPFSD may serve as a reference • create synergies with wider economic for policymakers in formulating national investment development goals or industrial policies, and policies and in negotiating investment agreements achieve seamless integration in development or revising existing ones. It can also serve as the strategies; basis for capacity building on investment policy • foster responsible investor behavior and and for UNCTAD’s technical assistance work. And incorporate principles of corporate social it may come to act as a point of convergence for responsibility (CSR); international cooperation on investment issues. • ensure policy effectiveness in their design The IPFSD has been designed as a “living and implementation and in the institutional document”. UNCTAD will continuously update its environment within which they operate. contents based on feedback from its numerous policy forums and from its work in the field, and it will provide a platform for “open sourcing” of best practice investment policies. iv Investment Policy Framework for Sustainable Development

Acknowledgements

UNCTAD’s Investment Policy Framework for Rajneesh Narula, Federico Ortino, Joost Pauwelyn, Sustainable Development (IPFSD) was prepared Stephan Schill, Andrea Saldarriaga, Karl Sauvant, by a team led by James Zhan. The team members Pierre Sauvé, Jorge Vinuales, Stephen Young, and included Richard Bolwijn, Quentin Dupriez, Joachim Zbigniew Zimny. Comments were also received from Karl, Sergey Ripinsky, Elisabeth Türk, and Jörg numerous UNCTAD colleagues, including Kiyoshi Weber. Wolfgang Alschner, Anna-Lisa Brahms, Adachi, Chantal Dupasquier, Torbjörn Fredriksson, Hamed El Kady, Diana Rosert and Thomas van Masataka Fujita, Hafiz Mirza, Fiorina Mugione, Paul Giffen also contributed to the work. Wessendorp, Richard Kozul-Wright and colleagues from the Division on Globalization and Development At various stages of preparation, in particular during Strategies and the Division on International Trade a series of expert group meetings organized to and Commodities. discuss drafts of the framework, the team benefited from comments and inputs received from Michael The IPFSD benefited from review and discussion at Addo, Yuki Arai, Nathalie Bernasconi, Jeremy several intergovernmental meetings, including the Clegg, Zachary Douglas, Roberto Echandi, Lorraine International Investment Agreements Conference Eden, Alejandro Faya, Stephen Gelb, Robert and the Ministerial Round Table at the World Howse, Christine Kaufmann, Jan Kleinheisterkamp, Investment Forum 2012 (WIF2012) and UNCTAD John Kline, Markus Krajewski, Arvind Mayaram, XIII in Doha, Qatar. Yuki Arai, Kate Miles, Ted Moran, Peter Muchlinski, v

Table of Contents

Preface: Towards a New Generation of Investment Policies...... iii

Acknowledgements...... iv

Introduction: Investment Policy Framework for Sustainable Development...... 1

I. A “New Generation” of Investment Policies ...... 3 1. The changing investment policy environment ...... 3 2. Key investment policy challenges ...... 6 3. Addressing the challenges: UNCTAD’s Investment Policy Framework for Sustainable Development...... 8

II. Core Principles for Investment Policymaking...... 10 1. Scope and objectives of the Core Principles ...... 10 2. Core Principles for Investment Policymaking for Sustainable Development...... 11 3. Annotations to the Core Principles...... 11

III. National Investment Policy Guidelines ...... 15 1. Grounding investment policy in development strategy...... 15 2. Designing policies for responsible investment and sustainable development...... 20 3. Implementation and institutional mechanisms for policy effectiveness...... 22 4. The IPFSD’s national policy guidelines...... 25

IV. Elements of International Investment Agreements: Policy Options...... 36 1. Defining the role of IIAs in countries’ development strategy and investment policy...... 36 2. Negotiating sustainable-development-friendly IIAs...... 39 3. IIA elements: policy options...... 43 4. Implementation and institutional mechanisms for policy effectiveness...... 64

V. The Way Forward...... 65

1

Introduction

Investment Policy Framework for Sustainable Development

The policy environment for cross-border investment other capital flows which should be addressed is subject to constant change. At the national level, by the financial system and policies) – by taking governments continue to adopt investment policy a systemic approach that examines the universe measures (at a rate of around 150 annually over the of national and international policies through the past decade according to UNCTAD’s monitoring of lens of today’s key investment policy challenges. It such measures), not to speak of countless measures also aims explicitly to strengthen the development taken every year that influence the overall business dimension of investment policies, and presents a environment for investors. At the international level, comprehensive Investment Policy Framework for new investment agreements have been concluded Sustainable Development (IPFSD). at a rate of more than one per week for the past Encouragement to pick up this gauntlet comes few years. At the level of “soft law”, the universe of from discussions with senior policymakers in codes and standards that govern the behavior of numerous forums, including at UNCTAD’s biennial corporate investors also continues to expand. World Investment Forum; at its Commission on Over the last two decades, as more and more Investment, Enterprise and Development; and at its governments have come to realize the crucial role regular intergovernmental expert group meetings of private investment, including FDI, in fuelling on investment and enterprise. It also stems from economic growth and development, great strides discussions with academics and business advisors have been made to improve both national and in UNCTAD’s round tables on investment policy, international investment policies. Very significant and from UNCTAD’s technical assistance work with efforts have been made by governments in developing countries. Further encouragement has developing countries in particular, often aided by emerged from other important policy platforms, most the international development community through notably the G-20, which in its Seoul Declaration in policy frameworks, model treaties and technical 2010 and the accompanying Multi-Year Action Plan assistance (such as UNCTAD’s Investment Policy for Development specifically refers to the need to Reviews). A lot of experience has been gained and strengthen the sustainable development dimension documented that now helps policymakers identify of national and international investment policies. measures that work well, or less well, under what The IPFSD also comes at a time when many circumstances and in what context. other investment stakeholders are putting Despite the progress made, and despite the forward suggestions for the future of investment lessons learned, important questions remain policymaking. At UNCTAD’s 2012 World Investment unanswered for policymakers. Some perceived or Forum the International Chamber of Commerce acknowledged shortcomings in investment policy (ICC) launched its contribution in the form of regimes are addressed only partially, or not at all, (revised) Guidelines for International Investment. by existing models and frameworks intended to The OECD has announced its intention to start support policymakers. work on an update of its policy framework for investment. The recently adopted European Union- This report takes a fresh look at investment United States Statement on Shared Principles for policymaking – focusing on direct private International Investment and the release of the new investment in productive assets (i.e. excluding 2 Investment Policy Framework for Sustainable Development

United States’ model BIT are also testimony of which serve as “design criteria” for national and policy dynamism. These developments appear to international investment policies (chapter II). signal a window of opportunity to strengthen the Chapter III presents a framework for national sustainable development dimension of investment investment policy. Chapter IV focuses on IIAs and policies. translates the Core Principles into options for the formulation and negotiation of such instruments, The remainder of this report first details the drivers with a particular focus on development-friendly of change in the investment policy environment – options. The final chapter looks at the way forward, introducing a “new generation” of investment policies suggesting how policymakers and the international – and the challenges that need to be addressed in a development community could make use of the comprehensive IPFSD (chapter I). It then proposes a IPFSD, and how it could be further improved. set of Core Principles for investment policymaking, I. A “New Generation” of Investment Policies 3

I. A “New Generation” of Investment Policies

1. The changing investment policy targeting, promotion and protection policies in environment developing countries. Emerging economies have not only become Investment policy is not made in a vacuum. It is important recipients of FDI, they are increasingly made in a political and economic context that, at large investors themselves, with their share in the global and regional levels, has been buffeted world outflows approaching 30 per cent. While in recent years by a series of crises in the areas these countries might previously have been more of finance, food security and the environment, concerned with the pressure they faced to provide and that faces persistent global imbalances and protection for investments made by others, they social challenges, especially with regard to poverty now also consider the security and treatment of alleviation. These crises and challenges are having their own investors’ interests abroad. profound effects on the way policy is shaped at the global level. First, the economic and financial crisis There are also new types of investors on the scene. has accentuated a longer-term shift in economic State-owned enterprises (SOEs) are becoming weight from developed countries to emerging important FDI players; UNCTAD counted some markets. Global challenges such as food security 650 multinational SOEs in 2010, operating about and climate change, where developing country 8,500 foreign affiliates WIR11( ). Although SOEs engagement is an indispensable prerequisite for account for only 1 per cent of the total number of any viable solution, have further added to a greater multinational enterprises, their overseas investments role for those countries in global policymaking. amount to roughly 11 per cent of global FDI flows. Second, the financial crisis in particular has boosted Sovereign wealth funds (SWFs), similarly, are the role of governments in the economy, both in gaining importance as FDI players. Their total FDI the developed and the developing world. Third, stock amounted to some $110 billion in 2011, and the nature of the challenges, which no country can their overseas investments make up less than 1 per address in isolation, makes better international cent of global FDI flows. But with total assets under coordination imperative. And fourth, the global management of $4-5 trillion, the scope for further political and economic context and the challenges direct investment in productive assets is significant. that need to be addressed – with social and Clearly the patterns and types of investment of environmental concerns taking center stage – are these new players (in terms of home and host leading policymakers to reflect on an emerging new countries and in terms of investors) are different, development paradigm that places inclusive and and so are their policy priorities. Furthermore, sustainable development goals on the same footing it is necessary to be vigilant concerning waning as economic growth and development goals. support for open investment climates in developed Trends in investment policy naturally mirror these market economies in the face of competition from developments. increasingly active developing-country investors. There have been fundamental changes in the Governments are playing a greater role in the investment and investor landscape. economy and are giving more direction to investment policy. Developing countries and economies in transition are now primary FDI destinations, and their Governments have become decidedly less reticent importance as FDI recipients continues to increase. in regulating and steering the economy. More In 2010, for the first time, developing countries and more governments are moving away from received more than half of global FDI flows – in part the hands-off approach to economic growth and as a result of the fall in investment in developed development that prevailed previously.1 Industrial countries. This increases the opportunities, but policies and industrial development strategies are also multiplies the stakes, for strategic investment proliferating in developing and developed countries 4 Investment Policy Framework for Sustainable Development

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 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 home. In developing countries, the same fears help overcome coherence problems posed by the are fuelling the debate on whether investment is highly atomized system of IIAs, consisting 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 A stronger role of the State also manifests itself provisions). Another example where policymakers with regard to other sustainability issues. New are increasingly engaged in international dialogue is social and environmental regulations are being international tax cooperation. Unsustainable levels introduced or existing rules reinforced – all of of public deficits and sovereign debt have made which has implications for investment. In addition governments far more sensitive to tax avoidance, to regulatory activities, governments are increasing manipulative transfer pricing, tax havens and similar efforts to promote actively the move towards options available to multinational firms to unduly sustainable development, for example through the reduce their tax obligations in host and home encouragement of low-carbon FDI. They are also countries. placing more emphasis on corporate responsibility Other, non-financial, global challenges also require by promoting the adoption of private codes of better coordination on investment, as witnessed by corporate conduct. efforts to promote green investment in support of The trend for policymakers to intervene more in the environmentally friendly growth, and international economy and, to an extent, to steer investment collaboration on investment in agriculture to help activity, is visible in the constantly increasing improve food security (WIR09, WIR10). share of regulatory and restrictive policies in total A new generation of investment policies is emerging. investment policy measures over the last five years. This trend reflects, in part, a renewed realism about As a result of the developments described above, a the economic and social costs of unregulated new generation of investment policies is emerging, market forces but it also gives rise to concerns pursuing a broader and more intricate development that an accumulation of regulatory activities may policy agenda within a framework that seeks to I. A “New Generation” of Investment Policies 5

Box 1. Defining Investment Protectionism

Despite the fact that international policy forums at the highest level (e.g. the G202) 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.

maintain a generally favourable investment climate. Sustainable development issues – including This new generation of investment policies has environmental, social and poverty alleviation been in the making for some time, and is reflected in concerns – as well as investor responsibility in these the dichotomy in policy directions over the last few areas, are not “new” in and by themselves. However, years – with simultaneous moves to further liberalize to date, the myriad of solutions and options investment regimes and promote foreign investment, developed over the years to address sustainable on the one hand, and to regulate investment in development concerns have not been part and pursuit of public policy objectives on the other. It parcel of mainstream investment policymaking, reflects the recognition that liberalization, if it is to and the international consensus on sustainable generate sustainable development outcomes, has development is not reflected in it. “New generation” to be accompanied – if not preceded – by the investment policies aim to systematically integrate establishment of proper regulatory and institutional sustainable development and operationalize it frameworks. The key policy challenge is to strike in concrete measures and mechanisms at the the right balance between regulation and openness national and international level, and at the level of (Epilogue WIR10). policy making and implementation. “New generation” investment policies place inclusive Broadly, “new generation” investment policies are growth and sustainable development at the heart characterized by (i) a recognition of the role of of efforts to attract and benefit from investment. investment as a primary driver of economic growth 6 Investment Policy Framework for Sustainable Development

and development and the consequent realization objectives to channel investment to areas key that investment policies are a central part of for economic or industrial development and for development strategies; and (ii) a desire to pursue the build-up, maintenance and improvement sustainable development through responsible of productive capacity and international investment, placing social and environmental goals competitiveness. on the same footing as economic growth and • To ensure that investment supports sustainable development objectives. Furthermore, (iii) a shared development and inclusiveness objectives. recognition of the need to promote responsible Investment policymaking will focus increasingly investment as a cornerstone of economic growth on qualitative aspects of investment. and job creation is giving renewed impetus to Because the behaviour of firms, including efforts to resolve, in a comprehensive manner, long- international investors, with respect to social standing issues and shortcomings of investment and environmental issues is driven in part by policy that may hamper policy effectiveness and corporate responsibility standards developed risk causing uncertainty for investors. These three outside the traditional regulatory realm, one broad aspects of “new generation” investment aspect of this challenge is finding the right policies translate into specific investment policy balance between regulatory and private sector challenges at the national and international levels. initiatives. A focus on sustainable development objectives also implies that investment policy 2. Key investment policy challenges puts increasing emphasis on the promotion At the national level, key investment policy of specific types of investment, e.g. ‘green challenges are (table 1): investments’ and ‘low-carbon investment’ (WIR10). • To connect the investment policy framework to an overall development strategy or • To ensure continued investment policy industrial development policy that works in relevance and effectiveness, building the context of national economies, and to stronger institutions to implement investment ensure coherence with other policy areas, policy and to manage investment policy including overall private sector or enterprise dynamically, especially by measuring development, and policies in support of the sustainable development impact of technological advancement, international trade policies and responding to changes in and job creation. “New generation” investment the policy environment. With the greater policies increasingly incorporate targeted role that governments are assuming in Table 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 I. A “New Generation” of Investment Policies 7

steering investment to support sustainable it more even. IIAs currently do not set out development objectives, and with the selective 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 effectiveness of their measures, especially national laws of the host country. In addition, where such measures imply restrictions on and parallel to the debate at the level of the freedom of economic actors or outlays of national policies, corporate responsibility public funds (e.g. in the case of incentives or initiatives, standards and guidelines for the the establishment of special economic zones). behaviour of international investors increasingly shape the investment policy landscape. Such Similarly, at the international level, the changing standards could serve as an indirect way to investment policy environment is giving rise to three add the sustainable development dimension to broad challenges (table 2): the international investment policy landscape, • To strengthen the development dimension of although there are concerns among the international investment policy regime. In developing countries that they may also act as the policy debate this development dimension barriers to investment and trade. principally encompasses two aspects: • To resolve issues stemming from the −− Policymakers in some countries, especially increasing complexity of the international those seeking to implement industrial investment policy regime. The current regime development strategies and targeted is a system of thousands of treaties (mostly investment measures, have found that IIAs bilateral investment treaties, free trade can unduly constrain national economic agreements with investment provisions, development policymaking. and regional agreements), many ongoing −− Many policymakers have observed that negotiations and multiple dispute-settlement IIAs are focused almost exclusively on mechanisms, which nevertheless offers protecting investors and do not do enough protection to only two-thirds of global FDI to promote investment for development. stock, and which covers only one-fifth of bilateral investment relationships (WIR 11). • To adjust the balance between the rights and Most governments continue to participate in obligations of States and investors, making

Table 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 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) 8 Investment Policy Framework for Sustainable Development

the process of adding ever more agreements designing investment policies for development. to the system, despite the fact that many By consolidating good practices, the IPFSD also are not fully satisfied with its overall design. attempts to establish a benchmark for assessing It has a number of systemic problems, the quality of a country’s policy environment for including gaps, overlaps and inconsistencies foreign investment – taking into account that one in coverage and content; ambiguities in treaty single policy framework cannot address the specific interpretation by arbitral tribunals; onerous investment policy challenges of individual countries arbitration procedures and unpredictability of (see boxes 4, 6 and 7 on the need for custom- arbitration awards. Also, the “interconnect” designed investment policy advice). between international investment policies Although there are a number of existing international and other policy areas such as trade, finance, instruments that provide guidance to investment competition or environmental (e.g. climate policymakers,4 UNCTAD’s IPFSD distinguishes itself change) policies, is absent. in several ways. First, it is meant as a comprehensive instrument dealing with all aspects of national and 3. Addressing the challenges: UNCTAD’s international investment policymaking. Second, Investment Policy Framework for it puts a particular emphasis on the relationship Sustainable Development between foreign investment and sustainable To address the challenges discussed in the previous development, advocating a balanced approach section, UNCTAD proposes a comprehensive between the pursuit of purely economic growth Investment Policy Framework for Sustainable objectives by means of investment liberalization Development (IPFSD), consisting of a set of Core and promotion, on the one hand, and the need Principles for investment policymaking, guidelines to protect people and the environment, on the for national investment policies, and guidance for other hand. Third, it underscores the interests of policymakers on how to engage in the international developing countries in investment policy making. investment policy regime, in the form of options Fourth, it is neither a legally binding text nor a for the design and use of IIAs (figure 1 and box voluntary undertaking between States, but expert 2). These build on the experience and lessons guidance by an international organization, leaving learned of UNCTAD and other organizations in national policymakers free to “adapt and adopt” as appropriate.

Figure 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 I. A “New Generation” of Investment Policies 9

Box 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 foreign direct investment (FDI). This includes policies with regard to the establishment, treatment and promotion of investment. In addition, a comprehensive IPFSD 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 chapter on international investment policies. However, many of the guidelines in the chapter 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. 10 Investment Policy Framework for Sustainable Development

II. Core Principles for Investment Policymaking

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

Box 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, its 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 sustainable 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. 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. II. Core Principles for Investment Policymaking 11

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 level.

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 in nature.

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.

3. Annotations to the Core Principles the poorest. It also calls for the mainstreaming of sustainable development issues – i.e. development Principle 1: Investment for sustainable that meets the needs of the present without development compromising the ability of future generations to meet theirs – in investment policymaking, both at This overarching principle defines the overall the national and international levels. objective of the Investment Policy Framework for Sustainable Development. It recognizes the need to Principle 2: Policy coherence promote investment not only for economic growth This principle recognizes that investment is a means as such, but for growth that benefits all, including to an end, and that investment policy should thus be 12 Investment Policy Framework for Sustainable Development

integrated in an overarching development strategy. environmental degradation. International dynamics It also acknowledges that success in attracting can have an impact on national investment policies and benefiting from investment depends not only as well, including through regional integration or on investment policy “stricto sensu” (i.e. entry through international competition for the attraction and establishment rules, treatment and protection) of specific types of foreign investment. The but on a host of investment-related policy areas increasing role of emerging economies as outward ranging from tax to trade to environmental and investors and their corresponding desire better to labour market policies. It recognizes that these protect their companies abroad drives change in policy areas interact with each other and that investment policies as well. there is consequently a need for a coherent overall The dynamics of investment policies also imply approach to make them conducive to sustainable a need for countries continuously to assess the development and to achieve synergies. The same effectiveness of existing instruments. If these do not considerations apply with respect to the interaction achieve the desired results in terms of economic between national investment policies and and social development, or do so at too high a international investment rulemaking. Successful cost, they may need to be revised. experiences with investment for development often involved the establishment of special agencies Principle 5: Balanced rights and obligations with a specific mandate to coordinate the work of Investment policies need to serve two potentially different ministries, government units and policy conflicting purposes. On the one hand, they have areas, including the negotiation of IIAs. to create attractive conditions for foreign investors. Principle 3: Public governance and institutions To this end, investment policies include features of investment liberalization, protection, promotion and The concept of good public governance refers facilitation. On the other hand, the overall regulatory to the efficiency and effectiveness of government framework of the host country has to ensure that services, including such aspects as accountability, any negative social or environmental effects are predictability, clarity, transparency, fairness, minimized. More regulation may also be warranted rule of law, and the absence of corruption. This to find appropriate responses to crises (e.g. financial principle recognizes the importance of good crisis, food crisis, climate change). public governance as a key factor in creating an environment conducive to attracting investment. Against this background, this core principle It also stresses the significance of a participatory suggests that the investment climate and policies approach to policy development as a basic ingredient of a country should be “balanced” as regards the of investment policies aimed at inclusive growth overall treatment of foreign investors. Where and and fairness for all. The element of transparency is how to strike this balance is basically an issue for especially important, as in and by itself it tends to the domestic law of host countries and therefore facilitate dialogue between public and private sector requires adequate local capacities. International stakeholders, including companies, organized policies vis-à-vis foreign investors likewise play a labour and non-governmental organizations role and – if not carefully designed – might tilt the (NGOs). balance in favour of those investors. The principle does not mean that each individual investment- Principle 4: Dynamic policymaking related regulation of a host country would have to This principle recognizes that national and be balanced. international investment policies need flexibility to Principle 6: Right to regulate adapt to changing circumstances, while recognizing that a favourable investment climate requires The right to regulate is an expression of a country’s stability and predictability. For one, different policies sovereignty. Regulation includes both the general are needed at different development stages. New legal and administrative framework of host countries factors may emerge on the domestic policy scene, as well as sector- or industry-specific rules. It also including government changes, social pressures or entails effective implementation of rules, including II. Core Principles for Investment Policymaking 13

the enforcement of rights. Regulation is not only national level include, inter alia, the rule of the law, a State right, but also a necessity. Without an the principle of freedom of contract and access to adequate regulatory framework, a country will not courts. Key components of investment protection be attractive for foreign investors, because such frequently found in IIAs comprise the principle of investors seek clarity, stability and predictability of non-discrimination (national treatment and most- investment conditions in the host country. favoured nation treatment), fair and equitable treatment, protection in case of expropriation, The authority to regulate can, under certain provisions on movement of capital, and effective circumstances, be ceded to an international body dispute settlement. to make rules for groups of states. It can be subject to international obligations that countries undertake; Principle 9: Investment promotion and facilitation with regard to the treatment of foreign investors this Most countries have set up promotion schemes to often takes place at the bilateral or regional level. attract and facilitate foreign investment. Promotion International commitments thus reduce “policy and facilitation measures often include the granting space”. This principle advocates that countries of fiscal or financial incentives, the establishment maintain sufficient policy space to regulate for the of special economic zones or “one-stop shops”. public good. Many countries have also set up special investment Principle 7: Openness to investment promotion agencies (IPAs) to target foreign investors, offer matchmaking services and provide This principle considers a welcoming investment aftercare. climate, with transparent and predictable entry conditions and procedures, a precondition for The principle contains two key components. attracting foreign investment conducive for First, it stipulates that in their efforts to improve sustainable development. The term “openness” is the investment climate, countries should not not limited to formal openness as expressed in a compromise sustainable development goals, for country’s investment framework and, possibly, in instance by lowering regulatory standards on social entry rights granted in IIAs. Equally important is or environmental issues, or by offering incentives the absence of informal investment barriers, such that annul a large part of the economic benefit of as burdensome, unclear and non-transparent the investment for the host country. Second, the administrative procedures. At the same time, the principle acknowledges that, as more and more principle recognizes that countries have legitimate countries seek to boost investment and target reasons to limit openness to foreign investment, for specific types of investment, the risk of harmful instance in the context of their national development competition for investment increases; i.e. a race strategies or for national security reasons. to the regulatory bottom or a race to the top of incentives (with negative social and environmental In addition, the issue of “openness” reaches consequences or escalating commitments of public beyond the establishment of an investment. Trade funds). Investment policies should be designed to openness can be of crucial importance, too; minimize this risk. This underlines the importance of in particular, when the investment significantly international coordination (see Principle 11 below). depends on imports or exports. Principle 10: Corporate governance and Principle 8: Investment protection responsibility This principle acknowledges that investment This principle recognizes that corporate protection, although only one among many governance and CSR standards are increasingly determinants of foreign investment, can be shaping investment policy at the national and an important policy tool for the attraction of international levels. This development is reflected investment. It therefore closely interacts with the in the proliferation of standards, including several principle on investment promotion and facilitation intergovernmental organization standards of the (Principle 9). It has a national and an international United Nations, the ILO, the IFC and the OECD, component. Core elements of protection at the providing guidance on fundamental CSR issues;5 14 Investment Policy Framework for Sustainable Development

dozens of multi-stakeholder initiatives; hundreds More international coordination, in particular at the of industry association codes; and thousands of regional level, can also help to create synergies individual company codes (WIR11). Most recently, so as to realize investment projects that would be the UN Human Rights Council adopted a resolution too complex and expensive for one country alone. endorsing the Report of the Special Representative Another policy area that would benefit from more of the Secretary-General on the issue of human international cooperation is investment in sensitive rights and transnational corporations and other sectors. For example, recent concerns about business enterprises. possible land grabs and the crowding out of local farmers by foreign investors have resulted in the CSR standards are voluntary in nature and so exist development by the FAO, UNCTAD, the World Bank as a unique dimension of “soft law”. The principle and IFAD of Principles for Responsible Investment calls on governments to actively promote CSR in Agriculture (PRAI). standards and to monitor compliance with them. Promotion also includes the option to adopt existing * * * CSR standards as part of regulatory initiatives, turning voluntary standards into mandatory Some Core Principles relate to a specific investment requirements. policy area (e.g. openness to investment, investment protection and promotion, corporate governance Principle 11: International cooperation and social responsibility) and can therefore relatively This principle considers that investment policies easily be traced to specific guidelines and options in touch upon a number of issues that would benefit the national and international parts of the framework. from more international cooperation. The principle Other Core Principles (e.g. on public governance also advocates that particular efforts should be and institutions, balanced rights and obligations, made to encourage foreign investment in LDCs. the right to regulate) are important for investment Home countries can support outward investment policymaking as a whole. As a consequence, they conducive to sustainable development. For a are reflected in guidelines dispersed across the long time, developed countries have provided entire range of relevant policy issues covered by investment guarantees against certain political risks the framework. in the host country or offered loans to companies The Core Principles interact with each other. The investing abroad. The Multilateral Investment individual principles and corresponding guidelines Guarantee Agency (MIGA) provides investment therefore must not be applied and interpreted insurance at the international level. The principle in isolation. In particular, Principle 1 – as the builds upon examples of countries that have started overarching rule within the policy framework – has to condition the granting of investment guarantees relevance for all subsequent principles. Integrating on an assessment of social and environmental investment policies into sustainable development impacts. strategies requires a coherent policy framework. The importance of international cooperation also Good public governance is needed in its design grows as more and more countries make use of and implementation. Sustainable development is an targeted investment promotion policies. Better ongoing challenge, which underlines the importance international coordination is called for to avoid a of policymaking dynamics. And an IPFSD needs global race to the bottom in regulatory standards, to comprise elements of investment regulation or a race to the top in incentives, and to avoid a and corporate governance, on the one hand, and return of protectionist tendencies. openness, protection and promotion, on the other hand, thereby contributing to an investment climate with balanced rights and obligations for investors. III. National Investment Policy Guidelines 15

III. National Investment Policy Guidelines

This chapter translates the Core Principles for State in economic planning. Because investment investment policymaking into concrete guidelines is a key driver of economic growth, a prerequisite at the national level, with a view to addressing for the build-up of productive capacity and an the policy challenges discussed in chapter I. To enabler of industrial development and upgrading, address these policy challenges – ensuring that investment policy must be an integrated part of investment policy is coherent with other policy such development strategies (see box 4). areas supporting a country’s overall development Defining the role of public, private, domestic and strategy; enhancing the sustainable development foreign direct investment impact of investment and promoting responsible investment; and improving policy effectiveness, Mobilizing investment for sustainable development while maintaining an attractive investment climate – remains a major challenge for developing countries, this chapter, including the detailed policy guidelines particularly for LDCs. Given the often huge it contains, argues for policy action at three levels: development financing gaps in these countries, foreign investment can provide a necessary 1. At the strategic level, policymakers should complement to domestic investment, and it can ground investment policy in a broad road be particularly beneficial when it interacts in a map for economic growth and sustainable synergetic way with domestic public and private development – such as those set out in investment. Agriculture, infrastructure and climate formal economic or industrial development change-related investments, among others, strategies in many countries. hold significant potential for mutually beneficial 2. At the normative level, through the setting of interaction between foreign and domestic, and rules and regulations, on investment and in public and private investment. For example, a range of other policy areas, policymakers public-private partnerships (PPPs) have become can promote and regulate investment that important avenues for infrastructure development is geared towards sustainable development in developing countries, although experience has goals. shown that high-quality regulatory and institutional settings are critical to ensure the development 3. At the administrative level, through benefits of such infrastructure PPPs WIR08( ). appropriate implementation and institutional mechanisms, policymakers can ensure Given the specific development contributions that continued relevance and effectiveness of can be expected from investment – private and investment policies. public, domestic and foreign – policymakers should consider carefully what role each type can play in the The following sections will look at each of these context of their development strategies. In particular levels in turn. the opportunities and needs for foreign investment – intended as direct investment in productive 1. Grounding investment policy in assets (i.e. excluding portfolio investment) – differ development strategy from country to country, as does the willingness to Many countries have elaborated explicit open sectors and industries to foreign investors. development strategies that set out an action plan Examples include the improvement of infrastructure, to achieve economic and social objectives and to investment in skills and education, investments to strengthen international competitiveness. These secure food supply, or investments in other specific strategies will vary by country, depending on their industries that are of crucial importance for a stage of development, their domestic endowments country. and individual preferences, and depending on Even looking at the role of foreign investment the degree to which the political and economic per se policymakers should be aware of different system allows or requires the participation of the types, each with distinct development impacts. 16 Investment Policy Framework for Sustainable Development

Box 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 1).

Box table 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 FYR 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.

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 markets (or survival in case of troubled acquisition productive assets (e.g. retained earnings) and can targets), but may also have negative effects (e.g. sometimes behave in a manner not dissimilar to on employment in case of restructurings). Similarly, portfolio investment. efficiency-seeking investments will have different Furthermore, the role of foreign investors and development impacts than market-seeking multinational firms in an economy is not limited III. National Investment Policy Guidelines 17

to FDI. They can also contribute to economic vocational and technical training. Vocational training development through non-equity modes of that prepares trainees for jobs involving manual international production (NEMs), such as contract or practical activities related to a specific trade or manufacturing, services outsourcing, licensing, occupation is a key policy tool, for instance, to franchising or contract farming. Because this form enhance the capacity of local suppliers. of involvement is based on a contractual relation As economies develop, skills needs and between the foreign company and domestic job opportunities evolve, making a constant business partners, it requires that the host country adaptation 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 A key aspect in defining the role of investment in opportunities. economic growth and development strategies FDI – as well as NEMs – are 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 Harnessing investment for productive where needed. Well-crafted immigration and labour capacity building and enhancing international policies have had demonstrated benefits in countries competitiveness that have allowed foreign skills to complement and The potential contribution of foreign investment to fertilize those created locally. Knowledge spillovers building or reinforcing local productive capacities also occur through international employees. An should guide investment policy and targeting adequate degree of openness in granting work efforts. This is particularly important where permits to skilled foreign workers is therefore investment is intended to play a central role in important not only to facilitate investments that may industrial upgrading and structural transformation otherwise not materialize for lack of skills, but also in developing economies. The most crucial aspects to support and complement the national human of productive capacity building include human resource development policy through education. resources and skills development, technology Technology and know-how. An important policy task and know-how, infrastructure development, and is to encourage the dissemination of technology. For enterprise development. example, governments can promote technology Human resources and skills. Human resources clusters that promote R&D in a particular industry development is a crucial determinant of a country’s and that can help upgrading industrial activities by long-term economic prospects. In addition, the bringing together technology firms, suppliers and availability of skilled, trainable and productive labour research institutes. Disseminating and facilitating at competitive costs is a major magnet for efficiency- the acquisition of technology can also improve the seeking foreign investors. As such, education and involvement of domestic producers in GVCs (e.g. human resource development policy should be call centers, business processing operations or considered a key complement to investment policy. contract farming). Particular care should be given to matching skills Appropriate protection of intellectual property rights needs and skills development, including in terms of is an important policy tool because it is often a 18 Investment Policy Framework for Sustainable Development

precondition for international investors to disclose essential given the dependence of economic technology to licensees in developing countries, growth on infrastructure development. especially in areas involving easily imitable All too many developing countries have attempted technologies (e.g. software, pharmaceuticals), to privatize infrastructure or public services only and hence can affect chances of attracting to fail or achieve less than optimal outcomes.7 equity investments (e.g. joint ventures) or non- Governments need to develop not only a clear equity modes of involvement (e.g. licensing). assessment of what can be achieved and at what At the same time the level of protection should costs, but also a comprehensive understanding of be commensurate with the level of a country’s the complex technicalities involved in infrastructure development and conducive to the development investments and their long-term implications in of its technological capacities. It can be a means terms of cost, quality, availability and affordability of encouraging independent research activities by of services. A sound legal framework to guide local companies, because businesses are more concessions, management contracts and all forms likely to invest resources in R&D and technological of public-private partnerships is a key piece in upgrading if their innovations are protected. the infrastructure development and investment Infrastructure. The development of domestic strategies (WIR08). infrastructure may necessitate investments of Enterprise development. Domestic enterprise such magnitude that it is impossible for domestic development is a key transfer mechanism for companies to undertake them alone. Infrastructure the development benefits of investment to development may also require certain technological materialize. At the same time, especially for foreign skills and know-how, which domestic firms do not investors, the presence of viable local enterprise have (e.g. telecommunication, energy, exploration is a crucial determinant for further investment of natural resources in remote areas). Likewise, and for partnerships in NEMs. A comprehensive the move to a low-carbon economy will often discussion of policy options to foster domestic necessitate bringing in the technological capacities entrepreneurial development – including in areas of foreign investors. 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 5). water and transport, and to a lesser extent Enterprise development policies aimed at telecommunications. Following technological enhancing the benefits from investment focus on progress and changes in regulatory attitudes, many building capacity to absorb and adapt technology countries have succeeded in introducing private and know-how, to cooperate with multinational (foreign) investment and competition in what firms, and to compete internationally. used to be public sector monopolies, e.g. mobile telecommunications or power generation. Another important policy task is the promotion of linkages and spillover effects between foreign Given the potential contribution of FDI to build high- investment and domestic enterprises (WIR01). quality infrastructure, countries should consider Policy coordination is needed to ensure that the extent to which certain sectors or sub-sectors investment promotion is targeted to those could be opened to (foreign) private investment, and industries that could have the biggest impact in under what conditions – balancing considerations terms of creating backward and forward linkages of public service provision, affordability and and contribute not just to direct, but also to accessibility. National security-related concerns with indirect employment creation. At the same time, regard to the liberalization of critical infrastructure policymakers in developing countries need to can be taken care of by screening procedures. A address the risk of foreign investment impeding clear vision of what is doable and desirable socially, domestic enterprise development by crowding out technically and from a business perspective is local firms, especially SMEs. Industrial policies may III. National Investment Policy Guidelines 19

Box 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 1). In each area the EPF suggests policy options and recommended actions. Box figure 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 policy makers 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. play a role in protecting infant industries or other crucial for remaining competitive once developing sensitive industries with respect to which host countries lose their low labour cost advantage. countries see a need to limit foreign access. However, switching from labour-intensive low-value activities to more capital-intensive higher value In the long run, enterprise development is essential production methods may raise unemployment for host countries to improve international in the transition phase and thus calls for vigilant competitiveness. Promotion efforts should therefore labour market and social policies. This confirms the not be limited to low value-added activities within important dynamic dimension of investment and international value chains, but gradually seek to enterprise development strategies, calling for regular move to higher-value added segments. This is reviews and adaptation of policy instruments. 20 Investment Policy Framework for Sustainable Development

Ensuring coherence between investment policies to outflows of financial resources in the form of and other policy areas geared towards overall repatriated earnings or fees; it can, under certain development objectives circumstances, crowd out domestic investment The interaction between investment policy and and domestic enterprise (WIR97); it can at times other elements of a country’s overall economic reduce employment by introducing more efficient development and growth strategy – including work practices or through restructurings (WIR94, human resource development, infrastructure, WIR00), or jobs created may be unstable due to technology, enterprise development, and others – the footloose nature of some investment types; it is complex. It is critical that government authorities can increase imports more than exports (or yield work coherently towards the common national limited net export gains), e.g. in case of investment objective of sustainable development and inclusive operations requiring intermediate inputs or for growth, and seek to create synergies. This requires market-seeking investments (WIR02, WIR11); coordination at the earliest stages of policy design, technology dissemination might not take place, as well as the involvement of relevant stakeholders, or only at high cost (e.g. through licensing fees) including the investor community and civil society. (WIR11), and local technological development may be slowed down; skills transfers may be limited 2. Designing policies for responsible by the nature of jobs created; fiscal gains may investment and sustainable be limited by tax avoidance schemes available to development international investors, including transfer pricing; and so forth. From a development perspective, FDI is more The balance of potential positive and negative than a flow of capital that can stimulate economic development contributions of FDI is proof that growth. It comprises a package of assets that investment policy matters in order to maximize includes long-term capital, technology, market the positive and minimize the negative impacts. access, skills and know-how (WIR99). As such, Reaping the development benefits from investment it can contribute to sustainable development requires not only an enabling policy framework by providing financial resources where such that combines elements of investment promotion resources are often scarce; generating employment and regulation and that provides clear, unequivocal (WIR94); strengthening export capacities (WIR02); and transparent rules for the entry and operation transferring skills and disseminating technology; of foreign investors (see box 6), it also requires adding to GDP through investment and value adequate regulation to minimize any risks added, both directly and indirectly; and generating associated with investment. fiscal revenues. In addition, FDI can support industrial diversification and upgrading, or the The host of different impact types listed above upgrading of agricultural productivity (WIR09) indicates that such regulations need to cover a and the build up of productive capacity, including broad range of policy areas beyond investment infrastructure (WIR08). Importantly, it can contribute policies per se, such as trade, taxation, intellectual to local enterprise development through linkages property, competition, labour market regulation, with suppliers (WIR01) and by providing access to environmental policies and access to land. The GVCs (WIR11) – the growing importance of GVCs coverage of such a multitude of different policy can have an important pro-poor dynamic to the areas confirms the need for consistency and extent that marginalized communities and small coherence in policymaking across government. suppliers can integrate into global or regional value Fostering sustainable development and inclusive chains as producers, suppliers or providers of growth through investment requires a balance of goods and services. promotion and regulation. On the promotion side, These positive development impacts of FDI do attracting low-carbon investment, for example, may not always materialize automatically. And the imply the need to set up new policy frameworks effect of FDI can also be negative in each of the for a nascent renewable energy sector, which may impact areas listed above. For example, it can lead also require government assistance in the start-up III. National Investment Policy Guidelines 21

phase, be it through tax incentives or measures At the same time, on the regulatory side, aimed at creating a market (WIR10). Encouraging sustainability considerations should be a key investment in sectors that are crucial for the poor consideration when deciding on the granting of may imply building sound regulatory frameworks investment incentives. The short-term advantages and facilitation of responsible investment in of an investment need to be weighed against the agriculture (including contract farming), as potential long-term environmental effects. And the agriculture continues to be the main source of sensitive issue of access to land requires careful income in many developing countries (WIR09). balancing of the rights and obligation of agricultural investors. For many developing countries, it is a

Box 6. Designing Sound Investment Rules and Procedures: UNCTAD’s Investment Facilitation Compact

UNCTAD’s Investment Facilitation Compact combines a number of programs 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 program 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 programs 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 1).

Box table 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 PDR, Mali, Morocco, Oriental Region of Morocco, Mauritania, Mozambique, Nepal, Rwanda, 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. 22 Investment Policy Framework for Sustainable Development

key challenge to strengthen such environmental and regulatory institutions and a service orientation and social protection while maintaining an attractive where warranted. As a widely accepted best- investment climate. practice principle, regulatory agencies should be free of political pressure and have significant Sustainability issues should also be a main independence, subject to clear reporting consideration in investment contracts between guidelines and accountability to elected officials or the host country and individual investors. Such representatives. These principles are particularly contracts can be a means to commit investors to relevant for investors in institutions including courts environmental or social standards beyond the level and judiciary systems; sectoral regulators (e.g. established by the host country’s general legislation, electricity, transport, telecommunications, banking); taking into account international standards and customs; tax administration or revenue authority; best practices. investment promotion agency; and licensing While laws and regulations are the basis of bodies. investor responsibility, voluntary CSR initiatives and As stated in the fourth Core Principle, managing standards have proliferated in recent years, and they investment policy dynamically is of fundamental are increasingly influencing corporate practices, importance to ensure the continued relevance behaviour and investment decisions. Governments and effectiveness of policy measures. Revisions can build on them to complement the regulatory in investment policy may be driven by changes framework and maximize the development benefits in strategy – itself caused by adaptations in the of investment (WIR11). overall development strategy – or by external Because CSR initiatives and voluntary standards factors and changing circumstances. Countries are a relatively new area that is developing quickly require different investment policies at different and in many directions, the management of stages of development, policies may need to take their policy implications is a challenge for many into account those in neighbouring countries, and developing countries. In particular, the potential be cognizant of trade patterns or evolving relative interactions between soft law and hard law can shares of sectors and industry in the economy. be complex, and the value of standards difficult Policy design and implementation is a continuous to extract for lack of monitoring capacity and process of fine-tuning and adaptation to changing limited comparability. A number of areas can needs and circumstances. benefit from the encouragement of CSR initiatives Beyond such adaptations, investment policy may and the voluntary dissemination of standards; for also need adjustment where individual measures, example, they can be used to promote responsible entire policy areas, or the overall investment policy investment and business behaviour (including the regime is deemed not to achieve the intended avoidance of corrupt business practices), and they objectives, or to do so at a cost higher than can play an important role in promoting low-carbon intended. Understanding when this is the case, and environmentally sound investment. Care needs understanding it in time for corrective action to to be taken to avoid these standards becoming be taken, and understanding the reasons for the undue barriers to trade and investment flows. failure of measures to have the desired effect, is the 3. Implementation and institutional essence of measuring policy effectiveness. mechanisms for policy effectiveness A significant body of academic literature exists on methodologies for evaluating policy effectiveness. Investment policy and regulations must be Specifically in the area of investment policy, there adequately enforced by impartial, competent and are three objective difficulties associated with the efficient public institutions, which is as important for measurement of policy effectiveness: policy effectiveness as policy design itself. Policies to address implementation issues should be an • It is often difficult to assess the effectiveness integral part of the investment strategy and should of discrete investment policy measures, such strive to achieve both integrity across government as the provision of incentives, let alone the effectiveness of the overall investment policy III. National Investment Policy Guidelines 23

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 the objectives. These objectives should be time periods (a few quarters or a year) to the principal yardstick for measuring policy ensure effective progress and implementation. effectiveness. Objectives of investment policy should ideally • The detailed quantitative (and therefore include a number of quantifiable goals for both complex) measurement of the effectiveness the attraction of investment and the impact of of individual policy measures should focus investment. To measure policy effectiveness for principally on those measures that are most the attraction of investment, UNCTAD’s Investment costly to implement, such as investment Potential and Performance Matrix can be a incentives. useful tool. This matrix compares countries with their peers, plotting investment inflows against • Assessment of progress in policy potential based on a standardized set of economic implementation and verification of the determinants, thereby providing a proxy for the application of rules and regulations at all effect of policy determinants. 24 Investment Policy Framework for Sustainable Development

Similarly, for the measurement of policy The impact indicator methodology developed effectiveness in terms of impact, UNCTAD’s for the G-20 Development Working Group by Investment Contribution Index may be a starting UNCTAD, in collaboration with other agencies, may point. Also important is the choice of impact provide guidance to policymakers on the choice of indicators. Policymakers should use a focused set indicators of investment impact and, by extension, of key indicators that are the most direct expression of investment policy effectiveness (see table 3). of the core development contributions of private The indicator framework, which has been tested investments, including direct contributions to GDP in a number of developing countries, is meant growth through additional value added, capital to serve as a tool that countries can adapt and formation and export generation; entrepreneurial adopt in accordance with their national economic development and development of the formal sector development priorities and strategies. At early and tax base; and job creation. The indicators stages of development, pure GDP contribution could also address labour, social, environmental and job creation impacts may be more relevant; at and development sustainability aspects. more advanced stages, quality of employment and technology contributions may gain relevance.

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

Area 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 GFCF

3. Total and net export generation • Total export generation; net export generation (net of imports) is also captured by the 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 transfer)

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 • GHG emissions, carbon off-set/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 transfer

Source: “Indicators for measuring and maximizing economic value added and job creation arising from private sector investment in value chains”, Report to the G20 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 4. III. National Investment Policy Guidelines 25

4. The IPFSD’s national policy guidelines divergences. Governments may have different perceptions about which industries to promote and The national investment policy guidelines are in what manner, and what role foreign investors organized in four sections, starting from the should play in this context. Social, cultural, strategic level, which aims to ensure integration of geographical and historical differences play a investment policy in overall development strategy, role as well. Furthermore, the investment climate moving to investment policy ‘stricto sensu’, to of each country has its individual strengths and investment-related policy areas such as trade, weaknesses; therefore, policies aimed at building taxation, labour and environmental regulations, and upon existing strengths and reducing perceived intellectual property policies, to conclude with a deficiencies will differ. Thus investment policies section on investment policy effectiveness (table 4). need to be fine-tuned based on specific economic While the national guidelines in the IPFSD are contexts, sectoral investment priorities and meant to establish a generally applicable setting for development issues faced by individual countries. investment-related policymaking, it cannot provide The IPFSD’s national investment policy guidelines a “one-size-fits-all” solution for all economies. establish a basic framework. Other tools are Countries have different development strategies available to complement the basic framework with and any policy guide must acknowledge these customized best practice advice (box 7).

Table 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 26 Investment Policy Framework for Sustainable Development

Box 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 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 policy makers 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. III. National Investment Policy Guidelines 27 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 for coherence capacity productive 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 28 Investment Policy Framework for Sustainable Development 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 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) III. National Investment Policy Guidelines 29 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 Government 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 procedures such for accountability and responsibility investors, foreign on imposed are approval preliminary or 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) 30 Investment Policy Framework for Sustainable Development 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) III. National Investment Policy Guidelines 31 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 sensitized 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 32 Investment Policy Framework for Sustainable Development 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 policy makers 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 the regulated closely with sectoral regulators. coordinating policies and measures, shaping of 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 or industries capacity and employment to priority investment areas, Adjustment costs or friction caused by shifting productive social support) and in both in labour market policies (e.g. re-training, activities as per investment policy should be addressed 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) III. National Investment Policy Guidelines 33 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 their ability to access markets or work (1) capacity building and technical assistance to local industry improve 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) 34 Investment Policy Framework for Sustainable Development 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 internationalto good best practices should serve as guidance. Investors be held to adhere paying bribes and denouncing corrupt practices. corporate governancefrom 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 IV. Elements of International Investment Agreements: Policy Options 35

”. above.) They should break down objectives for investment above.) They should break

may include: may include: ”. attraction of investment impact of investment investment potential/performance 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. stick for measurement Objectives for investment policy should be the yard formal investment strategy it should set out such objectives, see 1.1 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 (total, by industry, output and capital formation (idem), 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) 36 Investment Policy Framework for Sustainable Development

IV. Elements of International Investment Agreements: Policy Options

The guidance on international investment policies through reservations and exceptions), set out in this chapter aims to translate the Core balanced rights and obligations of States Principles into concrete options for policymakers, and investors (e.g., through encouraging with a view to addressing today’s investment compliance with CSR standards), and policy challenges. While national investment effective investment promotion (e.g., through policymakers address these challenges through home-country measures). rules, regulations, institutions and initiatives, at 3. Multilateral consensus building on investment the international level policy is translated through policy, in turn, can help address some of a complex web of treaties (including, principally, the systemic challenges stemming from the bilateral investment treaties, free trade agreements multi-layered and multi-faceted nature of the with investment provisions, economic partnership IIA regime, including the gaps, overlaps and 9 agreements and regional agreements). As inconsistencies in the system, its multiple discussed in chapter I, the complexity of that web, dispute resolution mechanisms, and its which leads to gaps, overlaps and inconsistencies piecemeal and erratic expansion. in the system of IIAs, is itself one of the challenges to be addressed. The other is the need to strengthen This chapter, 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 for promotion provisions more concrete and aligned the detailed design of IIAs. The final chapter of this with sustainable development objectives. report (chapter V) will suggest an avenue for further consensus building and international cooperation International investment policy challenges must be on investment policy. addressed at three levels: UNCTAD’s proposed options for addressing 1. When formulating their strategic approach the challenges described above come at a time to international engagement on investment, when a multitude of investment stakeholders policymakers need to embed international are putting forward suggestions for the future investment policymaking into their countries’ of IIA policymaking. With the recently adopted development strategies. This involves European Union-United States Statement on managing the interaction between IIAs and Shared Principles for International Investment, the national policies (e.g. ensuring that IIAs revision of the International Chamber of Commerce support industrial policies (WIR11)) and that (ICC) Guidelines for International Investment, between IIAs and other international policies and the release of the new United States or agreements (e.g. ensuring that IIAs do model BIT, IIA policymaking is in one of its more not contradict international environmental dynamic evolutionary stages, providing a window agreements (WIR10) or human rights of opportunity to strengthen the sustainable obligations). The overall objective is to ensure development dimension of IIAs. coherence between IIAs and sustainable development needs. 1. Defining the role of IIAs in countries’ 2. In the detailed design of provisions in development strategy and investment investment agreements between countries, policy policymakers need to incorporate sustainable International investment instruments are an integral development considerations, addressing part of investment policymaking that supports concerns related to policy space (e.g., investment promotion objectives but that can IV. Elements of International Investment Agreements: Policy Options 37

also constrain investment and development • IIAs can help to build and advertise a more policymaking. As a promotion tool, IIAs complement attractive investment climate. By establishing national rules and regulations by offering additional international commitments, they can foster assurances to foreign investors concerning the good governance and facilitate or support protection of their investments and the stability, domestic reforms. transparency and predictability of the national policy • On the other hand, IIAs alone cannot turn a framework. As to the constraints, these could take bad domestic investment climate into a good many forms: they could limit options for developing one and they cannot guarantee the inflow of countries in the formulation of development foreign investment. There is no mono-causal strategies that might call for differential treatment link between the conclusion of an IIA and FDI of investors, e.g. industrial policies (see WIR11); inflows; IIAs play a complementary role among or they could hinder policymaking in general, many determinants that drive firms’ investment including for sustainable development objectives, decisions.12 Most importantly, IIAs cannot be a where investors could perceive new measures as substitute for domestic policies and a sound unfavourable to their interests and resort to IIA- national regulatory framework for investment. defined dispute settlement procedures outside the normal domestic legal process. Host countries’ engagement in the current IIA system may not be solely driven by a clear and Given such potential constraints on policymaking, explicit design that grounds their treaties in a solid it is important to ensure the coherence of IIAs with development purpose, but rather influenced by the other economic policies (e.g. trade, industrial, negotiation goals of their treaty partners or other technology, infrastructure or enterprise policies non-economic considerations.13 As such, there is that aim at building productive capacity and a risk that IIAs, in number and substance, become strengthening countries’ competitiveness) as well largely a vehicle for the protection of interests of as with non-economic policies (e.g. environmental, investors and home countries without giving due 10 social, health or cultural policies). Policymakers consideration to the development concerns of should carefully set out an agenda for international developing countries. Not surprisingly, a detailed engagement and negotiation on investment analysis of the substance of model treaties of (including the revision and renegotiation of existing major outward investing countries shows that, agreements). on average, treaty provisions are heavily skewed When considering the pros and cons of engaging towards providing a high level of protection, with in IIAs, policymakers should have a clear limited concessions to development aspects that understanding of what IIAs can and cannot achieve. can be a trade-off against investor protection (i.e. leaving countries more policy space generally • IIAs can, by adding an international dimension implies granting less protection to investors). to investment protection and by fostering This trade-off suggests that there may be an stability, predictability and transparency, inherent development challenge in IIAs: developing reinforce investor confidence and thus promote countries with the most unfavourable risk ratings investment. From an investor’s perspective, are most in need of the protecting qualities of IIAs IIAs essentially act as an insurance policy, to attract investment, but they are generally also the especially important for investments in countries most in need of flexibility (or policy space) countries with unfavourable country-risk for specific development policies. ratings. • IIAs can promote investment in other ways Moreover, not only low-income developing countries beyond granting investor protection. Some may experience IIAs as a straightjacket, but also IIAs include commitments on the part of home higher income countries, and even developed countries to promote outward investment or market economies, are sometimes faced with to engage in collaborative initiatives for this unexpected consequences of their own treaties. As purpose (although this is currently a small more and more countries with sound and credible minority of treaties).11 38 Investment Policy Framework for Sustainable Development

domestic legal systems and stable investment assistance and efforts towards regulatory climates continue to conclude IIAs granting high cooperation and institution building. 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 in 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 right, turning the tables on the original developed Furthermore, international engagement on country IIA demandeurs. Spelling out the underlying investment policy should recognize that international drivers and objectives of a country’s approach to agreements interact with each other and with other IIAs thus becomes important not only for developing bodies of international law. Policymakers should countries, but also for developed ones. be aware, for example, that commitments made 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 • Consider the type of agreements to prioritize, requirements) may be undone through prior or and whether to go for dedicated agreements subsequent treaties. on investment or for investment provisions Finally, a particularly sensitive policy issue is integrated in broader agreements, e.g. whether to include liberalization commitments in 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. • Consider whether to pursue international When granting pre-establishment rights, managing engagement on investment policy in the the interaction between international and national context of regional economic cooperation or policies is particularly crucial: policymakers can integration or through bilateral agreements. use IIAs to bind – at the international level – the For smaller developing countries, with degree of openness granted in domestic laws; or limited potential to attract market-seeking they can use IIA negotiations as a driving force for investment in their own right, opportunities change, fostering greater openness at the national for regional integration and collaboration on level (WIR04).14 Granting pre-establishment rights investment policy, particularly when combined also adds new complexities to the interaction with potentially FDI-inducing regional trade between agreements. For example, a question may integration (UNCTAD 2009), may well take arise whether an unqualified MFN clause of a pre- priority over other types of investment establishment IIA could allow investors to enforce agreements. The benefits of this approach host countries’ obligations under the WTO GATS may be largest when combined with technical agreement through ISDS.15 IV. Elements of International Investment Agreements: Policy Options 39

The following section, which discusses how today’s not apply to private parties directly.16 However, investment policy challenges can be addressed in the there are examples where IIAs impose content and detailed provisions of IIAs, covers both obligations on investors (e.g. COMESA pre- and post-establishment issues. Policymakers Investment Agreement of 200717) or where have so far mostly opted for agreements limited to international conventions establish criminal the post-establishment phase of investment; where responsibility of individuals (e.g. the Rome they opt for pre-establishment coverage, numerous Statute of the International Criminal Court). tools are available to calibrate obligations in line These examples, together with the changes with their countries’ specific needs. in the understanding of the nature and functions of international law, would suggest 2. Negotiating sustainable-development- that international treaties can, in principle, friendly IIAs impose obligations on private parties.18 While stopping short of framing IIAs so as to impose Addressing sustainable development challenges outright obligations on investors, a few through the detailed design of provisions in options may merit consideration. investment agreements principally implies four areas of evolution in treaty-making practice. Such For example, IIAs could include a requirement change can be promoted either by including new for investors to comply with investment- elements and clauses into IIAs, or by taking a fresh related national laws of the host State when approach to existing, traditional elements. making and operating an investment, and even at the post-operations stage (e.g., 1. Incorporating concrete commitments environmental clean-up), provided that to promote and facilitate investment for such laws conform to the host country’s sustainable development: Currently, IIAs international obligations, including those in mostly promote foreign investment only the IIA.19 Such an investor obligation could indirectly through the granting of investment be the basis for further stipulating in the IIA protection – i.e. obligations on the part of host the consequences of an investor’s failure to countries – and do not contain commitments comply with domestic laws, such as the right by home countries to promote responsible of host States to make a counter-claim in investment. Most treaties include hortatory ISDS proceedings with the investor. language on encouraging investment in preambles or non-binding provisions on In addition, IIAs could refer to commonly investment promotion. Options to improve recognized international standards (e.g. the the investment promotion aspect of treaties UN Guidelines on Business and Human include concrete facilitation mechanisms Rights). This would not only help balance (information sharing, investment promotion State commitments with investor obligations forums), outward investment promotion but also support the spread of CSR schemes (insurance and guarantees), standards – which are becoming an ever technical assistance and capacity-building more important feature of the investment initiatives targeted at sustainable investment, policy landscape (WIR11). Options for treaty supported by appropriate institutional language in this regard could range from arrangements for long-term cooperation. commitments to promote best international CSR standards to ensuring that tribunals 2. Balancing State commitments with investor consider an investor’s compliance with CSR obligations and promoting responsible standards when deciding an ISDS case. investment: Most IIAs currently provide for State obligations but do not specify investor 3. Ensuring an appropriate balance between obligations or responsibilities. Legally binding protection commitments and regulatory obligations on companies and individuals are space for development: IIAs protect stipulated by national law but are absent in foreign investment by committing host international treaties, which traditionally do country governments to grant certain 40 Investment Policy Framework for Sustainable Development

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 These areas of evolution are also relevant for treatment standard and expropriation as well “pre-establishment IIAs”, i.e. agreements that – as by using specific flexibility mechanisms in addition to protecting established investors – such as general or national security contain binding rules regarding the establishment exceptions and reservations. More recent of new investments. While a growing number of IIA models, such as the one adopted by the countries opt for the pre-establishment approach, it United States in 2004, offer examples in this is crucial to ensure that any market opening through regard. The right balance between protecting IIAs is in line with host countries’ development foreign investment and maintaining policy strategies. Relevant provisions opt for selective space for domestic regulation should flow liberalization, containing numerous exceptions and from each country’s development strategy, reservations designed to protect a country from ensuring that flexibility mechanisms do not over-committing and/or ensuring flexibilities in the erode a principal objective of IIAs – their relevant treaty obligations (see box 8). potentially investment enhancing effect. These four types of evolution in current treaty 4. Shielding host countries from unjustified practice filter through to specific clauses in different liabilities and high procedural costs: Most ways. The following are examples of how this would IIAs reinforce their investment protection work, focusing on some of the key provisions of provisions by allowing investors directly to current treaty practice – scope and definition, pursue relief through investor-State dispute national treatment, most-favoured nation treatment, settlement (ISDS). The strength of IIAs in fair and equitable treatment, expropriation and granting protection to foreign investors has ISDS. In addition to shaping specific clauses, become increasingly evident through the sustainable development concerns can also be number of ISDS cases brought over the addressed individually, e.g. through special and last decade, most of which are directed differential treatment (SDT), a key aspect of the at developing countries. Host countries multilateral trading system but largely unknown in have faced claims of up to $114 billion20 IIA practice (see box 9). and awards of up to $867 million.21 Added to these financial liabilities are the costs of • Scope and Definition: An IIA’s coverage procedures, all together putting a significant determines the investments/investors that burden on defending countries and IV. Elements of International Investment Agreements: Policy Options 41

Box 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 up 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 by 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.

benefit from the protection offered by the terms of identifying relevant financial flows IIA. Past disputes have demonstrated the of either type, and in terms of targeted policy potential of IIAs to be interpreted broadly, so instruments. as to apply to types of transactions that were It may also be appropriate to exclude from a originally not envisaged to benefit from the IIA treaty’s scope specific areas of public policy 22 (such as government debt securities). When or specific (sensitive) economic sectors. Or, negotiating an IIA with a stronger sustainable in order to limit liability and to avoid “treaty development dimension, it may thus be shopping” and “roundtrip investment”, it appropriate to safeguard policy space and may be appropriate to confine application to exclude some types of financial transactions genuine investors from the contracting parties, (e.g. portfolio investment or short-term, excluding investments that are only channelled speculative financial flows) from a treaty’s through legal entities based in the contracting scope and to focus application of the treaty to parties. those types of investment that the contracting parties wish to attract (e.g. direct investment in • National Treatment (NT): National treatment productive assets). protects foreign investors against discrimination vis-à-vis comparable domestic Whether IIAs should exclude portfolio investors, with a view to ensuring a “level investment is a policy choice that has been playing field”. Non-discriminatory treatment subject to intense debate. Portfolio investment is generally considered conducive to good can make a contribution to development governance and is, in principle, enshrined by providing financial capital. However, in many countries’ domestic regulatory the sometimes volatile nature of portfolio frameworks. Nevertheless, even if national investment flows can be damaging. At the treatment is provided under domestic practical level, portfolio and direct investment legislation, countries may be reluctant to “lock are often difficult to differentiate, both in in” all aspects of their domestic regulatory 42 Investment Policy Framework for Sustainable Development

Box 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.

framework at the international level (e.g. comparable investors of different foreign private sector development initiatives, including nationality. The meaning of such treatment has regulatory, financial or fiscal incentives) and, been subject to diverging and unanticipated depending on their development strategy, interpretations by tribunals. Several arbitral States may wish to afford preferential treatment decisions interpreted MFN as allowing to national investors/investments as part of investors to invoke more investor-friendly industrial development policies or for other language from treaties between the respondent reasons. In such cases, negotiators could State and a third country, thereby effectively circumscribe the scope of national treatment sidelining the “base” treaty (i.e. the actual treaty clauses and/or allow for derogations (e.g. between the investor’s home and host country through the lodging of reservations excluding on the basis of which the case was brought). sectors, policy areas or specific measures from This practice can be seen in a positive light its application (see WIR11)). as “upward harmonization” of IIA standards • Most-Favoured-Nation (MFN) Treatment: MFN or in a negative one as “cherry picking” best clauses aim to prevent discrimination between clauses from different treaties, endangering individual treaty bargains. MFN treatment IV. Elements of International Investment Agreements: Policy Options 43

needs to be carefully considered, particularly capacity. To avoid this, policymakers could in light of countries’ growing networks of IIAs clarify the notion of indirect expropriation with different obligations and agreements and introduce criteria to distinguish between including pre-establishment issues. To avoid indirect expropriation and legitimate regulation misinterpretation, IIAs have started explicitly that does not require compensation. to exclude dispute settlement issues as well • Investor-State Dispute Settlement (ISDS): as obligations undertaken in treaties with third Originally, the system of international investor- States from the scope of the MFN obligation. State arbitration was conceived as an effective Other options include limiting the clause’s tool to enforce foreign investors’ rights. It reach through country-specific reservations. offered direct access to international arbitration • Fair and Equitable Treatment (FET): The for investors to avoid national courts of host obligation to accord fair and equitable countries and to solve disputes in a neutral treatment to foreign investments appears in the forum that was expected to be cheap, great majority of IIAs. Investors (claimants) have fast, and flexible. It was meant to provide frequently – and with considerable success finality and enforceability, and to depoliticise – invoked it in ISDS. There is a great deal of disputes. While some of these advantages uncertainty concerning the precise meaning of remain valid, the ISDS system has more the concept, because the notions of “fairness” recently displayed serious shortcomings (e.g. and “equity” do not connote a clear set of inconsistent and unintended interpretations of legal prescriptions in international investment clauses, unanticipated uses of the system by law and allow for a significant degree of investors, challenges against policy measures subjective judgment. Some tribunals have taken in the public interest, costly and lengthy read an extensive list of disciplines into the procedures, limited or no transparency), FET clause, which are taxing on any State, but undermining its legitimacy. While some especially on developing and least-developed ISDS concerns can be addressed effectively countries; lack of clarity persists regarding the only through a broader approach requiring appropriate threshold of liability. The use of FET international collaboration, negotiators can to protect investors’ legitimate expectations go some way to improving the institutional can indirectly restrict countries’ ability to and procedural aspects of ISDS and to change investment-related policies or to limiting liability and the risk of becoming introduce new policies – including those for the embroiled in costly procedures. They can do public good – that may have a negative impact so by qualifying the scope of consent given on individual foreign investors. Options to to ISDS, promoting the use of alternative reduce uncertainty regarding States’ liabilities dispute resolution (ADR) methods, increasing and to preserve policy space include qualifying transparency of procedures, encouraging or clarifying the FET clause, including by way arbitral tribunals to take into account of an exhaustive list of State obligations under standards of investor behaviour when settling FET, or even considering omitting it. investor-State disputes, limiting resort to • Expropriation: An expropriation provision ISDS and increasing the role of domestic protects foreign investors/investments against judicial systems, providing for the possibility dispossession or confiscation of their property of counterclaims by States, or even refraining 26 by the host country without compensation. As from offering ISDS. most IIAs also prohibit indirect expropriation (i.e. apply to regulatory takings), and as some 3. IIA elements: policy options arbitral tribunals have tended to interpret this The IPFSD table on IIA-elements (see page broadly (i.e. including legitimate regulatory 47-62) contains a comprehensive compilation measures in the pursuit of the public interest), of policy options available to IIA negotiators, the expropriation clause has the potential to including options to operationalize sustainable pose undue constraints on a State’s regulatory development objectives (also see table 5). The 44 Investment Policy Framework for Sustainable Development

options include both mainstream IIA provisions as • Limiting the Full Protection and Security (FPS) well as more idiosyncratic treaty language used provision to “physical” security and protection by fewer countries. In some instances, the IPFSD only and specifying that protection shall be IIA-elements table contains new suggestions by commensurate with the country’s level of 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 side 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 side, 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 working checks and balances, so as to guarantee policy space The objective of the IPFSD IIA-elements table is to while avoiding abuse. provide policymakers with an overview of options • Considering, in light of the quality of the host for designing an IIA. It offers a broad menu from country’s administrative and judicial system, which IIA negotiators can pick and choose. This the option of “no ISDS” or of designing the table is not meant to identify preferred options dispute settlement clause to make ISDS for IIA negotiators or to go so far as to suggest a the last resort (e.g. after exhaustion of local model IIA. However, the table briefly comments on remedies and ADR). the various drafting possibilities with regard to each IIA provision and highlights – where appropriate • Establishing an institutional set-up that – their implications for sustainable development. makes the IIA adaptable to changing It is hoped that these explanations will help IIA development contexts and major unanticipated negotiators identify those drafting options that developments (e.g. ad hoc committees to best suit their countries’ needs, preferences and assess the effectiveness of the agreement and objectives. to further improve its implementation through amendments or interpretations). The IPFSD IIA-elements table includes various options that could be particularly supportive of The IPFSD IIA-elements table recognizes that sustainable development. Examples are: specific policy objectives can be pursued by different treaty elements, thereby inviting treaty • Including a carefully crafted scope and drafters to choose their “best-fit” combination. definitions clause that excludes portfolio, short- For example, a country that wishes to preserve term or speculative investments from treaty regulatory space for policies aimed at ensuring coverage. access to essential services can opt for (i) excluding • Formulating an FET clause as an exhaustive list investments in essential services from the scope of of State obligations (e.g. not to (i) deny justice the treaty; (ii) excluding essential services policies in judicial or administrative procedures, (ii) treat from the scope of specific provisions (e.g. national investors in a manifestly arbitrary manner, (iii) treatment); (iii) scheduling reservations (for national flagrantly violate due process, etc.). treatment or the prohibition of performance • Clarifying – to the extent possible – the requirements) for specific (existing and/or future) distinction between legitimate regulatory essential services policies; (iv) including access to activity and regulatory takings (indirect essential services as a legitimate policy objective in expropriations) giving rise to compensation. the IIA’s general exceptions; or (v) referring to the importance of ensuring access to essential services in the preamble of the agreement. IV. Elements of International Investment Agreements: Policy Options 45

Table 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. 46 Investment Policy Framework for Sustainable Development

The IPFSD IIA-elements table likewise reflects that expropriation clause and an unqualified FET negotiators can determine the normative intensity provision. Another option is to limit the impact of IIA provisions: they can ensure the legally binding of ISDS by either formulating substantive and enforceable nature of some obligations while standards of protection as best endeavour at the same time resorting to hortatory, best (i.e. hortatory) clauses, or by precluding the endeavour language for others. These choices can use of ISDS in respect of particularly vague help negotiators design a level of protection best treaty articles, such as the FET standard.28 suited to the specific circumstances of negotiating Under such scenarios, protective standards partners and in line with the need for proper may still have a good-governance-enhancing balancing between investment protection and effect on host countries’ regulatory framework, policy space for sustainable development. while reducing the risk to be drawn into 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 and interactions between IIA provisions can take a • Interaction between protection and exceptions: number of forms: Strong protection clauses and effective flexibilities for contracting parties are not • Interaction between a treaty’s scope/definitions mutually exclusive; rather, the combination of and the obligations it establishes for the the two helps achieve a balanced agreement contracting parties: An agreement’s “protective that meets the needs of different investment strength” stems not only from the substantive stakeholders. For example, an IIA can combine and procedural standards of protection it “strong” substantive protection (e.g. non- offers to investors, but also from the breadth discrimination, capital transfer guarantees) and variety of categories of investors and with “strong” exceptions (e.g. national security investments it covers (i.e. that benefit from exceptions or general exceptions to protect the standards of protection offered by the IIA). essential public policy objectives).29 Hence, when designing a particular IIA and calibrating the degree of protection it grants, The policy options presented in the IPFSD IIA- negotiators can use different combinations elements table are grounded in the Core Principles. of the two. For example, (i) a broad open- For example, (i) the principle of investment protection ended definition of investment could be directly manifests itself in IIA clauses on FET, non- combined with few substantive obligations, discrimination, capital transfer, protection in case or with obligations formulated in a manner of expropriation or protection from strife; (ii) the reducing their “bite”; or (ii) a narrow definition of principle of good governance is reflected, amongst investment (e.g. covering direct investments in others, in IIA clauses that aim at increasing host a few priority sectors only) could be combined State’s transparency regarding laws and regulations with more expansive protections such as an or in IIA clauses that foster transparency by the unqualified FET standard or the prohibition of foreign investor vis-à-vis the host State; (iii) the right numerous performance requirements. to regulate principle is reflected, amongst others, in • Interaction between protection-oriented IIA clauses stating that investments need to be in clauses: Some IIAs combine narrowly accordance with the host country’s laws, allowing drafted clauses in some areas with “broad” countries to lodge reservations (including for future provisions in others. An example is the policies); clarifying and circumscribing the content combination between a carefully circumscribed of indirect expropriation or general exceptions. IV. Elements of International Investment Agreements: Policy Options 47

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 48 Investment Policy Framework for Sustainable Development (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 international(IIAs) investment agreements

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 IV. Elements of International Investment Agreements: Policy Options 49

” 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 international(IIAs) investment agreements

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 50 Investment Policy Framework for Sustainable Development 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 international(IIAs) investment agreements ”)

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 IV. Elements of International Investment Agreements: Policy Options 51 , 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 international(IIAs) investment agreements

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 52 Investment Policy Framework for Sustainable Development 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. ” ost IIAs include a guarantee of full protection and security (FPS), which ost IIAs include a guarantee of full protection xpropriation clauses do not take away States’ right to expropriate property, property, clauses do not take away States’ right to expropriate xpropriation 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 M 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 e 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 policy making (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 as or civil strife 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), 4.6.1 4.6.2 4.6.3 4.5.1 4.5.2 4.5.3 4.6.0 4.4.0 4.4.1 4.4.2 4.5.0 Policy options for international(IIAs) investment agreements

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 IV. Elements of International Investment Agreements: Policy Options 53

- - - - 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 international(IIAs) investment agreements

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 54 Investment Policy Framework for Sustainable Development 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 international(IIAs) investment agreements

Umbrella» 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 IV. Elements of International Investment Agreements: Policy Options 55 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 policy making. 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 international(IIAs) investment agreements

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 56 Investment Policy Framework for Sustainable Development 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 international(IIAs) investment agreements

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 IV. Elements of International Investment Agreements: Policy Options 57 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 policy-making 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 international(IIAs) investment agreements

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 58 Investment Policy Framework for Sustainable Development 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 international(IIAs) investment agreements

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 IV. Elements of International Investment Agreements: Policy Options 59

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 international(IIAs) investment agreements 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 60 Investment Policy Framework for Sustainable Development 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 international(IIAs) investment agreements 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 IV. Elements of International Investment Agreements: Policy Options 61 approach). ” hybrid “ 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 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

) ” 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”). , as opposed to legally binding, language. ” positive list affect the overall level of commitments that Party under Agreement” affect “ best efforts “ 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 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 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 1.1.0 1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 Policy options for international(IIAs) investment agreements tablishment

Pre-estab- lishment obligations … govern establishment of foreign investments in the host State icy options for IIAs 1 ol art B. Pre-es Sections UNCTAD’s Investment Policy Framework for Sustainable Development UNCTAD’s P P most organized from matters. As in Part A, policy options are supplementary to those in Part A and can be used by countries wishing 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 the options providing investor-friendly 62 Investment Policy Framework for Sustainable Development Sustainable development (SD) implications 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.

Preserve policy flexibility on pre-establishment issues by carefully crafting relevant general provisions 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 1.1.6 1.1.7 Policy options for international(IIAs) investment agreements Sections IV. Elements of International Investment Agreements: Policy Options 63 Sustainable development (SD) implications 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. 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 Preserve policy flexibility on pre-establishment issues by carefully crafting relevant general provisions 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 1.1.0 Policy options for international(IIAs) investment agreements 1.1.1 1.1.2 1.1.3 2.1.0 2.1.1 1.1.6 1.1.7 Policy options for international(IIAs) investment agreements

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 Sections 64 Investment Policy Framework for Sustainable Development

4. Implementation and institutional • Managing disputes that may arise under mechanisms for policy effectiveness IIAs. If dispute prevention efforts fail, States need to be prepared to engage effectively Implementation of IIAs at the national level entails: and efficiently in managing the disputes from • Completing the ratification process. This may beginning to end. This involves setting up vary from a few months to several years, the required mechanisms to take action in depending on the countries involved and case of the receipt of a notice of arbitration, the concrete issues at stake. The distinction to handle the case, and ultimately to bring it between the conclusion of an agreement and to a conclusion, including possibly through its entry into force is important, since the legal settlement. rights and obligations deriving from it do not • Establishing a review mechanism to verify become effective before the treaty has entered periodically the extent to which the IIA into force. The time lag between the conclusion contributes to achieving expected results in of an IIA and its entry into force may therefore terms of investment attraction and enhancing have implications, for both foreign investors sustainable development – while keeping and their respective host countries. in mind that there is no mono-causal link • Bringing national laws and practices into between concluding an IIA and investment conformity with treaty commitments. As with flows. any other international treaty, care needs to Moreover, because national and international be taken that the international obligations investment policy must be considered in an arising from the IIA are properly translated integrated manner, and both need to evolve with a into national laws and regulations, and country’s changing circumstances, countries have depending on the scope of the IIA, e.g. with to assess continuously the suitability of their policy regard to transparency obligations, also into choices with regard to key elements of investment the administrative practices of the countries protection and promotion, updating model treaties involved. and renegotiating existing IIAs. • Disseminating information about IIA obligations. Informing and training ministries, Undertaking these implementation and follow-up government agencies and local authorities efforts effectively and efficiently can be burdensome on the implications of IIAs for their conduct for developing countries, especially the least in regulatory and administrative processes developed, because they often lack the required is important so as to avoid other arms of the institutional capabilities or financial and human government causing conflicts with treaty resources. Similarly, they often face challenges commitments and thus giving rise to investor when it comes to analyzing ex ante the scope of grievances, which if unresolved could lead to obligations into which they are entering when they arbitral disputes. conclude an IIA, and the economic and social implications of the commitments contained in IIAs. • Preventing disputes, including through ADR mechanisms. This may involve the This underlines the importance of capacity-building establishment of adequate institutional technical cooperation to help developing countries mechanisms to prevent disputes from in assessing various policy options before entering emerging and avoid the breach of contracts into new agreements and subsequently to assist and treaties on the part of government them in implementing their commitments. IIAs can agencies. This involves assuring that the include relevant provisions to this end, including State and various government agencies take setting up institutional frameworks under which account of the legal obligations made under the contracting parties (and, where appropriate investment agreements when enacting laws and relevant, other IIA stakeholders such as and implementing policy measures, and investors or civil society) can review progress in establishing a system to identify more easily the implementation of IIA commitments, with a potential areas where disputes with investors view to maximizing their contribution to sustainable can arise, and to respond to the disputes development. International organizations can also where and when they emerge. play an important capacity building role. V. The way forward 65

V. The Way Forward

A new generation of investment policies is emerging, work on investment policies, investment policy pursuing a broader and more intricate development frameworks, guidelines and models, and to build policy agenda within a framework that seeks to on experience in the field in their implementation. maintain a generally favourable investment climate. The IPFSD is not a negotiated text or an undertaking “New generation” investment policies recognize that between States. It is an initiative by the UNCTAD investment is a primary driver of economic growth secretariat, representing expert guidance for and development, and seek to give investment policymakers by an international organization, policy a more prominent place in development leaving national policymakers free to “adapt and strategy. They recognize that investment must adopt” as appropriate. be responsible, as a prerequisite for inclusive and sustainable development. And in the design of It is hoped that the IPFSD may serve as a key point “new generation” investment policies policymakers of reference for policymakers in formulating national seek to address long-standing shortcomings of investment policies and in negotiating or reviewing investment policy in a comprehensive manner in IIAs. It may also serve as a reference for policymakers order to ensure policy effectiveness and build a in areas as diverse as trade, competition, industrial stable investment climate. policy, environmental policy, or any other field where investment plays an important role. The IPFSD can This report has painted the contours of a new also serve as the basis for capacity building on investment policy framework for sustainable investment policy. And it may come to act as a development. The Core Principles set out the point of convergence for international cooperation design criteria for investment policies. The national on investment issues. investment policy guidelines suggest how to ensure integration of investment policy with development In its current form the IPFSD has gone through strategy, how to ensure policy coherence numerous consultations, comprehensively and and design investment policies in support of by individual parts, with expert academics and sustainable development, and how to improve practitioners. It is UNCTAD’s intention to provide policy effectiveness. The policy options for key a platform for further consultation and discussion elements of IIAs provide guidance to IIA negotiators with all investment stakeholders, including for the drafting of sustainable-development-friendly policymakers, the international development agreements; they form the first comprehensive community, investors, business associations, labour overview of the myriad of options available to them unions, and relevant NGOs and interest groups. To in this respect. allow for further improvements resulting from such consultations, the IPFSD has been designed as a In developing the IPFSD, UNCTAD has had the “living document”. benefit of a significant body of existing work and experience on the topic. UNCTAD itself has carried The dynamic nature of investment policymaking out more than 30 investment policy reviews adds to the rationale for such an approach, (IPRs) in developing countries over the years (box in particular for the specific investment policy 4), analyzed in detail investment regulations in guidelines. The continuous need to respond to numerous countries for the purpose of investment newly emerging challenges with regard to foreign facilitation (box 6), and produced many publications investment makes it mandatory to review and, on best practices in investment policy (box 7), where necessary, modify these guidelines from time including in the WIR series. Other agencies have to time. Thus, from UNCTAD’s perspective, while a similar track record, notably the OECD and the the IPFSD will serve to inform the investment policy World Bank, various regional organizations, and a debate and to guide technical assistance work in number of NGOs. In defining an IPFSD, this report the field, new insights from that work will feed back has attempted to harness the best of existing into it. 66 Investment Policy Framework for Sustainable Development

The IPFSD thus provides a point of reference and regards their substantive obligations, “other IIAs”, a common language for debate and cooperation usually fall into one of three categories: IIAs including on national and international investment policies. obligations commonly found in BITs; agreements with limited investment-related provisions; and UNCTAD will add the infrastructure for such IIAs focusing on investment cooperation and/ cooperation, not only through its numerous policy or providing for future negotiating mandate on forums on investment, but also by providing a investment. In addition to “core IIAs”, there are platform for “open sourcing” of best practice numerous other legal instruments that matter for investment policies through its website, as a basis foreign investment, including double taxation treaties (DTTs). for the inclusive development of future investment 10 Examples include the interaction between IIAs 30 policies with the participation of all. and other bodies of international law or policy in the field of public health (e.g. the World Health Notes Organization Framework Convention on Tobacco Control, WHO FCTC), environment (e.g. the Basel 1 Many successful developing countries maintained Convention on the Control of Transboundary a significant level of government influence over the Movements of Hazardous Wastes) or human direction of economic growth and development rights (e.g. International Covenant on Economic, throughout; see Development-led globalization: Social and Cultural Rights), to name a few. In the Towards sustainable and inclusive development context of ensuring coherence between investment paths, Report of the Secretary-General of UNCTAD protection and climate change, WIR10 suggested to UNCTAD XIII. a “multilateral declaration” clarifying that IIAs do not 2 The G-20, in its 2010 Seoul declaration, asked constrain climate change measures enacted in good international organizations (specifically, UNCTAD, faith. WTO and OECD) to monitor the phenomenon of 11 In some countries the existence of an IIA is investment protectionism. a prerequisite for the granting of investment 3 See Sauvant , K.P. (2009). “FDI Protectionism Is guarantees. on the Rise.” World Bank Policy Research Working 12 This impact is generally stronger in the case of Paper 5052. preferential trade and investment agreements 4 For example, the World Bank’s Guidelines on (PTIAs) than with regards to BITs. See “The Role of the Treatment of Foreign Direct Investment, the International Investment Agreements in Attracting OECD’s Policy Framework for Investment (PFI), Foreign Direct Investment to Developing Countries,” and instruments developed by various regional UNCTAD Series on International Investment Policies organizations and NGOs. for Development, December 2009; www.unctad. 5 These include, inter alia, the UN Global Compact, org. For a full discussion of FDI determinants, see the UN Guiding Principles on Business and Human WIR98. Rights, the ILO Declaration on Fundamental 13 See also Skovgaard Poulsen, Lauge N. and Principles and Rights at Work, the IFC’s Aisbett, Emma (2011) “When the Claim Hits: Sustainability Framework and the OECD Guidelines Bilateral Investment Treaties and Bounded Rational for Multinational Enterprises. Learning.” Crawford School Research Paper No. 5. 6 See ILO Global Employment Trends 2012, available 14 As discussed in WIR04, interaction can be either on www.ilo.org. autonomous-liberalization-led or IIA-driven, or 7 See, for example, “Promoting investment for anywhere in-between. development: Best practices in strengthening 15 Related are questions of forum-choice, double investment in basic infrastructure in developing incorporation, dual liability and re-litigation of issues, countries,” note by the UNCTAD secretariat to all of which call for a careful consideration of how the Investment, Enterprise and Development to manage the overlaps between agreements. See Commission, May 2011, TD/B/C.II/14, www.unctad. also Babette Ancery (2011), “Applying Provisions org. of Outside Trade Agreements in Investor-State 8 Based on Doran, G. T. (1981). “There’s a S.M.A.R.T. Arbitration through the MFN-clause.” TDB, 8 (3). way to write management’s goals and objectives.” 16 This is in line with the traditional view of international Management Review, 70 (11 AMA FORUM); 35-36. law, as governing relations between its subjects, 9 The universe of “core IIAs” principally consists of primarily between States. Accordingly, it is BITs and other agreements that contain provisions impossible for an international treaty to impose on investment, so-called “other IIAs”. Examples obligations on private actors (investors), which are of the latter include free trade agreements (FTAs) not parties to the treaty (even though they are under or economic partnership agreements (EPAs). As the jurisdiction of the respective contracting parties). V. The way forward 67

17 Article 13 “Investor Obligation” provides: “COMESA 23 Nottage, Hunter (2003), Trade and Competition in investors and their investments shall comply with all the WTO: Pondering the Applicability of Special applicable domestic measures of the Member State and Differential Treatment, Journal of International in which their investment is made.” Economic Law, 6(1), p.28. 18 In fact, in the course of the past century, 24 Based on six categories as identified in WTO international law has been moving away from the (2000) “Implementation of Special and Differential traditional, strict view towards including, where Treatment Provisions in WTO Agreements and appropriate, non-State actors into its sphere. See, Decisions,” Note by Secretariat, WT/COMTD/W/77, e.g., A. Bianchi (ed.) (2009), “Non-State Actors and 25 October 2000, available at www.wto.org. More International Law.” (Ashgate, Dartmouth). recently, also the Doha Ministerial Declaration (2001) 19 Also the 2012 Revision of the International Chamber reaffirmed SDT as an integral part of the multilateral of Commerce (ICC) Guidelines for International trade regime. Investment refer to investors’ obligations to comply 25 COMESA Investment Agreement (2007), Article with the laws and regulations of the host State at all 14(3). times and, in particular, to their obligation to comply 26 Any comprehensive effort to reform the ISDS regime with national and international labour laws, even would also have to go beyond IIA clauses, and where these are not effectively enforced by the host address other rules, including those for conducting State. international arbitrations (e.g. ICSID or UNCITRAL). 20 The aggregate amount of compensation sought 27 Experience with ISDS has revealed numerous by the three claimants constituting the majority instances of unclear or ambiguous clauses that risk shareholders of former Yukos Oil Company in the being interpreted in an unanticipated and broad ongoing arbitration proceedings against Russia. See manner. Therefore the table includes options to Hulley Enterprises Limited (Cyprus) v. The Russian clarify. However, these clarifications should not be Federation, PCA Case No. AA 226; Yukos Universal used by arbitrators to interpret earlier clauses that Limited (Isle of Man) v. The Russian Federation, lack clarifications in broad and open-ended manner. PCA Case No. AA 227; Veteran Petroleum Limited 28 Absence of ISDS – and hence of the possibility to (Cyprus) v. The Russian Federation, PCA Case No. be subject to financial liabilities arising from ISDS – AA 228. may make it easier for countries to agree to certain 21 Ceskoslovenska Obchodni Banka (CSOB) v. The standards of protections. Slovak Republic, ICSID Case No. ARB/97/4, Final 29 Similarly, one can combine far-reaching liberalization Award, 29 December 2004. The case was brought or protection clauses with a possibility to lodge by CSOB on the basis of consent to arbitration reservations (e.g. for pre- and post-establishment contained in the 1992 BIT between the Czech clauses, and for existing and future measures). Republic and the Slovak Republic. The findings on See “Preserving Flexibility in IIAs: The Use of liability and damages were based on the underlying Reservations”, UNCTAD Series on International contract and Czech law. For more information on Investment Policies for Development, June 2006; ISDS consult http://www.unctad.org/iia-dbcases/ www.unctad.org. cases.aspx. 30 Interested stakeholders and experts are invited 22 For details, see UNCTAD (2011) “Sovereign to provide feedback and suggestions through the Debt Restructuring and International Investment dedicated UNCTAD IPFSD website, at www.unctad. Agreements.” IIA Issues Note, No.2, www.unctad. org/IPFSD. org, Abaclat and others v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011.