Investment Policy & Promotion

transcript

Issues of scope: what is an investment? Who is a

covered investor?

Lessons from experience

Going beyond protection: issues of establishment and

Tools to support countries in identifying and reducing

barriers to the establishment of investment.

Presenter: Roberto EchandiResource person: Robert Hunter

Event 1. Module 3. Key Elements of IIAs and their impact on domestic reform Session One: Issues of Scope and Investment Establishment

IIAs: Issues of ScopeVienna, 13 October 2015

INVESTMENT POLICY AND PROMOTION WEEK

Introduction to International Trade and Investment Agreements:

Establishment of investmentB

What is an investment? What is an investor?: lessons from experienceA

Tools to support countries in identifying and reducing barriers to the establishment of investment

Definitions of “Investment”: Types and Implications

• “Asset-based” definition– Tipical European Model BIT

• Asset invested by an investor a Party in the territory of the other Party

– Some IIAs limit the scope of the definition of “investment”:• Assets used for non-business purposes• Financial transactions that do not entail a real acquisition of interests • Public debt• Include characteristics of investment: commitment of resources, expectation for profit, assumption of risk

• “Direct investment”– Australia-Thailand FTA (Art. 901,903)

• Closed list approach– NAFTA– New Canada model BIT

Examples of “asset-based” definitions of “Investment”

Definitions of “Investment”: lessons from experience

• Scope of the definition:– Fedax vs. Venezuela: investment goes beyond that just FDI– Is a contract an investment?

• What is an investment? – Subjective vs. Objective tests (intent of the parties or textual interpretation of the text?)

• Salini vs. Morocco• Joy Mining vs.Egypt

» Certain duration» Regularity of profit and return» Element of risk» Substantial commitment» Significant contribution to host State´s development

• Legality of the investments– Assets invested in accordance with laws of the host State –even without a specific language included in BIT,

and assets invested in good faith. Phoenix Action vs. the Czech Republic– Inceysa Vallisoletane v. El Salvador, Fraport vs.the Philippines (juridiction denied)

The “legality of the investments” Chile-New Zealand BIT

Limiting the scope of definitions of “Investment”

Examples of definitions of “Investor”: Natural Persons

Definitions of “Investor”• Natural persons

– Citizens

– Permanent residents

• Case law

• Nottebohm case– request for a “effective link” (tradition, interests, activities or family ties)

between home State and national

• Champion Trading vs. Egypt, Soufraki vs. UAE– examine domestic law of the home State and all other relevant facts

• What about dual nationals?– Varies according to the forum and applicable IIA

Examples of definitions of “Investor”: Legal Entities

Definitions of “Investor”• Legal entities:

– Place of incorporation– Real seat or principal place of business (effective management)– Nationality of ownership or control

• Different IIAs use one or more of these requirements

• Case law: When does a company is a covered investor?– Prevailing criteria: nationality by incorporation– Autopista Concesionada vs. Venezuela

• Company constituted in the U.S. controlled by Mexicans

– Tokios Tokelés vs.Ukraine– Rompetrol vs. Romania

• Companies constituted abroad but owned or controlled by nationals of the host State

– ASEAN effective management approach (avoid “protection shopping”)– Yaung Chi Oo Trading vs. Myanmar (Additional Facility)

• Unless some indication against protection shopping exists in the IIA, company would be a national of place of incorporation.

• Claimant determined to be a company of a Contracting State

• Are State enterprises covered?– Depends on applicable IIA– Debate on whether these entities behave in the same manner as private ones.

• - Very few IIAs define the concepts• - Definition of ownership tends to be quantitative• - Definition of control tends to be qualitative• - GATS:

• - a juridical person is “owned” if more than 50 percent of the equity interest is owned.

• - a juridical person is “controlled” if there is the power to appoint a majority of the board of directors or othewise to legally direct its actions

• “Direct and indirect” ownership or control– Rationale: to protect investments or nationals or companies of a

contracting party, no matter how many corporate layers exist between the company and the investment.

Ownership and Control• Typical formulation: Art. 1 BIT Austria-UAE

“Investment by an investor of a Contracting Party means every kind of asset in

the territory of one Contracting Party owned or controlled directly or

indirectly by an investor of the other Contracting Party…”

• Clause tends to allow host country to deny treaty protection to those companies that are controlled by investors of a non-party and have no susbstantial business activities in the territory of the party under whose laws they are constituted.

• Clause makes sense in those IIAs that ascribe the nationality of a legal entity solely on the basis of its place of constitution

• Discretion tends to be granted to the host State to apply the clause

• Generation Ukraine vs. Ukraine: – U.S.-Ukraine BIT. Claimant was a company registered in the U.S. with a subsidiary in Ukraine. Ukraine

argued that claimant did not have substantial business activities in the U.S. and in fact was controlled by Canadians. Claimed failed due to lack of evidence.

– Denial of benefits is not a jurisdictional hurdle for the claimant,but a potential filter on the admisibility of claims which can be invoked by the respondent State.

• Plama vs.Bulgaria:– Denial of benefits is prospective, the tribunal had jurisdiction to hear the merits of the claims raised

before the investor was notified of the denial of benefits.

– Denial of benefits is a right that must be exercised through positive actions taken by the host State

Denial of Benefits

• Approaches in IIAs:

• Admission model: entry in accordance with laws and regulations of the host country

• Pre-establishment model: provide national treatment and/or MFN treatment regarding the right of establishment

Right of Establishment: Entry of foreign investment

• Host country discretion

– laws and regulations relating to entry may change.

– Ex: Most BITs

– Australian treaties: laws and regulations from time to time applicable.

• Once admitted, foreign investment is granted NT and MFN. No exceptions in the treaty.

Admission model

• NT and MFN in all stages of the process: establishment, acquisition and expansion (reference to both investor and investment).

• Lists of exceptions: all countries have closed sectors.

• The commitment is made in the Treaty, the national laws must be in conformity with Treaty obligations.

Pre-establishment NT and MFN

• Positive list: NT and/or MFN only in those sectors that are listed/scheduled in the positive list.– GATS approach– FTAs negotiated by the EU– Australia-Thailand FTA

• Negative list: NT and MFN except in the sectors listed in the negative list and in the annex of future measures─ Most recent PTAs─ U.S. and Canadian BITs─ Complemented by Sectoral Exclusions

Positive/negative list approaches

The logic, architecture and function of a negative list approach

• Annex I: Non-conforming measures

– Standstill

• List for illustrative purposes

• « List or loose »

– Roll back

– Ratchet

– Annex interpretation guidelines

• Annex II: Exclusions

Right of establishment: lessons from experience

• Most case law has focused on whether pre-investment expenditures undertaken by a potential investor qualify as an “investment”

• Mihaly International vs. Sri Lanka (U.S. BIT)

– ICISD case

– Pre-establishment expenditures incurred with a proposed BOT (build, operate and transfer) thermal power station project. Mihaly was selected to enter negotiations after a tendering procedure.

– No formal contract was ever signed between the parties, just a letter of intent describing the framework for the negotiations that would lead to the BOT agreement.

– Tribunal held that it was “unable to accept as a valid denomination of “investment”, the unilateral or internal characterization of certain expenditures by the claimant in preparation for a project of investment”.

Tools to support countries in reducing barriers to entry and

establishment of investment

The case for investment entry work

Typology of entry barriers

Typology Types of barriers Examples

De Jure BarriersBarriers in the legal framework

Legal and Regulatory barriersPolicy decisions

• Prohibition of foreign investment in certain sectors

• A country may prohibit FDI in the retail sector by regulating that only companies owned and controlled by nationals can own supermarkets or department stores

• Restrictions on top managerial personnel

• A country may restrict the appointment of foreigners to the board of directors and/or to executive-level positions

• Discriminatory licensing requirements

• A foreign investor may be required to meet additional conditions inorder to get a license to operate (in comparison to a domestic investor)

Procedural barriersRed tape

• Obtaining investmentapproval

• A country may require several different agencies to sign off on investment approval, causing increased time and costs

• Registration or notification of investment

• Registration or notification requirements may require detailed, forward-looking information that is time-consuming to prepare

• Obtaining a work permit or visa

• Work permits applications may be onerous and lengthy, and may impose restrictions on staff mobility

• Opening a bank account in a foreign currency

• Documentation required to open a bank account may be costly to collect and slow to process

• Having documents recognised

• A country may require that certain foreign documents be certified or notarised before they can be recognised for establishment

De Facto BarriersBarriers on the ground

• Lack of Transparency • Substantive laws and regulations of the country may be complex and difficult to access, and decision-making processes may be opaque .

• Excessive Discretion • Decision-makers may have significant discretion, allowing informal practices to creep into the system.

Pre-reform Situation Our Recommendations Adopted

Recommendation Additional FDI Generated

Investment Entry: Reforms in Turkey and Liberia- Implemented -

In 2003

• Removed minimum investment requirement on foreign investors

• Removed ex ante screening: all investors go through a simple system of registration

+ than USD1.47billion(3 years after reform)

• Screening of all foreign investment projects was mandatory

• Each foreign investor was subjected to a USD50,000 minimum investment requirement

Terminate these two restrictions

10,000

15,000

20,000

25,000

2003 2004 2005 2006

Actual FDI after Reform

FDI Trendline without Reform

26 business activities reserved exclusively for Liberians

• Establish national treatment as a cornerstone for investment

• Eliminate sectorial restrictions to ensure compliance with WTO

In 2010

• Reduced the number of Liberian-reserved activities from 26 to 16 (opened 10 sectors, accounting for about 40% of previous reserved ones)

• Set a threshold on 12 others

+ than USD213million(2 years after reform)

2010 2011 2012

Actual FDI after Reform

FDI Trendline without Reform

THANK YOU

rechandi@ifc.org

INVESTMENT POLICY AND PROMOTION WEEK

Investment Policy & Promotion

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