INVESTMENT FACILITATION FOR DEVELOPMENT IN WTO AND INDIA – ECONOMY

INVESTMENT FACILITATION FOR DEVELOPMENT IN WTO AND INDIA – ECONOMY

News: Some advice to India on the IFA negotiations

 

What's in the news?

●       The proposed IFA in WTO is meant to create legally binding provisions aimed at facilitating investment flows.

 

Key takeaways:

●       Backed by more than 100 countries, the legal obligations inter alia will require states to augment regulatory transparency and predictability of investment measures.

 

What is Investment Facilitation for Development?

●       In December 2021, 112 WTO members co-sponsored a Joint Statement on Investment Facilitation for Development.

●       Among 112 WTO members of this joint initiative, India is not a part of it.

●       Aims at developing a multilateral agreement on Investment Facilitation for Development that will improve the investment and business climate, and make it easier for investors in all sectors of the economy to invest, conduct their day-to-day business and expand their operations.

●       Facilitating greater participation of developing and least-developed members in global investment flows also constitutes a core objective of the future Agreement. 

●       The initiative does not cover market access, investment protection and investor-state dispute settlement.

●       The proposed IFA is meant to create legally binding provisions aimed at facilitating investment flows.

●       The legal obligations inter alia will require states to augment regulatory transparency and predictability of investment measures.

●       This agreement will be very different from investment protection agreements such as bilateral investment treaties (BITs) that allow foreign investors to bring claims against the host state for alleged treaty breaches. This is known as investor-state dispute settlement (ISDS).

 

Concerns of India:

1.      India suspects the need for new initiative: To the extent investment is related to trade it is already included in the TRIMs agreement and under mode 3 related to FDI in the General Agreement on Trade in Services (GATS).

2.      India suspects the channel used for enactment of this initiative: Plurilateral route of negotiations under which investment facilitation is being discussed has no legitimacy in the WTO. India has naturally not participated in the discussions and has not formally commented on the successive texts.

3.      ‘Investment facilitation for development’ is evidently a misnomer: There are hardly any development provisions, except extended time periods for implementation and the promised technical assistance. The proposed agreement would be too burdensome for developing countries and LDCs, because nearly all of the obligations that may be created are on host countries.

4.      Apprehension about misinterpretation: one of the reasons India is not a party to IFA (Investment Facilitation agreement) negotiations is the apprehension that foreign investors could use a future IFA to bring claims under the existing BITs. Arguably, foreign investors may use the most favored nation (MFN) provision in BITs to borrow or import stipulations from the IFA perceived to be more advantageous than those given in the underlying BIT.

5.      Fear of being sued by Foreign Investors in ISDS (Investor-state dispute settlement)

    1. The foreign investor may use the ubiquitous provision of fair and equitable treatment (FET) present in BITs to challenge non-compliance with IFA. Tribunals have held that the FET provision includes investors’ legitimate expectations. Debatably, the foreign investor may argue that the commitments undertaken by a state under the IFA create ‘legitimate expectations’ of the investor.
    2. Another entry point for the provisions of the IFA into the ISDS mechanism can be the so-called ‘umbrella clause’ — a BIT clause that allows contractual and other commitments owed to a foreign investor to be brought under the treaty’s protective umbrella.

      6.    An investor can use ISDS to seek compensation for -

a.       The expropriation of a foreign investor's property.

b.      Discrimination and minimum standards of treatment, denial of justice.

 

Go back to Basics

 

Bilateral Investment Treaty

 

  1. Bilateral Investment Treaties (BITs) are reciprocal agreements between two countries to promote and protect foreign private investments in each other’s territories.
  2. BITs encourage foreign investors to invest in a State and there by contributing towards overall developments and advancements of the economy.
  3. The following are the essential clauses covered under BITs.
    1. Applicability
    2. Fair and Equitable Treatment and Full Protection & Security
    3. National treatment and Most-favored-nation treatment
    4. Expropriation
    5. Dispute settlement mechanisms - between States and between an investor and a State
  4. Objective of BITs: BITs protect investments by imposing conditions on the regulatory behavior of the host state and thus, prevent undue interference with the rights of the foreign investor. These conditions may include:
    1. Imposing obligations on host states to accord fair and equitable treatment (FET) to foreign investment and not to discriminate against foreign investment.
    2. Allowing for repatriation of profits subject to conditions agreed to between the two countries.
    3. Most importantly, allowing individual investors to bring cases against host states if the latter’s sovereign regulatory measures are not consistent with the BIT, for monetary compensation.
  5. India and BITs
    1. Since signing the first BIT in 1994 with the UK, India has inked 86 such bilateral treaties, the latest being with Brazil in 2020.
    2. BITs have been one the major drivers of FDI inflows into India.
      1. A 2016 study suggests that by providing substantive protection and commitment to foreign investors, BITs indeed contributed to rising FDIs in the 2001-2012 period.
    3. However, there have been many cases of the penalty awarded by an International Dispute Settlement (ISDS) tribunal served against India.
      1. For example: In cases involving regulatory measures such as the imposition of retrospective taxes, cancellation and revocation of spectrum and telecom licenses.
    4. This led to a review of the BITs and in 2016 India launched the Model BIT. It aims to act as a base for negotiating new BITs with other States, as well as for re-negotiation of the existing ones.
    5. As per Model BIT in 2016, India moved away from an overly investor-friendly approach to a somewhat protectionist approach concerning foreign investments.
    6. Since its adoption, India has unilaterally terminated 66-odd BITs between 2016 to 2019, sending negative signals to the global investor community.
    7. This is evident as no country has shown any inclination to re-negotiate based on the Model BIT.
    8. Since 2016, India has signed just three treaties, none of which is in force yet.

 

How should India overcome its concerns of ISDS?

 

1.      Many BITs exempt an economic integration agreement from the application of MFN. Thus, the possibility of foreign investors successfully importing IFA provisions into the BIT is remote.

2.      It is doubtful that an ISDS tribunal will accept the argument that mere non-compliance with IFA breaches an investor’s legitimate expectations. The only exception to this will be if a State has included its IFA commitments as part of the specific assurances to the foreign investor luring her to invest and then goes back on these assurances without a proportionate public policy justification. Thus, a binding IFA, minus other things, cannot be the basis of an investor’s legitimate expectations.

3.      Most new investment treaties avoid ‘umbrella clauses’ altogether. This limits the possibility of investors suing states for non-compliance of IFA obligations as a breach of a BIT’s ‘umbrella clause’.

4.      Moreover, the IFA can be firewalled from BITs by the former unequivocally stating that it cannot be used to interpret or apply any rule for the protection of investment contained in any investment treaty.

5.      The IFA can also categorically state that it does not create rights for non-signatory countries and their investors. Indeed, the draft IFA text includes such language aimed at isolating the IFA from BITs and ISDS.

 

Conclusion:

Countries can overcome this problem by amending their respective BITs to exclude the IFA from its scope. Given the sizable number of 100­plus countries pushing for the IFA, who wish to insulate it from ISDS, these countries can agree among themselves to reform their BITs to reflect this will. In fact, the BIT reform process is already underway, with older treaties being replaced with newer ones that contain more balanced provisions.