Trends And Reforms Of Investment In International Investment Agreement

There have been significant changes in the past two decades regarding the national and international policies on Foreign Direct Investment (FDI). These changes have affected the ongoing integration of the world’s economy and the changing role of FDI in it. They have found expressions in national laws and practices and a variety of international instruments, bilateral, regional and multilateral[1]. The rule and principles of customary international law were applied on an international scale when the Foreign Direct Investment was concerned.

Three phases of International Investment Agreement:

UNCTAD’s International Investment Agreement reform is divided into three phases. The UNCTAD’s Phases of International Investment Agreement Reform refer to different conceptual stages which the countries should follow while planning the International Investment Agreement reform and these reforms are even inter-related to each other.

In doing so, policymakers may wish to note that:

  1. The implementation of the reform steps may well be gradual and progressive over time; and
  2. The substance of Phase 1 of International Investment Agreement Reform, in particular, the policy options for the five priority areas of reform, is equally relevant for Phases 2 and 3. In other words, Phase 1 options inform policy makers’ decisions on whether and how to modernize current old-generation International Investment Agreements and whether and how to enhance coherence, continuity and coordination between various levels and types of policymaking.

A. Phase I of International Investment Agreement Reform: Moving to a new generation of IIAS.

Phase I of IIA Reform talks broadly about five topics which include safeguarding the right to regulate, reforming investment dispute settlement, promoting and facilitating investments, ensuring responsible investment and lastly, enhancing systemic consistency. Phase 1 of IIA Reform involves making strategic choices about the scope of the agreements and depth of the reform agenda, and selecting policy approaches for key areas, including substantive IIA clauses, investment dispute settlement and systemic issues[2].

Implementation may include, reviewing a country’s International Investment Agreement network, preparing a reform action plan, revising its IIA model and starting to negotiate new, more sustainable development-friendly treaties.

i. Safeguarding the right to regulate:

Options include the clarification or limitation of provisions such as most-favoured-nation (MFN) treatment, fair and equitable treatment (FET) and indirect expropriation, as well as including exceptions, e.g. for public policies or national security. The option to direct in the open premium is tended to in IIAs chiefly through arrangements identified with the standard of treatment that the bargain bears to remote financial specialists. Among the arrangements especially ensnared in depicting the harmony between investment protection and the right to regulation in the public interest are Most Favoured Nation clauses, the Fair and Equitable Treatment standard, expropriation provisions and provisions on safeguards and exceptions, which may be either built into particular substantive standards of protection or drafted as generally applicable clauses.

ii. Reforming investment dispute settlement:

One of the most common debates in the International Investment Agreement Reform is the dispute settlement between investors and States through international arbitration. In recent years, the has been quite an increase in the number of ISDS cases which has also led to criticism towards the existing ISDS systems. The situation has triggered a worldwide debate about the pros and cons and about whether to have or not ISDS[3]. Analysing these developments many countries have been reassessing their position on ISDS and are adopting different measures.

iii. Promoting and facilitating investments:

States generally conclude IIAs with a view to attracting investment and benefitting from it[4]. Therefore, International Investment Agreements encourage proactive investments programmes effectively both inward and outward of countries. IIAs lacks over the provision regarding maintaining their quality of investments, therefore, to safeguard the same various option, include adding inward and outward investment promotion provisions, as well as joint and regional investment promotion provisions.

iv. Ensuring responsible investment:

Ensuring responsible investments is of utmost importance for any investment agreements. There is a concern that international competition for foreign investment may lead some countries to lower their environmental, human rights and other laws and regulations, and that this could result in a “race to the bottom” in terms of regulatory standards[5]. The concerns are explicitly discussed in the IIAS Reform stating two options, firstly, to explicitly reaffirms parties about the commitments that they have abided by the laws of human rights and other laws and regulations; and secondly, the normative intensity of the clause should be increased by stating that each party “shall ensure” (instead of “shall strive to ensure”) that it does not waive or derogate from environmental, labour or other laws.

v. Enhancing systemic consistency:

In view of the atomised, multi-faceted and multi-layer nature of the IIA regime, the key challenge of reform is to avoid further fragmentation of the system. This includes holistic addressing gaps, overlaps and inconsistencies across three dimensions of policymaking: among IIAs, among IIAs and other instruments of international law and between IIAs and Domestic policies[6].

B. Phase 2 of International Investment Agreement Reform: Modernizing the existing stock of IIAS.

i. Taking stock of reform:

International Investment Agreement Reform has made significant progress in the past few years. Sustainable Development has enriched international investment policymaking to another level. Since 2012, over 150 countries have undertaken at least one action in the pursuit of sustainable development-oriented IIAs[7].

ii. Three reasons for Phase 2 of IIA Reform:

Despite getting an ample amount of progress in Phase 1 of IIA Reform, their requires to modernizing the existing stock of IIAs by imposing new and more far-reaching treaties overstate, which broadens the scope of covered investments or introduces more far-reaching investor protections. It has been done through 3 reasons:

a. Old Treaties abound: The older treaties contained broadly worded, similar and substantive provisions and very few provisions, therefore, there was a need to abound the old treaties.

b. Old treaties “bite”: As the old treaties are broad and vague formulations, the recent experienced countries with ISDS called it so and demanded for change.

c. Old treaties perpetuate inconsistencies: Their continued existence creates overlaps and fragmentation in treaty relationships as well as interaction challenges within the IIA network, and between IIAs and other areas of international policymaking.

iii. Challenges and Choices:

The challenge that the policymaker has faced while choosing among reform mechanisms are:

  1. Most Favoured Nation Clause which is basically, aimed to prevent the nationality-based discriminations. For the existing IIAs, MFN related challenges are joint interpretation, amendment, management of treaty relationships and replacement.
  2. Survival Clause, in which most of the Bilateral Investment Treaties are designed in such a manner where treaty application to extend the period further even after termination from the range of 5 to 20 years were made.
  3. Transition Clause, effectively modifies the operation of the survival clause in the “outgoing” treaty; they are particularly relevant for reform options that replace old treaties, including through consolidation[8].

C. Phase 3 of International Investment Agreement Reform: Improving Investment Policy Coherence and Synergies.

i. Improving investment policy coherence and synergies:

In addition, to improve the approach of the new treaties and modernize the existing treaties, the government needs to strengthen the coherence and synergies of investment policy.

ii. Maximizing synergies between the IIA Regime and the national legal framework for investment:

Strengthening of cooperation between national and international investment policymakers, improving interaction and ensuring cross-fertilization between two regimes are crucial tasks for countries striving to create a mutually supporting, sustainable development-oriented investment policy regime.

iii. Managing the interaction between IIAS and other bodies of International law affecting investment:

In line with the current imperative of SDG, the IIA reform should consider the interaction between IIAs and other international bodies affecting investment. The IIA reform may help avoid conflict and maximize synergies, through simpler treaty drafting, exemptions in IIAs and guidance on the interpretation of IIA provisions.

iv. Dynamics of policymaking: flexibility and policy space:

The policies drafted should always be in such a way that it could co-exist with flexibility and policy space as it is beneficial for both national and international legal frameworks for investment which could lead to differential levels of developments.

The IIA reform is well underway across all regions, and many countries and regional groupings are in the process of reviewing, reforming and revising their IIAs, often on the basis of UNCTAD’s Investment Policy Framework and its earlier guidance on reform of the IIA regime.

[1] “Trends in International Investment Agreements: An Overview”; UNCTAD Series on issues in international investment agreements; United Nation New York and Geneva, 1999; UNCTAD/ITE/IIT/13 UNITED NATIONS PUBLICATION; page 1.

[2] “UNCTAD’S Reform Package for the International Investment Regime”; United Nation New York and Geneva 2018, 2018 edition; page 7.

[3] Ibid

[4] “INTERNATIONAL INVESTMENT ARRANGEMENTS: Trends and Emerging Issues”; UNCTAD Series on International Investment Policies for Development; UNITED NATIONS New York and Geneva, 2006.

[5] “UNCTAD’S Reform Package for the International Investment Regime”; United Nation New York and Geneva 2018, 2018 edition; page 64

[6] Ibid, page 68

[7] Ibid, page 70

[8] “UNCTAD’S Reform Package for the International Investment Regime”; United Nation New York and Geneva 2018, 2018 edition; page 77

This Article is Authored by Nidhi Mishra, LL.M. at ILS Law College, Pune.

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