Investment provisions in bilateral investment treaties
2010-02-17 Paul Kruger
Resources > By Topic > OTHER TRADE TOPICS > Investment
Paul Kruger, a tralac Researcher, discusses investment provisions in bilateral investment treaties.
According to UNCTAD (www.unctad.org/iia), 2676 bilateral investment treaties (BITs) have been concluded by the end of 2008. Not all of these treaties have entered into force as the process of ratification has to be completed first before they are considered legally binding instruments. It is estimated that around 75 percent of these BITs have entered into force (http://www.unctad.org/en/docs/webiteiia20069_en.pdf). The importance Europe attaches to investment measures is evident with countries like Germany (147), Switzerland (127), the Netherlands (105), France (103), the UK (102) having concluded by far the highest number of BITs.
Most investment treaties are limited in scope and only concern investment promotion and investment protection. Similarly, most of the 72 BITs concluded by the SADC EPA Member States mainly deals with post-establishment investment measures, or in other words, the treatment of foreign investments after they have been established or admitted in the host country. For example the BIT between Namibia and Spain specifically refers to this post-establishment phase by stating that the MFN and national treatment principle applies with regard to the “management, maintenance, use, enjoyment or disposal” of investments. These types of BITs do not regulate the access or admission of foreign investments into the host country and typically allow for investments in accordance with the domestic regulatory framework. Domestic laws and regulations will therefore still have to be consulted to determine the precise conditions for the entry and establishment of foreign investments.
In contrast, there are a small number of BITs which include investment liberalisation measures in addition to the investment protection and investment promotion measures. This approach can be found in the United States – Mozambique BIT where the MFN and national treatment is expanded to include “establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of covered investments”. The wider scope indicates that application has been extended to the pre-establishment phase to include measures pertaining to the ‘establishment, acquisition and expansion’ of foreign investments. Limitations on such treatment are permitted and contracting parties have the right to adopt or maintain exceptions to the MFN or national treatment principle, if specifically listed in the Annex. The United States stipulated exceptions in several areas which include: atomic energy, customhouse brokers, license for broadcast, common carrier or aeronautical radio stations, COMSAT, subsidies or grants, landing of submarine cables, fisheries, air and maritime transport, and related activities, banking, insurance, securities and other financial services, one-way satellite transmission services and digital audio services. Despite the large number of exceptions listed by the United States, Mozambique has listed no exceptions to its national treatment or MFN obligations. Therefore, Mozambique has in one fell swoop effectively liberalised most of its investment regime regarding pre- and post establishment investments from the United States. Has Mozambique carefully considered the consequences of absolute liberalisation? What about domestic legislation conflicting with the obligations of the treaty? For example, mining passes for small scale mining are reserved for Mozambican nationals (Section VII of the Mozambique Mining Regulations 28/2003). What will happen if a United States citizen wants to apply for a mining pass?
Recently countries have also started to include investment provisions in Free Trade Agreements (FTAs). The CARIFORUM EPA includes a chapter on “Investment, Trade in Services and E-commerce”, but only deals with the pre-establishment aspects of investment measures. This approach is the result of the EU’s constrained organisational structure – the European Commission has non-exclusive competency over investment and can therefore only apply the trade concept (the pre-establishment phase) in investment negotiations. Investment protection and investment promotion (post–establishment phase) are largely excluded from the EU’s competence and are instead the responsibility of the individual EU member states. These remain the exclusive domain of the respective BITs (http://ictsd.org/i/news/tni/32972/).
In the CARIFORUM EPA investment is grouped together with the concept of trade in services, implying that the same conditions applicable to trade in services also apply to the issue of investment. Market access and national treatment provisions typically associated with trade in services, apply equally to investment. Similarly to trade in services, a GATS style schedule of investment commitments is also included in the Annex to the EPA. The investment schedule is limited to non-services sectors and includes A) Agriculture, hunting and forestry; B) Fishing; C) Mining and quarrying; D) Manufacturing; and E) Production, transmission and distribution on own account of electricity, gas, steam and hot water. The schedule sets out the reservations and exceptions to the market access and national treatment obligations stipulated in the main text. As with trade in services, the schedule is only concerned with market access and national treatment restrictions and not with domestic regulations relating to qualification requirements and procedures, technical standards and licensing requirements and procedures. The schedule is based on the positive list approach, meaning that parties list only the reservations, limitations and exclusions they are planning to undertake. Sectors or sub-sectors not listed are therefore not committed. Although the CARIFORUM member states listed all investment sectors, they included a large number of open ended commitments, reserving the right to adopt or maintain investment limitations, effectively leaving those sub-sectors ‘unbound’. According to the explanatory note on investment, CARIFORUM member states have a 2 year window period in which any additional non-conforming measures can be included in the investment schedule. However, the text explicitly refers to ‘existing non-conforming measures’, so it can be assumed that only domestic regulatory measures in force at the signing of the EPA can be added.
Investment also forms an important part of the second phase of the SADC EPA negotiations. It is expected that the same format as the CARIFORUM EPA will be used. It is therefore critical to understand the scope and application of the investment chapter and schedule in order to avoid a similar situation than in the US – Mozambique BIT. As was done with the services sectors, a type of regulatory trade audit is necessary to determine the precise restrictions and conditions applicable when foreign investments are established in a host country. Countries also have the option to identify sensitive sectors in which they can reserve the right to adopt or maintain restrictive measures. In contrast to GATT Art XXIV and GATS Art. V, there are no provisions in international law regulating the inclusion of investment in FTAs. Since it is therefore uncertain how the asymmetric threshold between the contracting parties will be determined, a cautious approach by the SADC EPA countries is preferable.
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