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A Southern Agendaon Investment?

Promoting Developmentwith Balanced Rights

and Obligations for Investors,

Host States and Home States

By Howard Mann Konrad von Moltke

A Southern Agendaon Investment?

A Southern Agenda on Investment?

Promoting Development with Balanced Rights and Obligations for Investors,

Host States and Home States

Howard Mann, Konrad von Moltke

© 2005 International Institute for Sustainable Development (IISD)

Published by the International Institute for Sustainable Development

The International Institute for Sustainable Development contributes to sustainable development by advancingpolicy recommendations on international trade and investment, economic policy, climate change, measurementand assessment, and natural resources management. Through the Internet, we report on international negotia-tions and share knowledge gained through collaborative projects with global partners, resulting in more rigorousresearch, capacity building in developing countries and better dialogue between North and South.

IISD’s vision is better living for all—sustainably; its mission is to champion innovation, enabling societies to livesustainably. IISD is registered as a charitable organization in Canada and has 501(c)(3) status in the United States.IISD receives core operating support from the Government of Canada, provided through the CanadianInternational Development Agency (CIDA), the International Development Research Centre (IDRC) andEnvironment Canada; and from the Province of Manitoba. The institute receives project funding from numer-ous governments inside and outside Canada, United Nations agencies, foundations and the private sector.

A Southern Agenda on Investment? Promoting Development with Balanced Rights and Obligations for Investors,Host States and Home States

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Preface v

1. Investment and Development 1

2. International Investment Agreements 3

3. Necessary Conditions for Investment for Development 5

4. The Pre-establishment Phase 7

5. Re-thinking Performance Requirements 9

6. Host State Rights and Obligations 11

7. Investor Rights and Obligations 13

8. Home State Rights and Obligations 15

9. Dispute Settlement 16

10. Monitoring Results 18

11. Institutions and Funding for Investment Agreements 19

12. Conclusions 21

About the Authors 22


iii

Contents


iv

This paper is the product of a research process that hasinvolved the analysis of numerous international invest-ment agreements and disputes. Three regional consul-tations were organized in Bangkok (May 2004); CapeTown (May 2004); and Sao Paulo (June 2004), wherethe investment climate and investment agreements offive countries (Thailand, Malaysia, South Africa,Argentina and Brazil were considered). These consulta-tions also identified many of the elements of aSouthern agenda on investment that are included inthis report. The documents from this process are avail-able at http://www.iisd.org/investment/dci/sai.asp.

This report is issued under the responsibility of itsauthors and of the International Institute forSustainable Development (IISD). We are aware thatafter only 18 months of work it is not possible toarticulate a Southern agenda on investment that is theoutcome of a robust, broad policy debate in the devel-oping countries most affected by international invest-ment agreements. Yet the process undertaken by IISDrepresents the first attempt to develop a comprehen-sive agenda for investment negotiations that takes thepriorities of developing countries as its starting point.

The absence of an adequate investment policy debateover the past decades is surprising, even shocking.Existing international investment agreements arebased on a 50-year-old model that remains focussedon the interests of investors from developed countries.This paper identifies major issues of concern fordeveloping countries that are vital from the perspec-tive of sustainable development but that are not beingaddressed in the current negotiating processes. Theimplications are clear: from the perspective of develop-ment and sustainable development, past and presentnegotiations on international investment are serious-ly deficient. The entire process needs to be reconcep-tualized from the ground up.

To promote discussion on the most appropriateapproach to such a new beginning, we have formulatedthe IISD Model International Agreement onInvestment for Sustainable Development, which isbeing published separately. This draft agreement andsupporting documentation are also available athttp://www.iisd.org/investment.

We wish to thank the authors and institutes thathelped with our consultations:

Roberto Bouzas and Daniel Chudnovsky of theUniversity of San Andrés, Argentina; Pedro da MottaVeiga of Fundaçao Centro de Estudos do ComércioExterior, (FUNCEX), Brazil; Deunden Nikomborirakof the Thailand Development Research Institute(TDRI); and Trudi Hartzenberg of the Trade LawCentre for Southern Africa (tralac).

We also wish to thank the funders who have supportedthis work over the past 18 months: The SwedishInternational Development Cooperation Agency (Sida);the International Development Research Centre(IDRC); The Swiss Agency for Development andCooperation (SDC); The Norwegian Agency forDevelopment Cooperation (Norad); the NetherlandsMinistry of Spatial Planning, Housing and theEnvironment; the Danish International DevelopmentAgency (DANIDA); and the Heinrich Böll Foundation.

There are more than 2,000 international investmentagreements (IIAs). Yet these agreements address but asmall proportion of the issues that require attention ifinternational investment is to promote sustainabledevelopment. In practice, IIAs are about governancefor globalization but they fall far short of the stan-dards one can expect for such a legal structure.

All long-term economic objectives—in particular,development, environmental protection and sustain-able development—must ultimately address the con-ditions for investment because none can attain theirgoals without investment. This reality has been neg-lected by those who negotiate investment agreements.

There can be no doubt about the overriding priorityof developing countries when it comes to foreigninvestment. They want this investment to contributeto their development. Existing IIAs contribute little ifanything to this goal. A Southern agenda on invest-ment must begin by recognizing that IIAs that con-tribute to development will look unlike any existingIIAs. They must involve more actors, cover moreissues and be better at balancing the interests of theprincipal actors in international investment:investors, host states and home states.


v

Preface


vi

The linkages between investment and develop-ment—and sustainable development—are so strongas to be self-evident. In a market economy, invest-ment determines the pace, direction and strength ofdevelopment. Countries with insufficient investmenthave little prospect of development; countries that aredeveloping strongly are characterized by vigorousinvestment.

Foreign investment is a necessary part of the invest-ment universe in most countries. Even in developingcountries that are not as constrained by lack of capi-tal as others (South Africa, for example) the entry offoreign investment is important because it brings inforeign investors and creates economic links with theglobal economy and with the economies of theseinvestors’ home countries. The resulting benefits havebeen documented extensively.1

Public authorities in most jurisdictions seek to attractinvestors, including foreign investors. Attractinginvestment has, however, proven to be an uncertainart. Based on extensive analysis, there is consensusconcerning numerous necessary conditions to attractinvestors.2

Yet linkages between foreign direct investment (FDI)and development are less straightforward than mightbe supposed. More is not necessarily better, yet thereare hardly any attempts to establish qualitative dis-tinctions between investments, including FDI, which

can be driven by various factors and can take manyforms. The relative weight of these factors will varyaccording to the aims of the investor, financial aspectsand the circumstances of the host country, alwaysseen in comparison to competing opportunities forinvestment. Investment can be market-seeking,designed to supply a market that cannot be as effec-tively supplied in any other manner; it can beresource-seeking, designed to capture certain naturalresources that are not as available elsewhere; or it canbe efficiency-seeking, utilizing dimensions of a loca-tion’s competitive advantage—wages, skilled labour,natural resources or access to transportation, forexample.

Certain investments, in particular those that areresource-seeking or that have exceptionally elevatedrates of return, may be made almost irrespective ofissues of governance, while other investments, wherereturns are robust but comparatively uncertain, willnot be made under any circumstances. There arejurisdictions that exhibit all the characteristics of goodgovernance and attract no foreign investment, just assome jurisdictions with a reputation for poor gover-nance still attract investment.

The number and variety of factors that influence FDIdecisions are confusing and render any simpleapproach to foreign investment problematic. IIAsthat promote investment that supports developmentobjectives of the host country must reflect the fullrange of factors in an appropriate manner.

Certain foreign investments may crowd out domesticinvestment, leaving the host country with additionalexternal obligations but no measurable domestic ben-efits. Other investments, particularly in services, arelikely to create balance-of-payments pressures, as for-eign investors have a higher propensity to work withfamiliar (foreign) suppliers, thereby increasingimports without a corresponding increase in exports;


1

1.Investment and Development

Countries with insufficient investment havelittle prospect of development; countries

that are developing strongly are character-ized by vigorous investment.

1 See United Nations Conference on Trade and Development (UNCTAD), World Investment Report. Geneva: UNCTAD, annual.

2 United Nations Conference on Trade and Development (UNCTAD), Incentives. UNCTAD Series on Issues in InternationalInvestment Agreements. Geneva: UNCTAD, 2004.

and profits from service investments additionally bur-den the balance of payments when they are repatriated,since there are no balancing exports to generate for-eign currency.3

It is clear that development benefits associated withFDI do not accrue automatically. Not all FDI con-tributes to economic growth, and even FDI that con-tributes to growth may not support the developmentpriorities of host countries. For this to change, devel-oping countries believe that the linkage between FDIand development must be explicit and supported bypolicies that promote desired outcomes, even whilethey recognize the fundamental economic require-ments associated with any investment. Such policiesare not easy to craft and not easy to implement. IIAsshould be specifically designed to support them.

The need for domestic policies to ensure developmentbenefits flow from FDI is further accentuated whenseeking to promote sustainable development, whichbrings an additional set of policy priorities into play. Itis nonetheless essential if there is to be any prospect ofmoving towards a more sustainable society.

Many of the required policies are within the scope ofnormal governmental activity in host countries; theydo not depend on international agreements. There is,however, a continuing risk that international invest-ment agreements can get in the way of necessarymeasures, in particular when they fail to explicitly rec-ognize the need for such measures. Beyond thisdefensive concern there is the obvious desire to seeinternational investment agreements make a positivecontribution to development and sustainable devel-opment. This applies particularly in countries thatlack some of the vital capabilities to determine theviability of FDI—for example institutional resources,sufficient information to make necessary decisions, orthe financial means to support such decisions whenappropriate or the legal and administrative tools toensure that investments are sustainable in the localenvironment. Consequently, the challenge is to craftinternational investment agreements that promote aproper balance between investor rights and the sustain-able development goals of host and home countries.


2

Not all FDI contributes to economicgrowth, and even FDI that contributes togrowth may not support the development

priorities of host countries.

3 For details, see the SAI case studies on Argentina (http://www.iisd.org/pdf/2004/investment_country_report_argentina.pdf) and Brazil(http://www.iisd.org/pdf/2004/investment_country_report_brazil.pdf).

More than 2,000 international investment agree-ments (IIAs) exist, yet their purpose remains singularlylimited to protecting foreign investors while ignoringmany other critical aspects of the relationships sur-rounding FDI.4 Most of these agreements pursue thisgoal using absolute standards of treatment (“fair andequitable treatment” or “expropriation”) or relativestandards (“national treatment” or “most-favoured-nation treatment”) to achieve this objective. Theyprovide protection to investors after an investmenthas been made, particularly from expropriation, andaccess to international investor-state dispute settle-ment. Promoters of these agreements have arguedthat the effect of such protection will be the promo-tion of additional investment between the parties butthere is scant evidence to show that they have had ameasurable effect.5

Some international investment agreements alsoinclude rules governing the pre-establishment phaseof investments, imposing limits on the use of so-called performance requirements (specified actionsrequired of foreign investors as a condition of author-izing the establishment of an investment), and mayeven initiate a process of “liberalization” regarding theright to establishment, for example by identifying cer-tain sectors in which foreigners may invest as of right.There is often an assumption that the list of coveredsectors can be expanded through subsequent negotia-tion between the parties. In a few instances, the agree-ment will articulate the principle of free access(notably within the European Union), subject to a listof excluded sectors. It is worth noting that “liberal-ization” applies only to pre-establishment rules; post-

establishment rules cover all investments that havebeen made between the parties while the agreement isin force, unless they are specifically limited or bal-anced by other public interests in an agreement.

Almost all IIAs include one or more parties that aredeveloping countries. Yet few explicitly address thedevelopment aspirations of these countries in theirstatement of purpose.6 No specific provisionsdesigned to promote development have found wide-spread use. Freestanding IIAs do not mention sus-tainable development, a topic broached only occa-sionally by trade agreements that include investmentprovisions.

IIAs that make no difference in terms of developmentor increased investment may be viewed as a harmlessexercise in declaratory international relations. Indeed,there is evidence that at least some IIAs were con-cluded as an adjunct to some diplomatic event thatrequired a formal outcome and the signing of an IIAappeared harmless when no other option was avail-able. Investment is, however, too important to be theobject of such practices. Even seemingly harmlessagreements can produce undesirable results. Indeed,it is clear today that IIAs do have an impact, albeit notthe one their authors may have intended.

Existing IIAs fail badly from the perspective of gover-nance for globalization. They inadequately frame theroles of the key actors in international investment—investors, host states and home states—as well asthose of other stakeholders. They hinder the ability ofdeveloping countries to exercise some of their mostfundamental rights, namely to identify development


3

2.International Investment

Agreements

4 This generally includes bilateral investment treaties (BITs), bilateral, regional and inter-regional trade agreements that include invest-ment provisions, and multilateral investment agreements. Agreements on trade in services include investment provisions as well.

5 Mary Hallward-Driemer, Do Bilateral Investment Treaties Attract FDI? Only a bit... and they could bite, World Bank, June 2003,http://econ.worldbank.org/files/29143_wps3121.pdf. For an alternative view, see Jeswald Salacuse and Nicholas P. Sullivan, "Do BITsReally Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain," Harvard International Law Journal, vol. 46 no.1 (Winter 2005), pp. 67–130. The focus of this paper is, however, on U.S. BITs, including NAFTA and a U.S.-China BIT so thatthey are highly particular.

6 Luke Eric Peterson, Bilateral Investment Treaties and Development Policy-Making. Winnipeg, MB: International Institute for SustainableDevelopment (IISD), 2004, p. 4: “—the author’s experience of examining more than 150 [bilateral investment] treaties … suggests thatreferences to development are exceedingly rare in treaties pushed by a number of Western governments with developing countries.”

goals and to pursue public welfare by regulating eco-nomic activities. And they impact the capacity of allcountries to promote and enact sustainable develop-ment policies and measures.

The stated purposes of IIAs are important. They helpdetermine the standards by which an agreement andits impacts will be judged. In dispute settlement theyprovide arbitrators with guidelines for interpretation.More often than not today, the only stated purpose isinvestment protection and promotion, but substan-tive treaty provisions only deal with investor protec-tion, leading arbitrators to give priority to this onegoal. Frequently, however, a statement of purpose canbe used to articulate longer-term goals, some of whichmay currently be unattainable. This creates a frame-work for arbitrators and an incentive for negotiatorsto exercise caution and to create opportunities for(rather than obstacles to) subsequent adjustment ofagreements to reflect an evolving understanding ofwhat works and what does not.

Little empirical evidence has emerged to support thecontention that the treaties that provide investor pro-tection stimulate new and additional flows of foreigndirect investment. There is no recognizable relationshipbetween IIAs and investment flows. Some countries

that are party to no IIAs receive significant interna-tional investment and many countries that are party tonumerous IIAs receive almost none. Some countriesare not party to investment agreements yet receiveinvestment. Some countries that receive internationalinvestment are indeed party to IIAs, but the investmentdoes not follow the pattern of agreements in any dis-cernible manner.7 This is hardly surprising, actually,given the number of factors that condition investmentdecisions but are not affected by existing IIAs. In prac-tice these factors outweigh the impact of existing IIAs.

Development is undoubtedly the overriding purposeof developing countries in international economicpolicy. From a Southern perspective, investmentagreements are undesirable if they do not supportdevelopment. It is hard to argue that existing IIAsserve this priority.8 The substantive provisions of theexisting agreements give no visible consideration tothe processes and dilemmas of development—or sus-tainable development for that matter. This is due inpart to the uncertainties that surround efforts toensure that investment promotes development. Yettraditional investment agreements continue to bepursued, and investment provisions are inserted intrade agreements.

No IIA by itself can ensure that host countries attaintheir development goals. That is hardly surprisingonce it is recognized that IIAs are primarily aboutinternational governance of investment in a global-ized economy. Institutions of governance are designedto promote desirable outcomes, to avoid undesirableones and to ensure due process. They can rarely guar-antee specific outcomes by themselves. There is aneed for a regime for international investment that ischaracterized by equitable governance at all levels andthat meets the most fundamental criteria of legitimacy,transparency and accountability.


4

7 Salacuse, Hallward-Dreimer (see fn. 5).

8 See Luke Eric Peterson, Bilateral Investment Treaties (see fn. 6).

There is no recognizable relationshipbetween IIAs and investment flows. Somecountries that are party to no IIAs receivesignificant international investment and

many countries that are party to numerousIIAs receive almost none.

It is appropriate to focus first on what we do know,and that concerns conditions necessary to promoteinvestment.9

Markets. Investments can only be made where thereis a market for the products or services produced bythe investment at prices that cover its costs and prom-ise a reasonable profit. Without markets there shouldbe no investment—and when investment occurswhere there are no markets, it often signals the exis-tence of some form of market distortion. These mar-kets can be local, national or international. One of themajor limitations of investment in certain publicservices, such as water supply and sanitation, is theinability of local markets to support the costs associ-ated with making and upgrading those investments.Understanding markets and ensuring that they func-tion in a satisfactory manner is important to promot-ing investment flows.

Labour. The availability of (skilled) labour is fre-quently critical for investment. The appropriate fram-ing of this issue is one of the more challenging tasksof the sustainable development debate. On one hand,low labour costs are a critical source of comparativeadvantage for producers in developing countries; onthe other hand, it is important that fundamentallabour rights are respected. Where skilled labour isnot available locally, the ability to move qualified per-sons in and out of the host country becomes impor-tant, in addition to the need to control certain keyappointments in relation to investments that are inte-grated into an international product chain.

Natural Resources. Numerous foreign investments aremade to ensure access to important natural resources.Indeed, certain resources are so critical that invest-ments are made almost irrespective of conditions inthe host country. Some investors have struggled withissues relating to sustainable development of naturalresources and other issues such as respect for therights of indigenous populations.10

Infrastructure. The existence of key infrastructure—transportation, communications, energy and envi-ronmental services, in particular—is critical to manyinvestments, whether to produce goods or services. Insome instances, such as the exploitation of naturalresources, investors are willing to create necessaryinfrastructure as part of their overall investment.

Public Institutions. Foreign investors are dependenton the institutions of governance of the host country.They need timely, impartial and effective administra-tion of the rules and regulations governing their activ-ities, including reviews and appeals. While the exis-tence of good governance alone does not guaranteethe flow of investments, all other things being equal,the quality of governance can have a decisive impacton investment decisions.

Private Institutions. Investments do not exist in aninstitutional vacuum: they require a range of privateinstitutions to provide necessary support, mostly inthe form of services: banking, legal advice and insur-ance at a minimum and, often, technical support andother forms of consulting services. Investment riskrises rapidly in the absence of such institutions.

Not all of these conditions are controlled by publicauthorities in the host country. For this reason, as formany others, successful investment policies require anunprecedented level of public-private cooperation aswell as the active engagement of public authorities indifferent countries and the existence of appropriateinternational organizations. Promoting national andinternational mechanisms to foster these conditionsmust be the ultimate objective of international invest-ment agreements.

Investment can occur in the absence of one, and some-times even of all, of the above conditions, but it isunlikely to do much to promote sustainable develop-ment. Investment in the extraction of natural resourcesmay be determined by a single consideration, namely


5

3.Necessary Conditions for

Investment for Development

9 V.N. Balasubramanyam, “Foreign Direct Investment in Developing Countries: Determinants and Impacts,” paper prepared for OECDGlobal Forum on International Investment,” Mexico City, Nov. 26–27, 2001, p. 13.

10 See Mining, Minerals and Sustainable Development at http://www.iied.org/mmsd/finalreport.

where the needed resources are located. All other con-siderations recede next to this self-evident requirement.Yet, in the absence of some of the above conditions,international investment in natural resource extractionis unlikely to contribute to the sustainable develop-ment of the host country, let alone the host jurisdictionwithin that country. Numerous examples of oil extrac-tion in particular can be cited to illustrate this point.

This list also illustrates that investment is a complexphenomenon with significant implications for sus-tainable development. An adequate understanding ofthe full agenda on investment is a condition for fash-ioning successful international investment regimes.11


6

11 United Nations Economic Commission for Latin America and the Caribbean (ECLAC), Preliminary Version of the Foreign Investmentin Latin America and the Caribbean 2005. Santiago: ECLAC, 2005. Schiff, Maurice W. and L. Alan Winters, Regional Integration and Development. New York: Oxford University Press, 2003. See also the World Bank Investment Climate Surveys at http://rru.worldbank.org/InvestmentClimate/

From the perspective of development, and of sustain-able development in particular, the pre-establishmentphase of productive long-term investment is critical.During this planning and preparation phase, keydecisions are taken that determine the impact of aninvestment on a national economy, the environmentand the community. Prospective investors articulatetheir goals and their activities. Depending on the sizeand nature of the investment, they require permis-sions and authorizations that can include the registra-tion of a company (with the attendant rights andobligations, in particular in terms of hiring and taxes);permission to use certain public infrastructure such asroads and ports; and land use permits and environ-mental permits to use and discharge water, to emitwastes to the atmosphere or to otherwise manage thewaste stream. In the case of large productive invest-ments, each of these activities can have long-termimplications for the local community and the envi-ronment. Entire ecosystems may be transformed, par-ticularly by natural resource-based investments, andthe prospects of a community to grow and prospermay be determined.

During the pre-establishment phase, the relationshipsbetween a prospective investor, the host country andthe home country are likely to be more intense andentail more important decisions than at any othertime in the life-cycle of an investment. In practice, aforeign investor is about to become an economic cit-izen of the host country. Just as countries have the

right to accept or reject natural persons for citizen-ship, they need to be able to take considered decisionson the admission of economic citizens—because,once admitted, such citizens have rights that must berespected, not only because of international rules, butalso on account of domestic legislation. In practice,this phase may entail a negotiation process and IIAsthat create a right to invest—as some do—effectivelyshift the balance between the investor and the hoststate in favour of the former, often eliminating con-trols a host state might utilize. In particular, applyingthe right to national treatment in a pre-establishmentphase accords rights to foreign investors even thoughthey have not yet become economic citizens of thehost state.

Some IIAs that include national treatment in the pre-establishment phase utilize lists to limit its applica-tions. These can be positive lists that identify coveredsectors, or negative lists with sectors that are excluded.The effectiveness of such lists in protecting the rightof host states to pursue their development prioritiesdepends on the quality of information concerningpossible future implications of a listing, and on theability to change sectors once they have been listed inor out. The availability of such information may varywidely, with governments of many developing coun-tries at a pronounced disadvantage for lack of ade-quate information. These are matters that requirenegotiation in an environment where information isequally distributed. None of these issues can be deter-mined on the basis of economic principles, so thatadequate solutions require a careful balancing ofsometimes conflicting priorities. In this respect,investment negotiations bear little resemblance totrade negotiations where an optimum economic out-come can be calculated, even if it cannot be attainedin practice.

The admission of productive foreign investment to acountry, like the approval of any productive invest-ment, involves a complex process that is designed toensure that all relevant interests are taken intoaccount. These procedures range from the registrationand governance of an enterprise to numerous licences


7

4.The Pre-establishment Phase

During the pre-establishment phase, therelationships between a prospective

investor, the host country and the homecountry are likely to be more intense andentail more important decisions than at

any other time in the life-cycle of an investment.

that authorize the use of resources or public facilities,from environmental impact assessment to provisionsfor health and safety. They are accompanied byappropriate procedural requirements concerning theprovision of information, transparency and publicparticipation. And they are subject to administrativeappeal and judicial review. An IIA that risks short-cir-cuiting these requirements in any way would beharmful, ultimately undermining the essential devel-opment of the institutions required to support theseprocedures in an open society.

Once an investment has been made, relationshipsbetween the principal stakeholders shift notably. Theinvestor has acquired important rights, not only interms of permissions and authorizations but alsobroader rights based on the investment and the com-mitments it entails.

It is consequently important to distinguish clearlybetween the pre-establishment phase and the remain-ing lifetime of an investment, a lifetime that can runto many decades. It can even last more than a century,as is the case when virgin forest is converted to agri-cultural uses. The pre-establishment phase should bedesigned to ensure that a proper balance is struckbetween the legitimate interests of (private) investorsand the public goods their investment is likely toaffect. This is a demanding task that requires exten-sive administrative resources. In many countries, itincludes obligations to inform the public and oppor-tunities for public participation when the impacts ofa proposed investment are expected to be extensive.

Following this initial determination of rights andobligations of key stakeholders in an investment, thefocus shifts to ensuring that all parties live up to theircommitments and that the balance that has beenestablished is maintained in an appropriate manner. Itis also critical that this balance be adjusted to new

economic developments and to new knowledge orchanges in policy priorities in a manner that reflectsstandards of good governance.

From the perspective of IIAs and development, one ofthe most important decisions concerns whether theagreement is to cover the pre-establishment phase,and if so, what kinds of disciplines are envisaged. Arange of models exists in this regard, including agree-ments that establish binding limits on host countrygovernment action in the pre-establishment phase;agreements that enunciate general principles govern-ing the pre-establishment phase; and agreements thatdo not address the pre-establishment phase at all.12

None of the agreements to date addresses issues ofinvestor responsibility or the role of home countrygovernments in the pre-establishment phase, a signif-icant gap from a Southern perspective.

The implications of these arguments for a Southernagenda on investment are clear. The starting positionfor Southern negotiators is likely to be a rejection ofpre-establishment commitments. Should there never-theless be negotiations on such commitments, theyneed to be articulated in a manner that is notably dif-ferent from the approach to be found in most exist-ing IIAs, recognizing that decisions on the admissionof investments can involve complex procedures in thehost country, to which due deference must be given.


8

12 The WTO General Agreement on Trade in Services (GATS) establishes most-favoured-nation treatment in Article 2 as a general obli-gation, subject to possible negative listing. It also includes a range of pre-establishment provisions that apply when a country has madecommitments on specific sectors and specific modes of supply of services. As a rule, the country will have opened its market to serv-ice suppliers in the committed areas on a national treatment basis.

The starting position for Southern negotiators is likely to be a rejection of

pre-establishment commitments.

“Performance requirements” are obligations imposedupon an investor by host state public authorities.They are typically part of the pre-establishment nego-tiations conducted between a prospective investorand the relevant home state authorities, but they canalso arise in connection with re-authorization or thegranting of some advantage to an existing investment.A wide range of performance requirements have beenidentified but they fall into six broad categories:export performance; joint venture and equity owner-ship; research and development; technology transfer;employment and training; and other requirementssuch as local content requirements or the provision ofsurety in the form of bonds or otherwise.13

Performance requirements make an investor giveundertakings to meet certain criteria that would pre-sumably not be met based on market criteria alone—otherwise there would be no substantive reason toimpose them. Consequently performance require-ments are widely seen as imposing an economic bur-den or otherwise decreasing the economic efficiencyof an investment. Yet the literature on the appropri-ateness of performance requirements is ambiguous.Empirical economic analysis has shown that perform-ance requirements can work, presumably because theloss of economic efficiency is more than outweighedby gains in development and public welfare.

Performance requirements are subject to a range ofdisciplines in some IIAs, while others do not addressthem. Most importantly, the WTO Agreement onTrade Related Investment Measures (TRIMs) effec-tively prohibits local content requirements; trade-bal-ancing requirements; foreign exchange restrictionsrelated to the foreign-exchange inflows attributable toan enterprise; and export controls. As with all WTOagreements, implementation of the TRIMsAgreement is multi-unilateral: each member stateinterprets it individually, subject to the possibility ofa dispute being initiated to contest its interpretation.The TRIMs Agreement, however, provides only state-state dispute settlement through the WTO DisputeSettlement Understanding. Such disputes are relativelyunlikely, in particular with respect to individualinvestments, since states will need to weigh theirinterests in such a dispute against a general prudencein taking recourse to dispute settlement in the WTO.No investor-state recourse is available within theWTO.

A much longer list of performance requirements isprohibited, conditioned or discouraged by somebilateral investment treaties (BITs) or regional agree-ments such as the North American Free TradeAgreement (NAFTA). These include requirementsconcerning the establishment of joint ventures ordomestic equity; the location of facilities; employ-ment requirements; export requirements; restrictionson the sale of goods in the jurisdiction where produc-tion is located; supply of goods or services; sole sourcesupply agreements; technology transfer; and researchand development. Other performance requirements,such as the obligation to provide surety, are notrestricted.

It has been argued that developed countries usedmany of the policy tools in their development processthat IIAs now seek to prohibit for developing coun-tries.14 Even if this was the case, it does not follow


9

5.Re-thinking Performance

Requirements

13 United Nations Conference of Trade and Development (UNCTAD), Foreign Direct Investment and Performance Requirements: NewEvidence from Selected Countries. Geneva: UNCTAD, 2003.

14 Ha-Joon Chang, Kicking Away the Ladder. Development Strategy in Historical Perspective. London: Anthem Press, 2002.

Empirical economic analysis has shownthat performance requirements can work,presumably because the loss of economic

efficiency is more than outweighed bygains in development and public welfare.

that developing countries will benefit from using thesame tools under the dramatically changed circum-stances of the early 21st century with decolonizationcomplete and the emergence of a global economy.Nevertheless, the obverse does not hold either—thereare no adequate grounds to decide that performancerequirements in general are unacceptable.

Just as pertinent is the fact that developed countriesuse complex rules of origin to establish trade prefer-ences, many of which are by now sanctioned by bilat-eral or regional trade agreements. These have thesame economic effect as performance requirements.Rules of origin require that products must contain aspecified percentage of locally produced content toreceive the preferred tariff treatments set out in bilat-eral or regional free trade agreements. Rather thanspecify export performance, rules of origin limitimports. They act as local content requirements. Theyalso create powerful incentives to invest in the localjurisdiction in question or to establish backwardslinkages to other local economic actors. Seeking toachieve these effects through direct policy measures is,however, just what performance requirement prohibi-tions seek to proscribe.

Performance requirements impact on many of thedevelopment priorities a government may be pursu-ing when negotiating with an investor. They can helpto stabilize a relationship that is, by its nature, subjectto a wide range of disturbances that can emanatefrom any of the parties to the process. Consequently,many developing countries consider the right to useperformance requirements to be of vital importancein ensuring that foreign investment contributes totheir development priorities. At the very least, itappears questionable whether IIAs should prohibitsuch requirements since the determination of theirappropriateness often depends on the specific cir-cumstances of an investment rather than on generaleconomic principles, and is consequently best left tothe participants in that decision. Moreover, powerfulmarket disciplines exist to establish boundary condi-tions for performance requirements: when host statesoverreach they lose investment.

This suggests that developing countries should notaccept provisions in IIAs that limit their use of per-formance requirements, or should at least be exercis-ing great caution in doing so.


10

Most IIAs focus on investor rights and host state obli-gations. The lack of consideration given to investorobligations has often been remarked upon. Yet thereis also no visible effort to balance rights and obliga-tions of host states even though IIAs impact on both.

The most important of host state rights—the right toregulate—is not in the gift of any investment agree-ment. It is an inherent element of the sovereignty ofstates. Indeed, regulation is a core function of a sov-ereign state, one that is untouched by debates con-cerning the appropriate form and degree of regulationthat have raged in many developed countries for sev-eral decades. The right to regulate is so fundamentalthat it would be inappropriate for IIAs to address it asan exception to their own requirements.

It may be argued that the right to regulate does notneed to be mentioned in IIAs. Yet IIAs impact on ahost state’s right to regulate, and it is imperative thatthese impacts be explicitly recognized and weighedand that drafters ensure that any limits imposed onthis right are justified by commensurate benefits.That has not happened, leaving a situation wherecreeping limits are imposed on host states, oftenthrough dispute settlement procedures that them-selves do not meet even the most elementary criteriaof good governance.15

This stark statement of the current situation leaves anurgent need to ensure that limits placed directly orindirectly on the ability of host states to exercise theirright to regulate are explicitly identified, precisely

defined so as to limit the discretion of dispute panels,and fully justified.

Host state rights and obligations towards an investor,domestic or foreign, are in practice very extensive.The host state must adopt the full range of regula-tions that are designed to ensure that investors areaccountable, that the impact of an investment oncommunities and the environment is acceptable, andthat an investment contributes to public welfarethrough employment, taxes and in other ways. Inpractice, this involves the entire range of laws and reg-ulations governing the conduct of business in the hostcountry. At the same time, the host state must act ina manner that is legitimate, transparent and account-able and must protect the rights that investors andinvestments have acquired by virtue of investing andconducting a business.

Most countries have elaborate legal and institutionalarrangements to ensure a balance between investorrights and public welfare. All of these are potentiallyaffected by IIAs as long as no provision is made toensure that they are given due deference. Thesearrangements are robust, they continue to evolve andthey have withstood the test of time in developedcountries. The situation in developing countries isdifferent. Many developing countries have an incom-plete institutional infrastructure to achieve the desir-able balance. They seek to augment that infrastruc-ture even as they seek to attract investors, bothdomestic and foreign, and many of the existing insti-tutions have a limited history of dealing with majorchallenges. Developing countries that were previouslycolonized emerged from the colonial era almostdevoid of indigenous institutions and of the humanresources required to run, let alone to develop them.Lack of human and financial capacity continues tolimit necessary institutional development in manycases.

It would seem almost self-evident that IIAs shouldcontribute to the process of institutional development


11

6.Host State Rights and Obligations

15 Aaron Cosbey, et al., International Investment and Sustainable Development: A Guide to the Use and Potential of International InvestmentAgreements. Winnipeg, MB: IISD, 2004. http://www.iisd.org/publications/publication.asp?pno=627.

The most important of host state rights—the right to regulate—is not in the gift of

any investment agreement.

in developing countries. At the very least, they shouldnot undermine it. Yet there is little in most existingIIAs that contributes to this goal. The approach ofpre-emption that characterizes many IIAs, that is thetendency to move disputes directly to the interna-tional level without providing for settlement in thehost country, and without an expression of deferenceto the laws or institutions of the host country, mayundermine efforts to achieve good governancedomestically.

The unmet challenge is to devise international agree-ments that actually promote host country institutionaldevelopment. Presumably, this will require the elabo-ration of benchmarks that identify the degree towhich host country institutional development meetsinternational standards, and to link these to the spe-cific provisions of the agreement itself. Countries thathave adequate domestic institutions should largely beshielded from international interference. The goalhere is not to create perfect institutions, but institu-tions that meet essential standards of good gover-nance and that lead to results that appropriatelyreflect the interests of those who are affected by an

investment. Countries that do not meet such stan-dards should receive institutional assistance from theinternational level in a form that meets the same stan-dards of process and outcome.

There is an astonishing degree of variation in the for-mulations that are to be found in existing IIAs, evenamong agreements signed by a single nation and evenwhen expressing widely recognized principles such asnational treatment, most-favoured-nation treatment,expropriation and minimum standards of treatment.This transfers the task of determining whether suchdifferences are meaningful to dispute settlement, andcreates indeterminate scope for interpretation. It islikely that these variations do not reflect considereddecisions, but are the result of indifferent negotiationof IIAs and a lack of public discussion of their pur-poses and how best to achieve them.

In addition, most IIAs fail to provide those responsiblefor dispute settlement with a reliable guide to negotia-tors’ intent or with a framework for interpretation. Byenunciating principles for non-discrimination and fairtreatment of investors, but none for many other rele-vant dimensions of the investment process mentionedabove, IIAs indicate that investor rights should beinterpreted without reference to other priorities ofdevelopment, let alone sustainable development.

It is important to ensure that the texts of investmentagreements draw on a carefully developed vocabularythat can only be the result of extensive public analysisand debate. In practice, it is likely to require muchmore elaborate detailing of the intent and reach ofrights and obligations that are created.


12

Countries that have adequate domesticinstitutions should largely be shielded from

international interference.

The focus of many IIAs is on investor rights; mentionof investor obligations is rare. Yet an investmentagreement that does not address investor obligationsis manifestly incomplete.

Investor obligations are qualitatively different thanhost state rights or obligations or investor rights. Aninternational agreement between sovereign states thatseeks to create specific investor obligations is in manyways problematic. International agreements are con-cluded between—and impose obligations on—states.Normally, they impose obligations on individualsonly by obligating states to take all necessary measuresto ensure that their citizens act in accordance withinternational agreements. Some international agree-ments, in particular those dealing with human rights,create rights for individuals and are moving to createdirect obligations as well. Yet in the absence ofenforcement by states, the enforcement of these rightsthrough international institutions is exceedingly difficult.

By contrast, IIAs that create rights for investors movein an environment with few precedents. They havesucceeded by subjecting the conduct of states toinvestor-state arbitration. They do not, however, takethe next step and seek to create obligations for foreigninvestors

A canon of investor rights has emerged from existingIIAs. They include a parallel to the non-discrimina-tion approach that has served the trade regime well,that is “national treatment,” “most-favoured-nationtreatment” and dispute settlement. This approach,however, fails to adequately recognize the differencesbetween the relatively straightforward trade contextand the web of relationships created by an investmentto the host community and to multiple levels of gov-ernment. As a result, the emerging experience withthe North American Free Trade Agreement (NAFTA)and with several bilateral treaty arbitrations where thisapproach has been put into practice, has indicatedthat, seen through the prism of investor-state dispute

settlement, none of these provisions is without prob-lems.16

Other key investor rights have also not been withoutproblems. The most critical of these have been theright to a minimum standard of treatment by hoststates and protection against expropriation withoutcompensation. The former is emerging, at least undersome arbitrations, as an international law standard oftransparency and good governance that is beingimposed on host states without any sense that thiswas the original intention based on the history of theprovisions in this area. The latter has now beenexpanded to include claims to compensation for reg-ulatory measures that impact the economic perform-ance of an investment. This issue is returned to morespecifically below.

To a significant degree these problems are attributableto lax drafting practices that many assumed wereappropriate for agreements between states, with theimplicit safeguard of sovereignty in the implementa-tion process. No such safeguards exist, however, in theinvestor-state dispute settlement process and lack ofprecision in drafting can lead directly to undesirableoutcomes.

From a developing country perspective, what seemsmore critical than the idea of investor rights is theability to generate sufficient clarity in the scope ofthese rights so as to ensure both the investor and thehost state have the capacity to function properly andwithout undue fear or burdens. That said, there is asignificant question as to the ability of any nationaltreatment obligation to operate without undulyrestricting developing country policy space to pro-mote development linkages from foreign investments.

Efforts to generate obligations, or at least responsibil-ities, for foreign investors have been made in the past,but have never succeeded in the way the creation ofinvestor rights have. One reason is that the affectedindividuals have made their views known unambigu-


13

7.Investor Rights and Obligations

16 Howard Mann, Private Rights, Public Problems. A Guide to the NAFTA’s Controversial Chapter on Investor Rights. Winnipeg, MB: IISD,2001. http://www.iisd.org/publications/publication.asp?pno=270.

ously and have acted forcefully to avoid the draftingof open-ended rules.

Negotiations on binding investor obligations havebeen extremely contentious. More than 20 years ago,the United Nations Conference on Trade andDevelopment (UNCTAD) attempted to undertakethis task through its United Nations Centre forTransnational Corporations (UNCTNC). Theattempt attracted the overwhelming resistance ofmajor transnational corporations and of the govern-ments of countries where they were domiciled, and itfailed amid recriminations.17 The UNCTNC wasshut down, a rare occurrence in international organi-zations, and UNCTAD’s work on internationalinvestment was stunted for many years.

The definition of less-than-binding investor obliga-tions has had a less contentious history. TheOrganisation for Economic Cooperation andDevelopment (OECD) elaborated Guidelines forMultinational Corporations that have been success-fully amended.18 A growing number of other volun-tary guidelines have been developed and, recently, theInternational Organization for Standardization (ISO)has begun to work towards the development of a stan-dard in this area. None of these statements of investorobligations have been linked successfully to any inter-national investment agreements.

Since the demise of UNCTNC, there have not beenany attempts to develop an approach to investor obli-gations that takes the needs and priorities of hostcountries as their explicit point of departure. In prac-tice, the challenge involves striking a proper balance

between binding and voluntary elements in such pro-visions. Binding obligations can provide minimumlevel protections for host states for such things asenvironmental assessments, human rights practices offoreign investors, anti-corruption requirements andperhaps other minimal standards increasingly seen ascritical from a sustainable development perspective.Voluntary elements can ensure that standards reflectactual business conditions and can evolve as what isgenerally accepted as good practice evolves.

None of the existing IIAs goes the obvious next step,namely to subject the conduct of investors to the rulesand disciplines of dispute settlement. This goal can beachieved by making the obligations included in anIIA subject to domestic law and hence enforceable indomestic courts; by permitting state-investor arbitra-tion; or by conditioning the access of investors toinvestor-state arbitration on a review of investor per-formance in relation to investor obligations, whichcan indeed be voluntary so as to ensure that they areappropriate to the size and nature of an investment.These obligations should also be sufficiently flexibleto adjust to the changing understanding of appropri-ate investor practices. Additional depth for investorresponsibilities can also come from the use of volun-tary systems of standard-setting that involve the inter-ested parties.

A further approach may be to ensure that investor per-formance with regard to a voluntary standard canbecome part of any investor-state (or state-investor) dis-pute settlement process. Investors may be given a choiceof voluntary codes to adhere to and may be required toidentify a code that they accept and the process bywhich their practices are being monitored, includingthe option of audits that report to corporate boards.

This is a debate that has not been pursued, leavingsignificant ambiguity concerning the expectations ofhost developing countries with respect to investorbehaviour. Addressing this side of the investor-hoststate relationship for inclusion in IIAs has been raisedexpressly by developing countries such as China,India and Brazil, and is an increasingly prominentissue for civil society.


14

17 UNCTNC, “Draft United Nations Code of Conduct on Transnational Corporations,” in United Nations Conference on Trade andDevelopment (UNCTAD), International Investment Agreements. A Compendium, vol. 1: Multilateral Instruments. New York: UnitedNations.

18 OECD, OECD Guidelines for Multinational Enterprises: Text, Commentaries and Clarifications. Paris: OECD, 2000.http://www.olis.oecd.org/olis/2000doc.nsf/LinkTo/daffe-ime(2000)20

Voluntary elements can ensure that standards reflect actual business conditions

and can evolve as what is generally accepted as good practice evolves.

Existing IIAs do not address home state rights andobligations. Yet home states are indubitably stake-holders when it comes to foreign direct investment.The interests of home states are largely determined bytheir desire to ensure the security of their investors,who will in many instances be exporting capital fromthe home state and repatriating profits.

The rights of home states revolve around measures theymay adopt to promote foreign investment and to helptheir investors manage the attendant risks, which aretypically related to the movement of capital and thesecurity of investments in the host state. This caninvolve investment promotion and various forms ofinsurance. While these can serve the interests of all par-ties—home state, host state and investor—it is essentialthat they be handled in a manner that is rules-based andtransparent, a task that IIAs can help to accomplish.

The obligations of home states are more difficult todefine. Home states may be expected to provide certaininformation, assist in combating corruption and ensurethat investor liability extends to the home state in anappropriate manner. An emerging problem is the use of“home states of convenience” by investors who have nosubstantial activity in those states, with the potential toundermine the effectiveness of IIAs in much the waythat flags of convenience render the control of shippingpractices particularly difficult. Each of these areas pres-ents challenges in terms of drafting and implementingIIAs that promote development in host states.

The problem of “home states of convenience” can beresolved by making the designation of a home state amatter of mutual agreement between investor and

host state, subject to certain principles that establishthat an investor must have a material relationship toa designated home state. Such an approach can bedecoupled from the legal, financial and tax consider-ations that frequently determine the place of incorpo-ration for certain investments. This approach permitsthe development of more substantive provisions con-cerning home state obligations.

Once it has been established that the investor has amaterial relationship with the home state it alsobecomes possible to draw on relevant informationthat may be available to home state authorities con-cerning the investor and his or her operations. This isnot a simple matter, since much relevant informationis dispersed among home state agencies and it isimperative to ensure that confidentiality is main-tained throughout. Nevertheless, the home state maybe able to provide important assistance to host statesconfronted with complex, technically demandinginvestments and lacking many resources that may berequired to deal with them appropriately.

The problems of corruption are widely recognized.Yet combating corruption that involves internationalinvestment is particularly challenging since it requirescommitment and effort on the part of all actors,investors, home states and host states. Home statesmay be needed to ensure, in particular, that investorspublish information on payments they make to pub-lic authorities or their agents in host countries, and tomake corruption by investors a criminal activity athome, even for acts taking place abroad.

Finally, home states have a role to play when theirinvestors incur liability in the host states throughactions that originated in the home state, or whenthose who are liable are out of reach of host stateauthorities without assistance from home states.

It is striking to note that from the perspective of sustain-able development, home states have a much more activeand important role than is generally recognized by IIAs,or even discussed in the literature. The simple conclusionfrom the perspective of a Southern agenda is that manyhost states cannot respond appropriately to investmentopportunities without the help of home states.


15

8.Home State Rights

and Obligations

Home states may be expected to providecertain information, assist in combating

corruption and ensure that investor liabilityextends to the home state in an

appropriate manner.

Dispute settlement is a key institution for implemen-tation of trade agreements, ensuring that the unilateralinterpretation of the multilateral rules by each party issubject to review—and possible dispute—by all oth-ers. Dispute settlement in trade law is an exclusivelystate-state process.

Investment agreements are implemented in an entirelydifferent manner. The primary, though not the only,relationship for implementation is between the hoststate and the investor; hence state-state dispute settle-ment is unlikely to play a major role in the imple-mentation of IIAs. This has led to the introduction ofthe investor-state dispute settlement process in IIAs.

International dispute settlement was originallydesigned to resolve specific instances of conflictbetween states and between private parties. It was notdesigned for disputes between private parties andstates that require much more elaborate proceduralsafeguards to protect the rights of both parties. It wasnot designed to create a body of interpretation thatcould shift the balance of rights and obligations ofparties to an agreement or of those affected by it. Theabsence of stare decisis, that is the assumption that nodispute would prejudice the handling of other dis-putes, was an essential tool in limiting the functionsof dispute settlement. Absent stare decisis, there wasalso no need to establish an independent internationaljudiciary, to ensure that decisions were publicly avail-able, or to foster a culture of analysis and discussionto ensure that mistakes could be identified and ulti-mately corrected. Yet investment dispute settlementhas now embarked on a course that effectively assignsdispute panels an active role in implementation andinterpretation without any of the institutions of goodgovernance that are essential to such an undertakingin other jurisdictions.

For many years, there were not many investor-statedisputes (or at least few became known, since therewas, and is, no publicly available source to monitor allsuch disputes). Investor-state dispute settlement didnot attract much attention, but then neither did IIAs.Problems with investor-state dispute settlement haveonly emerged since investment agreements became a

contentious issue about 10 years ago. These problemsconcern less the principle of investor-state disputes—which reflects the problem structure of IIAs in a com-pelling manner—than the appropriateness of theinstitutions involved and whether the text of IIAsprovide sufficient guidance to the dispute settlementprocess to ensure that it does not lead to unacceptableresults. By now the number and seriousness of theconcerns about investor-state dispute settlement areso significant that they fester like an open wound.Fortunately, there are solutions to most of these con-cerns. Central to any Southern agenda on investmentis a requirement to ensure that the approach to dis-pute settlement is fully revisited.

There is no compelling reason why review of aninvestor’s claims against a state cannot be undertakenby the institutions of the state in question—providedthese are independent of the public authority that isin dispute and discharge their duties in accordancewith basic principles of good governance, includingan independent judiciary. This is the approach out-lined in GATS Article VI on domestic regulation ofservices. International investor-state dispute settle-ment is only needed when this process fails and aninvestor suffers serious damage without adequaterecourse.

Unfortunately, there is little indication in the texts ofIIAs that negotiators have acted with prudence topromote better domestic dispute settlement in thehost state or to ensure that international processes


16

9.Dispute Settlement

By now the number and seriousness of theconcerns about investor-state dispute settlement are so significant that they fester like an open wound. Fortunately

there are solutions to most of these concerns.

respect basic principles of good governance. Theresult has been that the vagaries of investor-state dis-pute settlement have become such that prudentadministrators may now avoid the most legitimate ofactions to minimize the chances of being caught up insuch a dispute, a phenomenon known as regulatorychill. This highly undesirable outcome is the result ofIIAs that have only addressed a limited part of theagenda associated with international investment andthat are inadequately drafted; and of shortcomings ofdispute settlement institutions. No agreement that failsto confront these problems comprehensively can beexpected to address the needs of developing countries.

The shortcomings in drafting described earlier in rela-tion to the articulation of investor rights are com-pounded by the inadequacies of the arrangements fordispute settlement. Existing dispute settlement insti-tutions were not designed to address complex issuesof public policy that now routinely come into play ininvestor-state disputes. They were created at a timewhen there was little international investment, fewinternational investment agreements and scant dis-cussion of what the appropriate rules for a globalizedeconomy might look like. Indeed, the concept ofglobalization itself had not yet been articulated. It is,consequently, hardly surprising that the investor-state

dispute settlement process is characterized by a lack oftransparency and suffers from structural conflicts ofinterest. In response to criticism, some modestchanges have occurred in some of the available dis-pute settlement institutions. Disputes filed with theInternational Centre for the Settlement of InvestmentDisputes (ICSID), which is closely linked to theWorld Bank, are now listed on a publicly availableregister. An arbitral panel (operating under rules ofthe United Nations Commission on InternationalTrade Law, UNCITRAL) has accepted amicus curiaebriefs. And arguments in some cases have been madein public. This is at best a beginning.

Solutions to the issues of dispute settlement are avail-able. They include more transparency; selection ofarbitrators in a neutral manner rather than by the par-ties; proper deference to domestic dispute settlementprocedures; clear separation of the functions of arbi-trator and advocate; and the introduction of an appel-late process. Most of these changes by now appearinescapable. The precise manner in which these stepsare taken must be the outcome of analysis, debate andproper negotiations, in which developing countriesparticipate.

These issues far transcend the needs of a Southernagenda on investment, reflecting matters that shouldbe of concern to all governments. Yet developingcountry host states are more affected by them thanany other actors in the investment process by the sim-ple fact of the number of arbitration claims they face,and will continue to face into the future. While theseproblems need to be addressed in the interests ofeverybody concerned with governance of the globaleconomy, they are of overriding concern for develop-ing countries.


17

Existing dispute settlement institutionswere not designed to address complex

issues of public policy that now routinelycome into play in investor-state disputes.

It is important to identify the anticipated results ofany international agreement that deals with invest-ment. Otherwise there is no standard against whichto assess its effectiveness. And it is necessary to mon-itor actual outcomes in light of projected results.

Economic theory indicates that liberalization of tradewill generate benefits almost automatically althoughit says nothing about the distribution of these bene-fits. No similar conclusions apply to either the liber-alization of investment or the introduction of newrules to promote investment or to ensure adequateinternational governance of investment. Indeed, mostexisting investment agreements are characterized by asubstantial degree of uncertainty concerning theirpractical consequences. It is, consequently, essential tomonitor international investments and the impact ofIIAs to ensure that lessons can be learned from experi-ence in a timely manner and to identify further stepsthat can be taken to improve effectiveness. It is strikingthat the single most important factor among the manyeconomic drivers of globalization—investment—hasno single international institutional focal point.

Most current information on international invest-ment is quantitative. International investment flows

and stocks have been assessed regularly for manyyears.19 Yet qualitative information is exceedinglyhard to come by, in particular qualitative informationthat is systematic and covers most countries. Indeed,there is not even much agreement on the criteria toapply in gathering such information. The place tostart is the articulation of widely accepted, carefullynegotiated purposes for international investmentagreements.

Monitoring the results of investment agreementsrequires an institutional and organizational frame-work that is capable of undertaking such a task—andthat is subject to the same principles of governance asinvestment, that is it is legitimate, transparent andaccountable. In practice this implies robust institu-tional means and an organizational structure thatreflects the needs of all actors in international invest-ment. While it is possible to identify some of the nec-essary elements of such an institutional framework forinternational investment—and existing internationalorganizations such as the United Nations Conferenceon Trade and Development and the World Bank pro-vide some elements—its final shape must be theproduct of careful negotiation.


18

10.Monitoring Results

19 Annual reports on investment are published by UNCTAD and by some of the UN regional commissions.

It is difficult to overstate the uncertainties associatedwith governance for international investment, in par-ticular when the primary focus is the development ofa Southern agenda. All governance concerning invest-ment must originate at the national level. Hence thefirst priority is to find ways to strengthen nationalinvestment governance.

The relationships among investment actors at theinternational level are poorly developed. These rela-tionships need to be explored over time and theappropriate institutional responses must be identi-fied. The ultimate goal is a robust, legitimate, trans-parent and accountable system of international gover-nance for investment that takes full account of thedevelopment priorities of developing countries. Thiscan only be the result of a process that extends over aperiod of years and is constructed to permit learningand adjustment as greater understanding of the spe-cific requirements is developed. The principal task ofan international agreement on investment thatreflects the needs of sustainable development is con-sequently to articulate the general principles that areto apply, to put in place an initial set of measures andto establish procedures that permit the dynamicadjustment of the regime over time.

IIAs are constructed like trade agreements on theassumption that they are largely self-executing andthat their benefits are automatic. Yet investment pro-motion, a frequently articulated goal of IIAs, let alonethe promotion of sustainable investments, requires agreater degree of institutional capacity, and must besupported by funding.

Investment involves case-by-case decisions forinvestors as well as public authorities. While someinvestments occur in accordance with well-estab-lished practices and consequently require little or nodiscretionary action, other investments engender longand complex decision-making processes for investorand host state. The institutional capabilities of bothparties—and the ability to take into considerationadditional concerns of other stakeholders—are ofcritical importance. While most of these institutionswill be domestically based, some may involve other

countries in regional cooperation, and some mayengage international organizations in a variety ofways, including the World Bank and theInternational Finance Corporation (IFC). IIAs mustcontribute to institutional development and theproper functioning of these processes, and not onlyby means of dispute settlement when one partybelieves they have gone wrong.

The institutional needs for this purpose at the inter-national level are not all currently known. Some havebeen developed by the World Bank Group but nowneed to better reflect the interests of all countries con-cerned than the governance structure of the WorldBank will ever permit. Some can be derived fromexisting models, in particular in the areas of trade pol-icy and international environmental management.Some will need to be developed step by step as needsare recognized and institutions are fitted to theseneeds. The implications for IIAs are relatively clear:they must have the flexibility to respond to new insti-tutional needs as they arise.

The broader question of funding in support of invest-ment (in particular foreign investment) to countriesthat currently receive less than might be expected inlight of their needs and the prevailing conditions,poses numerous dilemmas. Again, the World BankGroup has long played a role in this area, but the needto repay World Bank loans renders them less suited toinstitutional development and capacity building,since neither activity is liable to generate a revenuestream capable of amortizing a loan. The ability of theInternational Finance Corporation (IFC) to partici-


19

11.Institutions and Funding for

Investment Agreements

The institutional capabilities of both parties—and the ability to take into

consideration additional concerns of otherstakeholders—are of critical importance.

pate in investments—and to hold equity stakes—rep-resents one important avenue for improving the abil-ity of least developed countries to attract investment.Yet the crucial issues of institutional development andcapacity building remain unresolved, in addition tothe issues surrounding World Bank governance.

A robust international regime for investment needs tobe able to generate funds to support institutional

development, to undertake capacity building and toimprove key factors that may influence investmentdecisions. These funds must be governed in an equi-table manner by all the countries that participate in aparticular regime, reflecting both the ability to pro-vide capital and some criteria of need.20


20

20 The governance structure of the Global Environment Facility, which requires double majorities for formal decisions, may offer usefullessons.

Existing IIAs have not been designed to meet thedevelopment needs of developing countries, let aloneto promote sustainable development globally. To pur-sue these goals, future investment agreements willneed to exhibit a number of critical characteristics:

• Recognize that an investment agreement is fun-damentally about good governance to ensure thatinvestor rights and public goods are protected ina manner that is legitimate, transparent andaccountable.

• Apply basic standards of good governance to theinternational agreement itself.

• Establish a clear purpose or objective for theinternational agreement: to create an approach tointernational investment that respects the aspira-tions of developing countries and promotes globalsustainable development.

• Contain clear provisions that balance investorrights with investor obligations, and with hostand home state rights and obligations.

• Set out specific proposals to fix what is currentlya broken investor-state dispute settlement sys-tem.

• Include an approach to investor obligations thatstrikes a balance between voluntary and bindingelements.

• Provide an institutional framework that ensuresmonitoring of its progress as an instrument ofdevelopment, promoting learning from its errorsand creating a foundation for future improve-ments.

Investment is central to any attempt to promote sus-tainable development. It is hard to conceive of a globaleconomy without a robust, creative and transparentset of rules for investment. A bold new approach willset an agenda to improve the international investmentclimate and to advance sustainable development, giv-ing greater certainty to investors faced with demandsfrom many stakeholders and rewarding companiesthat already follow good practice.


21

12.Conclusions

About the Authors

Konrad von Moltke works on international environ-mental relations. Recently his work has focussed onenvironmental policy and international economicrelations: debt, trade and development. He has con-tributed to developing the agenda on trade and envi-ronment at global and regional levels. He is a SeniorFellow at World Wildlife Fund in Washington, D.C.,Adjunct Professor of Environmental Studies andSenior Fellow of the Institute on InternationalEnvironmental Governance at Dartmouth Collegeand Visiting Professor of Environmental Studies atthe Free University, Amsterdam. From 1989 to 1998,he edited International Environmental Affairs, a jour-nal for research and policy.

Dr. von Moltke studied mathematics at DartmouthCollege (Bachelor of Arts, 1964) and medieval histo-ry at the University of Munich and the University ofGöttingen (PhD, 1970). He taught at the StateUniversity of New York/Buffalo where he was also amember of the administration, concerned with thedevelopment of interdisciplinary undergraduate pro-grams. Six new programs were established during histerm as Director of the Collegiate System, includingan environmental studies college.

From 1972 to 1984, Dr. von Moltke lived in Europewhere he developed American Studies curriculummaterials and was active in founding a number of pri-vate European policy-oriented institutions in theEuropean Cultural Foundation (Amsterdam).Between 1976 and 1984, he was founding Directorof the Institute for European Environmental Policy(Bonn, Paris, London), a private institution devotedto the analysis of policy alternatives for Europeanenvironmental problems.

Dr. von Moltke is a citizen of the Federal Republic ofGermany and lives in Norwich, VT, and Paris. He haspublished extensively on medieval history, compara-tive education and curriculum development, andinternational environmental policy.

Howard Mann is a practising international lawyer inOttawa, Canada, and the Senior International LawAdvisor to IISD. Dr. Mann has a PhD in interna-tional law from the London School of Economics,and was a negotiator of several international environ-mental agreements for Canada prior to becoming aprivate sector lawyer and joining the IISD team.

Dr. Mann specializes in international sustainabledevelopment law, with a particular focus on interna-tional trade, investment and environmental law andlegal policy. He is widely published in these areas, andis a frequent participant at international conferences.Dr. Mann has sat on two special advisory committeeson international investment law and trade law to theGovernment of Canada, and is frequently calledupon to assist different international governmentaland non-governmental organizations on the develop-ment of international economic law from a sustain-able development perspective. His legal analysis ofNAFTA’s investment chapter from a sustainabledevelopment perspective remains a leading publica-tion in this field.

More information on Howard Mann can be found athis private practice site at http://www.howardmann.ca.


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IISD's Southern Agenda on Investment is one of, if not the first, deliberate effort tolook at how to approach international investment negotiations based on an agendathat takes the priorities of developing countries as its starting point. Existing inter-national investment agreements are based on a 50-year-old model that remainsfocussed on the interests of investors from developed countries.

This paper identifies major issues of concern for developing countries that are vitalfrom the perspective of sustainable development but that are not being addressedin the current negotiating processes, beginning with the very need for investment tosupport development goals. When these issues are identified, it becomes clear that,although there are more than 2,000 international investment agreements that havebeen signed, they address but a small proportion of the issues that require attentionif international investment is to promote sustainable development.

In practice, international investment agreements are now about governance forglobalization, but they fall far short of the standards one can expect for such a legalstructure. The Southern Agenda on Investment seeks to begin a dialogue on a dif-ferent approach, one focussed on the needs of the vast majority of people on theplanet. It is an agenda—and a dialogue—that must involve more actors, cover moreissues and be better at balancing the interests of investors; host states and local com-munities; and home states.

A Southern Agenda on Investment?

a southern agenda on investment? - iisd€¦ · articulate a southern agenda on investment that is...

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