Investment facilitation: what might we be led into?

Talks on investment facilitation have started in the World Trade Organisation (WTO) and India, after initial opposition, is modifying its stand. WTO members, however, need to be clear about the possible repercussions of the proposed agreement.

The existing Trade Facilitation Agreement (TFA) for the goods sector and the proposed Agreement on Trade Facilitation in Services (ATFS) have been drafted with the purpose of ensuring that the substantive obligations undertaken by members under the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS) for trade liberalisation are not bypassed by procedural bottlenecks. In fact, the existing TFA and the proposed ATFS are meant largely to explain and amplify the existing obligations for trade facilitation under GATT and GATS and to impart clarity and certainty.

The story, in the case of investment facilitation, however, is the other way around. An agreement under the WTO is being proposed to facilitate investment even though members have not agreed on an Investment Agreement (IA) under the WTO which would outline their substantive obligations with regard to foreign investment. It is, therefore, strange to have an Agreement on Investment Facilitation when members are not yet under any obligation to provide market access to foreign investors.

An IA broadly has three parts. The first part deals with the definitions; the second and substantive part generally deals with protection of foreign investment, which may include specific obligations relating to procedural impediments also; and the third part deals with dispute settlement and ancillary matters. The proposed Investment Facilitation Agreement (IFA) aims at a new idea — an agreement only on procedural matters relating to investment, specifically excluding the part relating to protection of foreign investment or market access. Let us see whether this is feasible and whether what is being proposed would actually remain only a ‘facilitation’ agreement.

Substantive obligations

Can we have a Multilateral Investment Facilitation Agreement without a Multilateral Agreement on Investment (MAI)? In my opinion, it might create a number of ambiguities and result in substantive obligations being imposed through the backdoor, creating discontent. The exclusion of the dispute settlement clause would not help much because while investor-State dispute settlement can remain in the domestic jurisdiction of the members as proposed, ultimately a member may be required to defend its regulations and decisions of domestic tribunals and courts before the WTO Panel and Appellate Body, as happens in trade remedy cases.

There is a possibility that the otherwise procedural and facilitative norms under the investment facilitation proposals may impose substantive obligations also. First of all, some of the proposals themselves have substantive obligation. For example, Brazil’s proposal includes most favoured nation (MFN) treatment obligation. Although it is expected to be confined to only investment facilitation measures, it extends to all ‘investors and their investments’. Apart from MFN, another substantive obligation covered under the proposals is corporate social responsibility which, in all possibility, would be dropped if the proposed agreement becomes a reality.

In the White Industries case, India was found to be in violation of MFN obligation because it did not provide speedy remedy to the foreign investor for enforcement of foreign award. It may be a matter of dispute in similar cases, whether the issue involved a substantive obligation or a procedural one, which can be covered under the term investment facilitation. Similarly, a set of cases may involve tax matters because tax laws are never free from ambiguity. There may be a lot of gap between drafting of tax laws and their interpretation by the respective courts.

The Vodafone case shows that two courts may give different interpretations to the same legal provision. In the shrinking capacity of the government to tax, it may be debatable whether a government is justified in amending its tax laws with retrospective effect in the wake of a decision based on a technical meaning of the words given by the courts but not possibly expected by the legislators. Under the present laws of bilateral investment treaties (BITs), it may be contested by foreign investors as violation of a number of clauses such as ‘fair and equitable treatment’, ‘full protection and security’, ‘indirect expropriation,’ etc., but under the proposed agreement, this may be considered regulatory unpredictability and hence violative of trade facilitation norms.

In fact, there are a number of cases under IAs in which countries were held liable for violation of investor protection norms for procedural reasons. A few examples are Tecmed vs Mexico, involving refusal of permit without proper notice to the claimant; Pope Talbot vs Canada, in which verification review for tax purposes was held to be confrontational and aggressive; Metalclad vs Mexico, where claimant was not properly advised about the legal requirements for initiating, completing and successful operation of the investment. Many issues in these cases were procedural in nature and were held to be violation of substantive rights of the investors under the BITs.

There are, therefore, chances that through the IFA, substantive obligations relating to investor protection may be imposed on WTO members. The list of substantive rights and obligation under BITs is no longer limited only to expropriation and compensation. It is an expanding list and the frontiers of each of the protections given to investors are also expanding. It is a matter of further discussion whether MAI is desirable or not and whether it should be concluded under WTO, but an investment facilitation agreement in the absence of MAI requires a lot of deliberation and care before it is finalised and members can never be too sure about what they are entering into.

(The writer is Professor of Law, National Law University, Odisha)