2.5 International commitments
To reduce uncertainty about national political decisions, governments can commit to international treaties. International investment law, an area emerging since the 1950s, is now in focus again, in light of ever-increasing global connectivity and cross-border capital flows. The longer an investment is committed to, the more important investment protection becomes – which is why international investment agreements (IIAs) are of such relevance for infrastructure assets.
International investment agreements
IIAs define the terms and conditions for private investment in a given country by nationals and companies of another country. Here, the most common form of IIA is the bilateral investment treaty (BIT), signed between a country where potential investments take place and the home country of potential investors. More than 2,000 BITs are in force as of 2014 and, on average, one to two new treaties are being signed every week. Increasingly, investment provisions are also being included in multilateral treaties, such as free trade agreements (FTAs), economic partnerships, regional agreements and double-taxation treaties.
The basic idea of all IIAs is to protect foreign investment from arbitrary governmental actions, by defining a standard set of investor-protection clauses and opening the way to international arbitration in the event of disputes (see Box 3). Purely domestic investment is not covered. Regarding the scope of protection, a balance has to be struck between the protection of investors from arbitrary decisions on the one hand, and the “policy space” of countries on the other; that is, on their freedom to enact and change regulation according to national requirements and priorities.
For an impression of current arbitration cases, see Figure 11. The set of BITs is by far the most common legal basis for cases, with the European Energy Charter Treaty of importance too. Infrastructure-related industries account for 40% of cases – which is not surprising, given the large volume and long duration of many contracts for such projects.
BOX 3: Protection Clauses in Bilateral Investment Treaties (BITs)
Though differing in their details, most BITs share the following clauses:
- Absolute protection: including protection from unlawful expropriation, the right to fair and equitable treatment, full protection and security, and free transfer of funds.
- Relative protection: including national treatment (foreign investors treated equally to local investors) and most-favoured-nation treatment (treatment equal to that given to investors from a nation that otherwise would be more favoured).
- Dispute resolution: providing for international arbitration (for instance, at the ICSID forum) to settle disputes between investors and the host government. Typically, an arbitration tribunal comprises three members appointed as follows: one by the investor, one by the state, and one “neutrally”, according to the terms of the specific BIT. The tribunal members generally evaluate claims without regard to a country’s specific legislation.60
In addition to these protection standards, some BITs also specify various obligations for investors, as well as other provisions related to investment.61 Investment provisions in other international agreements (such as FTAs) typically include analogous clauses.
Figure 11: Newly Registered International Arbitration Cases 2013
1 North American Free Trade Agreement (NAFTA), Central American Free Trade Agreement, Moscow Convention for the Protection of Investors’ Rights.
Note: 57 cases in total (the total “by industry” includes 7 cases under UNCITRAL rules but administered at ICSID).
UNCITRAL = United Nations Commission on International Trade Law;
ICT = Information and communications technology.
Source: UNCTAD IIA issue notes; ICSID caseload statistics; BCG analysis
Macroeconomic and political stability, in conjunction with a large and growing GDP, is generally agreed to be a prerequisite for FDI. As for IIAs’ direct impact, however, the evidence is mixed. For many countries, IIAs complement other steps within a broader economic reform package, and the effects are difficult to differentiate.62 As a result, countries have taken different views about the advantageousness of IIAs. For example, Mexico currently has in place about 30 BITs and 10 FTAs with investment provisions. Over the last 20 years, FDI has been on average about $20 billion per year, while the “price tag” over the 20 years has been approximately $270 million (paid in 15 arbitration cases). Mexican officials feel that it has been well worth it: the balance is positive.63 Other countries have come to different conclusions, however, and argue that the IIA regime is in need of reform.64
Looking at the number of BITs in force shows huge differences between countries (see Figure 12). A number of them have very few BITs in force,65 and though investment treaties are by no means the only way to stimulate investment, those countries might consider extending their use of IIAs. In doing so, they could benefit from international best practices and the current debate on balanced treaties for sustainable development.
IIAs are widely regarded as an effective way of mitigating political & regulatory risk. Their shortcomings, however, are increasingly emphasized by policy-makers and the general public alike. Vigorous debate has revolved around some topics: for example, whether a broad interpretation of protection clauses will limit the policy space for sustainable development in developing countries inappropriately, and whether the current arbitration procedures really allow for unbiased and cost-effective rulings.
Recently, IIAs have had considerable media coverage in developed countries. This has been triggered by controversial claims, such as tobacco companies disputing anti-smoking policies, and the negotiation of major FTAs including the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada, and the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the United States. Clearly, methods are being developed for achieving effective and appropriately balanced BITs. The momentum has grown since a 2004 update of the US model treaty for BITs that introduced flexibility mechanisms such as national security exceptions and reservations.66 The 2012 United Nations Conference on Trade and Development (UNCTAD) Investment Policy Framework for Sustainable Development provides guidelines on how to negotiate sustainable-development-friendly treaties.67 Moreover, the B20 Infrastructure and Investment Taskforce 2014 promotes the development of a non-binding International Model Investment Treaty.68
Figure 12: Bilateral Investment Treaties by Country
Note: Data as of July 2014.
Source: UNCTAD Investment Policy Hub (September 2014)
In addition to those emerging standards, a number of international best practices have been identified, as a guide for countries that decide to negotiate or renegotiate an IIA.
- EXAMPLE: For a balanced contract – defining the scope and meaning of protection clauses with great precision and clarity: This approach is especially important for the fair and equitable treatment (FET) provision, which has become the most frequently invoked clause in disputes between investors and governments. The interpretation of this clause was sharpened by the North American Free Trade Agreement (NAFTA) in 1994 and again in 2001. FET was linked to the (well-defined) minimum standard of treatment of aliens under customary international law, and thereby prevented arbitration rulings from imposing undue limits on national government authorities. This standard was subsequently used in model BITs of the NAFTA parties and in further treaties.69
- EXAMPLE: For a sustainable investment-protection regime – reinforcing arbitration’s credibility: One aspect is transparency; in response to growing public concerns, the United Nations Commission on International Trade Law (UNCITRAL) has developed and adopted the UNCITRAL Transparency Rules for Arbitration, which now apply to new treaties signed after April 2014 (unless parties explicitly opt out). For example, the rules allow for public access to documents and hearings in arbitrations.70 Other aspects, in addition to transparency, are: the prevention of conflicts of interest for arbitrators (via a code of conduct,71 fee schedules or caps, and transparency on third-party financing); and encouraging fast and equitable proceedings at reasonable cost through, for instance, early dismissal of frivolous claims and the promotion of options for alternative dispute resolution.72
Transnational programme management for cross-border infrastructure projects
Transnational infrastructure projects are one way for countries to fulfil their ambition for regional integration. Such ventures are especially beneficial in regions with many small (and partly landlocked) countries, such as Africa, Europe and South-East Asia. Of course, transnational projects do carry additional political & regulatory risk, as several legislatures and administrations might be involved, potentially with incompatible political cycles and conflicting national agendas. Unilateral changes can affect the overall business case of projects, and international agreements might lack a competent supranational authority to enforce them.
To minimize the political & regulatory risks in this context, the various countries involved should adopt a comprehensive approach to transnational infrastructure programme management. The best practices in this regard are outlined in the 2014 World Economic Forum report, Managing Transnational Infrastructure Programmes in Africa – Challenges and Best Practices:
- Establish regional planning for the different infrastructure sectors, and align on delivery models; harmonize concession schemes
- Harmonize technical standards and regulation, and institutionalize cross-border collaboration via a special agency
- Achieve a balanced allocation of cost, benefit and risk across countries; for example, by including an arbitrator such as a regional development bank73
Examples of transnational infrastructure programmes include the Trans-European Transport Network, the Programme for Infrastructure Development in Africa (PIDA), and the Master Plan on ASEAN Connectivity.74