UNCTAD tomorrow launches a new initiative aimed at helping members of the Group of Fifteen (G-15)(1) developing countries strengthen investment cooperation among themselves. Together with the G-15 Technical Support Facility and the UNDP Special Unit for Technical Cooperation among Developing Countries, the UNCTAD secretariat is hosting a meeting of chief negotiators of interested members of the G-15 to negotiate bilateral investment treaties (BITs) between themselves. The negotiations will take place in Glion-sur-Montreux, Switzerland, from 8 to 14 January 1999.
So far, seven G-15 countries have confirmed their intention to participate and negotiate BITs among themselves. These are Egypt, India, Indonesia, Jamaica, Malaysia, Sri Lanka and Zimbabwe.
The conclusion of BITs was one of the policy measures identified by G-15 Heads of State and Government at their Seventh Summit Meeting in Kuala Lumpur, Malaysia, in November 1997, to enhance South-South cooperation over foreign direct investment (FDI) and promote FDI flows amongst developing countries. Total outward FDI stock of G-15 countries grew at an annual average rate of 17 per cent between 1995-96, and was estimated at US$44 billion in 1996. Despite this steady increase, FDI flows between G-15 countries have been relatively modest and there is considerable scope for enhancement. By comparison, total FDI outward stock in 1996 stood at US$3,178 bilion.
By concluding BITs, signatory countries send a strong signal of their commitment to providing a favourable investment climate. Says Ambassador Anthony Hill of Jamaica, Chairperson of the G-15 Personal Representatives: "The conclusion of BITs will facilitate FDI between member countries of the G-15, in the mutual interest of promoting our development."
According to UNCTAD´s Secretary-General, Mr. Rubens Ricupero: "One of the main attractions of this format for negotiating BITs is that it gives developing countries the opportunity to share negotiating experiences. If successful, this type of exercise can be replicated and involve more developing countries". UNCTAD believes that bringing negotiators together in a place where they can concentrate on the task at hand allows for economies of scale and capacity-building. Actual negotiations, combined with the possibility of exchanging information among negotiators and benefitting from the advice of resource persons provided by UNCTAD, helps to further the negotiating capacity of the participating countries.
Coinciding with the start of the G-15 negotiations, UNCTAD has issued a new publication Bilateral Investment Treaties in the Mid-1990s (317 pages).(2) Bilateral investment treaties are the single most important instrument governing investment relations between States. As this new study shows, their number has increased exponentially over the past 40 years. Increasingly, these agreements have been accepted around the world as a framework to provide for stability and reliability in bilateral investment relations. The role of BITs as instruments of international investment cooperation is further emphasized by the fact that there is no comprehensive mutilateral investment agreement to regulate investment relations.
The new UNCTAD study pays special attention to how BITs address development concerns, examining what can be done to increase their potential as policy instruments to advance the development of developing countries. A central question addressed is whether BITs have had an impact on attracting investment flows. While an analysis of FDI flows between signatory countries shows that the influence of BITs on FDI is, in fact, weak, BITs are nevertheless increasingly regarded by foreign investors as an expected component of a country´s investment environment. In many cases, they have become a sine qua non for the availability of political-risk insurance. An international comparison of FDI determinants leads to the overall conclusion that other determinants of FDI flows such as the size of the host country´s market are more decisive than BITs in influencing FDI flows. But as countries around the world compete for FDI as part of their development efforts, all other conditions being equal, the presence of a BIT can help tilt the balance in investors´ locational decisions.
The BITs explosion
The study examines the role of BITs as instruments of international investment policy. It also highlights a number of significant developments that have taken place during the 1990s. Above all, the number of BITs concluded has risen dramatically. More than two-thirds of the 1,513 treaties signed by the end of 1997 came into existence in this decade (figure 1). In 1997 alone, 153 BITs were concluded -- approximate one every two-and-a-half days.
Apart from the increase in the total number of BITs, a considerable number of additional countries have chosen to sign such treaties. The number of countries that have concluded BITs has now reached 167.
Most significantly, the number of BITs concluded between developing countries themselves, and between these countries and economies in transition, has also risen substantially during the 1990s. In 1997 alone, over a quarter (27 per cent) of the treaties concluded that year were between developing countries (figure 2). Originally concluded overwhelmingly between developed and developing countries to provide additional legal guarantees to investors operating in host developing countries, as the latter become more important outward investors increasingly nowdays such treaties are also concluded between developing countries.
Similarities and differences among BITs
It is unusual to find two BITs that are identical in every respect. They often represent a package of mutual advantages in which acceptance of one provision is balanced with concessions in another provision. Still, an important characteristic of BITs remains that, even though they vary considerably in terms of the specific formulations they employ, in terms of the broad principles they address they cover most of the same ground. The core provisions common to the vast majority of BITs are:
- The definition of investment is broad and open-ended so that it can accommodate new forms of foreign investment; it includes tangible and intangible assets and generally applies to existing as well as new investments.
- The entry and establishment of investment is encouraged, although it is typically subject to nationa l laws and regulations (the great majority of BITs does not grant a right of establishment).
- Most treaties provide for "fair and equitable" treatment, often qualified by more specific standards, such as those prohibiting arbitrary or discriminatory measures or prescribing a duty to observe commitments concerning investment.
- Most treaties now grant "national" treatment, although the principle is often subject to qualifications (to take into account the different characteristics between national and foreign firms) as well as exceptions (mainly industry and sector specific, or related to policy measures such as incentives and taxation).
- Guarantees of "most favoured nation" treatment, subject to some standard exceptions, are virtually universal.
- Virtually all BITs subject the right of the host country to expropriate corporate assets to the condition that it should be for a public purpose, be non-discriminatory, be in accordance with due process and be accompanied by compensation.
- A guarantee of the free transfer of payments related to an investment is common to many BITs, although it is often qualified by exceptions applied when the host country´s foreign currency reserves are at low levels.
- An investor-to-State dispute-settlement provision has become standard practice, with a growing numer of BITs providing the investor with a choice of mechanisms.
In addition, some BITs include one or several of the following:
- A requirement that the host country should ensure that investors have access to information on national laws.
- A prohibition on the imposition of performance requirements, such as local content, export conditions and employment requirements, as a precondition for the entry or operation of an investment.
- A commitment to permit or facilitate the entry and stay of foreign personnel in connection with the establishment and operation of an investment.
- A guarantee of national and MFN treatment on entry and establishment.
Some of the variations among BITs reflect the fact that they were negotiated at different periods of time. Treaties have tended to become more complex and sophisticated over time, so that any one country´s early BITs may differ noticeably from its later agreements. Also, because countries have monitored each other´s practice, innovations introduced by one country tend to find their way into BITs subsequently negotiated by other countries.
Recently signed BITs, even in those signed by the same countries, also vary considerably despite the growing convergence of FDI policies and approaches worldwide. This may be due, in part, to differences in the prototype treaties proposed by countries, which reveal preferences as to what individual countries would consider to be an ideal BIT. In each case the relative bargaining position of the BIT partners and their underlying strategies also play an important role in the formulation of the agreement.
Overall, the most significant differences in the formulation of substantive provisions among BITs are on the admission of investments, general standards of treatment (especially with respect to the scope and range of qualifications and exceptions to the standards of national and MFN treatment), standards for compensation upon nationalization, balance-of-payments exceptions regarding the transfer of funds, and, in the case of investor-to-State disputes, the requirement to exhaust local remedies.
The new UNCTAD study, which includes a number of models prepared by developed and developing countries, will be the main source of reference material during the coming week´s G-15 negotiations.
Funding for the meeting has been provided by the Government of Switzerland and the TCDC Unit of UNDP.