Presentation on the World Investment Report 2015, with special emphasis on international investment agreements and investor-state dispute settlement reform
24 June 2015
Cecilia Malmström, EU Trade Commissioner
Bernd Lange, INTA Chair,
Christofer Fjellner, Member of the European Parliament,
Ladies and Gentlemen,
Good afternoon and thank you for your invitation.
It is my great pleasure to be with you today and present some key issues in the 2015 edition of the World Investment Report. The Report was officially launched today, actually just half an hour ago, by Secretary-General Kityi at the ACP Ministerial meeting, also in Brussels. So this is truly the fastest follow-up discussion on a flagship report that UNCTAD has ever done. In fact, to my knowledge, it is the first time ever that UNCTAD co-hosts a seminar on one of its flagships with the Europan Commission and European Parliament. And I would like to sincerely thank both for making this possible.
But, to be frank, this is not by accident. This year, in its 25th edition, the World Investment Report looks at the timely issue of Reforming International Investment Governance.
In particular, the report focuses on two very important, but also complex and politically sensitive, topics:
Options for reforming the international investment agreements, including investor-state dispute settlement clauses, and
Improving coherence between international tax and FDI policies, particularly with respect to how tax avoidance impacts developing countries.
Both topics are the object of intense discussions and reform efforts in the international community, as well as within the EU. And, in my humble opinion, the manner that the EU handles these two areas of reform effort - more specifically, what position this Parliament will take - will have far reaching consequences for international investment governance, for the reform efforts of other countries and especially poorer developing countries.
My presentation today will focus on suggestions of reforms of IIAs and ISDS, based on our report, which is also the focus of this seminar. But before going into detail on this topic, the co-hosts have agreed that I spend a few minutes on touching upon the main global trends in FDI flows and also providing some highlights of our main findings on FDI and its relationship with tax avoidance by multinational corporations in developing countries.
FDI TRENDS
Let me start with FDI trends.
1) Global FDI flows reduced significantly but recovery is in sight.
They fell by 16 per cent to $1.2 trillion, due to the fragile global economy, investor uncertainty, and elevated geopolitical risks. BUT, the good news: We project global FDI inflows to grow to $1.4 trillion in 2015 and to $1.7 trillion by 2017.
Continued strong profitability and cash holdings by multinational enterprises signal ample "capacity to invest". Our business survey of over 1,000 top executives of large MNEs signals a rise of FDI flows in the coming years. Of course, economic and political risks may yet disrupt this recovery.
This is a positive outlook and we need to profit from it. Massive investment is needed to foster development, especially in the context of the forthcoming sustainable development goals. And FDI remains the main source of external financing for developing countries.
FDI can make a difference for development, but we need to ensure it goes to the right places. And for this we need to be cautious that protectionist measures are not adopted.
2) The report confirms the tetonic shifts that have occured in the global investment landscape:
Developing Asia is now the largest source and destination of FDI.
More generally, while overall FDI flows to the developed economies declined by 28 per cent, FDI inflows to developing economies reached their highest level ever last year, at $681 billion - 200 bn more than to the developed world. Developing economies now account for 55% of global FDI inflows, and for 5 of the top 10 FDI recipients in the world. And China, for the first time in history, became the world's largest recipient of FDI. The United States is now only the third.
Moreover, developing economies now account for more than one third of global FDI outflows, up from 13% in 2007. This is remarkable. And developing Asia invests more than the European Union and and North America.
3) We need to remain vigilant to improve investment conditions:
Fortunately, according to the latest data on investment policy trends, countries' investment policy measures continued to be predominantly geared towards investment liberalization, promotion and facilitation.
In 2014, more than 80 per cent of new investment policy measures aimed to improve entry conditions and reduce restrictions.
However, we are still seeing also investment restrictions on the books of all countries, as well as new restrictive measures being adopted by some countries. In our report, we have identified that some EU member states also are in this category.
INTERNATIONAL TAX AND INVESTMENT POLICY COHERENCE
Let me stop here with the trends and go to the issue of Tax avoidance by MNEs and the role of investment policies.
This report highlights, and it is the first of its kind, the critical importance of investment as a vehicle for both tax contribution and for tax avoidance in developing countries. Thereby, the report addresses one of the root causes of tax avoidance. And it contributes directly to the global endeavor in combating tax avoidance, including in the EU, G20 and FfD. After all, all societies need to have a sound fiscal base to meet the expectations of its citizens.
MNEs make a significant contribution to developing country government budgets. Our Report estimates the fiscal contribution of foreign affiliates in developing countries at approximately $730 billion annually. This represents, on average, some 10 per cent of total government revenues. In the poorest countries, this contribution is even higher.
BUT: Tax avoidance practices of MNEs are also responsible for a significant leakage of development financing resources. An estimated $100 billion of annual tax revenue losses for developing countries is related to inward investment stocks directly linked to offshore hubs: Off shore hubs includes both tax havens, such as those in Caribbean, and Special Purpose Entities, particularly in European countries.
These offshore investment hubs play a systemic role in international investment flows: they are part of the global FDI financing infrastructure. Around 30% of all FDI flows pass through these hubs before reaching their destination as real investment. So the hubs work as lubricants for FDI flows globally, while at the same time offering private investors an opportunity for global tax planning.
The policy imperative is therefore clear: We need to take action against tax avoidance, and against unhealthy "race to the bottom" on taxes, while maintaining investment facilitation for sustainable development.
Today, anti-avoidance discussions at OECD and the G-20 pay only limited attention to investment policy. They also paid limited attention to developing countries, which are in a weaker position to tackle this problem. This report fills these important gaps.
REFORMING INTERNATIONAL INVESTMENT AGREEMENTS, INCLUDING INVESTOR-STATE DISPUTE SETTLEMENT CLAUSES
^I would like to turn now to the third and main part of my presentation: reforming international investment agreements, including investor-state dispute settlement clauses.
This subject has been lately a source of debate and controversy. As you are fully aware, ISDS threatens to become a serious bone of contention between European and US policy makers regarding the potential TTIP agreement. But my focus is not TTIP. As a matter of fact, it is becoming a bone of contention pretty much everywhere.
But controversy is not a factor that should deter us from addressing the issues that matter. And to address it with open eyes, taking into account the global context of investment policy and the full range of issues raised and concerns expressed, as well as in an inclusive and sustainable manner.
Let me start with the global context and the EU's citical role in this.
What we have today is a truly global regime for investment, but one based on a patchwork of bilateral and regional legal arrangement, NOT on multilateral rules. And the number of bilateral and regional investment agreements continues to grow. In 2014, thirty-one new IIAs were concluded. With the new agreements in 2014, the IIA universe consists of 3,271 treaties.
Today: The overwhelming majority of countries are party to at least one IIA, some even have signed over 100. Moreover, at least 53 IIAs, including mega regional ones are under negotiations, with the participation of over 100 countries.
In short, everyone has a stake in the IIA regime and everyone is using it. For many - if not most - countries, this is their main international tool to promote FDI, be it outflow or inflow. As such, these agreements have become an important vehicle for promoting jobs and building productive capacity, especially for developing countries.
The EU plays a critical role in this system. A few EU countries created this system, dating back to end of 1950s. Much of the historical evolution and growth of these IIAs was driven by EU countries, reflecting their role as critical investors globally. And the real boom in IIAs, which occurred in early 1990s, was a result of the historical achievement in Europe - the fall of the Berlin Wall and the end to Europe's tragic division in a Western and Eastern bloc. For the investment regime, this paved the way for a truly global recognition of the respect for private property. And still today, the EU and its Member States are party to 53% of the BITs in the world.
This leads me to our report's scond point: While practically everyone is part of the global IIA regime, and have a real stake in it, no one seems really satisfied with it. From UNCTAD's point of view, this leads to the unrefutable conclusion, namely that status quo is not an option.
We are truly at a cross-roads with the current IIA-regime.
In conclusion, where we are today, is not whether the global IIA-regime should be changed, but instead how and - more controversially - to what extent.
Some countries have responded to this reform need to up their game and moving quicker on concluding IIAs with incremental adjustments. Others have gone for bigger reforms while staying within the current system, and yet others have disengaged. At least 50 countries and regions were engaged in reviewing and revising their IIA models. For instance, Brazil, India, Norway and the European Union (EU) published novel approaches. South Africa and Indonesia continued their treaty terminations, while formulating new IIA strategies. I know this is fully recognized by the Commissioner and I would like to congratulate her and her team for facing head on the challenge ahead of us. And the EU is not alone. But others are moving very fast with their reforms. So, if anything, the EU is a late mover to this game.
The challenge is that this run the risk to only fragment the system further.
There is a pressing need for a systematic and holistic reform of the global IIA regime. This is also in the long-term interest of investors. And the World Investment Report offers a complete action menu for such a reform.
When talking about a potential reform to IIA, We, at UNCTAD, think that the reform should have five main objectives:
Safeguarding the right to regulate in the public interest to ensure that IIAs' limits on the sovereignty of States do not unduly constrain legitimate public policymaking.
Reforming investment dispute settlement to address the legitimacy crisis of the current system.
Both of these are also in the Commission's useful proposal. But, from a global perspective, we also highlight three additional elements of possible reforms:
Promoting and facilitating investment by effectively expanding this dimension in IIAs;
Ensuring responsible investment to maximize the positive impact of foreign investment and minimize its potential negative effects; and
Enhancing the systemic consistency of the IIA regime to overcome the gaps, overlaps and inconsistencies of the current system and to establish coherence in investment relationships.
We acknowledge that attaining these objectives in each specific context is challenging endeavour. This is why the WIR's action menu for IIA reform invites countries to define their own road maps for IIA reform. Countries can pick and choose the reform actions and options needed to formulate their own reform packages, in line with individual objectives. And I would be happy to go into further detail on each of these reform areas in our subsequent discussion (Q&A).
But the key message to you is this: we need a truly holistic approach to reform. This is not only about reviewing all different dimensions of the existing agreements, where we have presented our five categories of reform areas. But it is also about ensuring full engagement at all levels - national, bilateral, regional and multilateral levels. There needs to be full buy-in domestically of the reforms foreseen. The reforms have to be clearly linked, indeed integrated, with the overall national investment policies and objectives. The reforms have to be achieved in a contractual arrangement, be it bilateral or regional, which requires serious engagement with partners. Finally, we need to ensure that the current reform wave of the global IIA regime promotes multilateral convergence in approaches. No one can do these reforms alone.
And this is our strong plea to the EU: as the founder of this regime, as its promoter and as the predominant actor, you are perfectly placed - and indeed have a special responsibility - to ensure that such global convergence is achieved.
Many thank for your attention!
