IIAs for Effective Protection of Foreign Direct Investment

© fotolia/Stefan Welz

Comprehensive protection from political risks to foreign direct investment is of great importance to business. International Investment Agreements (IIAs) and investment chapters in free trade agreements (FTAs) offer such protection.

IIAs and investment chapters in FTAs offer protection against uncompensated direct and indirect expropriation, unfair and unreasonable treatment, and discrimination. If a state violates investors’ rights as laid down in the international agreement, the investor may seek redress through investor-state dispute settlement (ISDS). Since 2009, the European Commission has been responsible for IIAs. BDI would like to see a new IIA applying across the EU to ensure strong protections for investors.

FDI must be protected

In 2013, the stock of German direct investments abroad (FDI) amounted to €919 billion. The resulting foreign turnover (2013: €2.4 trillion) is more than double the value of German exports (2013: €1.1 trillion). Accumulated FDI in Germany was worth €458 billion in 2013. This international orientation strengthens competitiveness, secures employment in Germany, and generates growth and prosperity. It is therefore ever more important to comprehensively protect FDI in Germany and abroad. IIAs offer such protection.

What are IIAs?

IIAs are international agreements between two or more countries concluded to

  • grant foreign investors fair competitive opportunities,
  • protect investors’ property, and
  • offer foreign investors a means to assert their rights in the host country.

Most IIAs offer four central guarantees:

  1. Protection against discrimination: The parties agree to observe the prohibition on discrimination. Investors from the partner country must not be treated any worse than domestic investors (national treatment). Nor may investors from the partner countries be treated worse than investors from other countries (most favoured nation treatment, MFN).
  2. Protection against expropriation without compensation: The parties agree not to expropriate investors either directly or indirectly. Exceptions are permitted where the measure is proportionate to the public interest. In such a case, the expropriation must be non-discriminatory and transparent. It must also be proportionate and rapidly completed, and the investor must be suitably compensated
  3. Protection from unfair and unreasonable treatment: The parties agree to safeguard the investor’s justified expectations in relation to their investment. For example, treatment is not fair and reasonable if the investor is denied access to national legal channels or put under pressure politically, or government decisions are opaque.
  4. Guarantee of free movement of capital: The parties agree only to restrict movement of capital in specific cases. Investors must be able to transfer capital – such as interest, profits, or loan repayments – abroad at any time.

In most IIAs, the parties define which investors and which types of investment fall under the agreement. More recent IIAs also include clauses underlining the right of the state to take appropriate and proportionate regulatory action in the public interest, for example to protect health and the environment.

Most IIAs provide for investor-state dispute settlement to resolve disputes. The agreements specify which institution represents the forum for ISDS cases. One such recognized institution is the International Centre for Settlement of Investment Disputes (ICSID). The ICSID is headquartered in Washington, D.C., and is part of the World Bank group. In the event of violations in the destination country, an investor may take their case to dispute settlement before the ICSID. For each case, a tribunal of three judges is formed to hear the case and deliver a ruling. 

Germany has concluded 131 IIAs with other states, 129 of which are in force today. In 2009, the European Commission assumed responsibility for concluding new investment agreements. BDI wants future European IIAs to continue to guarantee adequate protection for German foreign investments. This must be implemented above all in the scope of the Transatlantic Trade and Investment Partnership (TTIP) with the United States and in the bilateral investment agreement with China.

In recent months, a controversial discussion has emerged over investment agreements, with criticism concentrating in particular on investor-state dispute settlement. However, such procedures are important in order to ensure adequate protections for investments abroad. Rather than categorically rejecting ISDS, it would be more constructive to improve existing procedures.

BDI positions

  • Improve transparency of ISDS procedures, for example by publishing documents.
  • Tighten concepts such as “indirect expropriation” and “fair and equitable treatment”.
  • Introduce protections against abusive actions.
  • Institute exceptions for regulation in the public interest.
  • Establish an appeals mechanism.

As well as implementing reforms in IIAs, it would be productive to anchor the principles for the protection of foreign direct investment and dispute settlement multilaterally.