Reform of Investment Protection in Emerging Economies

Emerging economies are pressing for reforms in investment promotion and protection. Existing agreements are being terminated and renegotiated, new standards drafted. The objective is frequently to secure the state’s right to regulate.

International investment agreements (IIAs) send an important message to investors that the government of the country in which they are investing will comply with internationally agreed standards of protection. As such, they promote investment, particularly in countries characterized by significant political risks. By contributing to technology and knowledge transfer, foreign investment promotes economic development.

At the same time, many emerging economies are increasingly seeking to safeguard their right to regulate, in the process pursuing a range of different strategies: terminating or renegotiating existing IIAs, or preparing new model IIAs with reformed standards as the basis for negotiating new agreements. While a uniform modernization path is not discernible, many of the reforms draw upon the policy recommendations by the UNCTAD, which offers states assistance in modernizing their IIAs.

Brazil has published a model IIA configured more to promote than protect investments. The substantive provisions are vague. For example, it includes no provisions on indirect expropriation or fair and equitable treatment. An investment committee comprising representatives of the parties is charged with promoting investment. Given that the new IIA model lacks investor-state dispute settlement (ISDS), the committee also acts as mediator in investment disputes. Where the parties fail to agree, the model provides for state-to-state dispute settlement.

India has also revised its model IIA, among other things to prevent »treaty shopping«. In future, investors will be required to demonstrate »real and substantial business operations« in the country in question before acting under the provisions of its agreement with India. Arrangements concerning fair and equitable treatment are replaced by a section on fair treatment of investors that explicitly lists the state’s obligations. Moreover, investors must first exhaust national legal instances before launching an ISDS case.

Indonesia has begun the process of terminating its IIAs and is preparing a new model IIA. According to UNCTAD, Jakarta intends above all to revise the definition of investment. Portfolio investments will no longer be covered and investments should be more strongly orientated on their contribution to economic development. Moreover, the principle of national treatment is to be restricted in the interests of domestic small and medium-sized enterprises and companies involved in resource extraction. ISDS cases are to be admitted only with the consent of the investor’s home country.

South Africa has terminated its IIAs with a string of industrialized countries, including Germany, Austria, and Denmark. The South African government thus gives the risks of IIAs (such as restrictions on the right to regulate) greater weight than the potential benefits (for example increasing foreign direct investment). As an alternative, the South African government drafted a national investment promotion law, asserting that this would maintain a high level of protection. However, it remains unclear when the new law will come into force.