Investment facilitation for development or trouble?

Turkiye pulled out of the Investment Facilitation for Development (IFD) discussion at the WTO on Feb 1, 2023. More members will follow suit not just because of IFD's defective birth investment's negative mandate in line with the July 2004 General Council Decision, but for the implications of the Investor-State Dispute Settlement (ISDS) mechanism from International Investment Agreements (IIA).

Germany, Spain, France, Netherlands, and Italy pulled out of the Energy Charter Treaty last year to stave off the ISDS mechanism. So far, 30 of the 53 members of the Energy Charter have faced 150 ISDS disputes.

The provision of the ISDS in IIAs has been controversial across countries as governments faced unpleasant experiences. The ISDS disputes are also costly, incurring an estimated average of $6 million for each party. Several efforts are underway to find alternative dispute-resolution methods in newer IIAs, including in IFD, which has opted for WTO's dispute mechanism.

However, in reality, the signatories of IFD cannot escape ISDS's clutches if they have already signed some IIAs. This linkage and the interplay of IIAs and the IFD are unambiguous.    

Risks and rewards of joining IFD

Facilitations help investors in the application process, but investment decisions are market-driven and based on destination countries' political, policy and regulatory stability.

There is no evidence to show any correlation between investment facilitation and development or investment inflows. The current discourse of IFD is just an assumption.

The current literature on the impact of signing IIAs on investment flows is not encouraging either. Some studies have shown no correlation, and others have indicated limited influence. Despite states giving protection and legal assurances in IIAs, there is no conclusive evidence that IIAs have directly helped investment flows

On the contrary, despite excluding the ISDS mechanism from the scope of the IFD text, the risks to the states continue. The following paras briefly explain some of these risks.

Relationship with international investment treaties

Proponents of the IFD have tried to build a firewall between the IFD and the ISDS mechanism of the IIAs.

Article 4 of the current version of the IFD text (16 Dec 2022) reads that members will not use IIAs to interpret this text, and this agreement shall not serve as a means to interpret any provision of an IIA of a member and shall not be used as the basis for a claim or in any way by a claimant under the procedures for the resolution of investment disputes between investors and States provided for in an IIA of a member.

The former is reasonable, as parties to IFD can agree to certain restraints, but the latter is untenable, as such restrictions cannot be imposed on parties that are not its signatories. Even IFD members with IIAs cannot honour this commitment unless they have such a restraint in their respective IIAs.

Further, in the unlikely event that some members do amend their IIAs to address the issue, it is still not enough, as disputes in the ISDS are brought against the states by private investors.

Interpretation of the IFD by the ISDS tribunals will have severe implications considering the commitments in IFD are expansive and include measures pertaining to the pre-investment stage. So, a country that has signed the IFD and an IIA could face an ISDS dispute even before any investment flows into its territory!

Fair and equitable treatment (FET) and legitimate expectations

Among others, in the IIAs, the states commit to non-expropriation (direct and indirect) of investments, non-discrimination between two foreign investments and foreign and domestic investments, and to treat all investments fairly and equitably.

One FET standard element is 'legitimate expectations'. According to international investment law, states are responsible for ensuring stability and predictability under legitimate expectations.

States create legitimate expectations through various means, such as public announcements and statements by authorities and by signing MoUs, agreements, and treaties. Countries signing the IFD create such a legitimate expectation for their existing and potential investors, and non-implementation of some or even one element of the IFD is fertile ground for ISDS dispute.

According to UNCTAD's ISDS monitor, out of the total 722 ISDS cases for which data is available, a staggering 86 per cent of the disputes allege a breach of legitimate expectations under FET.

Most favoured nation

This Most Favoured Nation (MFN) article of IIAs can potentially turn the IFD on its head and suck all the IFD commitments into its domain.

In the investment sphere, there is no multilateral agreement. Countries have entered into bilateral treaties. Suppose a host country liberalises its FDI ceilings for one of its bilateral treaty partners, it then has to extend the same benefit to the investors of other countries with whom it has investment treaties.

The MFN application extends beyond FDI caps to the other commitments in the other IIAs. In other words, if a host country has agreed to provide 'full protection and security' and 'national treatment' standards with one country and not with a second country, then an investor of the second country invoking a dispute under the second treaty can import the commitment of the first treaty using the MFN article. Tribunals have passed orders with this interpretation to the detriment of host states.

Thus, an MFN article in one IIA of any host country is a window for disputing investors to import all investment-related commitments of the host country from across the board.

Dispute resolution under IFD

The current IFD text ascribes itself to the WTO's Dispute Settlement Understanding (DSU). If IFD is not multilateralised into WTO as a plurilateral, it can replicate the WTO's DSU mechanism. But the challenge in case of disputes would then be how to operationalise retaliation and compensation awards.

Whether the dispute-winning country retaliates by removing it's IFD measures or by using the goods tariff. Would such an award and action be WTO-consistent?  

Development or market access

Other than in the title, there is no indication in the agreement of how investment facilitation measures help development. But the obligation of the state to provide information, as per Articles 5 & 9, is pre-investment market access, especially the obligation to announce the policy details to the investors even before they are adopted, including justification and rationale for considering such measures.  

Further, the terms 'investment' and 'investor' are still not defined. If the investment is open and asset-based, then the portfolio investments can come into the country and fly by night without contributing to the development through FDI.

India is not a party to IFD discussions. India also terminated its 83 BIT Agreements in 2015. The latest news is that the EU, as a block, is actively considering pulling out of the Energy Charter to save itself from the ISDS and to preserve its policy space.

Considering the link between IFD and ISDS, should the developing countries sign the IFD and, in the bargain, cede their policy space and also import the ills of the ISDS mechanism or avoid the trouble and attract investments using UNCTAD's Global Action plan for investment facilitation without treaty bindings.  

The author is the Counsellor, Permanent Mission of India to WTO. Views are personal.