Formulating a New Generation of Investment Policies (Speaking points) James Zhan Director, Investment and Enterprise, UNCTAD

Transcription

1 South Africa s International Obligations in Terms of Investment Portfolio Committee on Trade and Industry Parliament of the Republic of South Africa (Cape Town, 25 August 2015) Formulating a New Generation of Investment Policies (Speaking points) James Zhan Director, Investment and Enterprise, UNCTAD Introduction Thank you for invitation. It is a great pleasure to speak about an issue that is at the core of UNCTAD s function (and dear to my heart). Maximizing the role of investment for sustainable development is a key challenge for every country, including South Africa. It is timely at the time when investment policymaking worldwide is at the crossroads. Outline of presentation 1. Global context: recent developments in investment rule making 2. FDI in South Africa s economy: trends and significance 3. Regulatory framework for foreign investment: a new generation 4. Comments on South Africa s Investment Bill 5. Three aspects beyond protection: openness, facilitation and coherence 6. Concluding remarks The key messages of my presentation: Let me highlight the five key messages at the beginning of the presentation. 1. The investment paradigm is shifting towards investment for sustainable development and inclusive growth. A new generation of investment policy is emerging in the global policy landscape, including through IIA reforms worldwide. 1

2 2. Foreign investment plays an important role in South Africa s economy and there is great potential for more, and more can be done. Attracting quality investment and maximizing its contribution to sustainable development requires a holistic approach, addressing three sets of determinants: economic, policy and business facilitation. 3. A modern regulatory framework for investment needs to effectively deal with three dimensions: protection, openness and facilitation. It should balance the rights and obligations of investors and States. 4. The current version of the Investment Bill represents an important step towards a new generation investment policy framework for South Africa. The Bill is timely and can play a critical role in filling an international investment policy gap, ensure coherence between national legislation and international commitments, clarifying some key issues. In the long-term, it may serve as guideline for negotiating future international commitments. 5. Beyond the scope of the current Bill, further work is important to strengthen the dimensions of investment facilitation and policy coherence of the regulatory framework. Investment facilitation and policy coherence are important means to ensure that investment policy is in line with the country s overall development strategy. 1 Global context: recent developments in international investment rule making a) Recent developments in international investment rule making Let us start with current trends in international investment. 2

3 The current international investment regime is multilayered, multi-faceted and highly fragmented. It now consists of close to 3,300 treaties, at the bilateral, regional, sub-regional and plurilateral level. In recent years, the trend has shifted from bilateral to regional investment policymaking. Over 100 countries are involved in the negotiation of at least 53 IIAs, including megaregional ones. The five ongoing efforts in the TPP, TTIP, RCEP, Tripartite and PACER Plus negotiations involve close to 90 countries. Generally speaking, almost all countries are party to one or more investment treaties, but hardly anyone is satisfied with the current investment regime. Over time, these IIAs have given rise to more than 600 investor-state dispute settlement cases. A number of ISDS claims concerned sustainable development sectors such as infrastructure and climate-change mitigation, including, in particular, the supply of electricity, gas and water, port modernization, and the regulation of renewable energy. Measures challenged. In 2014, for example, the two types of State conduct most frequently challenged by investors were (i) cancellations or alleged violations of contracts or concessions, and (ii) revocation or denial of licenses or permits. Other challenged measures included legislative reforms in the renewable energy sector, alleged discrimination against foreign investors relative to domestic ones, alleged direct expropriations of investments, alleged failure on the part of the 3

4 host State to enforce its own legislation and alleged failure to protect investments, as well as measures related to taxation, regulation of exports, bankruptcy proceedings and water tariff regulation. Some of the new cases concern public policies, including environmental issues, anti-money laundering and taxation. Amounts claimed. Information regarding the amounts sought by investors is scant. For cases where this information has been reported, the amount claimed ranges from $8 million to about $2.5 billion. Outcomes of the cases: Looking only at the decisions on the merits, 60 per cent were decided in favour of the investor, and 40 per cent in favour of the State. b) The investment paradigm is shifting towards sustainable development The investment-development paradigm is shifting towards investment for sustainable development and inclusive growth. This is in response to the growing unease with the current functioning of the global IIA regime, today s sustainable development imperatives and the evolution of the investment landscape. In fact, past years have seen heated debates at national, regional and global levels about the role and impact of the IIA regime, in particular ISDS. As evident from UNCTAD s October 2014 World Investment Forum (WIF), from stakeholder engagements in many countries, and from various parliamentary hearing processes, a shared view is emerging on the need for reform of the IIA regime to make it work for all stakeholders. The question is not about whether to reform or not, but about the what, how and extent of such a reform. Today, new IIAs are increasingly featuring objectives of sustainable development and inclusive growth, and seeking to strike a balance between the rights and obligations of investors and States. Regarding the 3,000 old treaties, the IIA regime is going through a period of reflection, review and revision. In 2014, at least 50 countries and regions reviewed and revised their IIA models. Brazil, India, Norway and the European Union published novel approaches. South Africa and Indonesia continued their treaty terminations, while formulating new IIA strategies. In light of the above, UNCTAD has formulated a new Investment Policy Framework that guides investment policymaking in this new era and has proposed a roadmap for reforming the existing international investment regime. 4

5 To sum up, the investment paradigm is shifting towards investment for sustainable development and inclusive growth. A new generation of investment policy is emerging in the global policy landscape, including through IIA reforms worldwide. 2 FDI in South Africa s economy: trends and significance a) Global FDI trends Global FDI flows declined in They fell by 16 per cent to $1.2 trillion, mostly because of the fragility of the global economy, policy uncertainty for investors and elevated geopolitical risks. New investments were also offset by some large divestments. FDI flows to developing economies reached their highest level ever, increasing by 2 per cent, to $681 billion. Developing economies now attract 55 per cent of global FDI. The low level of flows to developed countries persisted in The overall FDI flows to this group of economies declined by 28 per cent to $499 billion, partly due to some large project divestment. 5

6 b) Trends in FDI flows to South Africa FDI inflows in South Africa have been lumpy annually but with an increase over the longer time. On an annual basis, investment flows to South Africa increased in 2013 (from $4.6 bn to $8.3 bn), but was again sharply down in 2014 to $5.7 bn. South Africa is a significant recipient of FDI among developing economies it ranked 14 th in terms of stock. Globally, it ranks at 33, bearing in mind that a number of developing countries are among the world s largest recipients of FDI. There is a potential for South Africa to attract more. 6

7 c) Patterns and significance of FDI: origin, industry, capital formation The United Kingdom remains a key source of FDI. Other significant investors include the Netherlands, Germany and the United States. Investment from emerging markets, especially China, India and Malaysia is growing strongly. Over the past decade, South Africa s stock of manufacturing FDI (17 per cent) has shrunk relative to services FDI. By 2013, finance alone accounted for the major portion of its inward FDI stock at 40 per cent. Extractive industries accounted for 28 per cent. Banking, telecommunications, tourism, real estate, mining and manufacturing are attractive sectors. Greenfield FDI projects were in motor vehicles, pharmaceuticals, food processing, information technology and beverages. 7

8 FDI is an important contributor to South Africa s capital formation. The share of FDI stock in GDP was as high as 40 per cent as of FDI has a strong positive impact in South Africa, especially in key sectors such as automotive, telecoms, banking and mining, and has played a key role in boosting exports, facilitating growth and creating employment. FDI provides capital, allows for the transfer of technology and skills, and links South Africa to the global economy. Foreign investment plays an important role in South Africa s economy, especially in terms of R&D expenditures, value added and wages and salaries. Its share in the country s total R&D expenditures, total value added and total wages and salaries is 36%, 21% and 20% respectively. The share of employment (9.6%) is above the average of developing economies (7.9%). South Africa s unemployment rate of 25% is high and promoting investment can help address unemployment challenges. 8

9 With a relatively low savings rate, foreign investment is important to help fuel growth. Indeed, foreign investment can potentially play a bigger role in South Africa s economic growth and development. However, it is important to mention that the contribution of FDI to development is multifaceted, with its impacts both positive and negative that cannot easily be quantified. In conclusion, foreign investment has been playing an important role in South Africa s economy. There is great potential for more, and more can be done. Attracting quality investment and maximizing its contribution to sustainable development requires a holistic approach, addressing three sets of determinants: economic, policy and business facilitation. 3 Regulatory framework for foreign investment: a new generation a) FDI determinants Existing research and policy analysis suggest that FDI flows are influenced by a wide range of factors. In UNCTAD we call these factors investment determinants. There are three types of determinants: economic determinants, policy determinants, facilitation determinants Economic determinants differ according to the main motive of an investor: Market-seeking FDI, resource/asset-seeking FDI, or efficiency-seeking FDI. The policy framework for FDI comprises all host-country policy areas that may be relevant to a foreign investor. They vary from country to country. The core 9

10 components of FDI policy include access, protection and facilitation. But it is important to note here that IIAs are only one element within the overall policy framework. While they are part of the policy framework explicitly targeting FDI issues, other policy areas may be equally, if not even more critical for a foreign company s investment decision. Finally, business facilitation measures may tilt the balance in favour of a location once other preconditions are met. In conclusion, policy is one set of the key determinants for attracting investment, and IIAs are only one aspect of this set of determinants. Countries like South Africa also need to pay attention to the economic and investment facilitation dimensions of these determinants when pursuing investment for sustainable development strategies. b) UNCTAD s Investment Policy Framework (2015 version) In 2012 UNCTAD launched its Investment Policy Framework for Sustainable Development. Its Core Principles were endorsed at the 2012 World Investment Forum in Doha. Several high profile launch events were held, including in South Africa (Johannesburg) with H.E. Rob Davies in attendance. Since its launch, it has been used extensively and has helped shape national and international investment policymaking: In UNCTAD's technical assistance, for example the IPFSD is used as a basis for IPRs. 10

11 It is also referenced in UNCTAD's intergovernmental machinery (e.g. it acted as a point of converge in international debates, such as the World Investment Forum, the Trade and Development Board, and IIA Conferences). And it is used by countries, regional and inter-governmental organizations, think tanks, and civil society. Pertinent regional blocs that have used it include the EU and SADC. South Africa has also referenced it with the revision of its investment policy. All of the Framework's elements are guided by the core principles, which offer a set of "design criteria" for investment policies. The core principles are not rules per se, but they guide overall policy action. We will discuss them in more detail in a moment, and also have a look at how they are reflected in the South African Bill. 11

12 Before that, let us have a brief look at three key "content" elements of all investment policymaking: c) Protection, access (establishment) and facilitation It is important that a country s approach towards investment policy encompasses all three areas. They are embodied in the UNCTAD Investment Policy Framework, and as we will see they are also embodied in the country's approach. In sum, a modern regulatory framework for investment needs to effectively deal with three dimensions: protection, openness and facilitation. It should also balance the rights and obligations of investors and States. 4 Comments on South Africa s Investment Bill 12

13 As far as the current version of the Investment Bill, which focuses on the protection dimension, is concerned, I would like to share with you a few general comments. The Bill in general reflects the current thinking and global trends in international investment rule making, including the shift of the investment-development paradigm. A number of the elements therein can also be found in the latest revisions of the national laws and treaty models of other developed and developing countries. The Bill is also in line with the Core Principles for Investment Policymaking advocated by UNCTAD. It reflects the gist of new generation investment policies. It seeks to balance the rights and obligations of firms and the State. It addresses the five key concerns of the IIA regime identified by UNCTAD. o With regard to investment dispute settlement, it is worth noting that the Bill also introduces specific mechanisms for dispute prevention, which is becoming a novel feature in investment policymaking. o We also took note of an important and sensitive development regarding the resolution of investment disputes: the Bill opts for the exhaustion of domestic remedies, followed by State-to-State dispute settlement. Indeed, this is one option that has been intensively discussed at various forums in the context of the reform of the IIA regime. In the 2015 World Investment Report, we have an in-depth analysis on the pros and cons regarding this issue. It is important that policymakers and lawmakers are aware of this pros and cons analysis. Should parliamentarians be interested in discussing these pros and cons, I would be happy to elaborate in the question & answer time of my presentation. In the absence of IIAs with some important investment source countries, and in light of the BITs termination with some others, the Investment Bill can play an important role in filling an international investment policy gap. If IIAs remain an international investment policy option for South Africa (be it to pursue BITs for compelling reasons ), for investment chapters in FTAs/RTAs, or for regional integration purposes in the context of Africa as well as South-South cooperation), the Bill may serve as a guideline for negotiating future international commitments. The Bill itself is an effective means to ensure coherence and synergy between national and international investment policies in South Africa and between investment policies on the one hand and other public policies on the other. 13

14 Beyond the scope of the current Bill, there may be a need and room to further strengthen the investment facilitation and promotion dimension of the regulatory framework to ensure that the country attracts quality FDI and maximizes the benefits for sustainable development. All of that brings us to the question of what is the principal function of investment treaties? To use an analogy: Investment protection treaties are perceived by investors as a safety belt in the car or a life boat on a cruise. It is like an insurance policy to put investors in a comfort zone to operate, even though they do not guarantee investment flows. They may tilt the balance of the risk/return profile, particularly in governance-weak countries, compensating for some domestic regulatory weaknesses. However, investment flows are determined on the basis of three sets of determinants encompassing a wide range of factors. At the same time, countries have to protect themselves against IIAs that bite, which is one of the key lessons learnt from the six decades of international investment policymaking, worldwide. In that sense, the Bill marks the important step towards the right balance and trade-off between protection of investors/investment on the one hand, and preserving the right to regulate on the other. To sum up, the current version of the Investment Bill represents an important step towards a new generation investment policy framework for South Africa. It is timely and reflects some new international good practice in investment policymaking. The Bill can play a critical role in filling an international investment policy gap, ensure coherence between national legislation and international commitments, clarifying some key issues. In the long-term, it may serve as guideline for negotiating international commitments. 5 Three aspects beyond protection : openness, facilitation and coherence There are three other key aspects that are beyond the ambit of the current Bill, but that are crucial to address, they are: openness, investment facilitation and policy coherence. a) Openess/Access Openness can also be referred to as market access for foreign investment, investment liberalization, or establishment of (foreign) enterprises. 14

15 A welcoming investment climate, with transparent and predictable entry condition and procedures are a precondition for attracting foreign investment conducive to sustainable development. Two key issues arise. First, liberalization needs to be in line with national development strategies and sustainable development goals. Second, liberalization should be properly sequenced, taking into account sensitive issues and sectors, such as public services. These two points reflect that countries may have the legitimate right to regulate the entry of foreign investment. In complex situations, it may also involve trade-offs between various development objectives. In the UNCTAD Policy Framework for Sustainable Development, we highlight different ways and means, including their pros and cons, for each and every option of managing openness and liberalization. Furthermore, the term openness is not limited to formal openness as expressed in a country s investment framework, and possibly in its entry rights granted in IIAs, but it also relates to informal investment barriers, such as burdensome and non-transparent administrative procedures. This leads us to the second key element, which is investment facilitation and promotion. b) Investment facilitation Alleviating constraints in the policy framework of host countries may not be sufficient to trigger private investment in target sectors. Potential investors may still hesitate to 15

16 invest, because they consider the overall risk-return ratio as unfavorable. Investment facilitation efforts can help overcome these investor hesitations. Investment facilitation in broader terms can cover pro-active investment promotion such as targeting and after care services in the post initial investment period. In most of the existing investment treaties investment facilitation and promotion are absent or weak, even though they are frequently called investment promotion and protection agreements. More recent treaties start paying attention to this issue. Some countries and regions even have a focused approach. Brazil, for example, has re-oriented its IIAs towards investment facilitation, even calling them Cooperation and Facilitation Investment Agreements. This is pursued through three main features: (i) the improvement of institutional governance, with the establishment of Focal Points and of a Joint Committee; (ii) the identification of ongoing agendas for investment cooperation and facilitation; and (iii) the creation of mechanisms for risk mitigation and dispute prevention. APEC intensified its efforts recently on connectivity and efficiency and infrastructure development, in addition to its efforts of voluntary liberalization and protection. In the WIR 2014, UNCTAD proposed Six Action Packages the so-called big push for investment in achieving the sustainable development goals and inclusive growth: a new generation of investment promotion and facilitation a reorientation of investment incentives regional SDG investment compacts new forms of partnerships for SDG investment enabling a re-orientation of financial markets changing the global business mindset c) Policy coherence and interaction Policy coherence recognizes that investment is a means to an end, and that investment policy should be integrated in an overarching development strategy. Policy coherence acknowledges that success in attracting and benefiting from investment depends not only on investment policy strictu sensu (i.e. entry and establishment, treatment and protection, facilitation and promotion) but on a 16

17 host of investment-related policy areas ranging from tax to trade to environment and labour market policy. It recognizes that these policy areas interact with each other and that there is a need for a coherent overall approach to make them conducive to sustainable development. The same considerations apply with respect to the interaction between national investment policies and international investment rule making. In summary, beyond the scope of the current Bill, further work is important to strengthen the dimensions of investment facilitation and policy coherence of the regulatory framework. Investment facilitation and policy coherence are important means to ensure that investment policy is in line with the country s overall development strategy. 6 Concluding remarks Allow me to recapitulate the five key messages, as already highlighted at the beginning of my presentation. 1. The investment paradigm is shifting towards investment for sustainable development and inclusive growth. A new generation of investment policy is emerging in the global policy landscape, including through IIA reforms worldwide. 2. Foreign investment plays an important role in South Africa s economy and there is great potential for more, and more can be done. Attracting quality investment and maximizing its contribution to sustainable development requires a holistic approach, addressing three sets of determinants: economic, policy and business facilitation. 3. A modern regulatory framework for investment needs to effectively deal with three dimensions: protection, openness and facilitation. It should balance the rights and obligations of investors and States. 4. The current version of the Investment Bill represents an important step towards a new generation investment policy framework for South Africa. The Bill is timely and can play a critical role in filling an international investment policy gap, ensure coherence between national legislation and international commitments, clarifying some key issues. In the long-term, it may serve as guideline for negotiating future international commitments. 17

18 5. Beyond the scope of the current Bill, further work is important to strengthen the dimensions of investment facilitation and policy coherence of the regulatory framework. Investment facilitation and policy coherence are important means to ensure that investment policy is in line with the country s overall development strategy. Cooperation between South Africa and UNCTAD I wish to thank you again for this opportunity to participate in the discussion on South Africa s investment policy approach. In fact, it is our job to provide ahead of the curve research and analysis, technical assistance to over 150 developing countries. We offer a full package of technical assistance services, which include Investment Policy Reviews, capacity-building on IIA formulation and negotiations, as well as investment promotion and facilitation, and which we supplied as requested by governments. 18