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Investment Policy Blog

There is a pressing need for systematic reform of the International Investment Agreement (IIA) regime. As is evident from the heated public debate and parliamentary hearing processes in many countries and regions, a shared view is emerging on the need for reform of the IIA regime to ensure that it works for all stakeholders. By now, IIA reform has become a “must”. Today, the question is not about whether to reform, but about the what, how and extent of such reform.

One recent example showing how the debate on IIA reform has evolved is the recent European Parliament resolution on the negotiations for the Transatlantic Trade and Investment Partnership (TTIP). Adopted on 8 July 2015, the resolution contains a number of recommendations to the European Commission. With regard to investment protection provisions in the TTIP, the European Parliament recommends, among others, that standards of protection and definitions should be drafted “in a precise legal manner protecting the right to regulate in the public interest”. The resolution further recommends “to replace the ISDS system with a new system for resolving disputes between investors and states which is subject to democratic principles and scrutiny, where potential cases are treated in a transparent manner by publicly appointed, independent professional judges in public hearings and which includes an appellate mechanism, where consistency of judicial decisions is ensured, the jurisdiction of courts of the EU and of the Member States is respected, and where private interests cannot undermine public policy objectives”.

This year’s World investment Report (WIR) responds to the reform actions emerging at different policy levels and the global debates on the future of the international investment regime. Building on UNCTAD’s earlier work in this area, the WIR 2015 offers an action menu for IIA reform.

The Report tackles five key challenges in international investment policymaking:

  1. safeguarding the right to regulate for pursuing sustainable development objectives,
  2. reforming investment dispute settlement,
  3. promoting and facilitating investment,
  4. ensuring responsible investment, and
  5. enhancing systemic consistency.

The Report offers policy options to address these challenges in key areas of IIA reform, i.e. substantive IIA clauses, investment dispute settlement, and systemic issues. It also offers actions for reform-oriented policymaking at the national, bilateral, regional and multilateral levels.

UNCTAD presents the following policy options for meeting the five main challenges (see table IV.3). Most of these policy options relate to the standard elements found in an IIA.

  • Safeguarding the right to regulate: Options include clarifying or circumscribing provisions such as most-favoured-nation (MFN) treatment, fair and equitable treatment (FET), and indirect expropriation, and including exceptions.
  • Reforming investment dispute settlement: Options include (i) reforming the existing mechanism for investor-State dispute settlement (ISDS) while keeping its basic structure, or (ii) replacing existing ISDS arbitration systems, which could include either: (1) the creation of a standing international investment court; (2) State-State dispute settlement; and/or (3) reliance on domestic judicial systems of the host State.
  • Promoting and facilitating investment: Options include adding inward and outward investment promotion provisions (i.e. host- and home-country measures), and joint and regional investment promotion provisions, including an ombudsperson for investment facilitation.
  • Ensuring responsible investment: Options include establishing provisions on investor responsibilities, such as clauses on compliance with domestic laws and on corporate social responsibility.
  • Enhancing systemic consistency of the IIA regime: Options include improving the coherence of the IIA regime, consolidating and streamlining the IIA network, managing the interaction between IIAs and other bodies of international law, and linking IIA reform to the domestic policy agenda.

Some of these reform options can be combined and tailored to meet several reform objectives. On the whole, policymakers need to find the right balance, meeting reform needs, while maintaining the investment protection rationale of IIAs.

An issue that is at the heart of the IIA reform debate is investor-State dispute settlement. A number of countries – and regions – have been reassessing their positions on ISDS and have already adopted certain reform measures. Also the European Parliament’s resolution makes concrete recommendations on this issue by suggesting “to replace the ISDS system with a new system for resolving disputes between investors and states”. In light of today’s public discourse, and the criticism of the existing system, maintaining the status quo is hardly an option. Several of the policy options set out in UNCTAD’s WIR 2015 can help reform ISDS or replace it (see table IV.6).

Options that aim at reforming existing ISDS mechanisms while keeping their basic structure could be the inclusion in IIAs of new provisions designed to (i) improve the arbitral process; (ii) refine investors’ access to investment arbitration; (iii) establish filters for channelling sensitive cases to State-State dispute settlement; and (iv) introduce local litigation requirements. To complement the existing investor-State arbitration mechanism, new elements can be added, for example by introducing an appeals facility and building in effective alternative dispute resolution. These elements can be combined with the above-mentioned reform options for ISDS.

There is also the option of replacing the existing ISDS systems with other mechanisms for settling investment disputes. Potential replacements include the creation of a single institutional structure, a standing investment court with judges appointed or elected by States on a permanent basis; the court could also have an appeals chamber. Other options could be the exclusive reliance on State-State dispute settlement or on domestic dispute resolution.

Whatever option countries prefer, they need to bear in mind three challenges: (1) what is needed is comprehensive reform, applying not only to ISDS but also to the substantive IIA provisions; (2) reform steps ideally should not only apply to future treaties, but also address the stock of existing IIAs; and (3) IIA reform is not enough – domestic capacity-building is needed for improving developing countries’ administrative and judicial capacities (a prerequisite for some of the reform options suggested in the WIR).

By presenting reform approaches, guidelines, tools, solutions, and a road map for the reform process, this WIR offers an action menu for IIA reform. It pulls together a variety of contributions that have been put forward in recent years, by UNCTAD and many others, on aspects of IIA reform. It invites countries to use this action menu and define their own road maps for IIA reform: countries can pick and choose, and adapt and adopt, various reform actions and options to formulate their own reform packages, in line with their national development strategies and specific circumstances.

At the same time, IIA and ISDS reform are global challenges and there is therefore, at the global level, a need for a holistic approach to reforming the regime in a systematic and comprehensive manner. An effective support structure is important to achieve this. The outcome document of the Third International Conference on Financing for Development (FfD) has entrusted UNCTAD to play a lead role to facilitate such a global endeavour. It calls upon UNCTAD to continue its work on investment agreements, including meetings and consultations with Member States (see para. 91 of the FfD outcome document).

Overall, IIA reform – at all levels – should be guided by the goals of harnessing IIAs for sustainable and inclusive growth, and determining the most effective means to safeguard the right to regulate while providing protection and facilitation of investment (see table IV.8). The reform should focus on critical areas, include actions at all levels, take a systematic and sequential approach, ensure inclusiveness and transparency, and make use of multilateral support structures – such as the one provided by UNCTAD.

To continue the debate in the international investment and development community on the future direction of the IIA regime, we invite stakeholders to provide comments online on the investment policy hub. Please feel free to address one or several of the following three questions:

  • How should IIA reform proceed at the global level?
  • What could be the proper sequencing for actions at all levels?
  • How can international organizations such as UNCTAD facilitate the reforms at national, bilateral and regional levels?

I look forward to reading from you and to engaging with you on this important matter.

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