Investment policy for sustainable development, UNCTAD proposes (September 2012)


Rethinking Bretton Woods | Mon, Sep 10, 2012

By Aldo Caliari

An assessment of UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD), a document that intends to serve as a comprehensive point of reference for policymakers formulating national and international investment policies.

UNCTAD has released its Investment Policy Framework for Sustainable Development (IPFSD), a document that intends to serve as a comprehensive point of reference for policymakers formulating national and international investment policies.

UNCTAD characterizes the IPFSD further by saying it:

–emphasizes the “relationship between foreign investment and sustainable development, advocating a balanced approach between the pursuit of purely economic growth objectives by means of investment liberalization and promotion, on the one hand, and the need to protect people and the environment, on the other hand,” and

–underscores the interests of developing countries in investment policymaking.

Those two claims will be taken as the standpoint from where to make the assessment that follows.

In a further characterization, UNCTAD says the IPFSD is a document that is neither a legally binding text nor a voluntary undertaking between States, but expert guidance by an international organization, leaving national policymakers free to “adapt and adopt” as appropriate.

The IPFSD comprises three parts: 1) a set of Core Principles for investment policymaking, 2) guidelines for national investment policies and 3) guidance for policymakers on how to engage in the international investment policy regime. It is designed as a “living document” and, consistent with this, an online version has been posted to establish an interactive, open-source platform for the exchange views, suggestions and experiences related to the IPFSD.[1]

According to UNCTAD, the IPFSD builds on the experience and lessons it and other organizations have learned and consolidates “good practices.” However, as shown below, when getting into the “international investment” guidance what the IPFSD provides is a set of options that range between two opposite ends of the spectrum, so it would be hard to predicate, at least of this portion of the IPFSD, that it is about “good practices.” (Without denying other merits of that portion, see Section IV).

In this analysis, Section I looks at the context and rationale of UNCTAD’s IPFSD, Section II focuses on the “Core Principles for investment policymaking.” Section III looks at the national investment policy guidelines and Section IV at the guidelines for international investment treaties negotiation.


  1. I.                    Context and rationale

Several factors are noticed by UNCTAD as changing the political and economic context of investment policy. In terms of the actors in FDI, UNCTAD says there is a growing role of emerging and developing countries as recipients of FDI – though it fails to mention that this continues to be heavily skewed in terms of countries to the so-called emerging markets and in terms of sectors towards natural resource-intensive industries.

Another factor is the decided trend by governments to regulate and steer the economy, instead of the hands-off approach that prevailed previously, with governments more focused on the quality –not only the quantity- of investment. The entrenched joblessness after the Great Recession of 2008-09 has led to governments looking for “the right types” of investment, the document also says.

A third factor the document mentions is that there are compelling reasons for improved international coordination to “keep protectionist tendencies and discriminatory treatment of foreign investors in check.”

UNCTAD presents the IPFSD as a response to a series of challenges in investment policy:

  1. To connect the investment policy framework to an overall development strategy or industrial development policy that works in the context of national economies.
  2. Ensure that investment supports sustainable development and inclusiveness objectives. Investment policy-making will focus increasingly on qualitative aspects and one aspect of this challenge is “finding the right balance between regulatory and private sector initiatives.”
  3. Ensure continued investment policy relevance and effectiveness: “With the greater role that governments are assuming in steering investment to support sustainable development objectives, and with the selective departure from an open and liberal approach to investment, comes greater responsibility on the part of policymakers to ensure the effectiveness of their measures, especially where such measures imply restrictions on the freedom of economic actors or outlays of public funds (e.g. in the case of incentives or the establishment of special economic zones).”
  4. To strengthen the development dimension of the international investment policy regime. In the policy debate this development dimension principally encompasses two aspects:

−−Policymakers in some countries, especially those seeking to implement industrial development strategies and targeted investment measures, have found that IIAs can unduly constrain national economic development policymaking.

−−Many policymakers have observed that IIAs are focused almost exclusively on protecting investors and do not do enough to promote investment for development.

  1. To adjust the balance between the rights and obligations of States and investors, making it more even. IIAs currently do not set out any obligations on the part of investors in return for the protection rights they are granted. Negotiators could consider including obligations for investors to comply with national laws of the host country. In addition, and parallel to the debate at the level of national policies, corporate responsibility initiatives, standards and guidelines for the behaviour of international investors increasingly shape the investment policy landscape. Such standards could serve as an indirect way to add the sustainable development dimension to the international investment policy landscape, although there are concerns among developing countries that they may also act as barriers to investment and trade.
  2. To resolve issues stemming from the increasing complexity of the international investment policy regime. Here the document refers to ambiguities in treaty interpretation by arbitral tribunals; onerous arbitration procedures and unpredictability of arbitration awards. Also, the “interconnect” between international investment policies and other policy areas such as trade, finance, competition or environmental (e.g. climate change) policies, is absent.


  1. II.                  Core Principles for Investment Policymaking

The Core Principles are defined by UNCTAD as not a set of rules per se, but the principles that the IPFSD attempts to convert collectively and individually into policy guidelines for national policymakers and negotiators of IIAs.

Their design, it says, is inspired in various sources of international law and politics. Among these, the most recent is the mandate emerging from the recent UNCTAD XIII Conference, which “recognized the role of FDI in the development process and called on countries to design policies aimed at enhancing the impact of foreign investment on sustainable development and inclusive growth, while underlining the importance of stable, predictable and enabling investment climates.”

However, some other sources go as far back as a decade. A surprising one is the use of Goal 8 (Target 12) of the Millennium Development Goals, which encourages “the further development of an open, rule-based, predictable, non-discriminatory trading and financial system.” Surely those most familiar with MDG advocacy will find this –literally correct—assertion a bit odd, as no targets were crafted for investment policy under the Goal 8. Even more odd is that UNCTAD says these concepts “equally apply to the investment system.” If there was any doubt, in 2003, proposals for extending the multilateral trading system to cover investment failed at the WTO Ministerial in Cancun.

It is not apparent that if governments had to express a consensus today, they would use the same language they used back then, in the light of UNCTAD’s own reckoning of the fact that the hands-off approach that prevailed at the time has been replaced by a more cautious view informed also by the lessons of the financial crisis that engulfed the world economy.

Several other international instruments relate to individual Core Principles. They comprise, in particular, the Universal Declaration of Human Rights and the UN Guiding Principles on Business and Human Rights, the Convention on the Establishment of the Multilateral Investment Guarantee Agency, the World Bank Guidelines on the Treatment of Foreign Direct Investment, the UN Global Compact, the OECD Guidelines for Multinational Enterprises and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, and several WTO-related agreements, including the GATS, the TRIMs Agreement and the Agreement on Government Procurement.

Principle 1 is probably the least susceptible of criticism, and in line with the main purpose of the IPFSD says “The overarching objective of investment policymaking is to promote investment for inclusive growth and sustainable development.”

Principle 2 is about Policy coherence: “Investment policies should be grounded in a country’s overall development strategy. All policies that impact on investment should be coherent and synergetic at both the national and international level.”

It is welcome that the need for policy coherence is recognized. However, the principle skirts the issue that contradictions often do happen – and will probably be a part of reality for the foreseeable future—and in those cases it is good to have some guiding norm for subordination – for instance, that in case of conflict it is the sustainable development and human rights commitments undertaken by a country that should prevail. Given that the primacy of human rights norms is not disputed at a normative level – based on Art. 103 of the UN Charter – UNCTAD would have been in safe ground making this recognition.

But it is fair to point out that, when dealing with options for crafting international investment agreements (IIAs) provisions, the IPFSD does say one option is that IIAs determine that in case of conflict between their provisions and, e.g., human rights norms, the latter should prevail. (See Section IV)

Principle 3 says that “Investment policies should be developed involving all stakeholders, and embedded in an institutional framework based on the rule of law that adheres to high standards of public governance and ensures predictable, efficient and transparent procedures for investors.”

Principle 4 is about Dynamic policymaking “Investment policies should be regularly reviewed for effectiveness and relevance and adapted to changing development dynamics.”

This principle is quite an exciting contribution to the debate. It provides grounds for encouraging that investment treaties be subject to automatic and periodic evaluations to subject their rules to review. UNCTAD, in spelling out this principle, says that “dynamics of investment policies also imply a need for countries continuously to assess the effectiveness of existing instruments. If these do not achieve the desired results in terms of economic and social development, or do so at too high a cost, they may need to be revised.”

This need to adapt investment policies to incorporate what is learned through their implementation tends to be absent in international investment agreements that, once subscribed, are hard to renegotiate. Even in the limited instances that theoretically allow for renegotiations, these tend to be subject to insurmountable obstacles. In the context of the WTO, for instance, provisions disciplining TRIMS were supposed to be subject to a review that would take account of the practical experience with them. No review has taken place, yet.

However good the adoption of Principle 4 is, tensions with the principles 7 and 8 are bound to emerge.

Principle 7 on Openness to investment, states that “In line with each country’s development strategy, investment policy should establish open, stable and predictable entry conditions for investment.” Principle 8 states that “Investment policies should provide adequate protection to established investors. The treatment of established investors should be non-discriminatory.”

It is hard to see how adopting a principle of openness to foreign investment follows from a commitment to sustainable development. Sustainable development, defined as development that “meets the needs of the present without compromising the ability of future generations to meet their own needs.” There is no reason to hold, a priori, that a regime of openness to FDI with some exceptions is better for that than the exact reverse. The ability of a regime to serve sustainable development will depend on the particular configuration of regimes and mixtures between domestic and foreign in a given country.

The adoption of openness as a principle does not coexist comfortably, either, with the interests of developing countries that UNCTAD says to be trying to defend. The notion of open trade responds to the theory of comparative advantage, elaborated having in mind trade in goods. Regardless of where one stands on the benefits of open trade – itself a highly debated issue—extending such arguments to open investment is not a straightforward proposition to make.

The qualification that this needs to be “in line with each country’s development strategy” softens that only partially and is not enough to conceal the preference for an “open” regime. UNCTAD further claims that, as important as the formal openness is the “absence of informal investment barriers, such as burdensome, unclear and non-transparent administrative procedures.” But one country’s
“unclear” administrative procedures may be another country’s last resort to limit the negative impact of rules on foreign investment that cannot be changed without great economic and political costs.

Same comment applies to Principle 8, which as outlined by UNCTAD, comprises protections such as principles of non-discrimination, fair and equitable treatment and protection in the case of expropriation that seem corollaries form the expressed preference for an open regime. Again, there is no reason why non-discrimination should be consecrated as a principle, rather than an exception to be allowed in cases where investment can prove to fit into the sustainable development strategy and generate positive impact.

Going back to the contradiction with Principle 4, both principles 7 and 8 seem to limit the scope for examination and “dynamic policymaking” called for in Principle 4, when they call for a predictable and stable entry framework. Taken to the extreme, a highly predictable and stable entry framework, especially one that has non-discrimination embedded in it, will be logically one that does not allow any kind of learning from experience.

Principle 5 is on Balanced rights and obligations: “Investment policies should be balanced in setting out rights and obligations of States and investors in the interest of development for all.

According to UNCTAD, “Investment policies need to serve two potentially conflicting purposes. On the one hand, they have to create attractive conditions for foreign investors. To this end, investment policies include features of investment liberalization, protection, promotion and facilitation. On the other hand, the overall regulatory framework of the host country has to ensure that any negative social or environmental effects are minimized. More regulation may also be warranted to find appropriate responses to crises”

Though the need to strike a balance is correct, the statement seems to place these two priorities on an equal footing. This is not warranted given the lack of solid basis to claim that foreign investment is a necessary condition for development –certainly no more than national investment.

Principle 6 is one to welcome: “Each country has the sovereign right to establish entry and operational conditions for foreign investment, subject to international commitments, in the interest of the public good and to minimize potential negative effects.

UNCTAD goes as far as saying that regulation is not just a State right but a necessity. One could, however, observe the use of the verb “minimize” as a more feeble option than “avoid.” And other grounds for regulation could have been acknowledged. It is also ambiguous whether the “subject to international commitments” intends to refer to non-investment commitments (such as human rights, for instance) or as investment international commitments – in which case this part of the sentence would cancel out what is good in the right to regulate.

In Principle 9 UNCTAD refers to Investment promotion and facilitation: “Policies for investment promotion and facilitation should be aligned with sustainable development goals and designed to minimize the risk of harmful competition for investment.”

This principle makes a positive contribution. UNCTAD reminds us that in their efforts to improve investment climate, countries should not compromise sustainable development goals, “lowering regulatory standards” or “offering incentives that annual a large part of the economic benefit” for the host country.

Remaining principles address the themes of Corporate governance and responsibility and International cooperation.

  1. III.                The National Investment Policy Guidelines

The National Investment Policy Guidelines section of the IPFSD deals with three levels: the strategic level – grounding investment policy in economic or industrial development strategies, the normative level – setting rules and regulations on investment and investment-related areas and the administrative level – implementation and institutional mechanisms for investment policies.

At the strategy level, the IPFSD gathers the well-tested lesson that a strategy for development has to come before (and not after) designing investment rules and policies. “Given the specific development contributions that can be expected from investment …policy-makers should consider carefully what role each type can play in the context of their development strategies.”

The IPFSD further calls to distinguish the development impacts of –greenfield investment – which will generally imply a greater immediate contribution to productive capacity and job creation – compared to the merger and acquisitions investment that “may bring benefits such as technology upgrading or access to markets but may also have negative effects (e.g. on employment…).”

It also calls to distinguish the different development impacts of efficiency-seeking investments and market-seeking investments, and the different financial guises of foreign investment, mentioning FDI not always implies capital expenditures for building up productive assets and can behave like portfolio investment – a point often assumed away in discussions on liberalization of investment.

This part of the IPFSD National guidelines also emphasizes the different productive capacities that should guide the efforts to develop policy towards investment. On human resources and skills, it says  “Although particular care should be paid to promoting employment by nationals “, UNCTAD says, “countries have a lot to gain from enabling investors to tap foreign skills readily and easily where needed. Well-crafted immigration and labour policies have had demonstrated benefits in countries that have allowed foreign skills to complement and fertilize those created locally. Knowledge spillovers also occur through international employees.” Though this is true, a more balanced statement would have recognized that companies operating in several jurisdictions oftentimes have an incentive to avoid the knowledge spillover in order to not create potential competitors, so “knowledge spillovers” cannot be expected to happen automatically.

On Technology and know-how, it calls for the level of intellectual property rights protection to be “commensurate with the level of a country’s development and conducive to the development of its technological capacities.” But it contains the controversial statement that such protection “is an important policy tool because it is often a precondition for international investors to disclose technology to licensees in developing countries, especially in areas involving easily imitable technologies.” However, the high costs of new technologies are a major factor limiting developing countries’ capacity to upgrade and enter new markets, and in such case having foreign companies disclose technology that cannot be integrated locally, or only at high cost, may defeat the whole point of having the investment at all.[2]

On infrastructure, it says “all too many developing countries have attempted to privatize infrastructure or public services only to fail or achieve less than optimal outcomes. Governments need to develop not only a clear assessment of what can be achieved and at what costs, but also a comprehensive understanding of the complex technicalities involved in infrastructure investments and their long-term implications in terms of cost, quality, availability and affordability of services.”

On enterprise development, it is very good that it stresses need for “linkages and spillover effects between foreign investment and domestic enterprises” and calls for investment promotion to be “targeted to those industries that could have the biggest impact in terms of creating backward and forward linkages and contribute not just to direct, but also to indirect employment.” It is also welcome that it highlights the risk of foreign investment crowding out local firms, especially SMEs, and the role of industrial policies in protecting infant industries or other sensitive industries with respect to which host countries see a need to limit foreign access.

However, as noted later in this analysis, the IPFSD’s section dealing with indicators of impact for investment neglects an incorporation of these risks.

Promotion efforts, UNCTAD adds, should not be limited to low value added activities within international value chains, but gradually seek to move to higher value added segments.

At the normative level, the IPFSD contains a very sound starting point. It mentions the positive impacts FDI can have but warns they “do not always materialize automatically. And the effect of FDI can also be negative in each of those areas.” It goes on to give the examples that it might lead to outflows of financial resources in the form of repatriated earnings or fees. This is in line with the observation that the net factor payments item has become much more important in the balance of payments of development countries, so even countries that successfully strengthened export performance have seen their current account position weakened due to a structure of investment that entails high profit remittances. Regarding export performance, UNCTAD also states that investment operations requiring intermediate inputs or market seeking investment might lead to limited export gains, due to the higher import content of such investment.

In spite of these positive generic propositions, the devil is in the details of implementation. In this regard, two products by UNCTAD are supposed to reflect on these aspects for specific countries: the UNCTAD –ICC Investment Guides and UNCTAD’s Business Facilitation Program. The involvement of the ICC as an apparently equal partner in the first one is a matter of concern. As demonstrated by the ICCs G20 Scorecard,[1] this is not a group intent on providing neutral perspectives on how developing countries can improve their business climates, but has gone on record with extreme views on the side of openness to foreign investment. It begs the question of what sort of balance can be expected between views of investors and those of host governments and citizens that UNCTAD recognizes should be traded-off against each other in investment policy decisions.

At the administrative level, the IPFSD advocates that regulatory agencies should be free of political pressure and have significant independence, subject to clear reporting guidelines and accountability to elected officials. It reaffirms the importance of Principle 4 (commented in …) in stating that “policy design and implementation is a continuous process of fine tuning and adaptation to changing needs and circumstances.” It goes further: “investment policy may also need adjustment where individual measures, entire policy areas, or the overall investment policy regime is deemed not to achieve the intended objectives or to do so at a cost higher than intended.”

At this level the IPFSD calls for setting objectives in the form of yardsticks to measure the effectiveness of the policies.


In discussing the objectives of investment policy UNCTAD argues they should include quantifiable goals for the attraction of investment and the impact of investment. For measuring effectiveness on the attraction of investment, UNCTAD suggest use of is Investment Potential and Attraction Matrix, which “compares countries with their peers, plotting investment inflows against potential based on a standardized set of economic determinants.” For measuring the impact it supports the use of indicators that “are the most direct expression of the core development contributions of private investment.” They include contributions to GDP through additional value added, capital formation and export generation, entrepreneurial development, etc.

The chosen objectives give rise to concerns along two lines. One has to do with the form and priority given to them. It would seem that these two goals are measured separately and, moreover, that attraction comes first. Perhaps a more desirable method would be to have “quantity for impact” measures that evaluate how much the attracted investment is achieving positive impacts. Moreover, the fact that a tool (UNCTAD’s matrix) is provided for measuring “actual” quantity compared to “potential” quantity while there does not seem to be a similar tool, yet, to measure impact, might mislead policymakers into going for the more visible target of bulking quantity to the detriment of impact.

The second has to do with the indicators for measuring impact. These come from a joint paper that UNCTAD and other agencies submitted to the G20 on “Indicators for measuring and maximizing economic value added and job creation arising from private sector investment in value chains.” As observed by critics, the indicators are mostly focused on measuring what investment adds on jobs, entrepreneurial development, etc. while neglecting a measurement of where they may actually affect those variables in a negative way. Given that the IPFSD’s normative level, as shown above, reflects these more negative scenarios, it is unclear why they are not incorporated into the indicators for measuring the effectiveness of policy.

In spite of these descriptions of the three levels contained in the IPFSD National policy guidelines, a study of the actual National policy guidelines, contained in a table that spans through 9 pages,[3] reveals some with a far less nuanced and balanced view and gives reason to be concerned if this is the advice that is being provided to developing countries or informing UNCTAD’s analyses of country investment climates. (hereinafter “G” means Guideline).


For instance, take G 2.1.1: “Attracting high levels of diverse and beneficial FDI calls for a general policy of openness and avoidance of investment protectionism, subject to qualifications and selective restrictions to address country-specific development needs and policy concerns, such as regarding the provision of public goods or the control over strategic industries and critical infrastructure.”

Firstly, it is not helpful to provide as guidance a concept as elusive as that of “investment protectionism.” In the same document UNCTAD has a box stating that there is no universally agreed definition of what the term means.[4] Then, why put that in a guideline for host countries? More worrisome, given the lack of conclusive evidence about whether foreign investment is good for growth and development, one can question the call for a “general policy of openness” as a way to attract “high levels of diverse and beneficial FDI.” Such call is also contradictory with statements in other parts of the IPFSD. What would be the point of saying that policymakers “should consider carefully what role each type [of investment] can play in the context of their development strategies”[5] if then they are asked to have openness as a general rule? More consistent with this would be guideline to say the reverse: no foreign investment should be allowed unless it is consistent with goals established in a national development strategy. If the IPFSD remains faithful to its statement that FDI can have negative effects,[6] would not it make more sense to be limited and selective on the conditions under which investment is allowed rather than be limited and selective on  the conditions under which it is not?

An extension of this problematic approach is reflected in G 2.1.3: “Restrictions on foreign ownership in specific industries or economic activities should be clearly specified; a list of specific industries where restrictions (e.g. prohibitions, limitations) apply has the advantage of achieving such clarity while preserving a policy of general openness to FDI.”

This is taking a side for one option, a negative list approach – any sector not listed as subject to restrictions should be deemed open – as opposed to the equally valid option of a positive list approach – only sectors listed as not subject to restrictions should be deemed open.

Likewise, G 2.1.4 holds:  ”A periodic review should take place of any ownership restrictions and of the level of ownership caps to evaluate whether they remain the most appropriate and cost-effective method to ensure achievement of [inter alia, national development] objectives.”

No symmetrical requirement can be found for measures that lift or ban ownership restrictions. Is there a presumption that these measures are always the most appropriate and cost-effective for achieving such objectives?

G 2.1.8 says “Performance requirements and related operational constraints should be used sparingly and only to the extent that they are necessary to achieve legitimate public policy purposes. They need to be … imposed principally as conditions for special privileges, including fiscal or financial incentives.”


If performance requirements demonstrate to be helpful to ensure the positive contribution of FDI can be realized, then why would they need to be used sparingly? Likewise, it is not clear what are the basis for holding, a priori, that they are more or less useful when imposed in exchange for a special privilege or incentive. This could be more accurately described as dependent on the particular context and the nature and size of the privilege, compared to the impact of the promoted investment.

The same bias shows in G 2.2.2 “As a general principle, foreign investors and investments should not be discriminated against vis-à-vis national investors in the post-establishment phase and in the conduct of their business operations. Where development objectives require policies that distinguish between foreign and domestic investment, these should be limited, transparent and periodically reviewed for efficacy against those objectives.”


It would be better to make a decision on unequal treatment contingent upon the nature and impact of the FDI, rather than state a general principle of non-discrimination. Policies that distinguish between foreign and domestic should not be subject to more review for efficacy than policies than do not distinguish (or grant equal treatment). Then why do only the former get singled out in this guideline?


And in G 2.2.4, which reads “Countries should guarantee the freedom to transfer and repatriate capital related to investments in productive assets, subject to reporting requirements (including to fight money laundering) and prior compliance with tax obligations, and subject to potential temporary restrictions due to balance of payment crises and in compliance with international law. Controls should be periodically reviewed for efficacy.”


Additionally, in the latter, to suggest controls would be subject to efficacy reviews, but not opening measures is asymmetrical at best and seems to prejudge the benefits of liberalization of capital flows measures.


G 3.2.3, “The tax system should tend to neutrality in its treatment of domestic and foreign investors” ignores that there are many justifiable reasons why a country might want to favor its own nationals with lower taxation levels, especially given the heterogeneity characteristic of developing country economies which might call for special measures to support disadvantaged groups.


In G 3.6.1 it is said that “More than the nature of land titles (full ownership, long-term lease, land-use rights or other), predictability and security are paramount for investors. Governments should aim to ease access to land titles, adequately register and protect them, and guarantee stability.”


At a time when “land grab” deals made with foreign investors are the matter of a growing number of complaints by illegitimately displaced communities, this type of advice is very problematic.  Rather than a guideline biased towards easing access to land, this guideline could have taken the opportunity to strengthen safeguards for national landholders exposed to abuse by restricting foreign investment access to land unless well-proven purposes and objectives to be achieved by the land acquisition in question justify it. Moreover, security and stability of title could legitimately be subject to continued monitoring of the achievement of the sustainable development targets that were associated to allowing the acquisition in the first place.


On the other hand, UNCTAD should be given credit for some guidelines that will, in the view of this author, come as very handy in ensuring investment promotes sustainable development.


See, for instance, G 1.2.5: “The potential for FDI to generate business linkages and to stimulate local enterprise development should be a key criterion in defining investment policy and priorities for FDI attraction.“


This offers a clear basis for combatting the “more is always better” approach often present in investment climate reforms.


G 2.3.2 reads “Governments should encourage adherence to international standards of responsible investment and codes of conduct by foreign investors. Standards which may serve as reference include the ILO Tri-partite Declaration, the OECD Guidelines for Multinational Enterprises, the UNCTAD, FAO IFAD and World Bank Principles for Responsible Agricultural Investment, the UN Guiding Principles on Business and Human Rights and others. In addition, countries may wish to translate soft rules into national legislation.”


Corporate social responsibility principles have a role to play but it is clear they cannot substitute normative legal instruments to enforce investor obligations, so the encouragement for countries to translate soft rules into national legislation should be welcome. (especially reading it jointly with G 2.3.1 that states “Investors’ first and foremost obligation is to comply with a host country’s laws and regulation.”)


According to G 2.4.4, “Where screening or preliminary approval is imposed on foreign investors, responsibility and accountability for such procedures should be clearly separate from investment promotion and facilitation functions in order to avoid potential conflicts of interest.”


The proposed separation could ensure that agencies in charge of screening or approving foreign investment do not have incentives to overlook flaws for the sake of increasing investment volumes.

Also useful are 2.4.9 through 2.4.16 which offer good guidance to counter abuses of fiscal incentive that tax justice advocates have been denouncing for a long time. Among these, that “Investment incentives, in whatever form (fiscal, financial or other), should be carefully assessed in terms of long-term costs and benefits prior to implementation, giving due consideration to potential distortion effects,” and “The rationale and justification for investment incentives should be directly and explicitly derived from the country’s development strategy.“


Also useful from a tax justice perspective is G 3.2.6 which calls on developing countries to “build on international best practices for fighting transfer pricing.” In this regard, the guidelines fall short of endorsing the OECD Principles and this is good because, with their reliance on “arm’s length” principles, such principles are known to have imposed burdensome constraints on the ability of developing countries to adequately face transfer pricing practices.


G 3.9.3 call for governments to “Following strategic decisions on which sectors to open to private investment, … put in place a carefully crafted legal framework for concession contracts and public-private partnerships. “


So the guideline restates the need for opening to happen only on the basis of strategic considerations and upholds the need for a transparent set of rules for going about concessions, which helps avoid granting privileges or waivers to foreign investors that have been the feature of so many ill-conceived privatization projects.


G 3.9.5 reads “Wherever possible, concessioning to private investors should aim to introduce competition so as not to replace a public monopoly with a private one. Placing natural monopolies under private concession should be limited to cases where it increases efficiency and the delivery of services. “

It, thus, recognizes that there will be situations where private concessions should not even be considered an option.

Finally, in G 4.2.1, the principle of dynamic policymaking is translated into a guideline: Policy design and implementation is a continuous process of fine-tuning and adaptation to changing needs and circumstances. Periodic review (every 3-4 years) of performance against objectives should take place, with a view to: – verifying continued coherence of investment policy with overall development strategy

– assessing investment policy effectiveness against objectives through a focused set of indicators

– identifying and addressing underlying causes of underperformance

– evaluating return on investment of the more costly investment policy measures (e.g. incentives).”

This guideline could offer a necessary safeguard against granting measures such as fiscal stabilization agreements, or land leases that extend over decades and have proved problematic due to the lack of built-in mechanisms to supersede them when the investors fail to fulfill expectations or commitments.

Guidelines 4.7.1, 2 and 3 refer to the provisions on transfer of funds. These provisions, because they grant right to free movement of investment-related flows in and out of the country, have come in stark conflict with macroeconomic policy tools that an emerging consensus among regulatory bodies believes are necessary to successfully prevent and respond to crises. There are some good proposals offered here. G 4.7.1 gives as an idea reversing the rule so, instead of setting forth a principle of free transfer of funds with exceptions, set forth the principle of no right to the free movement of capital unless for particular types of transfers to be determined. G 4.7.2 mentions exceptions in the event of serious balance-of-payments and external financial difficulties or threat thereof (where movements of funds cause or threaten to cause serious difficulties in macroeconomic management). G 4.7.3 suggests host States could reserve the right to restrict an investor’s transfer of funds in connection with the country’s fiscal obligations of the investor/investment in the host country, reporting requirements in relation to currency transfers, bankruptcy, insolvency, or the protection of the rights of creditors, and other laws.

UNCTAD says these exceptions, in order to prevent abuse, should be conditioned upon application in line with IMF rules, but this may not mean much of a hindrance since the IMF does not have legal jurisdiction to forbid a country from introducing capital account restrictions.


A negative aspect of the language on exceptions, though, is that, UNCTAD, also to prevent abuse, says they should be respecting conditions of temporality, equity, non-discrimination, good faith and proportionality. The conditions of temporality or non-discrimination may represent undue constraints given that the current status of research regarding the conditions under which capital controls or other capital management techniques can be useful does not warrant a categorical statement excluding non-temporary or discriminatory measures.


  1. IV.                International investment agreements: Policy Options


While the previous section looked at national measures, the IPFSD recognizes that the space for many of those measures, even if desirable, will be constrained by the clauses in international investment agreements. It aims, therefore, to offer guidance for countries negotiating such treaties. In this regard, the IPFSD also distinguishes three levels of challenges: 1) the strategic level, where policymakers need to embed international investment agreements in their countries’ development strategies, 2) the design of provisions in investment agreements, where they need to address the concerns of policy space and 3) multilateral consensus building, where they should address gaps, overlaps and inconsistencies arising from the multi-layered and multi-faceted nature of the regime.

At the strategy level, UNCTAD looks at pros and cons of IIAs. In doing so, it seems mindful of the lack of conclusive evidence around the impact of IIAs on attracting investment and chooses to use a cautious “IIAs can” to refer to their alleged ability to promote investment.

Importantly, it warns that IIAs may become “largely a vehicle for the protection of interests of investors and home countries without giving due consideration to the development concerns of developing countries.” It further asserts that, on average, existing treaty provisions are heavily skewed in this way.

The IPFSD also recommends to watch for the interactions of international agreements. For example “commitments made to some treaty partners may easily filter through to others through most-favoured-nation clauses.”

At the level of design of provisions in IIAs, the IPFSD offers welcome support for several proposals that, in many cases, had been first developed by civil society.

For instance, IIAs could balance State commitments with investor obligations, UNCTAD says. “Legally binding obligations on companies and individuals are stipulated by national law but are absent in international treaties.”

If treaties can give rights, they can also impose obligations on private parties, but in spite of its striking simplicity this is not often considered part of the acceptable range of choices in IIAs negotiations.

A suggestion UNCTAD makes is that IIAs stipulate that investors should “comply with … national laws of the host State when making and operating an investment, and … at the post-operation stage.” The failure of investors to comply with their obligations could then be the basis for host States to make a counterclaim if sued in an investment tribunal. This is a good idea so far but UNCTAD goes on to add investor compliance with national laws is “provided that such laws conform to the host country’s international obligations, including those in the IIA.” If this latter condition is attached, it could easily cancel out what is achieved by adding such a clause.

In line with one of the national guidelines referred above, the IPFSD also says IIAs could refer to commonly recognized international standards, thus making, for instance, the UN Guidelines on Business and Human Rights binding for such investors.

In another recommendation, it recognizes that IIAs standards of protection by their nature will place limits on government regulatory freedom, so it calls for an appropriate balance between protection commitments and regulatory space. One concrete suggestion it offers: “Countries can safeguard some policy space by carefully crafting the structure of IIAs, and by clarifying the scope and meaning of particularly vague treaty provisions such as the fair and equitable treatment standard and expropriation…”

Another important point is about shielding host countries from unjustified liabilities and high procedural cost. Noting that host countries have faced claims of up to USD 114 billion, it recognizes the burden on defending countries and the damage to policy space. Moreover, that currently investor-state mechanisms have been used by investors in unanticipated ways showing an increasingly blurred line between political risk and under interference on the one hand and legitimate domestic policies on the other.

Within the alternative clauses that treaties could include UNCTAD reviews examples covering scope and definition, national treatment, MFN treatment, fair and equitable treatment, expropriation and investor –state dispute settlement.

When discussing the scope it warns about the misuse of general provisions, signaling the importance of carving out, for instance, government debt, portfolio investment, or areas of public policy and sensitive sectors. It also warns about the problem of investors channeling complaints through legal entities based in the contracting parties, and argues such practice could be countered with provisions that only “genuine investors” from the contracting parties can benefit from treaty provisions.

UNCTAD says national treatment may need to be circumscribed by negotiators given that States may wish to afford preferential treatment to national investors as part of industrial development policies, or for other reasons. And on MFN treatment, that IIAs have started explicitly excluding dispute  settlement issues and obligations undertaken in treaties with third parties from MFN obligations. This is a response to the trend by which a number of investment tribunals have interpreted that MFN allows investors to invoke more favorable provisions of a treaty between the host State and a third country.

On the controversial issue of investor –state dispute settlement, the IPFSD recognizes flaws that have been displayed recently, such as inconsistent and unintended interpretations, unanticipated uses by investors, challenges against policy measures in the public interest, costly and lengthy procedures and limited or no transparency. Among the remedies it proposes “promoting the use of alternative dispute resolution (ADR) methods, increasing transparency of procedures, encouraging arbitral tribunals to take into account standards of investor behaviour when settling investor-State disputes, limiting resort to ISDS and increasing the role of domestic judicial systems, providing for the possibility of counterclaims by States, or even refraining from offering ISDS.”

The IPFSD makes suggestions on how to operationalize sustainable development objectives, along three –clearly not exclusive—cluster methods: adjusting existing provisions to make them more sustainable development friendly, adding new provisions and introducing special and differential treatment.

This section is complemented by a 16-page table with very detailed set of options that for each of the areas typically covered under IIAs provides a spectrum of optional approaches.

As stated earlier, this portion cannot be considered a set of “good practices” because it is not really siding with any particular option. But their greatest merit as a contribution to the debate is that it places within the spectrum of valid options many that are rarely  – if ever – considered by treaty negotiators.

For instance, that parties to an IIA might opt for:

-not banning any performance requirement, (4.9.4)

– incorporating exceptions for regulatory measures aiming to protect human rights o allow for prudential measures (5.1.4)

– specifying that only a narrow set of issues are subject to investor-State dispute settlement (or omitting investor –State dispute settlement altogether, naming host State’s domestic courts as the appropriate forum (6.2.4 and 6.2.6)

– mechanisms for joint interpretation of the treaty by the Parties in case of ambiguities (6.3.1)

-limiting remedies and compensations to ensure that the amount is commensurate with the country’s level of development (6.4.2)

Of course, the reason why some of these options are nowhere to be found in existing treaties – treaties that have proved impossible to renegotiate – is the political economy reality that most powerful countries usually have templates that are tabled on a take-it-or-leave-it basis. Moreover, in the trade-off between interests of investors and the sustainable development concerns of the host countries, the evolution of IIAs has a clear trend to being further skewed towards the former. In one place in the IPFSD UNCTAD sounds a hopeful note in mentioning that investment treaties are evolving and cites the US recent review of its bilateral treaties template. But critics have noted how little the template has incorporated that favors interests of host countries.[7]

Still, only policy advice to developing countries that encompasses all available policy options, as well as what can be gained and lost from each of them, can offer a picture accurate enough at the time of deciding whether to become, or to continue to be, party to an IIA. Having those policy options in the open, also for consideration by Parliaments and domestic constituencies and actively debated by citizens is the only hope we might have for paradigms for investment that truly support sustainable development in the future.