International Financing of foreign investments

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International Financing of foreign investments

  • International Financing of foreign investments

  • Main questions of (investment) law / investment regime:

  • Requirements for foreign investment, treatment of foreign investors, protection of investments (i.a. against expropriation), incl. dispute resolution mechanism

  • Responsibilities of investors

Form of FDI:

  • Form of FDI:

  • - « new » activity («greenfield»)

  • - v. merger or acquisition of existing activity

  • - or shifting existing activities to a foreign country

  • Alternatives:

  • - exporting goods produced at home (direct sales or via distribution channels)

  • - licensing technology in return for royalties

  • (see International Business Strategy course)

Top 10 Host economies

  • Top 10 Host economies

« Project financing » through international institutions

  • « Project financing » through international institutions

  • International lenders (financing institutions)

  • An important player is the World bank: comprises 5 institutions:

  • IBRD (1944) (188 members): loans for projects (usually in cooperation with banks) to states, with funds from member states or capital markets, short term and on interest; no flow-back to funding states: neutral assessment – annual reports

  • IDA (1960): advantageous loans for least developed countries: long term, no or very low interest

  • IFC (International Finance Corporation, 1956): loans or capital investment in private sector; technical assistance and advice

  • MIGA (Multilateral Investment Guarantee Agency 1985): see infra

  • ICSID (1965): mediation and arbitration institution, infra.

MIGA (Multilateral Investment Guarantee Agency) 1985: mainly covers non-commercial risks of investors from MIGA-member countries in other MIGA-countries; succesful (168 members)

  • MIGA (Multilateral Investment Guarantee Agency) 1985: mainly covers non-commercial risks of investors from MIGA-member countries in other MIGA-countries; succesful (168 members)

  • Coverage can be granted by MIGA after assessment of risks if:

  • An investment is made (interpreted widely)

  • By an investor from a MIGA-country

  • After the granting of the guarantee (only new investments)

  • In a developing country, member of MIGA

  • - Contributing to development

  • Approval by the host country is required; usually MIGA will contract with the country to limit the risks

  • Risks that can be covered: mainly 4 types: currency transfer restrictions; expropriation and similar measures; breach of contract without domestic remedy; sometimes war and civil disturbance. Not: eg devaluation

  • Conditions will be specified in a contract MIGA-investor: premium to be paid; uninsured percentage (usually 10 %), arbitration clause

  • Disputes between MIGA-states on the Convention: submitted to Board of MIGA

  • Disputes MIGA - host country: negotiation; if necessary arbitration

Other international lenders (financing institutions)

  • Other international lenders (financing institutions)

  • Regional development banks - often on condition of flow-back to funding countries:

  • African DB

  • Asian DB (67 members, strong Japanese influence)

  • Inter-American DB

  • new AIIB (Asian Infrastructure Investment Bank, 2014, strong Chinese influence)

  • EBRD (European Bank for reconstruction and Development) – for Eastern Europe; 65 members, capital mainly from EU countries, US, Canada, Japan

  • Investment Funds of the EU:

  • - ACP countries (Cotonou agreement): investment facilities

  • - EU-internal: European Investment Bank (projects for regional development)

  • - European Social Fund

  • UN-organisations, esp. UNDP

Sources for rules on foreign investment:

  • Sources for rules on foreign investment:

  • National law

  • International Investment Agreements (IIAs), either (mostly) Bilateral Investment Treaties (BIT) (s. infra) or Multilateral treaties (regional, sectorial, TRIMS, world bank treaties) (s. infra)

  • Customary international law, esp. concerning protection in case of expropriation (s. infra)

  • To some extent OECD Codes and Recommendations (e.g. OECD National treatment for foreign-controlled enterprises, )

  • International investment contracts, i.e. contracts between investor and host country, s. next slide

Basically on 2 levels: freedom to invest; protection of investments made

  • Basically on 2 levels: freedom to invest; protection of investments made

  • Why may domestic law (of the host state) be problematic ?

  • protectionism: obligation to buy in the guest country (performance obligations, infra); restrictions on import / export, restrictions on transferring (expatriating) profit , …

  • using sovereignty, eg limited protection against expropriation

  • Lack of legal security beacuse of frequent changes in law and regulations, or the possibility of change without transitional rules protecting investments already made (such protective rules may be called ‘grandfathering’)

  • Sometimes also reverse discrimination of nationals, privileges for foreign investors

  • TRIMS 1994: only trade related aspects of investments:

  • Prohibition of quantitative measures and measures with similar effect

  • Principle of national treatment of foreign investment legaly ‘entered’

  • National law:

  • Apart from TRIMS, national law will determine whether foreign investment is allowed, e.g. whether foreigners can buy important business assets;

  • rules often found in Foreign trade Acts (eg German Außenwirtschaftsgesetz (AWG), Japanese Foreign Exchange and Foreign Trade Act 1949, American Trade Act 1974 + Foreign Investment and National Security Act 2007 = FINSA, etc.,

  • And administered by national administrations (in the US the CFIUS: Committee on Foreign Investment in the US, since 1975, based on the 1950 Defense Production Act)

  • mainly to protect national defense, critical infrastructure, etc.

Can international investment contracts help ?

  • Can international investment contracts help ?

  • i.e. contracts between investor and host country

  • Contain eg stabilisation clauses (compare infra in BIT)

  • Effectiveness against host country depends on applicable law and competent jurisdiction:

  • Applicable law: domestic law or international public law ? quasi-international law ?

  • Dispute resolution mechanism ? most effective is application of international public law and international arbitration

  • But jurisdiction in the investors’ country may also help – e.g. the US Foreign Sovereign Immunities Act 1976 has an exception to immunity of foreign states for expropriation in violation of international law

  • Disadvantages of domestic jurisdiction may include 1°general shortcomings of the judiciary, 2°possible bias, 3°in e.g. the US international public law is not part of the domestic law applied by the courts (no ‘direct effect’)

Esp. protection against expropriation

  • Esp. protection against expropriation

  • Types of expropriation:

  • individual expropriation s.s. (public interest + compensation);

  • collective nationalisation;

  • confiscation;

  • Indirect expropriation: regulatory expropriation, creeping expropriation or quasi-expropriation (disproportionate burdens or restrictions)

  • lot of disputes as to what amounts to expropriation: does it only depend on the effects (Sole Effects Doctrine) or does the protection not apply in case of a proportional measure for a genuine public purpose if investor is treated fair and equitable (no abuse of power)?

  • Expropriation and international law ?

  • in European countries: 1st Protocol to the ECHR

  • rules of customary public international law ? Next 2 slides

Traditional customary public international law has as rules & conditions for expropriation:

  • Traditional customary public international law has as rules & conditions for expropriation:

  • - No general prohibition

  • Allowed only in the public interest (but interpreted thus that poliical purposes are not excluded)

  • No discrimination of foreigners (unless required for national security)

  • Effective Prompt Appropriate Compensation (Hull-formula) (i.e. quick, in convertable and exportable currency, full value)

  • Due process of law (procedural protection)

Traditional customary public international law questioned:

  • Traditional customary public international law questioned:

  • by the USSR 1917, Latin Am. (Calvo doctrine), developing countries, ….

  • UN-Resolution no. 1803 from 1962: stresses permanent sovereignty over natural resources of every state (host state for investments)

  • A more radical « Charter of economic rights and duties of States » in 1974 (« new economic order »):

  • NEO-Charter proposed to extend the sovereignty to include all economic activities, does not require « public interest », grants only « reasonable » compensation, refuses international procedural control, etc.

  • Such expropriations will however not be recognised by other countries

  • Thus not accepted as customary law, meanwhile slipped into oblivion (Reaction after 1974’s: BIT’s)

Uncertainty about the customary international public law creates need for treaties

  • Uncertainty about the customary international public law creates need for treaties

  • Next slides: multilateral treaties; bilateral treaties

  • Foundation of 2 new institutions under the world bank:

  • - ICSID 1965 (infra)

  • - MIGA 1985 (supra)

Bilateral investment treaties (BIT) (also known as Foreign Investment Promotion and Protection Agreements, FIPAs)

  • Bilateral investment treaties (BIT) (also known as Foreign Investment Promotion and Protection Agreements, FIPAs)

  • BIT’s in response to the NEO-Charter

  • - First main promoter: Germany (German foreign investors having lost everything in 1918 and 1945) starting in 1959 with Germany-Pakistan

  • almost 3000 BIT’s (IIA’s included: 157 with Belgium, 198 with Germany, 172 with France, etc.,) (more specifically end of 2013: 2857 BIT’s and 339 other agreements with an investment dimension)

  • Big countries have a model BIT

  • Sometimes followed by a larger FTA (China-Switzerland FTA 2014, supplementing the 2010 BIT); esp. the USA concluded many «TIFA»

  • Some countries are terminating their BIT’s, eg South Africa (BIT w. Benelux, Germany, Spain)(«Black Economic Empowerment»); Indonesia; Bolivia & Ecuador left ICSID

  • Others limit the scope of the dispute settlement, eg Australia (included in 2013 safeguards in areas as public health, welfare and environment)

  • Alternative ‘Brazilian’ model (cooperation and facilitation investment agreemnt). In force Brazil-Angola (2015), negotiating Brazil-India, etc…

Content of BITs’: see infra

  • Content of BITs’: see infra

  • Fate of « Extra-EU-BIT’s » after Lisbon Treaty (making FDI an exclusive Union competence): Reg. 1219/2012 - EU intends to replace national extra-EU-Bits’ by common EU-BIT’s (eg negotating a BIT with China since 2013 to replace the 27 existing BIT’s), often in a wider framework (of Partnership agreements or FTA’s covering not only Investment). Duty of MS’s to eliminate incompatibilities.

  • Fate of intra-EU BIT’s:

  • EU Commission requires member states to terminate them; Romania gave in already

  • ECJ 6 March 2018 in C-284/16, Achmea (place of arbitration in Germany, action by Slovakia to set aside award, question from the BGH about compatibility of compulsory arbitration in intra-EU-BIT with EU law): Compatible according to advocate-general, not according to ECJ. The arbitral tribunal is not a court of a member state or common to member states, nor subject to review by a court of a MS, differing from commercial arbitration, thus no guarantee of full effectiveness of EU law.

  • Investors may relocate outside the EU if they believe BIT protection is better than protection under EU law (eg non-contractual liability of the EU is extremely restrictive ….)

OECD: OECD 1967 Draft Convention on the Protection of Foreign property failed as Convention (but has been affirmed as an OECD Recommendation on National treatment for foreign-controlled enterprises, now version 2017); OECD-MiA failed; negotiations on a GIT in WTO failed

  • OECD: OECD 1967 Draft Convention on the Protection of Foreign property failed as Convention (but has been affirmed as an OECD Recommendation on National treatment for foreign-controlled enterprises, now version 2017); OECD-MiA failed; negotiations on a GIT in WTO failed

  • On the other hand, the OECD Code of Liberalisation of Capital Movements was accepted as binding (first version 1961, now 2016)

  • Other Regional IT’s, such as:

  • Investment agreement of the OIC (Bagdad 1981, 27 ratified)

  • ASEAN Comprehensive Investment Agreement (ACIA) 2009

  • Arab Investment Agreement 1980 (incl. an Arab Investment Court)

  • Sectorial: Energy Charter Treaty 1994, infra

  • Investment aspects in other treaties, next slide

FTAs (Free Trade Agreements) may also contain investment protection, as:

  • FTAs (Free Trade Agreements) may also contain investment protection, as:

  • NAFTA Ch. 11: non-discrimination; investor chooses dispute resolution

  • Mercosur


  • CETA (EU / Canada Partnership, 2016) with a permanent ‘investor Court System’ (ICS) (provisionally entered into force 2017)

  • EU-Singapore FTA Oct 2014 (EUSFTA concluded, not signed yet, ongoing debate given the ECJ opinion of May 2017 that that ISDS and portfolio investment are no exclusive competence of the Union and require agreement by the MS)

  • (But most free trade agreements of the EU with countries outside Europe* do not deal with investment protection) * in force: Mexico, Chili, South Korea and 8 Mediterranean countries; some others signed and provisionally applied

  • (EU: internal market as a more radical solution – but not necessarily providing the same protection to investors)

  • Negotiations on other FTA’s with investment provisions, such as EU-Vietnam FTA (finalised 2016)

  • Also investment aspects in Cotonou (EU / ACP), supra

  • TRIMS, supra

  • Codes of conduct of the World Bank, OECD, « UN Global Compact »,…

  • World bank related treaties, infra

Sectorial Multilateral investment treaties ?

  • Sectorial Multilateral investment treaties ?

  • Sectorial Energy Charter Treaty 1994, in force 1998

  • 45 countries from Europe (incl. EU itself), former Soviet U + Japan; (Russia withdrew in 2009; Norway and Australia did not ratify; Italy withdraws as from Jan 1, 2016 – existign investments covered for 20 years)

  • Oil & electricity;

  • Concerns investment / exploitation / transport;

  • Principle of non-discrimination

  • (cont.)

Energy Charter Treaty

  • Energy Charter Treaty

  • Dispute resolution mechanism (arbitration) for breaches of Part II ECT. Investor may choose arbitration according to ICSID, Uncitral or SCC (Stockholm)

  • E.g. Procedures by Vattenfall v. Germany (i.a. decision to close nuclear plants)

  • E.g. Arbitration Youkos v. Russia (initiated while Russia was still bound by the ISDS)

  • E.g. renewable energy investors v. Spain; abolition of subsidies for soalr panles; in one of the cases, decision in 2016 did reject the claims.

  • Scope of application (usually):

  • Defines « investment »

  • (inward) investment, usually broadly defined (FDI = foreign direct investment)

  • Sometimes restricted to certain investments or under certain conditions

  • May not cover purely financial investment (FPI = Foreign Portfilio investment) or indirect investment

  • Recent treaties narrow the definition (CETA definition in art. 8.1.)

  • Defines the protected investors

  • Defines expropriation (also indirect, regulatory, creeping ?)

  • As it is often sufficient to invest via a company incorporated under the laws of a country with a BIT, investors form third countries may use this indirect way (« nationality planning »)

Typical content (1)

  • Typical content (1)

  • Freedom to invest ? (free inflow and outflow of capital)

  • Usually not fully liberalised. In CETA art. 8.4.

  • Usually no full national treatment, but a MFN clause + minimum standard of «proper & equitable» treatment. See art. 3 BLEU-China BIT: national treatment + MFN; CETA art. 8.6 and 8.7.

  • NB. The MFN clause leads to some harmonisation as if there was a multinational treaty

  • Freedom and non-discrimination usually restricted by a «national security» exception (e.g. for control over so-called critical infrastructure) (usually also a ‘self-judging clause’)

  • Incl. often prohibition of ‘performance requirements’ (such as requirement of « national » content of products …) (conflicts with EU quota rules). Eg art. 8.5 CETA

  • Comp. Art. 1 OECD Draft: ensure fair and equitable treatment to foreign property.

Typical content (2)

  • Typical content (2)

  • Protection of investments made:

  • Stabilisation clauses (later regulation cannot negatively affect the investment); observance clauses (later regulations not applicable); also called ‘umbrella clause’ (giving an umbrella to certain obligations). Comp. Art.2 Draft OECD (‘Observance of undertakings’); art. 7 BLEU-China BIT.

  • Purpose: turn a contractual obligation (which can often be overruled by national public law or change in legislation) into an international obligation - validity (binding character) sometimes disputed

    • > in recent treaties the umbrella clause is narrower (eg EU – Vietnam FTA art. 14: only if a written agreement that creates an exchange of rights and obligations in connection with an investment)
    • > distinction betwene broad and narrow protection of legitimate expectations: stronger protection in acse of a ground for specific trust (declaration by the government, ….); weak protection of general expectations (only in case of sudden, discriminatory, discretionary, …. change of regulation)
    • But case law takes also int account the behaviour of the investor, whether the investor has been imprudently taking risks
  • In response to criticism against BIT’s and their dispute resolution: the « Right to regulate »; in the 2015 Concept paper of the EU Commission «the right of states to take measures to achieve legitimate public policy objectives on the basis of the level of protection that they deem appropriate ». In recent treaties, the right to regulate is stronger (and investment protection thus weaker), eg CETA art. 8.9

Typical content (3)

  • Typical content (3)

  • Usually rules on protection in case of expropriation. Comp.

    • Art.3 Draft OECD (protection against takings of property: must be in the public interest, under due process of law, non-discriminatory, just compensation (genuine value, quick, and transferable).
    • Art. BLEU-China BIT: merely under domestic legal procedure, non-discriminatory, just compensation (genuine value, quick and transferable); no public interest requirement.
  • Is protection also given to intellectual property rights ?

  • Capital transfer guarantees (free movement of capital, ‘free transfer of payment’) (some conflicts with EU law). In the OECD Draft only a recommendation. Free transfer in art. 5 BLEU-China BIT.

  • Legal certainty is low, because of vague standards; however legal certainty under property protection in EU law or MS law may be even lower.

    • > a reason for vagueness is that investment is ‘cross-sectional’ (is not restricted to the specific categories of legal rules as qualified under domestic law);
    • > some recent treaties are more specific on the scope of indirect expropriation and/or definition of fair and equitable treatment. E.g. CETA
  • Survival clauses after termination of the treaty: usually still applicable for a long period (10/20 years) to investments already made before termination

Some elements in investment treaties, Free Trade Agreements etc.

  • Some elements in investment treaties, Free Trade Agreements etc.

  • Codes of conduct of the World Bank, OECD, « UN Global Compact »,…

  • Conditions imposed by financing institutions

  • Esp. the performance standards of the IFC. They concern:

  • Assessment of environmental and social risks

  • Labor and working conditions

  • Resource efficiency and pollution prevention

  • Community health, safety and security

  • Land acquisition and involuntary resettlement

  • Biodiversity conservation and living natural resources

  • Indigenous peoples

  • Cultural heritage

  • S. also the OECD guidelines for multinational enterprises

  • Reporting obligations for big companies, eg in EU Non-financial reporting directive: report annually on social matters, human rights, ani-corruption mesaures

Renegotiation clauses

  • Renegotiation clauses

  • Arbitration clauses:

  • Arbitration may be under the ICSID rules (infra) or under UNCITRAL rules (see Ch. 12).

  • Arbitration gives the investor direct access (not only right to aks one’s government to act, as in eg dumping and trade defense cases)

  • Sometimes subject to a national court requirement (eg UK-Argentina BIT: first go to the Argentinian court; if no decision within 18 months arbitration is open)

  • The UNCITRAL rules impose a certain degree of ‘transparency’ (public access for third parties to hearings and documents except confidential or protected information), but this applies only a) to arbitration under BIT’s concluded after April 1, 2014 or b) when parties agree. Under ICSID, access is much more limited (discretionary decision of the tribunal)

  • 2014 UNCITRAL Convention on Transparency in treaty-based investor-State arbitration (for existing BIT’s) (Mauritius Convention)

  • Question whether an arbitration clause in a BIT displaces a forum clause in the investment contract itself: concurrent jurisdiction*, or priority of one clause over the other ? (*ICSID arb 97/3 Compania de Aguas del Aconquija)

ICSID – Convention 1965: dispute resolution procedure for investment disputes

  • ICSID – Convention 1965: dispute resolution procedure for investment disputes

  • now 150 ratifications (+ 9 signatures); became much more important since the 1990’s. Canada ratified Nov 2013 (after solving federalism problem). Missing: Russia (not ratified), i.a. India, Brazil, South Africa (not signed); Withdrawal by Ecuador, Bolivia, Venezuela.

  • Scope of application:

  • only investment disputes

  • between a party to the ICSID Convention and an investor from another contracting party (or a local daughter company)*

  • jurisdiction of the ICSID has been accepted in an investment contract, domestic law, BIT or ad hoc

  • ICSID organises the procedure, does not settle the dispute itself

  • conciliation procedure (not succesful)

  • arbitration procedure

  • no «seat»; annulment procedure organised by ICSID itself

  • * Dispute whether still possible under intra-EU BIT’s (according to EU Commission, contrary to 344 TFEU; pending question before CJEU)

Advantages of ICSID –Arbitration

  • Advantages of ICSID –Arbitration

  • If a choice of law was made in the contract, the arbitrators must apply that law

  • But national law can be set aside if contrary to public international law (art. 42 ICSID) (for a case where this setting aside was annulled by the ICSID Committee in 2017: case 07/27 Venezuela Holdings)

  • Arbitral award can be set aside only by ICSID itself (ad hoc Committee), not by a national court; limited grounds for annulment

  • Exclusive jurisdiction; national courts lose jurisdiction; no immunity of jurisdiction for ICSID states before ICSID

  • Member states recognise the awards as binding and guarantee the enforcement within their territory; nevertheless enforcing often remains difficult. See eg the EU forbidding Romania to comply with an ICSID award granting compensation (Micula case)

  • « Additional facility »: ICSID assistance in cases out of the scope of application of the Convention (eg investor not a national of an ICSID State) (but awards are then not falling under the ICSID Convention bu unde rthe NY Convention or arbitration)

  • Awards are published in annual Reports.

  • Claimants: mostly big business, but ca 22 % are SME’s.


  • Criticism:

  • Asymmetric: no jurisdiction (or only very limited) over counterclaims by states against investors

  • Insufficient guarantees for fair trial & impartiality,

  • no public character (unless Uncitral Transparency rules apply)*;

  • no guarantee of consistent interpretation by a single tribunal

  • right of states to regulate not adequately upheld (bias)

  • Etc.

  • Responses

  • Uncitral Transparency

  • ICSID Tribunal requiring parties to disclose their funding by third parties (in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan)

  • EU Commission concept paper 2015 proposing i.a. a multilateral appellate body and/or an « Investment Court System » for the TTIP between the EU and the USA. A draft mandate for multilateral negotiations was published by the EU Commission in Sep 2017. ECJ will have to further clarify compatibility with fair trial requirements (Belgium requested an Opinion of the ECJ in 2017)

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