BACKGROUND

  The Multilateral Agreement on Investment has been in negotiation in the OECD since 1995. Its basic aim is to liberalise international investment, making it easier for investors from one country to invest in another. It has the following main elements:

(a)  to ensure that, within the area covered by the agreement, overseas investors should be treated as well as domestic investors ("national treatment") and as well as the investors of any other country ("most favoured national treatment");

(b)  to ensure high levels of investor protection—that investors are not expropriated without due process and compensation, that they are able to transfer their earnings freely across borders, and so forth;

(c)  to outlaw certain performance requirements which limit an investor's freedom of action;

(d)  to provide an independent arbitral tribunal for the resolution of disputes, accessible either by governments or by investors direct ("state-state and investor-state dispute settlement").

  2.  Negotiations on the MAI had been scheduled for conclusion at the April 1998 OECD Ministerial meeting. It became clear in the run-up to this Meeting that this would not be possible. Ministers agreed instead a period of "reflection and further consultation" before negotiations resumed in October 1998. No formal deadline has been set, but if the MAI is not agreed by the next OECD Ministerial in May 1999, negotiators are unlikely to have the political will to continue.

  3.  The MAI grew out of a recognition of the need for a rules-based multilateral framework for investment. Following the refusal of a number of key developing countries to work in the WTO, developed countries decided to start work in the OECD on a free-standing, high quality treaty open to anyone who wished to sign. This was based on a like-minded approach to investment liberalisation as reflected in existing OECD investment instruments. The MAI also draws on experience with the many existing bilateral investment treaties.

UK POLICY OBJECTIVES FOR THE MAI

  4.  The UK's overarching objective in the international economic sphere is to obtain sustainable growth for the UK economy through the efficient allocation of the world's resources and global financial stability. We hope to achieve this stability by fostering open and transparent markets for capital flows. We also want to help developing countries gain access to private sector investment funds. The particular contribution made by the MAI will be to harness the growing importance of overseas investment flows to generate greater prosperity and an improved quality of life throughout the world. As the world's second largest outward investor, we have much to gain from an MAI. We have few "defensive" interests, as the UK is liberal and open to inward investment. With a very few exceptions, we treat foreign investors the same as domestic investors.

  5.  The Government's general view is that an MAI would be desirable if it can be had on the right terms. An MAI on the right terms would:

(a)  improve the conditions for UK companies investing overseas;

(b)  leave intact the powers of governments to carry out normal regulation of the behaviour of domestic and inward investors;

(c)  avoid undermining the protection of the environment and the rights of employees;

(d)  be available for accession by developing countries on an equitable basis, thereby helping them to attract investment; and

(e)  build on the UK's strong position as an attractive destination for foreign investment.

  6.  The Government is determined that it will only sign up to an agreement if these terms are achieved.

OPPORTUNITIES FOR UK COMPANIES OVERSEAS

  7.  The growing importance of overseas investment for UK companies was underlined by the Export Forum in their 1997 report ("Towards an Export Initiative") commissioned by DTI and FCO. There is considerable scope for UK investors to benefit from the development of international rules governing the treatment of investors and the breaking down of those barriers that currently exist.

  8.  The UK's long-term aim in this area—which is shared by a number of OECD countries—is the complete liberalisation of international investment, at least within the OECD. The MAI was conceived as a means of taking us down that path. In practice, the MAI is likely to fall short of our initial liberalising expectations. We have always accepted that all countries needed the scope for "exceptions" to cover particular sectors where nationality might be relevant (indeed, the UK has itself asked for a handful of exceptions—see). In our view, a number of our fellow OECD countries have made excessive use of this option and are seeking to secure unacceptably broad lists of exceptions. We have been working with our EU partners to identify particular overseas barriers that we would like to see negotiated away.

  9.  As a result of the MAI, we expect to see a freeze on new discrimination ("standstill") and further negotiations to break down those unjustified barriers that remain ("rollback"). Together with our EU partners, we are also pressing for full negotiations on investment liberalisation in the WTO as part of a new comprehensive round of multilateral trade negotiations. The EU has already set out an ambitious potential agenda (to include investment rules, competition, services, government procurement and trade-related intellectual property) at the Special Session of the WTO's General Council on 24-25 September 1998 in preparation for a further wave of negotiations to be launched at a Ministerial in late 1999.

  10.  Along with the analytical work on trade and investment currently going on in UNCTAD and WTO, we see the MAI making a positive contribution to future negotiations of investment rules in the WTO. In particular, the MAI negotiations have brought the question of support for investment liberalisation to the fore as well as enabling comprehensive consideration of important basic issues. We remain therefore of the view that the MAI and a WTO investment agreement are not perfect substitutes but are part of the trend towards the development of a comprehensive multilateral framework for investment.

PRESERVING THE RIGHT OF GOVERNMENTS TO REGULATE

  11.  The Government has examined closely the potential impact of the MAI on Government bodies within the UK. We have reached the conclusion that—apart from the small number of cases where we need to take exceptions—no current Government activities—whether central or local—will be affected by the MAI.

  12.  The main reason for this is the open climate for inward investment that exists within the UK. There are very few areas where we discriminate—or might conceivably want to discriminate—based on the nationality of an investor. We have requested an exception to cover each of these. We have published our list of exceptions, which covers areas ranging from fisheries management to the Government's "special shares" in certain companies. If we did not secure these exceptions, we would have great difficulty in signing the MAI. In practice, however, we do not anticipate any problem in securing them. We would in addition benefit from general exceptions currently in the text of the agreement relating to the preservation of national security and public order.

  13.  It has been suggested that certain types of Government activity—for example, a grant scheme for SMEs, or a programme to promote employment in disadvantaged areas, or the promotion of goood relationships between investors and local suppliers, or any activity that favours companies established in the UK or investors resident in the UK—might be held to be "de facto discrimination" and in breach of the MAI. The common understanding among negotiators is that the treaty does not currently have that effect and should not. We are considering whether the text requires further clarification to provide greater certainty on issues such as these. More tenuous claims that, for example, the MAI would undermine proposals for Scottish land reform or UK fisheries policy, either mis-represent the effects of the national treatment provisions or, as in the case of fisheries, ignore the fact that there are country specific exceptions to cover situations where policy does discriminate on the basis of nationality.

  14.  Concern has also been expressed about the MAI provisions on performance requirements. There will be a complete prohibition on certain performance requirements being imposed on companies: for example, a requirement that a company must discriminate in favour of domestic suppliers, or export a certain proportion of output. Here the MAI will build on the WTO Agreement on Trade-Related Investment Measures (TRIMS). However, it is proposed that the performance requirements article should permit countries to agree certain requirments with investors in return for some form of "advantage", such as a grant. We support this. While we do not generally favour performance requirements, we accept that Government bodies should have the discretion to negotiate an agreement with an investor on a requirement when they are offering something in return. Our assessment is that the performance requirement currently imposed by UK government bodies are in return for an advantage and therefore permissible under the MAI, for example, Regional Selective Assistance (RSA).

  15.  The argument has also been made that the UK should take exceptions as a precaution in case any central or local government body should wish to apply discriminatory measures in future. The Government does not support this approach. Successive Governments have taken the view that measures targeting the nationality of investors are unlikely to be either necessary or effective, even assuming it were possible to negotiate such precautionary exceptions (and the UK and others are taking a robust line with those negotiating parties who are trying to do so). This is why the UK has already signed up to a range of international commitments, both in the EU and the WTO, with a view to preventing discrimination against UK companies overseas. It follows in our view from the previous paragraphs that Government bodies at all levels will retain considerable scope to pursue their desired economic and social objectives lawfully.

PROMOTING STRONG ENVIRONMENTAL AND LABOUR STANDARDS

  16.  On coming to office in May 1997, the Government reversed the previous UK policy, which was that no specific reference to environmental or labour standards was needed in the MAI. The UK is now pressing for a number of provisions in the MAI, which we think are necessary to preserve the scope for regulation both at home and abroad.

  17.  Firstly, the Government thinks that there needs to be a clear statement in the text to the effect that a regulation—for example in the environmental field—that treats companies differently for good objective reasons will not be regarded as discriminatory. Similarly, it must be made clear that normal Government regulatory activity will not be regarded as a "measure tantamount to expropriation". Many other delegations share the UK's view on this matter and some possible forms of text are being prepared.

  18.  Secondly, the Government thinks that the MAI should address the problem of a country offering to waive or derogate from a regulation in order to attract a particular investment. The current text of the MAI contains a number of different formulations of this "Not Lowering Standards" provision, not all of which are binding. The UK is pressing hard for a binding provision.

  19.  Thirdly, the Government is concerned that the MAI should be compatible with present and future Multilateral Environmental Agreements (MEAs). The UK is contributing to work on this issue by the OECD Secretariat.

HELPING DEVELOPING COUNTRIES TO PROSPER

  20.  The MAI was originally conceived as an agreement to be signed by OECD members with scope for non-OECD countries to sign up once the Agreement was agreed. However, it is encouraging that a number of non-OECD members—Argentina, Brazil, Chile, Estonia, Hong Kong China, Latvia, Lithuania and Slovakia—have obtained observer status at the MAI negotiations with a view to becoming founder members (and we understand that Bulgaria, Israel and Slovenia are in the process of seeking observership). It is envisaged that other developing countries may wish to accede to the MAI in advance of any work being completed in the WTO on a comprehensive framework for international investment rules.

  21.  The need to ensure that an MAI is friendly to developing countries is a strong element of Government policy, with DTI working closely with the Department for International Development to pursue this policy goal. DFID commissioned initial research from Dr E V K Fitzgerald, University of Oxford, which concluded that accession to the MAI could be helpful to developing countries. The OECD Secretariat is now carrying out further work to look at the possible terms of developing country accession to the MAI, including what support developing countries might need to meet the institutional requirements of the MAI.

DEBATE AND CONSULTATIONS

  22.  The MAI is subect to standard Parliamentary procedures for treaties. It has been debated on three occasions in Parliament—twice in the Commons (23 July 1997 and 23 February 1998) and once in the Lords (18 March 1998)—as well as being the subject of many Parliamentary Questions. The Commons Select Committee on European Legislation is currently considering the MAI. They heard evidence from Barbara Roche MP, Minister for Small Business, on 8 July 1998. This Committee indicated that they would be interested in a further hearing later in the negotiating process. The Trade and Industry Committee and the Environmental Audit Committee have also announced inquiries into the MAI. The Government is awaiting the outcome of Committee scrutiny before considering whether further debate in Parliament would be helpful.

  23.  This Department at Ministerial and official level has consulted widely, including with business, unions and Non-Government Organisations. Information on the MAI is available from the internet (www.oecd.org/daf/cmis/mai/maindex.htm) and Ministers and officials have explained the Government's position to a very large number of public enquirers.

CONCLUSION

  24.  The Government will continue to listen to those in the UK who have expressed concern about the impact of the MAI. We are confident that all current UK Government activities are compatible with the MAI, and we would strongly contest any suggestion to the contrary. We accept that there are areas where the current text could be clearer and we will be working to achieve greater certainty. But we do not think the UK has anything to fear from the MAI, and indeed has much to gain.

  25.  We will continue to subject the terms of the proposed Agreement to stringent scrutiny to ensure that it will not be an obstacle to progress towards our environmental, labour and international development objectives. We would also like to see an Agreement which was as attractive to developing countries as to developed. We shall continue to negotiate in good faith, seeking a positive outcome. But, in the end, we will of course have to decide, as will our EU partners, whether the Agreement is indeed satisfactory.

October 1998