House of Commons - Trade and Industry

Select Committee on Trade and Industry Third Report

III THE DRAFT MAI

National/Most Favoured Nation Treatment

29. At the heart of the draft MAI lies the provision that overseas investors from countries signatory to the Agreement should be treated at least as well as domestic investors (national treatment) and at least as well as investors of any other country (most favoured nation treatment); and that investors should receive whichever of the two treatments is better, subject to certain exceptions.[41] The concepts of national treatment and most favoured nation treatment are well established within WTO trade rules and the EU and could be found in broadly similar form to the MAI in other investment treaties, including NAFTA (Articles 1102 and 1103) and in the UK's bilateral treaties, which are themselves based on an OECD model text.[42] ICC(UK) described these obligations as "fundamental" and noted that the standards set were "relative and not absolute. There is no attempt to impose upon a government objective requirements as to how investors are to be treated, there is merely an obligation not to discriminate and to accord equal treatment".[43]

30. All of the NGOs who submitted evidence to us were critical of the non-discrimination clauses in the draft text. A common theme running through their submissions was that the draft MAI threatened to undermine states' national sovereignty, in particular their ability to set their own economic policies, independent of other nations.[44] Consumers International, for instance, argued that "nations must retain the ability to...accord differential treatment to investors if necessary to produce balanced, equitable and sustainable development".[45] Two aspects of non-discrimination were particularly criticised:

National treatment and most favoured nation treatment would apply to foreign investment before investors had gained entry to states contracting to the MAI, as well as to those investments already established. This would prevent states from vetting, and, if necessary, excluding, foreign investment before establishment.[46]
The draft admitted the possibility of governments discriminating against domestic firms in favour of foreign investors.[47]

31. In respect of the UK, these arguments do not stand up to much scrutiny. The DTI told us that "there are very few areas where we discriminate - or might conceivably want to discriminate - based on the nationality of an investor".[48] This conclusion applies both to investment already established within the UK as well as to that seeking to enter; if practised against investment originating within the EU, such discrimination would already be illegal anyway. Given that this is the case, it would clearly be in the British interest for other countries, particularly our major trade and investment partners, to adopt a like-minded approach. This rationale already underpins the bilateral investment promotion and protection treaties signed by the UK and 90 developing countries which incorporate national and most favoured treatment, although not always with respect to firms before they have established themselves in the host country.[49] We recommend that the already entrenched principles of national treatment and most favoured nation treatment form the centrepiece of any future multilateral agreement on investment.

32. Governments may decide to pursue a policy of not granting foreign investment national or most favoured nation treatment in certain sectors of the economy (see paragraph 55) or in respect of certain countries. In the latter case, Governments may prohibit or penalise investment flows to or from particular countries for various reasons, including human rights or national security concerns, or in an attempt to enforce international agreements. Some witnesses suggested that such boycotts or sanctions would be outlawed by the draft MAI, including those pursued in the past against the apartheid regime in South Africa.[50] We were also alerted to the possibility that the pursuit of ethical investment policies by Governments or local authorities — for instance ethical pension funds — might contravene the draft Agreement. We asked DTI on 27 October what assessment they had made of the extent to which UK national or local governmental bodies utilise any pensions or investments schemes which discriminate on grounds of either nationality or companies' ethical standards. We are disappointed not to have received a reply.

33. In oral evidence, the Minister warned us of the dangers of unilateral trade and investment boycott or sanctions policies, but indicated that such policies might be legitimate if they had "international endorsement".[51] Were a multilateral investment agreement to be signed by a small number of developed countries the prospects of boycotts or sanctions being implemented by signatories against each other would be remote. Were such an agreement to be signed by a larger number of countries — the membership of the WTO, including Myanmar and Cuba, for instance — then the issue of non-conforming boycotts and sanctions becomes more salient. We recommend that the Government consider mechanisms by which internationally endorsed boycotts and sanctions policies can be accommodated within any future multilateral investment agreement.

34. The US has introduced legislation which not only forbids US firms to invest in Iran, Libya and Cuba, but provides for sanctions against any firms, regardless of their nationality, investing in those countries.[52] The negotiations of the draft MAI provided an opportunity for European states to seek to change this secondary boycott legislation to which they are strongly opposed, and which does not conform with the proposed text. The Minister emphasised his opposition to secondary boycott legislation and pledged that efforts to persuade the US to amend or repeal it would continue.[53]

Performance Requirements

35. The draft MAI proposes the prohibition of various requirements which governments might place on foreign investors, including:[54]

to export a given level or percentage of goods or services;
to achieve a given level or percentage of domestic content;
to purchase, use or accord a preference to goods produced or services provided in its territory;
to transfer technology, except in certain limited circumstances;
to hire a given level of nationals;
to establish a joint venture with domestic participation; or
to achieve a minimum level of domestic equity participation other than nominal qualifying shares for directors or incorporators of corporations.

Performance requirements imposed on foreign investors in relation to the receipt of an advantage, such as a government grant, are not prohibited by the draft text.[55]

36. The draft MAI is intended to build upon the WTO's TRIMs Agreement by expanding the list of prohibited performance requirements. This has caused difficulties for several negotiating countries who fear that, in giving up powers to influence the decisions of foreign investors, Governments will lose their ability to legislate and regulate. Australia, for instance, requested an exception from all obligations with respect to performance requirements over and above commitments made in the TRIMs Agreement and the Energy Charter Treaty.[56]

37. A number of witnesses expressed the same reservations, but particularly in relation to developing countries. Oxfam, for instance, argued that the proposed prohibition of performance requirements "further reduces the benefits to and diversification of local economies, restricts the transfer of appropriate skills and technology, and threatens appropriate and time-bound protection for viable local firms. Exchanging a performance requirement for an 'advantage' puts poor countries at a disadvantage, and encourages the use of investment incentives, which rich countries find far easier to offer".[57] Cafod's view was that the draft MAI would allow multinational firms to "repatriate profits freely; provide no employment for local people; invest without transferring technology or skills; buy out nationally-owned operations completely; invest only in mergers and acquisitions rather than in developing new productive operations; [and] invest without providing productive links to the national economy", amongst other things.[58]

38. Witnesses had few specific comments about the potential impact of the draft MAI's proposals on performance requirements on the UK, except with regard to the Best Value initiative, considered in paragraph 60.[59] The DTI's memorandum stated that they "do not generally favour performance requirements" but 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 requirements currently imposed by UK government bodies are in return for an advantage and therefore permissible under the MAI, for example, Regional Selective Assistance".[60] The undertakings given by some overseas investors in the UK, particularly in the automotive sector, on local content are voluntary and non-enforceable. We are not convinced that it is desirable for Governments to impose conditions on foreign investment on a case by case basis and without offering anything in return; such an approach would only tend to deter foreign investors from entering a country. While we acknowledge that the draft MAI might permit multinational firms to exploit developing countries, as Cafod and others suggest, we have not yet seen any argument to persuade us that it would be in the interests of foreign investors to act in this way.

Investment Protection

39. The draft MAI obliges signatory countries to offer foreign investors "fair and equitable treatment...[no] less favourable than that required by international law".[61] Investment protection measures in specific circumstances — including protection from strife and respect for guarantees, indemnities and insurances — are spelt out in more detail, each being based on the principle of non-discrimination. Two elements of investment protection have generated concern:

provision for the unimpeded transfer of payments relating to an investment out of the host country, with only a narrow range of exceptions permitted.
restrictions on the direct or indirect expropriation of a foreign investment, except where it is in the public interest, non-discriminatory, in accordance with due process of law and fully compensated.[62]

Transfer of Payments

40. Robert Nurick, in a paper submitted to us by the MAI Coalition, drew attention to the "footloose" nature of FDI, which caused UK prosperity to be "very much dependent on the fluctuating fortunes of the global economy". He cited examples of inward investment projects terminated or postponed as a result of the recent Asian financial crisis.[63] We have taken considerable interest in this issue, both in our First Report of last session and during our visit to Japan in March 1998.[64] Although there have been a handful of high-profile withdrawals, or withdrawals of interest, from the UK by inward investors, the vast majority of foreign investors continue to play a key economic role. Whatever the possible drawbacks of the mobility of some inward investment we believe that any policy intended to constrain the normal commercial decisions of foreign investors, as opposed to investors in general, would serve only to drive potential inward investors from our shores.

41. The draft MAI also offers protection for intangible investments, including shares, stocks, bonds, derivatives and other financial assets. The Minister indicated that the primary reason for this was due to the difficulty of drawing a distinction between short-term and long-term investment in the context of the negotiation of the draft text.[65] Cafod claimed that "the MAI therefore liberalises investment-related capital flows" by "removing barriers to the speculative short-term investments which contributed to the Mexican and Asian crises" thus making such crises more likely in future.[66] Oxfam commented that both foreign direct and portfolio investment "can lead to serious balance of payments crises",[67] an assessment with which Friends of the Earth concurred.[68] Save the Children Fund stated that "in countries where controls on investment and capital have been liberalised, family security has decreased and family structures have broken up" and that "continued support for an agreement seeking to further lift controls on portfolio capital flows is not tenable given today's financial turmoil".[69]

42. Nothing in the draft text requires countries to liberalise markets currently closed to foreigners; the proposed agreement instead insists that where markets are open, foreign investors should be treated on the same terms as their domestic counterparts. The draft text also provides for temporary non-conforming measures which could be introduced by countries to deal with crises, subject to the approval of the International Monetary Fund; and permanent prudential measures which, whether in conformity with the draft MAI or not, could be agreed between signatory countries in order to "ensure the integrity and stability" of a country's financial system.[70] The NGOs' concerns touch upon an important point. The process by which the draft MAI has been negotiated within the OECD began prior to the Asian financial crisis which raised the possibility of the re-design of the world's financial regulatory institutions. The capital control measures imposed by Chile, which involve a one-year unremunerated reserve requirement on foreign loans and have attracted some support from the International Monetary Fund, and discussion of the viability of a tax on global capital flows both challenge the assumption, which underpinned the draft MAI, that international flows of capital can be treated on the same basis as those generated entirely within one economy.[71] We recommend that, in any future negotiation of a multilateral agreement on investment, the Government seek ways to accommodate measures which could protect economies from financial instability caused by short-term financial flows, such as the one-year unremunerated reserve requirement on foreign loans recently introduced by Chile.

Expropriation

43. There is no real dispute over the rights of foreign investors for compensation from host governments arising from direct cases of expropriation. There has however been extensive debate about the extent to which signatory governments would be affected by claims for compensation arising from indirect, or "creeping" expropriation, and about the validity of such claims. Indirect expropriation would involve a government decision which, although not intended to be discriminatory on the grounds of the nationality of the investor, proved to be so in fact. Various examples of governmental decisions which could be construed as causing indirect expropriation were cited in evidence, many relating to environmental and labour standards (with which we deal further in paragraph 34).[72] Witnesses were concerned that widespread, unpredictable claims of indirect expropriation by foreign investors would lead to existing laws and regulations being repealed or struck down by the proposed dispute settlement panel; or to a "chilling" effect upon the enactment of new laws.[73]

44. The CBI argued that "the MAI should establish mutually beneficial international rules which would not inhibit the normal non-discriminatory exercise of regulatory powers by governments and such exercise of regulatory powers would not amount to expropriation".[74] ICC(UK) told us that "expropriation is not forbidden by the MAI...the negotiating text on expropriation is, effectively, a restatement of international law".[75] The DTI argued that the common understanding among negotiators of the draft MAI was that the text did not permit claims of indirect expropriation against normal government regulatory activity, although some further clarification might be required.[76] The UK has already signed 90 bilateral investment promotion and protection agreements with developing countries which include provision for the protection of investors from expropriation and "measures having effect equivalent to expropriation", disputes resulting from which can be referred to international arbitration.[77] In 23 years since the first such agreement came into force, no UK investor overseas has ever invoked their right to go to international arbitration in respect of a Government environmental measure nor has any foreign investor similarly challenged UK environmental legislation. [78]

45. The expropriation clause in the draft MAI is based on a similar clause in NAFTA. If provision for compensation for indirect expropriation represented a threat to normal regulatory action by governments, as several witnesses alleged, it might be possible to learn lessons from the NAFTA experience.[79] A handful of disputes have arisen from claims of indirect expropriation since NAFTA came into force,[80] of which the most celebrated is the claim made by Ethyl Corporation, a US chemicals firm, against the Canadian government.

46. Ethyl claimed damages of $251 million for potential lost profit when the Federal Government announced plans to ban the importation and internal transportation of MMT, a chemical used only in Canada to increase the octane rating of petrol, of which Ethyl was the sole manufacturer.[81] Scientific evidence had suggested that its use might damage motor vehicles' on-board environmental control systems and endanger public health. The dispute was due to be adjudicated by the dispute settlement procedures established by NAFTA. In the event, the legislation was over-turned by Canada's Agreement on Internal Trade (AIT), after several Provinces contested the scientific evidence which underpinned it. In their judgement, the panel appointed under the AIT made no mention of Ethyl's suit. Following the repeal of the legislation, Ethyl dropped their NAFTA case and settled with the Federal Government for $13 million. NGOs have claimed that this case graphically illustrates the ability of firms to challenge laws enacted in response to environmental and health concerns; and demonstrates the influence foreign firms may hold over governments, given that Ethyl initiated proceedings against the Canadian government while the bill to ban MMT was before parliament.[82] However, even in the litigious atmosphere of the US, very few companies have made claims for indirect expropriation of their assets through NAFTA procedures, and no case has yet been concluded. In the absence of appropriate case law it is impossible to judge how claims for indirect expropriation might be decided by dispute settlement mechanisms of the sort proposed by the draft MAI. Evidence from NAFTA and from the UK's existing bilateral treaties provides no basis to suppose that, contrary to the impression conveyed, a flood of litigation against governments' regulatory actions will result from an MAI.

Protecting Regulatory Standards

47. The possibility that governments' everyday regulatory activity - setting standards in relation to environmental, labour, public health and safety issues - only indirectly related to foreign investment could fall foul of the expropriation provisions of the draft MAI has generated considerable controversy both within the OECD negotiations and externally. Several NGOs have suggested that the draft text:

threatens to undermine specific standards which could be challenged by investors as discriminatory;
deters governments from raising standards in future - the "chilling" effect referred to above; and
encourages governments to lower standards in order to attract investment - a so-called "race to the bottom".

48. Several witnesses proposed that binding environmental, labour and other standards be incorporated into the draft MAI to overcome this problem. Oxfam, for instance, stated that "an MAI presents an opportunity for a binding agreement for the Non-Lowering of Standards (environmental and labour) applying to all investors, and adherence to core International Labour Organisation (ILO) standards especially the right to organise and collective bargaining".[83] Consumers International argued that "the MAI should make specific reference to obligations on corporations and governments to comply with principles enshrined in key internationally recognised statements of good practice", to avoid a "pull to lower product and environmental standards".[84] A consistent theme of NGOs was that any multilateral investment agreement had to balance the rights offered to investors abroad with responsibilities.[85] The World Development Movement called for "a new framework of rules" to "provide fair rules for foreign investors; protect the environment, workers, consumers and local communities; allow governments to strengthen links with the local economy; and regulate speculative capital and unacceptable corporate practices such as transfer pricing, international monopolies and corruption".[86]

49. The negotiators of the draft MAI have not been deaf to the demands of the NGOs. There was agreement amongst them "on the objective of protecting government regulators and their normal non-discriminatory work", by inserting into the draft text references to standards and measures to be respected.[87] Consensus has not been reached on the exact means by which this objective can be achieved, however, particularly concerning:

which types of standards and measures should be protected. The draft text suggests widespread consensus that environmental measures should not be affected by the proposed agreement, but several nations (Australia, New Zealand, Korea and Mexico) oppose labour standards being similarly regarded. The question of how public health and safety standards should be included is also unresolved.[88]
the definition of standards and measures included. The key issue is the extent to which the draft MAI should protect domestic standards and measures or international standards, such as those specified by the ILO.
whether there should be one clause exempting certain standards and measures from the whole draft agreement, or several clauses providing exemptions from most but not all of the agreement.
the breadth of protection. Governments have failed to reach agreement on whether any 'not lowering of standards' clause should relate to specific investments or be more general in nature.
whether or not clauses on the protection of standards and measures should be binding, and thus subject to dispute settlement.

50. The previous Government was opposed to any reference being made in the draft MAI to labour or environmental standards, a policy which the current administration has reversed. The DTI told us that "there needs to be a clear statement in the text to the effect that a regulation that treats companies differently for good objective reasons will not be regarded as discriminatory"; that "it must be made clear that normal Government regulatory activity will not be regarded as a 'measure tantamount to expropriation'; and that it was "pressing hard" for a binding 'not lowering of standards' provision.[89] The recent DFID White Paper on International Development stated that "the Government is working to ensure that the MAI fully reflects our commitment to core labour standards and that it prevents countries from lowering environmental standards to attract investment".[90] The Government's policy is thus broadly in line with the note issued by the Chairman of the OECD Negotiating Group on MAI in March 1998 which proposed the insertion of references to environmental, labour and other standards at various points in the draft text, particularly in the preamble, and including by means of interpretative footnotes.[91]

51. Business groups have declared themselves broadly satisfied with the Government's approach. British Invisibles said that they "support efforts to ensure the MAI encourages all participants to maintain proper environmental and labour standards";[92] the CBI argued that the draft agreement would "ensure that standards are not lowered to attract investment"; and ICC(UK) stated that they were happy for it to be made clear in the proposed text "that governments retain the freedom to regulate in a non-discriminatory way".[93] All three, however, have rejected the notion that the draft MAI include binding provisions on a range of environmental, labour and other standards, arguing that these issues are best dealt with by other international fora, such as the ILO.[94] The Government has taken the same view. The Minister argued that "I am greatly in favour of raising international levels of employment standards...[and] better environmental controls...but they have to be pursued through various forums as objectives in themselves and at their own pace. They cannot become conditions against which every piece of trade and investment is measured".[95] This view is in stark contrast to that of the NGOs; referring to environmental, labour and consumer protection standards in particular, Ms Hurtado of Consumers International commented that "if the agreement did not have these elements in it, it would not be worth pursuing".[96]

52. We are dissatisfied with the treatment of environmental, labour, health, safety and other standards by the negotiators of the draft MAI at the OECD. The protection of such standards should have been on the negotiators' agenda from the beginning of their deliberations. Instead, it appears to have been proposed rather late in the day and by means of preambular and footnoted text of doubtful legal weight. We share the view expressed by many that any multilateral agreement on investment must not drive down standards or open the door to the driving down of standards.[97] We recommend that in any future negotiations of a multilateral investment agreement the protection of existing regulatory standards be of central concern.

53. Behind the NGOs' emphasis on the need for multinational enterprises to accept responsibilities associated with their investments lies a suspicion that firms invest abroad in order to take advantage of lower costs and laxer standards than are permitted in their home countries; and that competition among potential destinations for investments leads to inducements being offered in the form of looser controls. This point was explicitly made to us by Friends of the Earth and Consumers International, who sent us a number of specific examples.[98] The empirical evidence concerning the reasons for firms' investment decisions is mixed. A recent survey by the Overseas Development Institute suggested that low labour costs and the availability of natural resources were important determinants of firms' direct investment decisions, but that the size and openness of the host country's market, skill levels and political risk were also relevant.[99] UNCTAD has argued that firms seek either markets, resources or efficiency when choosing the location of their direct investments abroad and that factors associated with market size are, in general, the most important.[100] Mr. Bate of ICC(UK) said that companies were not motivated by the desire to "go around the world looking for a cheap place do something", but admitted that low standards "could be a reason" to invest.[101] He emphasised that "most of the big UK countries have their own codes of conduct...[and] have got to take an ethical, responsible approach to their businesses and their investments" because consumers are increasingly aware of the ethical impacts of investment abroad.[102]

54. In placing reliance on voluntary codes of conduct, specific to particular firms, the possibility remains that some UK firms do seek out those countries with relatively lax labour, environmental or other standards in order to invest in them, or are more attracted to some countries than others by laxity. The Government has stated its objective to eliminate poverty "through support for international sustainable development targets and policies which create sustainable livelihoods for poor people, promote human development and conserve the environment".[103] This objective will evidently not be achieved if UK firms are the source of poor quality investment in the developing world, which undermines existing labour, environmental or other standards or makes the raising of such standards more difficult. The Government should recognise that, in pursuit of its laudable objective to eliminate world poverty, all foreign investment by UK firms should be of high quality.

55. Clearly the definition of the quality of investment, and the means by which the Government can ensure that foreign investment by UK firms is of high quality, are crucial issues for the Government to consider. We wish to offer our preliminary observations:

It is essential that those countries which do not sign up to international standards — for instance ILO conventions on child labour, free trade unions and the like — are not seen by UK firms as desirable investment destinations simply because core standards can be avoided in them. Nor should governments receive the impression that, by withdrawing from commitments previously made, they will be rewarded by an influx of foreign investment. Increasing competition for foreign investment must not encourage an international "race to the bottom" where standards are continually reduced or derogated from in order to appeal to investors in developed countries.
British firms investing in countries which have signed up to international standards should at least respect those standards, even if the host country fails adequately to enforce them. It is for the Government to consider the extent to which it can assist British investors in achieving this aim, particularly in situations where the host country either actively encourages undermining of the standards to which it has pledged itself or passively connives at such undermining.

These are complicated issues which permit of no easy answers. They are worth pursuing nevertheless. The Government has made a start by establishing its Ethical Trade Initiative. We conclude, however, that the complex questions concerning the relationship between investment, international labour, environmental and other standards and sustainable development are not necessarily best addressed in the negotiation of a multilateral investment agreement.

56. The World Development Movement submitted to us a list of core international standards concerning basic human rights, working conditions, consumer protection, business practices and other factors to which many countries are already signatories.[104] Prominent on the list were a number of ILO conventions which almost every country has signed up to, but which are frequently overlooked because of the non-binding nature of their provisions. The DTI informed us of a new ILO initiative to ensure the implementation of its conventions.[105] We welcome this. We believe that the UK Government should be at the forefront of efforts to ensure that core international standards, to which many countries have signed up, become legally enforceable binding commitments on signatory countries; and that it should make regular reports to Parliament on progress in this area.

OECD Guidelines for Multinational Enterprises

57. The OECD adopted in 1976 a Declaration on International Investment and Multinational Enterprises, which included Guidelines for Multinational Enterprises.[106] The Guidelines recommend best practice across a range of corporate activity, including employment, industrial relations, environmental protection, taxation, competition and disclosure of information. The Guidelines are voluntary but procedures have been established to ensure that they are followed-up. National Contact Points were set up in each country adhering to the Declaration in 1991 to publicise the Guidelines and deal with issues arising from them. Disputes relating to the Guidelines can be referred to various OECD committees, with resolution depending on dialogue between OECD's Trade Union and Business and Industry Advisory Committees. A periodic review of the Guidelines is currently underway.

58. The preamble of the draft MAI made reference to the Guidelines, stating that they "will promote mutual confidence between enterprises and host countries and contribute to a favourable climate for investment" but that they would remain "non-binding and...observed on a voluntary basis".[107] ICC(UK) supported this approach, arguing that "they are not legally binding because of the very large range of topics covered and because they are meant to be of positive assistance to the management of international business rather than to be a list of prohibitions" and emphasising the importance of national contact points which are "available for question, complaint or explanation".[108] Some NGOs were dissatisfied with this approach, calling for the Guidelines to be binding commitments on firms.[109]

59. We believe that the Guidelines, in setting out corporate good practice across a range of disciplines, could play an important part in ensuring that foreign investment by firms from OECD countries is of high quality. In surveying both the implementation of the Guidelines by mutlinational firms and the effectiveness of National Contact Points, Governments and the OECD could benchmark the quality of most global foreign investment flows, highlighting areas of poor performance. With the assistance of accurate and objective information on multinationals' investment decisions, policy makers could focus on specific measures for improvement.

60. We are not convinced that the Guidelines currently offer a credible means of achieving the results we outline. We have noted the comments of the OECD's Trade Union Advisory Commitee that "implementation and enforcement mechanisms for the OECD guidelines...have to be radically improved" and that the present review offers a chance to rebuild the Guidelines' credibility.[110] The relevance of the Guidelines to the UK Government might also be questioned by the discovery that, during 1998, DTI's Trade Policy and Europe Directorate, the UK's National Contact Point for the Guidelines, "examined issues stemming from two enquiries from non-governmental bodies relating to activities of multinational enterprises outside the OECD area".[111] We requested further information from DTI on 24 November on these enquiries, the work undertaken by the Government to promote the Guidelines and the current review of the Guidelines; a reply was not received in time for inclusion in this Report. Although we have no evidence to suggest that UK firms regularly flaunt the measures contained in the Guidelines, we have received the impression that the Guidelines are at best of marginal importance both to the activities of UK firms investing abroad and to the DTI's investment objectives. We recommend that the DTI study the extent to which UK firms follow, or are even aware of, the OECD Guidelines on Multinational Enterprises, so that the quality of foreign investment by UK firms can be assessed and policies formulated to resolve any problems thereby revealed.

Dispute Settlement

61. The draft MAI set out procedures for the resolution of disputes between states and between states and investors arising from the Agreement.[112] Disputes between states could be resolved by consultation, conciliation, mediation or, if necessary, binding arbitration by means of a tribunal formed with the assistance of the International Centre for the Settlement of Investment Disputes (ICSID).[113] Disputes between states and investors could be resolved by states' normal legal procedures but, failing that, the draft MAI provides for binding arbitration under the rules of ICSID, the UN Commission on International Trade Law or the International Chamber of Commerce. ICC(UK) submitted a useful paper to us on its arbitration procedures, including the investor-state disputes referred to it in recent years.[114]

62. ICC(UK) described the provision for investor-state dispute settlement procedures in the draft MAI as "fundamental", arguing that "it is not sufficient for an investor to rely on the support of its own government which may well have political or diplomatic motives for not wishing to be associated with a claim and which, in any event, may not have the expert legal and technical resources available to conduct a complicated case". They pointed out to us both that provision for investor-state dispute settlement was contained in many bilateral treaties and that "very large companies are sometimes able to negotiate with governments without the need for arbitration; the provisions in the MAI will be useful to smaller enterprises which do not have the same potential influence".[115]

63. As we have discussed, NGOs were critical of governments' normal regulatory activity being hampered by the prospect of action being taken through international tribunals by foreign investors as a result of MAI.[116] Three further criticisms were made of the proposed dispute settlement procedure:

Disputes between domestic firms and governments could not be referred to binding arbitration by international tribunals in the manner proposed for disputes between foreign investors and governments.[117]
The draft MAI proposes giving foreign investors the right to sue governments, without permitting NGOs or other organisations to sue foreign investors or states by means of international tribunal.[118]
In the event of an investor-state dispute reaching an international tribunal, the draft MAI does not envisage NGOs contributing to the membership of the tribunal or directly presenting evidence to it.[119]

64. In providing for investor-state dispute resolution, the draft MAI envisages an extra protection to foreign investment from discriminatory practices by governments, over and above domestic legal systems. Experience of NAFTA suggests that firms will turn to international arbitration when in dispute with foreign governments only as a last resort.[120] We are persuaded that provision for investor-state dispute settlement, as proposed by the draft MAI, could be an incentive for small and medium sized enterprises to invest more heavily abroad; and we are unpersuaded that the incorporation of such procedures in a multilateral investment agreement would unleash a tide of litigation against the Government by foreign firms. Nor are we convinced of the rationale for granting to third parties the right either to contribute to the formation of international arbitration tribunals or to make presentations directly to them. While we share the Minister's view that arbitration panels should be as transparent as possible, legal and quasi-legal proceedings take place to resolve disputes between two specific parties and should not be opportunities for wider policy issues to be aired.[121]

65. The dispute settlement procedures proposed by the draft MAI would require Governments, as the contracting parties to the Agreement, to defend cases brought by foreign firms as a result of the policies pursued by "sub-national" governmental bodies. This prospect proved particularly troublesome during the negotiations of the draft text to federal states, such as Canada.[122] As a unitary state, this proved less of an issue in the UK, but was raised by the LGA, in relating to local authorities,[123] and by other witnesses in relation to the Scottish Parliament, Welsh Assembly, the Northern Irish Assembly and Regional Development Agencies. In particular, some argued that the draft MAI would restrict the ability of these bodies to pursue certain policy options.[124] The DTI emphasised the depth of the UK's existing international commitments to non-discrimination and argued that "Government bodies at all levels will retain considerable scope to pursue their desired economic and social objectives lawfully".[125] Nevertheless, we believe that the difficulties encountered with the draft MAI in Canada and elsewhere as a result of the complex and changing relationships between central government and other executive bodies will require careful consideration by the Government in advance of any new negotiations of a multilateral investment agreement. It will be essential to ensure that all executive bodies are clear about what policies would infringe such an agreement, and how the central government would respond to a legal challenge by an investor as a result of policies pursued at other levels.

Exceptions

66. Various exceptions from the provisions of the draft MAI were proposed by the negotiators at several different levels, including:

general exceptions from all aspects of the draft Agreement, proposed for national security, public law and order and the maintenance of international peace and security. France, backed by Canada, proposed a broadly-defined general exception for culture.[126]
carve outs of issues which would not be affected by the draft Agreement, except where explicitly referred to in the text. It was proposed to carve out taxation from the draft MAI, because of the challenge posed by dealing with the complex web of international double taxation treaties.
temporary safeguards, whereby signatories to the draft MAI could introduce non-confirming policies in order to deal with balance of payments crises or external financial difficulties, subject to the supervision of the International Monetary Fund.
prudential measures, relating to financial services, which may or may not conform with the rest of the proposed Agreement, would be the subject of agreement between signatories to the draft text and would not be subject to review or external approval.
country-specific exceptions, dealt with below.

67. There was criticism of the carve-outs from the draft MAI of competition policy, investment incentives and taxation issues. Robert Nurick's paper described the absence of rules on investment incentives in the draft text as "a serious omission"; Consumers International argued that "any global investment liberalisation must be accompanied by the establishment of an international competition framework to allow national competition authorities to collaborate and share information"; and the International Business Regulation Forum urged a link between future multilateral investment negotiations and "the OECD's own multilateral treaty for co-operation in tax enforcement".[127] We appreciate the potential benefits to be gained from internationally agreed rules on competition policy, aspects of taxation and, particularly, the regulation of investment incentives, but one international agreement cannot be reasonably expected to deal with them all. We are content for international discussion of consumer policy, taxation issues and investment incentives, as well as other issues raised in the context of the draft MAI such as labour standards, to progress at their own pace in appropriate fora.

Country-Specific Exceptions

68. The MAI negotiations at the OECD were intended to produce a "gold standard" agreement, from which signatories claimed very few specific exceptions.[128] The UK Government claimed only a handful of exceptions, relating to national security, fisheries, analogue broadcasting and maritime transport and others, and did not anticipate any problem in securing them all.[129] The DTI was critical of other OECD countries who were "seeking to secure unacceptably broad lists of exceptions", an attitude shared by business organisations.[130] The CBI said that "any exceptions to MAI rules should be transparent [and] kept to an absolute minimum".[131] ICC(UK) warned that the draft MAI was threatened by "too great a series of reservations by individual countries" which, if not negotiated away, might lead to business withdrawing its support for the agreement.[132]

69. Only the UK published in full its list of proposed exceptions to the draft MAI, but a list of each countries' exceptions as of April 1997 was published on the internet. This list showed that the 29 OECD countries had applied for approximately 400 exceptions between them.[133] While most proposed exceptions were specific (Austria sought to protect its chimney sweeps from the draft MAI), some were extremely broad. Australia proposed the right to maintain and adopt any existing performance requirements; South Korea wished for foreign investors to seek Government permission to acquire large companies; and the US sought an exemption for all existing non-conforming measures of all States.[134] Several NGOs were alarmed that, by not applying for broad exceptions to the draft MAI, the Government could be putting the UK at a competitive disadvantage to its major competitors once the Agreement was signed.[135]

70. Our inquiry represented an opportunity for aggrieved interest groups to demand exceptions to the draft MAI; none was forthcoming. None of the business groups from whom we took evidence expressed a desire for more UK exceptions to the draft MAI; Mr. Bate of ICC(UK) praised the extent to which the DTI had listened to business opinion about exceptions and professed himself happy with the proposed list.[136] Mr. Smith of the LGA said that he "had not gone down the reservation route" in attempting to protect local authorities from the effects of MAI, because if the UK proposed an exception for all local authorities' measures "it seems a racing certainty that every other country would roar in with its reservations for the whole of sub-national government and then you would exclude vast tracts from the original intent" of the draft Agreement.[137]

71. The DTI told us that "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")".[138] The CBI spoke of exceptions to the draft MAI being "examined at a future date with a view toward further liberalisation".[139] Some NGOs have been critical of the rollback proposal, suggesting that it will exacerbate the dangers that they have already identified with the draft MAI.[140] The concepts of standstill and rollback are well accepted within GATS. By requesting few country-specific exceptions from the draft MAI the UK would be in a strong position to argue for the rollback of indulgent exceptions taken by others. Consequently, we are content that the DTI's strategy in respect of country specific exceptions has been appropriate.

Specific Issues of Concern

72. During the course of our inquiry a number of specific issues were raised which, although naturally relating to the provisions of the draft MAI discussed above, we wish to consider separately.

Best Value

73. The Government intends to replace compulsory competitive tendering for local authorities' services with a new "best value" framework.[141] The key changes from the current system are that "performance (or quality) and expectations (the needs of users, customers and 'stakeholders') are now deemed to be as important as price; there will no longer be a compulsion for local authorities to put services out to tender; and local authorities must be more responsive and accountable to their communities".138[142] Best value provides an opportunity for local authorities to enter into joint ventures with foreign private firms in order to provide services, which Mr. Smith of the LGA believed could fall foul of the MAI's prohibition of performance requirements although he also expressed his belief that "there is nothing in the principles of best value that require you to discriminate on the grounds of nationality".[143] Other witnesses also speculated on the compatibility of best value with the MAI.[144] The potential for conflict between the provisions of an MAI and Government policy, or its effects, in a wide range of areas is real. Coordination between Government departments is essential to avoid an international agreement negotiated by one department undermining initiatives promoted by another.

New Deal

74. Robert Nurick's research, submitted to us by the MAI Coalition, stated that aspects of the Government's New Deal initiative might contravene the draft MAI. Nurick stated that the Government "emphasises the need for programmes which are based on partnerships between local government, the private and voluntary sectors and the local community itself. This may require conditions being put on investors eg local employment conditions and local purchasing of goods and services".[145] As we have noted, the DTI "do not generally favour performance requirements" imposed on firms, unless an advantage is granted in return for them[146]. Legal advice suggests that the draft text permits non-discriminatory employment programmes targeted at disadvantaged regions or persons, of the sort envisaged by the New Deal project. The DTI is satisfied that Government assistance schemes which involve requirements being placed on business would not contravene the draft MAI and we support their assessment.

Scottish Land Reform

75. During the course of the negotiations of the draft MAI it was suggested that the Government's policy for reform of Scottish land ownership, by promoting forms of community ownership, would be incompatible with the proposed Agreement.[147] Mr. Wilson dismissed such speculation as "far-fetched", arguing that "the kind of land reform I want is certainly not based on discrimination against nationalities. It is much more to do with competence and the motives of those who are involved in the ownership and management of land irrespective of nationality". Community ownership "arguably discriminated against potential private owners of land within Scotland, within the United Kingdom...it is not a matter of nationality".[148] This matter will require resolution in any future agreement.

Fisheries Policy

76. A report of the European Parliament's Committee on External Economic Relations of 26 February 1998, making reference to an opinion of the Committee on Fisheries of 21 January 1998, urged the EU and member states not to sign the draft MAI until assurances were received that it did not infringe EU fisheries policy in any way. European fisheries policy is openly discriminatory, intending to protect indigenous fishing capacity and to maintain a link of ownership between traditional fishing communities and fishing fleets. The Committee on Fisheries questioned whether exceptions taken to the draft MAI by EU member states would provide sufficient protection for the policy from challenge by non-EU investors, particularly because of the possibility of the future roll-back of country-specific exceptions.[149] The UK's Sea Fish Industry Authority re-iterated many of these concerns, concluding that "it may be wise that the fisheries sector should be permanently excluded from full implementation of the MAI".[150] The Minister told us that "the negotiators were very mindful of the potential dangers to the fishing industry" and that he was satisfied that "in any future negotiations the same protections for the fishing industry [as in the draft MAI] would be sought and maintained".[151] It is vital that, in any future negotiation of a multilateral agreement on investment, UK policies which discriminate on grounds of nationality for legitimate reasons — as the EU's Common Fisheries Policy does — should be excepted permanently from the agreement; and that a full dialogue is maintained with those immediately affected by the proposed exception.

Developing Countries

77. Much of the criticism of the draft MAI has concerned its potential impact on developing countries, both if they were to sign up to it, or if the disciplines contained within it became standard worldwide.[152] Although we have not inquired in detail into the relationship between developing countries and foreign investment, we feel that some preliminary observations can usefully be made:

Far from being suspicious of foreign investment, developing countries are mostly desperate to attract more of it. Clare Short MP, the Secretary of State for International Development, has spoken of the "general overwhelming desire" in the poorest developing countries for more inward investment.[153]
Although the problems which might result from foreign investment have been well documented, the benefits it can bring to developing countries should not be underestimated. The recent DFID White Paper listed "employment, exports, new skills and technology" as potentially beneficial by-products of FDI and noted that "portfolio flows can provide resources for local companies and deepen domestic capital markets".[154]
Empirical evidence supports Mr. Bate's assertion that foreign investors "tend to take their best practices with them" so that "it is very often that labour standards are improved as a result of companies investing in countries".[155]
In many developing countries environmental, labour and other standards either do not exist or are not respected. Foreign investment cannot be held responsible for undermining standards in countries whose governments do not or cannot enforce them.
The provisions contained within the draft MAI, including on indirect expropriation and investor-state dispute settlement, are familiar to many developing countries, many of which have signed up to them in bilateral investment treaties with individual developed nations.

78. DFID indicated that their "assessment was that accession to the MAI, while potentially beneficial, could pose particular challenges for countries with relatively weak regulatory capacity; with poorly specified domestic laws affecting investment; with small economies in which a single large foreign investor might have a significant impact; or with specific sectors in which few domestic investors were active".[156] We agree with this analysis. A rules-based multinational investment agreement should be based upon strong, non-discriminatory domestic regulatory systems, to maintain and improve environmental, labour, consumer protection, health and safety and other standards. The challenges posed by weak regulatory regimes, poorly specified domestic laws, the dominance of a small number of firms in particular economic sectors and related factors must be candidly acknowledged and overcome.

41 Draft MAI, p13; for exceptions see paragraph 53 Back

42 Ev, pp39-44 Back

43 Ev, p12 section 4; also Ev, p10 paragraph 12 Back

44 Ev, p1 paragraph 6, p61, p65 paragraph 3.2, p71, p79 paragraph 4.7 Back

45 Ev, p1 paragraph 5 Back

46 For instance, Ev, p65 Back

47 Ev, p1 paragraph 7 Back

48 Ev, p20 paragraph 4, p26 paragraph 12; for exceptions see paragraph 56 Back

49 Fitzgerald Report, p31 Back

50 World Development Movement briefing on local government in the UK, Jul 98 Back

51 Qq155-7 Back

52 The Cuban Liberty and Democratic Solidarity (or Helms-Burton) Act 1996; and the Iran and Libya Sanctions (or d'Amato) Act 1996. The European Parliament's Committee on External Economic Relations heard oral evidence on the impact of both measures on 24 Jun 98. Back