The New EU Competence for Foreign Direct Investment. Legal Questions of its Implementation

Table of Content

Abbreviations

1. Introduction

2. The role of Investment Treaties and their significance in general

3. The situation before TOL and the status quo

4. What does the FDI competence of Art 206/207 really cover and what is outside the exclusive competence?

5. Legal questions and problems of the new FDI competence regarding implementation

6. The current status and the future of BITs signed by MS

7. Austrian – Nigerian Agreement for Promotion and Protection of Investment

8. Conclusion

List of Official Documents Referred to in the Paper

Bibliography

Abbreviations

illustration not visible in this excerpt

1. Introduction

With the entering into force of the Treaty of Lisbon (TOL) the European Union was massively changed in order to take on the challenges that lie ahead in the future. Among many of those institutional changes, the powers of the Union in the field of investments have been enlarged, with foreign direct investments (FDI) now being part of the Common Commercial Policy (CCP).^[1] The motivation for such a an empowerment is manifold, reaching from FDI attraction and facilitation both important for European economic growth, the establishment of a level playing field for investors, to the beneficial effect of an increased negotiation leverage.

Four years have passed since the new FDI competence has been established and on the face of it not much has been achieved. Only one piece of regulation addressing questions of legal implementation has been adopted.^[2] Exclusive EU Free Trade Agreements (FTA) containing comprehensive investment provisions are still to be concluded. Nevertheless a lot of preparatory work has been conducted by the Commission (COM) and the European Parliament (EP).^[3] Of course the academic debate regarding the scope of the competence is vivid as well as the other obstacles regarding the legal implementation, mainly in the field of Investor to State Dispute Settlement (ISDS).

The aim of this seminar paper will be to firstly give an overview of the role of investment treaties in general, followed by a retrospective on the legal situation of FDI prior the TOL and an analysis of the current legal framework. Based on primary and secondary sources, the scope of the Union’s exclusive FDI competence of Art. 206/207 TFEU will be inquired as well as questions of legal implementation centred on the issue of financial responsibility within ISDS. By addressing the legal status of the Bilateral Investment Treaties (BIT) concluded by MS the legal basis is set to analyse the Austrian Nigerian Agreement for the Promotion and Protection of Investment which was authorized by the COM and concluded by the Republic of Austria in 2013. In this context it will be interesting to assess the potential for the template of this agreement to become a kind of EU-third country model BIT to be concluded by the Union and to which extent the content of the agreement would be covered by the Unions FDI competence.

2. The role of Investment Treaties and their significance in general

Trade and investment are separate but interrelated concepts with the crucial difference that the former has a higher level of regulatory uniformity. The WTO and its multilateral legal frameworks, e.g. GATT and GATS provide a common basis for most issues of trade liberalisation and partially cover investment related topics. However with the unsatisfactory progress of trade liberalisation associated with the DOHA Rounds, regional trade agreements and bilateral preferential trade agreements are becoming increasingly frequent. Nevertheless the level of uniformity due to a lack of a multilateral standard relating to investment regulation is low. Thus there is a great dispersion of international investment law due to many different Investment Agreements having different levels of protection, always depending on the constellation of the parties to the agreement. This as well applies to the European Union MS where until now “a rather large and atomised universe of investment agreements existed”.^[4]

International Investment Agreements (IAA) can be categorized into BITs, Preferential Trade and Investment Agreements (PTIA) or Double Taxation Agreements. All of them foster and facilitate investment by mitigating risks and establishing legal certainty. Although for any kind of investment decision the business model and the envisaged return on investment is crucial, operating in a foreign legal environment includes risks. This is defined as “uncertainty in regard to cost, loss or damage”.^[5] Therefore legal safeguards relating to expropriation, ISDS and non-discrimination are dominant substantive measures to facilitate FDI and can be found in every IIA. IIA which only focus on market access, excluding investment protection, i.e. the post-establishment phase are becoming rarer.^[6] Three substantial rules which can be continually found are the concept of non-discrimination which is implemented by the Most-Favoured Nation Clause (MFN) and National Treatment. Despite those standard clauses no uniform level of investment protection is guaranteed, as these are relative concepts. The Fair and Equitable Treatment provision commonly found in IAA is deemed to remedy this fact by supplementing non-discrimination via a minimum standard derived from in general international practice. Besides safeguards providing for adequate, prompt and effective compensation in case of direct or indirect expropriation there seems to be tendency in including social and environmental protection. All of these aspects are included in the Austrian-Nigerian Agreement on Promotion and Protection of Investment which will be analysed in the second section of this paper. The graphic below illustrates the increasing number of concluded IIA, reflecting ongoing globalization. Whereas in the 1990’s the absolute number of IIAs was around 500, in 2012 the mark up of 3500 has almost been reached.

illustration not visible in this excerpt

Figure 1: Trend of BITs and other IIAs‘s^[7]

3. The situation before TOL and the status quo

In the EC-Treaty^[8] no express competence on FDI can be found. In Art. 133 TEC it could be assumed that the provision “uniform principles, particularly in regard to […] the conclusion of tariff and trade agreements, [and] the achievement of uniformity in measures of liberalisation […]” implies EC competence in the field of investments due to its strong focus on market liberalisation. A broad view along those lines existed already in the 1970^[9], but was narrowed down via the Opinion 1/94. Before the TOL a dualism existed in the sense that the EC was concluding IIA focusing on market-access whereas the MS would conclude standalone BITs covering investment protection with ISDS mechanisms. Just before the TOL the Court of Justice of the European Union (CJEU) issued its Opinion 1/08 clarifying that the EC had competence for investments in the field of services. In the opinion of the author the situation before TOL was very blurry and a clear cut delimitation of the competences between of MS and EC is difficult and would go beyond the scope of this paper, especially considering that the TOL has now simplified matters to a great extent.

After the TOL FDI was explicitly inserted in the CCP which follows from Art. 206 and Art. 207 (1) TFEU. Also with Art. 3 (1) lit. e there are no doubts that the nature of the FDI competence is exclusive, meaning that in the sense of Art. 2 (1) TFEU MS can only act if they are empowered to do so by the Union. Unlike international agreements in general, the negotiation and conclusion of IIA requires unanimity in the Council due to Art. 207 (4) TFEU. Claims were forwarded before the TOL that the democratic legitimization in the EC must be increased. Besides other measures this was partially implemented by empowering the EP with the ordinary legislation procedure which includes the EP. Also in regard to the conclusion of IIA Art. 217 (6) requires the consent of the EP. In consequence from now on and in the future it will be up to the Union to negotiate and conclude new investment treaties or investment chapters part of FTA. Overall the situation of a Union’s Investment Policy has been clarified but with the TOL still some questions to the scope of the exclusive FDI competence exist, which will be addressed in the next section.

4. What does the FDI competence of Art 206/207 really cover and what is outside the exclusive competence?

The first question arising in this context is whether the new exclusive FDI competence covers investment protection. A literal interpretation of Art. 206 TFEU can yield to a narrow scope only covering pre-establishment provisions, i.e. market access. It can be reasonably assumed that “…progressive abolition of restrictions on international trade and on foreign direct investment…” focuses on market liberalization. Taking into account Art. 207 (1) TFEU this interpretation could be backed by understanding FDI as a limited subject matter of trade similar to commercial aspects of intellectual property and thus supporting a narrow view. Another way of interpreting this ambiguous article is to understand FDI being the third field of trade agreements.^[10] This then would include investment protection. From a contextual interpretation point of view it seems difficult to accord Art. 206/207 TFEU a broad application due to the essential focus on CCP on the exchange of goods and services in general.^{[11] [12]} However the scope of the exclusive competence gets broader if a dynamic interpretation is applied focusing on the aim of improving market liberalization. From that point of view it does not seem apt to functionally divide the pre-establishment from the post establishment phase. Surely market access in a way is a precondition, but lacking investment protection can equally be a strong restriction on FDI. Searching for overall sense and thus applying a teleological interpretation in the spirit of an ever closer Union eventually shifting CCP along the lines of a Common Economic Policy, it could be assumed that the Treaty provision has been intentionally formulated ambiguously. Therefore when political will emerges a legal basis will exist.^[13]

From the point of view of the COM investment protection is uncontestably covered in the Unions exclusive FDI competence. In its explanatory memorandum of the proposal on financial responsibility^[14] it clarifies that the Union has exclusive competence “on all matters relating to foreign investment”. Furthermore it states the invalidity of the claim that Art. 345 TFEU bars the Union on interfering with expropriation rules which are allegedly only subject to the MS. This indeed would limit the Union competence to market access. The mentioned memorandum considers expropriation rules as legal safeguards and the associated conditions do not interfere in the system of ownership of the MS.^[15]

Another point of academic contention is the role of portfolio investments. From the ordinary meaning of FDI it could be assumed that portfolio investments are not covered due to their different investment nature compared to FDI. A clear cut distinction between FDI and Portfolio investments seems difficult taking into account the fluid delimitations of the concepts. The Treaties do not define the term FDI and do not refer to portfolio investments. In its July 2010 Communication the COM defines FDI “to include any foreign investment which serves to establish lasting and direct links with the undertaking to which capital is made available in order to carry out an economic activity”.^[16] Portfolio investments are described to have a different intention with a short-term commitment. Both the mentioned COM communication and the proposal on financial responsibility leave no doubt that the COM asserts its exclusive competence on both FDI and portfolio investments. The COM justifies this competence by combining Art. 63 TFEU with Art. 3 (2) TFEU. The former sets the common rule that any kind of restriction to capital movement is prohibited. Thus IIA containing provisions on portfolio investments could potentially violate Art. 63 TFEU and therefore the Union must have the exclusive competence to conclude such IIA.^[17] A different angle on this debate results by assuming that future PTIA will be very broad in the sense that non-economic elements will be included. This then would be uncontestably outside the scope the Unions exclusive competence. These elements would include cultural cooperation and procedural aspects relating to intellectual property rights violations.^[18] With the empowerment of the EP, additional areas of regulation to be incorporated without the Union having exclusive competence are not farfetched. The consequence would be that such broad agreements are likely to be concluded by the Union and the MS together. However in the end the issue of the exact delimitation of the FDI competence could be settled by the CJEU. The role of the CJEU in this matter along other questions regarding the legal implementation of the FDI competence will be broached in the next section.

5. Legal questions and problems of the new FDI competence regarding implementation

One aspect of crucial importance is the ISDS that will be needed in the future for the Union to fully implement its new competence and to achieve the aims set out in the introduction. If a pure Union IIA is concluded the international responsibility of the Union regarding arbitration awards is undeniable. In the case of a mixed agreement both the MS together with the Union are responsible under public international law. Although for the third country concluding such an IIA with the Union can rely on legal certainty, an internal mechanism allocating financial responsibility must be established.^[19] The following chart shows that in the past frequent violations regarding BITs have occurred. This implies that ISDS claims will also be likely in the future when the Union concludes such IIA.

illustration not visible in this excerpt

Figure 2 Number of concluded and pending ISDS claims against MS^[20]

The COM recognized the necessity of a mechanism allocating financial responsibility and approaches this issue with its proposal on the financial responsibility.^[21] The proposal is characterized by five underlying principles: It links financial responsibility to the actor who affords the treatment in question, ensures a maximum of Union budget neutrality, detaches claims of third countries from the internal functioning, rejects the approach of allocating responsibility based on competences and stresses coherence of external action.^[22]

Art. 3 in the proposal lays down the so called “Apportionment Criteria” which are the basis for the COM to allocate financial liability. Of course the legal safeguard to take recourse via Art. 263 TFEU to challenge the allocation determined by the COM remains an option for the MS.^[23] Decisive for establishing financial responsibility is not the attribution of competence but the actor affording treatment not in compliance with the IAA. I.e. the Union is held liable if one of its institutions, bodies or agencies affords the treatment in question. The same applies for the MS, however with the exception that if the action was required by EU-law then the Union will bear the financial responsibility. This exception is imaginable if the MS transposes a directive and thus triggers ISDS claims by a third country. However subparagraph 1 of paragraph 1 Art.3 excludes the possibility of MS to evade from financial liability when acting or legislating in order to comply with EU-law solely to remedy a prior action which conflicted with Union law. This would apply to a situation where the MS illegally grants concession to a third country investor. With the MS bringing the matter in order and complying with EU competition law, the formerly privileged investor could make a claim. However if this is the case then it will be attributed to the MS and not to the Union.^[24] Art. 8, 11 and 14 of the proposal are more straight forward by establishing financial liability based on acceptance (Art. 8), on the choice to act as respondent to the claim (Art.11) and when settling the claim. The latter provision could be useful for MS if it becomes evident that settlement will be less resource intensive than going through the arbitration procedure and eventually facing an expected award. It appears to be reasonable that if the MS wants to settle the claim that under no circumstances this should be financially born by the Union budget.

[...]

^[1]. Art. 207 (1) TFEU

^[2]. Regulation establishing transitional arrangements for bilateral investment agreements between Member States and third countries Reg. 1219/2012

^[3]. Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for managing financial responsibility linked to investor-state dispute settlement tribunals established by international agreements to which the European Union is party, Brussels, 21.6.2012 COM(2012) 335 final 2012/0163 (COD)

^[4]. COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS, Brussels, 7.7.2010 COM(2010)343 final, Towards a comprehensive European international investment policy, 10.

^[5]. Scott L. Hoffman, The Law and Business of International Project Finance ( Cambridge: Cambridge University Press, 2008) , 27.

^[6]. IIA only focusing on market access were predominantly concluded by the EC before the TOL when MS were concluding IIA containing investment protection.

^[7]. UNCTAD World Investment Report 2013, http://unctad.org/en/pages/DIAE/International%20Investment%20Agreements%20%28IIA%29/Research-and-Policy-Analysis.aspx (accessed April 18, 2014).

^[8]. Consolidated Version of the Treaty Establishing the European Community http://eur-lex.europa.eu/en/treaties/dat/12002E/pdf/12002EEN.pdf (accessed April 18, 2014).

^[9]. Opinion 1/75.

^[10]. August Reinisch, “The Future Shape of EU Investment Agreements ,” ICSID Review 28, no. 1 (Spring 2013), under “Oxford Journals,” http://icsidreview.oxfordjournals.org/content/28/1/179.short?rss=1 (accessed April 18, 2014).

^[11]. Wenhua Shan and Sheng Zhang, “The Treaty of Lisbon: Half Way toward a Common Investment Policy,” The European Journal of International Law 21, no. 4 (2010), under “Current Issue” http://www.ejil.org/article.php?article=2107&issue=104#downloadacrobatreader (accessed April 18, 2014).

^[12]. Jan Ceyssens, “Towards a Common Foreign Investment Policy? – Foreign Investment in the European Constitution,” Legal Issues of Economic Integration 32, no. 3 ( August 2005), under “Journals,” https://www.kluwerlawonline.com/abstract.php?area=Journals&id=LEIE2005027 (accessed April 18, 2014).

^[13]. Kevin Kazimirek, “The New EU Competence over Foreign Direct Investment and its Impact on the EU´s Role as a Global Player,” Study of the Jean Monnet Centre for Europeanisation and Transnational Regulations Oldenburg (April 2012), www.cetro.uni-oldenburg.de/download/CETROSelectedTheses-Kazimirek.pdf (accessed April 18, 2014).

^[14]. Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for managing financial responsibility linked to investor-state dispute settlement tribunals established by international agreements to which the European Union is party, 3.

^[15]. Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for managing financial responsibility linked to investor-state dispute settlement tribunals established by international agreements to which the European Union is party, 4.

^[16]. COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Towards a comprehensive European international investment policy, 2.

^[17]. Regulation establishing transitional arrangements for bilateral investment agreements between Member States and third countries 1219/2012, 1.

^[18]. Julien Chaisse, “Promises and Pitfalls of the European Union Policy on Foreign Investment—How will the New EU Competence on FDI affect the Emerging Global Regime?,” Journal of International Economic Law 15, no. 1 (February 2012), under “Oxford Journals,” http://jiel.oxfordjournals.org/content/15/1/51.full (accessed April 18, 2014).

^[19]. Ibid.

^[20]. Ibid.

^[21]. Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for managing financial responsibility linked to investor-state dispute settlement tribunals established by international agreements to which the European Union is party

^[22]. Colin Brown and Ilmars Naglis, “Dispute Settlement in Future EU Investment Agreements,” in EU and Investment Agreements: Open Questions and Remaining Challenges, ed. Marc Bungenburg et al. (Baden Baden: Hart Publishing, 2013), 30.

^[23]. Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for managing financial responsibility linked to investor-state dispute settlement tribunals established by international agreements to which the European Union is party, 11.

^[24]. Colin Brown and Ilmars Naglis, “Dispute Settlement in Future EU Investment Agreements,” in EU and Investment Agreements: Open Questions and Remaining Challenges, ed. Marc Bungenburg et al. (Baden Baden: Hart Publishing, 2013), 30.