There is a significant investment policy component to the COVID-19 response. More than 70 countries have taken measures either to mitigate the negative effect on FDI or, conversely, to shield domestic industries from foreign takeovers.
The crisis has led to new policies to facilitate, retain and promote investment. Several countries have taken steps to alleviate the administrative burden for firms and to reduce bureaucratic obstacles with the aim of speeding up production or delivery of goods during the pandemic. The crisis and the resulting disruption of regular government services have also accelerated the uptake of online tools and e-government platforms providing continuity of essential services for businesses and investors. UNCTAD’s IPA observer of April 2020 documents efforts by investment promotion agencies (IPAs) worldwide to respond to the emergency.
Several countries have included incentives for the development of medication and vaccines in their state aid packages. Other incentive schemes concern the expansion or conversion of production lines to increase medical supplies. To help domestic air carriers, several governments have decided or are considering acquiring equity or nationalizing companies. Finally, most State aid packages contain fiscal or financial aid for SMEs to help keep supply chains intact.
The COVID-19 pandemic has resulted in intensified screening of foreign investment in the health industry and other strategic sectors. At least nine countries introduced measures to safeguard domestic productive capacities in health care, pharmaceuticals, medical supplies and equipment. Almost all these measures were adopted by developed countries.
Other State interventions in the health industry affecting investors include obliging private firms to shift production to goods needed in response to the COVID-19 pandemic, and making it possible to requisition factories, production units, private health care facilities or public health related goods.
The COVID-19 pandemic is slowing down the pace of international investment agreement (IIA) negotiations. Several rounds of negotiations of BITs and treaties with investment provisions (TIPs) scheduled for 2020 have been cancelled or postponed. Some of the policy responses to the health crisis and its economic fallout could be challenged by foreign investors through arbitration proceedings under IIAs. This highlights the need to safeguard sufficient regulatory space in IIAs to protect public health and to minimize the risk of investor–State dispute settlement (ISDS) proceedings.
The pandemic is likely to have lasting effects on investment policy making. It may reinforce and solidify the ongoing trend towards more restrictive admission policies for foreign investment in industries considered of critical importance for host countries. At the same time, the pandemic may result in more competition for investment as economies strive to recover from the crisis.
In 2019, 54 countries and economies introduced at least 107 policy measures affecting foreign investment, with developing economies in Asia the most active, accounting for almost 50 per cent. The total number of new policy measures continued to decrease for the second consecutive year since the peak in 2017. Seventy-six per cent of newly introduced measures aimed at liberalizing, promoting and facilitating investment, while the remaining 24 per cent related to new restrictions or regulations (figure 5).
The policy trend of recent years towards more stringent foreign investment screening related to national security continued in 2019. Six countries, mostly developed economies, adopted new measures in this area, targeting strategic industries and critical infrastructure. Methods to reinforce screening systems included, for example, the expansion of the sectoral scope of reviews, the lowering of the capital threshold for triggering screening, the broadening of review criteria, the strengthening of the sanctions system, the extension of the review period and the establishment of special screening bodies.
Numerous cross-border M&A deals fell through in 2019 because of regulatory or political concerns. Several involved the sale of strategic domestic assets (such as in the energy sector or medical services) to foreign investors. At least 11 large M&As (deals exceeding $50 million) were withdrawn by the parties because of concerns related to national security, competition policy or other public interests.
At the same time, 34 countries introduced policy measures in 2019 in the direction of liberalization, promotion, or facilitation of foreign investment. These measures continue to constitute the majority, accounting for 76 per cent of all newly introduced investment policy measures in 2019. Steps toward liberalization were taken in at least 13 countries. They covered various industries, including mining, energy, financial services, transportation, and telecommunication.
To promote investment, at least 13 countries offered new incentives. Seven countries simplified or streamlined administrative procedures. Steps taken in this direction included the establishment of one-stop shops, the abolition of approval requirements, the lowering of administrative fees, the elimination of discriminatory treatment of foreign investors in licensing processes, and the setting up of an investment portal to facilitate matchmaking between domestic and foreign investors.
Other investment policy developments included the adoption of new investment laws, the establishment of special government bodies to promote high quality investment as well as new legislation on special economic zones, public–private partnerships and arbitration procedures.
In the international investment policy arena, change in the IIA regime is underway. In 2019, 22 new IIAs were signed. The new treaties included 16 BITs and six treaties with TIPs. The most active economies in concluding IIAs were Australia, Brazil and the United Arab Emirates, each with three new IIAs. With these new IIAs, the size of the IIA universe rose to 3,284 (2,895 BITs and 389 TIPs). By the end of the year, at least 2,654 IIAs were in force (figure 6).
The number of IIA terminations continued to increase. In 2019, at least 34 treaties were effectively terminated, of which 22 unilaterally, six by consent, four by replacement and two by expiry. Particularly active in terminating treaties was Poland, with 17 BITs terminated, followed by India, with seven. For the second time since 2017, the number of IIA terminations exceeded the number of new treaty conclusions. By the end of the year, the total number of effective terminations reached 349.
Several other significant developments affected the international investment policy landscape. They include an agreement by EU member States to terminate intra-EU BITs, as well as Brexit and the entry into force of the agreement establishing the AfCFTA.
In 2019, investors initiated 55 publicly known ISDS cases pursuant to IIAs (figure 7), the lowest number in five years. As of 1 January 2020, the total number of publicly known ISDS claims had reached 1,023. As some arbitrations are kept confidential, the actual number of disputes filed in 2019 and previous years is higher. To date, 120 countries and one economic grouping are known to have been respondents to one or more ISDS claims.
More than half of the arbitral decisions rendered on jurisdictional grounds in 2019 were in favour of the State. Those on the merits more frequently ended in favour of the investor. By the end of 2019, at least 674 ISDS proceedings had been concluded.
Progress on the reform of the IIA regime is visible in treaties concluded in 2019. Nearly all new IIAs contain features in line with UNCTAD’s Reform Package for the International Investment Regime, with the preservation of States’ regulatory space being the most frequent area of reform. Countries continue to implement ISDS reform elements in new IIAs, using four principal approaches: (i) no ISDS, (ii) a standing ISDS tribunal, (iii) limited ISDS and (iv) improved ISDS procedures. Since 2012, over 75 countries and regional economic integration organizations benefited from UNCTAD’s support for the development of new model BITs and IIA reviews. To further support the IIA reform process, UNCTAD will launch its IIA Reform Accelerator later in 2020.