Making Sense of Investment Facilitation for Development Agreement (II)

By Kavaljit Singh | Commentary | February 20, 2024

With less than a week to go until the World Trade Organization’s 13th Ministerial Conference (MC13), to be held in Abu Dhabi from February 26, consensus from all members on support for the proposed Investment Facilitation for Development Agreement (IFDA) is still missing. The proposed IFDA has thus far received the support of three-quarters of WTO members, while some prominent members, such as India and South Africa, have opposed this initiative and may not give their consent to the proposed IFDA at MC13.

The supporting countries, led by China, seek to incorporate the proposed agreement into the WTO rulebook as a standalone plurilateral agreement under Annex 4. However, the process of integrating the proposed IFDA into the WTO rulebook requires a decision to be adopted by consensus among all WTO members, even though some members may not join it.

If the IFDA receives support from all members at MC13, it will be the first plurilateral agreement since the founding of the WTO. If this were to happen, the IFDA would potentially open the door to more plurilateral agreements on new issues and regional specifics while rendering the institutional foundations of the multilateral trading system more fragile. In effect, this would drastically alter the character of the WTO, which is the core of the multilateral trading system. Therefore, the decision on the IFDA at MC13 would have much wider ramifications for the future of the multilateral trading system than are currently seen.

Implementation Hurdles

Even if IFDA becomes a reality, the hard part will begin with its implementation. Large and diverse countries with federal and decentralised forms of government will find it extremely difficult to implement some of the key provisions of the proposed agreement.

Although the coordinators of the IFDA negotiations have decided not to make public the agreed text (of July 6) before MC13, a cursory look at this leaked text shows that many provisions may be easier to implement in small countries and city-states (such as Singapore and Monaco) than in a country as large and diverse as India.

For instance, consider the case of a member’s obligations under the proposed IFDA. Article 2.3 of the leaked text states: “A Member’s/Party’s obligations under this Agreement shall apply to measures adopted or maintained by:

  • its central, regional or local governments and authorities; and
  • non-governmental bodies in the exercise of powers delegated by central, regional or local governments or authorities.”

Further, Article 2.4 states: “In fulfilling its obligations and commitments under this Agreement, each Member/Party shall take such reasonable measures as may be available to it to ensure their observance by regional and local governments and authorities and non-governmental bodies within its territory.”

As the author is well-acquainted with the Indian administrative system, let us attempt to place the above provisions in the Indian context. In India, the federal government, state governments, and local bodies (e.g., municipalities and municipal councils) have jurisdiction over different investment issues.

An investor (domestic or foreign) must approach different Indian authorities – for land acquisition, building permits and pollution certificates (mainly municipalities and local authorities, but varies across states); compliance with environmental regulations (Ministry of Environment); license from sectoral regulators (e.g., the Reserve Bank of India) – depending on the type of business. As land is principally a state subject under the Indian Constitution, New Delhi cannot decide on transparency or administrative procedures related to land issues. This issue falls under the jurisdiction of 37 state governments.

Furthermore, there are more than 3700 local authorities in India (comprising 100 municipalities, 2100 nagar panchayats, and 1500 municipal councils) that issue building permits and pollution certificates for setting up factories and offices. Investment facilitation measures such as transparency norms and administrative procedures fall within the remit of these local authorities.

Given India’s peculiar administrative system, it is difficult to imagine whether all local bodies and state governments will cooperate with the central government to implement a legally binding IFDA if India decides to join the proposed agreement. Given these circumstances, New Delhi may not be able to ensure full compliance with the IFDA commitments in a time-bound manner by different state governments and local authorities. It is worth remembering that it took 17 years of consensus building to rollout a nationwide Goods and Services Tax (GST) in India.

Similarly, a single information portal (Article 8) and focal point (Article 22) would be ineffective in India because of its peculiar administrative system.

To be clear, it is unlikely that India or any other member country will alter its administrative system to meet the requirements of the proposed IFDA, whose purported gains are intangible, while the burden of implementing demanding provisions is heavy. This burden cannot be alleviated through technical assistance and capacity-building measures, as outlined in the July 6 text.

Sustainable Investment Provisions: Without Teeth That Bite

The July 6 text devotes an entire section on sustainable investment and includes two provisions on “responsible business conduct” and “measures against corruption”, with the expectation that these measures would facilitate higher-quality investments and thereby promote sustainable development in host countries.

Some analysts may view the inclusion of these provisions as a major departure from previous WTO agreements, but it is important to note that these provisions are the only ones exempted from dispute settlement proceedings. Article 44.4 of the text states: “Members/Parties shall not have recourse to dispute settlement under this Article for matters arising under Article 37 on “Responsible business conduct” and Article 38 on “Measures against corruption”.” In other words, no dispute claims can be raised against the non-implementation of these two provisions on sustainable investment.

In addition, there are no binding obligations for private investors and home countries to encourage responsible business conduct in the July 6 text.

Some Bigger Issues

In addition to these practical considerations, there is also a question of policy space. There is a legitimate concern that legally binding commitments on investment facilitation and their enforcement under the WTO will restrict the policy space for member countries to choose the best mix of policies and instruments that are consistent with their peculiar administrative structures and local conditions. A bottom-up approach is more effective and appropriate for countries to design investment facilitation measures that take local circumstances into account.

Why should countries opt for a top-down, legally binding plurilateral agreement when more flexible and beneficial options for investment facilitation are available?

One option is to pursue a unilateral approach to investment facilitation, which is currently being adopted by all WTO members. Members have been, and are, unilaterally implementing a wide range of investment facilitation measures at the national and subnational levels, as per their administrative structures.

The second option is to pursue investment facilitation measures through voluntary non-binding mechanisms. Some of these recent initiatives include: UNCTAD’s Global Action Menu for Investment Facilitation (2017), Outlines for BRICS Investment Facilitation (2017), and the EU-India Investment Facilitation Mechanism (2017).

Another option to promote investment facilitation is through policy advice, technical assistance, and capacity building.

To conclude, investment facilitation is just one instrument that attracts investment, and it is by far not as important as a country’s economic determinants. Many states in India (such as Punjab and Himachal Pradesh) have established single-window systems and streamlined administrative procedures with time-bound approvals of investment proposals; however, such measures have not always been accompanied by increased investments (domestic or foreign). The same has been the case in many countries, calling into question the efficacy of investment facilitation measures.

With close to 120 members backing the proposed IFDA, it remains to be seen whether the rest of the members will give it a green signal at MC13, given the centrality of “consensus-based decision making” at the WTO, as emphasised in the Marrakesh Agreement.

Over the next week, the world’s eyes are on the MC13.

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