Investment Climate Reform in Southeast Asia - Stephen Thomsen – Southeast Asia Regional Forum


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Stephen Thomsen looks at investment climate reform in Southeast Asia and draws lessons for the update of the OECD Policy Framework for Investment currently underway. This presentation was made at the Southeast Asia Regional Forum in Bali, Indonesia, on 24-26 March 2014.

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Investment Climate Reform in Southeast Asia - Stephen Thomsen – Southeast Asia Regional Forum

  1. 1. INVESTMENT CLIMATE REFORM IN SOUTHEAST ASIA: LESSONS FOR THE PFI UPDATE Stephen Thomsen Head, Investment Policy Reviews, OECD Global PFI Task Force Meeting Bali, 24 March 2014
  2. 2. Roughly 200 questions grouped into 82 topics.  A checklist, not a questionnaire Comprehensive • Covering 10 policy areas (investment, investment promotion, competition, trade, tax, corporate governance, CSR, human resource development, public governance) • Touching on all types of investors: public & private, foreign & domestic, large & SME, formal & informal Non-prescriptive • No single, uniform approach that will suit all economies at all points in time and under all conditions. A good investment climate can accommodate a range of policies. It is also a moving target. • Policy decisions involve trade-offs. Policy Framework for Investment (PFI)
  3. 3. Governance matters: • A sound business environment is a process as much as an outcome. How to make policy matters as much as the policy itself. – Policy design, implementation/enforcement, evaluation/review – Transparency, stability/predictability, coherence, effectiveness Questions: • Do the existing questions adequately address trade-offs? • What areas could be added to the PFI? • How to strengthen its relevance for SMEs? • How can we strengthen the links across policy areas? Policy Framework for Investment (PFI)
  4. 4.  Ease of doing business  Land ownership and registration  Intellectual property rights  Non-discrimination  Contract enforcement  Expropriation  Access to justice and alternative dispute resolution  International investment agreements Investment Policy
  5. 5. 1.1 How does the government ensure that laws and regulations covering investment, including by SMEs, and their implementation and enforcement are clear, transparent, readily accessible and do not impose unnecessary burdens? 2.4 How has the government sought to streamline administrative procedures to quicken and reduce the cost of establishing a new investment? […] 10.3 Are administrative burdens on investors measured and quantified? What procedures exist to identify and reduce unnecessary burdens, including those on investors? […] The ease of doing business
  6. 6. 2012 2013 2014 Singapore 1 1 1 Malaysia 18 12 6 Thailand 17 18 18 Brunei Darussalam 83 79 59 Viet Nam 98 99 99 Indonesia 129 128 120 Cambodia 138 133 137 Philippines 136 138 108 Lao PDR 165 163 159 Myanmar - - 182 Doing Business in ASEAN Rankings based on 189 countries as of 2014
  7. 7. 1.2 How is the government moving towards progressively establishing timely, secure and effective methods for registering land and other forms of property? Questions: • What mechanisms exist when acquiring land for large-scale projects (e.g. infrastructure, mines, dams, plantations) to ensure that those living on the land are consulted and fairly compensated and that there is a mechanism to redress grievances? • Does the government periodically assess whether restrictions on foreign ownership of land deter investors? Land ownership and registration
  8. 8. Land Ownership Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Private ownership allowed Yes Yes No Yes No Yes Yes Yes No Foreign ownership allowed No No No Yes No No Yes/No No No Under which conditions: Foreign ownership of land is limited to entities with majority Cambodian ownership. Foreigners may not own land but may receive long- term leases for business purposes. Foreign investors with registered capital > USD 500000 are entitled to purchase a land use right from the state for residential or business purposes. Land acquisition is allowed for business purposes only. Approval from MIC required for lease of government land. Foreign ownership of land is limited except where FDI>40% for which leases are permitted Foreign established entities are restricted from owning vacant land and land zoned for residential purposes Foreign companies may not own land, except those promoted by the BOI and oil concessions or when provided by treaty or ministerial permission. Foreigners may not own land but may receive long- term leases for business purposes. Maximum lease period allowed 99 years 99 years 50 years 99 years 50 years 75 years 60 years 60 years 70 years Foreign ownership of land in ASEAN
  9. 9. 1.3 Has the government implemented laws and regulations for protecting IP rights and are there effective enforcement mechanisms? Does the level of protection encourage innovation and investment by domestic and foreign firms? How does the government meet the IP needs of SMEs? Questions: • How does the government balance the need to foster investment and innovation with public access to goods, services and knowledge? • How does the government improve enforcement (public awareness campaigns, training for officials, specialised IP courts)? • What mechanisms exist to resolve disputes (IP courts, arbitration and mediation)? • Is the existing IP regime suitable in terms of encouraging technology transfers between foreign and domestic firms? Intellectual property rights
  10. 10. Question 1.6 • Has the government established non-discrimination as a general principle underpinning laws and regulations governing investment? • In the exercise of its right to regulate and to deliver public services, does the government have mechanisms in place to ensure transparency of remaining restrictions on international investment and to periodically review their costs against their intended purpose? • Has the government reviewed restrictions affecting the free transfer of capital and profits and their effect on attracting international investment? Non-discrimination
  11. 11. Existence of a single investment law for both domestic and foreign investors Principle of national treatment / non- discrimination enshrined in laws Negative list approach Guarantee of free transfer of funds provided by law Cambodia Yes Yes, except for land / Yes Lao PDR Yes Yes / Yes Indonesia Yes Yes Yes Yes Malaysia No No / Yes Myanmar Domestic and foreign investment laws will be unified No Yes, but requires further clarifications Yes but with approval Philippines 2 investment laws Yes Yes Yes Thailand 2 investment laws No Yes Yes Viet Nam Yes Yes Yes Yes ASEAN approaches to non-discrimination
  12. 12. Governments discriminate in many ways among firms, both as a matter of policy and sometimes inadvertently: between public and private, large and small, or domestic and foreign (national treatment) – and sometimes even among foreign firms. Four principal ways in which governments discriminate against foreign investors (both entry and operational restrictions):  Screening (all projects or only those above a threshold or foreign equity share or all foreign investments)  Equity restrictions (by sector or overall, for acquisitions or greenfield projects)  Restrictions on key personnel (managers, directors, technical experts)  Other restrictions (land ownership, profit/capital repatriation, branching, reciprocity, minimum capital requirements, etc.) Forms of discrimination against foreign investors
  13. 13. • Threshold, specific sectors, mergers and greenfield • National security, competition, net benefit or economic needs test • Burden of proof on investor (Canada) or host government (Australia) • Tied to the provision of incentives • Ex post notification Different approaches to screening
  14. 14. Benefits • Secures domestic support for an open investment regime • Allows host government to negotiate more concessions so as to extract the maximum benefit from each investment project • May be necessary for major projects with significant potential social or environmental impacts – both domestic and foreign Costs • Administrative cost to government • Costs to investor: time, legal fees, delays and uncertainty • All else held equal, screening mechanisms are associated with lower levels of foreign direct investment Costs/benefits of screening
  15. 15. • If the government screens foreign investment projects, has it considered alternatives or a more narrow set of criteria? • Is the screening process transparent, with clear criteria within the competence of the agency to assess? • Is discretion limited and are there clear timelines for approval and the possibility of appeal? Possible PFI questions on screening
  16. 16. • Prohibition on investment • Maximum foreign equity share (5-99%) • Joint venture requirement • Mergers and takeovers, greenfield • Extractive industries: oil, gas, mining • Infrastructure sectors: telecoms, transport • Agriculture, fishing • Services: finance, professional services, retail, media • Government: health, education, defence • Few restrictions in manufacturing : cigarettes, alcohol, etc. Sectoral restrictions
  17. 17. Question 8.5 Do laws and regulations restrict the deployment of skilled workers from an enterprise investing in the host country? What steps have been taken to unwind unduly restrictive practices covering the deployment of workers from the investing enterprise and to reduce delays in granting work visas? Restrictions on key personnel
  18. 18. • Land • Key personnel, board of directors • Capital repatriation • Minimum capital requirement • Local content • Technology transfer • Export requirement • Government procurement • Official aids and subsidies Other restrictions
  19. 19. • Measures only statutory restrictions on FDI (i.e. where national treatment is not applied) • Does not include the degree of implementation, institutional quality or state ownership • Covers equity restrictions, screening, restrictions on key personnel and operational restrictions • Scores currently available for almost 60 countries, covering 22 sectors. • Time series available for some countries • Most ASEAN scores are preliminary OECD FDI Regulatory Restrictiveness Index
  20. 20. OECD FDI Regulatory Restrictiveness Index (full sample) Selected economies 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 2013 FDI RR Index Total 2014 FDI RR Index - Screening & Approval (Open=0; closed=1))
  21. 21. ASEAN economies are generally more restrictive across sectors than OECD 0 0.1 0.2 0.3 0.4 0.5 0.6 OECD ASEAN9 OECD FDI Regulatory Restrictiveness Index (open=0; closed=1)
  22. 22. 0 50 100 150 200 250 300 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 The Philippines Myanmar Indonesia Thailand Lao PDR Viet Nam Malaysia Cambodia Singapore 2013 OECD FDI Regulatory Restrictiveness Index 2012 FDI Stocks (current, % of GDP) OECD FDI Regulatory Restrictiveness Index ,2013(open=0;clsoed=1) 2012 FDI Stocks (% of GDP) FDI Index scores vs FDI stocks (% of GDP) in ASEAN9 countries (Preliminary scores)
  23. 23. IDN NZLMYS AUS MMRLAO VNM THA KHM PHL 0 20 40 60 80 100 120 140 160 180 0 0.1 0.2 0.3 0.4 0.5 2012InwardFDIStocks(%ofGDP) 2013 FDI RR Index (Closed = 1; Open = 0) Sources: OECD Statistics and IMF estimates. Excludes Iceland, Belgium, Iceland, Jordan and Luxembourg. Fewer FDI restrictions mean more FDI More Open MoreFDI
  24. 24. • If there is a negative list, is it subject to periodic review and is there a mechanism to reduce restrictions over time? • Does the government ensure that the negative list is complete and with a sufficient degree of detail? • Does the government benchmark its restrictiveness against other countries? Possible additional PFI questions: Negative lists
  25. 25. 1.5 Does the government maintain a policy of timely, adequate and effective compensation for expropriation also consistent with its obligations under international law? What explicit and well-defined limits on the ability to expropriate has the government established? What independent channels exist for reviewing the exercise of this power or for contesting it? Questions: Include notion of state’s right to expropriate for public purposes? How should indirect expropriation be treated? How to balance the benefits in terms of investor protection from expanding the scope of expropriation provisions against the perceived potential risks from frivolous claims? Expropriation
  26. 26. ACIA protects against direct & indirect expropriation, when it is done:  For public purposes;  In a non-discriminatory manner;  Against prompt, adequate and effective compensation, in accordance with due process of law.  Whether a measure amounts to indirect expropriation is to be determined on a case-by-case basis What countries provide:  Most AMS protect against expropriation (direct & indirect) and grant fair compensation, in accordance with international standards cited above  Countries are generally silent on the criteria used to qualify an indirect expropriation  A few AMS (e.g. Cambodia, Myanmar) protect against nationalisation only and are silent on methods of compensation Protecting against expropriation in AMS
  27. 27. Question 1.7 Are investment policy authorities working with their counterparts in other economies to expand international treaties on the promotion and protection of investment? Does the government periodically review existing international treaties and commitments to determine whether these provisions create a more attractive environment for investment? What measures exist to ensure effective compliance with the country’s commitments under its international investment agreements? Questions • How to ensure adequate policy space? • How to ensure awareness of international investment-related commitments among ministries and other relevant public bodies? International investment agreements
  28. 28. 6 21 63 23 67 6 35 40 40 60 2 0 1 0 4 0 1 14 7 23 3 3 3 3 3 3 3 3 3 0 7 7 7 4 4 5 4 6 8 0 10 20 30 40 50 60 70 80 Brunei Cambodia Indonesia Lao PDR Malaysia Myanmar The Philippines Singapore Thailand Vietnam BIT FTA ASEAN FTA BIT with AMS IIAs in force in the ASEAN region Source: UNCTAD, ASEAN, World Trade Institute
  29. 29. Contract enforcement and dispute resolution 1.4 Is the system of contract enforcement effective and widely accessible to all investors? What alternative systems of dispute settlement has the government established to ensure the widest possible scope of protection at a reasonable cost? International arbitration instruments 1.8 Has the government ratified and implemented binding international arbitration instruments for the settlement of investment disputes? Dispute settlement
  30. 30. Protection against expropriation in investment laws Possibility for recourse to investment arbitration provided by law Adherence to int’l conventions on arbitration (ICSID & NY Conventions) Adherence to IIAs (including BITs and FTAs) Cambodia Yes, but incomplete Yes Yes Yes Lao Yes No Not a member of ICSID Yes Indonesia Yes Yes Yes Yes Malaysia Yes Yes Yes Yes Myanmar Yes, but incomplete Yes, but unclear Not a member of ICSID Adhered to NY Convention in 2013 Yes Philippines Yes Yes Yes Yes Thailand Yes, but incomplete Yes ICISD Convention signed but not yet ratified Yes Vietnam Yes Yes Not a member of ICSID Yes Approaches to international investment agreements in ASEAN
  31. 31. Policy Framework for Investment (and User’s Toolkit) FDI Index Investment Policy Reviews ASEAN-OECD Investment Programme ASEAN Investment website For further information