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

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

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)

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)

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

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

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

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

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

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

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

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

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

• 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

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

• 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

• 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

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

• 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

• 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

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))

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)

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)

IDN

NZL MYS AUS

MMR LAO 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

20

12

In

wa

rd

FD

I S

toc

ks

(%

of

GD

P)

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

Mo

re

FD

I

• 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

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

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

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

6

21

63

23

67

6

35

40 40

60

2 0 1 0

4

0 1

14

7

2 3 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 ThePhilippines

Singapore Thailand Vietnam

BIT

FTA

ASEAN FTA

BIT with AMS

IIAs in force in the ASEAN region

Source: UNCTAD, ASEAN, World Trade Institute

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

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

Policy Framework for Investment (and User’s Toolkit)

www.oecd.org/investment/pfi.htm

www.oecd.org/investment/toolkit/

FDI Index

www.oecd.org/investment/fdiindex.htm

Investment Policy Reviews

www.oecd.org/investment/countryreviews.htm

ASEAN-OECD Investment Programme

www.oecd.org/investment/seasia.htm

ASEAN Investment website

www.investasean.asean.org

For further information