Critical Issues on Investment Law Harmonization within ASEAN

Critical Issues on Investment Law Harmonization within ASEAN By: Mariani Sallehuddin Overview The Association of South East Asian Nations (ASEAN) was established in 1967 with the signing of the Bangkok Declaration by the five original Member States namely: Indonesia, Malaysia, Philippines, Singapore and Thailand. It was later joined by Brunei Darussalam, Viet Nam, Lao PDR, Myanmar and Cambodia. 1 Its establishment was mainly driven by political and security motivations with a view to advancing cooperation in economic, social, cultural, technical, educational and other fields. The consequences of the 1997 Asian financial crisis together with the global recession negatively affected ASEAN Member economies. The ASEAN was destabilized by increasing internal division and it failed to deepen its integration. Nevertheless, the crisis inspired a change in attitudes of the economic authorities within the region in favour of greater regionalism. ASEAN also began to open its eyes on the importance of attracting foreign capital inflows. Investment liberalization and facilitation are integral part of regional economic integration. Investment plays an important part in the structural modification of the relevant economies and realization of the benefits of dynamic effect of the regional economic integration. ASEAN Investment Area (AIA) The ASEAN Leaders decided to establish the ASEAN Investment Area (AIA) at its Fifth ASEAN Summit in Bangkok on 15 December 1995. The AIA was created in response to the 1 Brunei Darussalam joined in 1984; Viet Nam in 1995, Laos and Myanmar in 1997 and Cambodia in 1999. 1

crisis with the aim of attracting foreign direct investment flows from both outside and within ASEAN. The Framework Agreement on the AIA (AIA Agreement) was thereafter signed on 7 October 1998 and entered into force on 7 April 1999. The objectives of the AIA Agreement are; 2 (i) To establish a competitive ASEAN Investment Area with a more liberal and transparent investment environment among Member States to increase FDI inflows into ASEAN; (ii) To jointly promote ASEAN as the most attractive investment area, strengthen and increase the competitiveness of ASEAN s economic sectors; (iii) To reduce or eliminate regulations and conditions which impede investment flows and the operation of investment projects in ASEAN; and (iv) To contribute towards free flow of investment by 2020. The scope of the AIA Agreement covers manufacturing, agriculture, fishery, forestry, mining and quarrying and services incidental to these five sectors. It adopted a two-track approach of the Temporary Exclusion List (which was to be phased out by 2010/2015) and the Sensitive List (in which certain sectors remain closed to both ASEAN and non-asean investment but is subject to a review with the possibility of elimination from the list or a transfer to the Temporary Exclusion List). 3 The establishment of the AIA has been regarded as a policy option of ASEAN to achieve economic integration within the region and more liberalized investment intra-asean. AIA would encourage the inflow of FDI due to the economies of scale generated by the enlargement of the ASEAN market through regional economic integration and intra-asean investment liberalization. Consequently, this resulted in enhanced regional ASEAN laws and regulations. Harmonization of ASEAN investment laws will ensure the certainty and unity of the ASEAN investment regime and practices. 4 The harmonized investment laws mutually guarantee foreign investment protection and improve the system of investment- 2 Article 3 of the AIA Agreement. 3 Article 7(2) (4) of the AIA Agreement. 4 Dr. Lawan Thanadsillapakul, ASEAN Bilateral Investment Agreements <http://asialaw.tripod.com/articles/aseanbit3.html> 2

related laws and regulations. 5 In addition to a favourable economic environment, a good legal environment for foreign investment is an important determining factor in the allocation of foreign investment. 6 ASEAN as a Hub of Investment Decisions made at the following ASEAN Summits accelerated the economic integration among ASEAN Member States. The 2 nd Informal ASEAN Summit held in Kuala Lumpur in 1997 decided to transform ASEAN into a stable, prosperous and highly competitive region with equitable economic development and reduced poverty and socio-economic disparities (ASEAN vision 2020). 7 At the Bali Summit in 2003, the ASEAN Leaders declared that the ASEAN Economic Community (AEC), ASEAN Socio-Cultural Community and ASEAN Security Community shall be the goal of regional economic integration by 2020 and this goal is accelerated to 2015 at the Cebu Summit in 2007. The Declaration on the AEC Blueprint was issued in 2007 with the aim to transform ASEAN into a single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy. The AEC Blueprint was developed as a single and coherent roadmap for advancing the AEC by identifying the characteristics and elements of the AEC, with clear targets and timelines. The achievement of long-term stable economic development relies on the stimulation of intra-regional demand and opening up the region to outside demand. 8 The AEC is seen as having the potential to comply with these conditions for achieving the long-term stable development goal in this region. 9 5 Ibid. 6 Ibid. 7 Wisarn Pupphaseva, Investment Liberalization and Facilitation: Contribution to the ASEAN Economic Community Blueprint, in Hadi Soesastro (ed), Eria Research Project Report 2007 No 1-2: Deepening Economic Integration in East Asia The ASEAN Economic Community and Beyond (Economic Research Institute for ASEAN and East Asia 2007). 8 Anita Prakash and Ikumo Isono, ASEAN in the Global Economy An Enhanced Economic and Political Role (ERIA Policy Brief, No 2012-01, January 2012) 9 Ibid. 3

In order to become an economically integrated and competitive region, the existence of investment liberalization and facilitation are crucial for ASEAN. Free flow of investment and freer flow of capital are two major integral parts of the AEC Blueprint. 10 A free and open investment regime is considered to be the most important element in enhancing ASEAN s competitiveness in attracting FDI and intra-asean investment to guarantee dynamic growth of ASEAN economies. 11 Under the AEC Blueprint, legal instruments of regional integration were reviewed to make them relevant to the present competitive global economic environment. These measures included the revision of the 1998 AIA Agreement and the 1987 Agreement for the Promotion and Protection of Investments (known as the Investment Guarantee Agreement or ASEAN IGA). Following the financial crisis, ASEAN experienced two important aspects of economic growth. One of the aspects is the proliferation of bilateral and multilateral Free Trade Agreements (FTAs). 12 13 As the need for interdependence developed in the region, ASEAN began to negotiate and conclude FTAs, including FTAs investment agreements with other neighbouring economies namely, China, Korea, Japan, India, Australia and New Zealand. 14 In addition, ASEAN Member States have also individually entered into bilateral FTAs with developed and developing countries. These FTAs are much more comprehensive than the AIA Agreement and the ASEAN IGA. Due to this fact, there is imminent need for their review to enhance the provisions and to make them applicable to the current investment environment. ASEAN Comprehensive Investment Agreement (ACIA) The ASEAN Comprehensive Investment Agreement (ACIA) was envisaged with the view of improving and merging investment agreements previously concluded by ASEAN namely, 10 Pupphaseva (n 4). 11 Ibid. 12 ASEAN experienced two crucial aspects of economic growth namely, proliferation of bilateral and multilateral FTAs and possession of sophisticated production network comprising of both big firms and SMEs. For the purpose of this paper, discussion will only focus on the proliferation of bilateral and multilateral FTAs. 13 Prakash and Isono (n 5). 14 Ibid. 4

ASEAN IGA and the AIA Agreement into a single comprehensive investment agreement. Taking into consideration the competitive global environment for FDIs, the ACIA was crafted with the aim of creating a more liberalized investment regime towards the achievement of regional economic integration, based on international best practices. 15 The ACIA is anticipated to facilitate the transformation of ASEAN into an investment hub that would be able to compete effectively with the rest of emerging economies. 16 The ACIA consists of 49 articles, 2 annexes and one Schedule (reservation list of Member States). It contains comprehensive provisions covering the four pillars of investment namely; liberalization, protection, facilitation and promotion. The objectives of the ACIA are: 17 Progressive liberalization of the investment regimes of Member States; Provision of enhanced protection to investors of all Member States and their investments; Improvement in transparency and predictability of investment rules, regulations and procedures conducive to increased investment among Member States; Joint promotion of the region as an integrated investment area; and Cooperation to create favourable conditions for investment by investors of a member state in the territory of the other Member States. The guiding principles of the ACIA are as follows; 18 Forward looking, reaffirming, improving and building upon the existing AIA and ASEAN IGA; Disallow back-tracking of commitments except with compensation; Balanced in its focus: incorporating liberalisation, promotion, facilitation, and protection; 15 Yap Lai Peng, The ASEAN Comprehensive Investment Agreement 2009: Its Objectives, Plan and Progress in S Tiwari (ed), ASEAN: Life after the Charter (Institute of Southeast Asian Studies 2010) 16 Ibid. 17 Article 1 of the ACIA. 18 Article 2 of the ACIA. 5

Progressive liberalisation to achieve free and open investment environment, in line with AEC; Benefit ASEAN-owned investors and companies and foreign-owned ASEAN based investors; Consider granting special and differential (S&D) treatment for the newer ASEAN Member States; Flexible treatment taking into account individual countries sensitivities; Reciprocal treatment in the enjoyment of concessions as in AIA; Preservation of ASEAN preferential treatment; and Allow expansion to cover other sectors in the future. There are various key differences between the ACIA and the AIA Agreement. The ACIA is a single investment agreement created pursuant to the decision of the AIA Council in 2007 to revise the ASEAN IGA and the AIA Agreement. It provides for the clear interaction of the various provisions of liberalization and protection while the ASEAN IGA and the AIA Agreement are two distinct agreements containing protection provisions and liberalization provisions respectively. The ACIA grants immediate benefits to ASEAN investors and ASEAN-based foreign investors with the deadline to achieve free and open investment by 2015. On the other hand, the AIA gave benefits to ASEAN investors between 2003-2010 and the benefits are only extended to non-asean investors by 2020. In relation to scope of the ACIA, while it shares similar scope of the AIA Agreement which covers manufacturing, agriculture, fishery, forestry, mining and quarrying as well as services incidental to these five sectors, its scope has also expanded to include portfolio investments and could also cover any other sectors in the future. The ACIA also provides comprehensive and clearer definitions in accordance with international investment agreements while the AIA Agreement has limited definitions and the term investment is not defined under the AIA Agreement. Apart from that, the ACIA also contains procedures on modification of commitments with compensatory adjustment 6

but such procedures are not provided for under the AIA and modifications are presented only to the AIA Council. With regards to the method of scheduling of reservations, unlike the AIA Agreement which adopted a two track approach of the Temporary Exclusion List and the Sensitive List, the ACIA adopts a single list approach of scheduling reservations. Reservations under ACIA are only taken in relation to national treatment and senior management and board of directors whereas the AIA Agreement provides for limitations in respect of whether certain sectors are closed for foreign participation without clearly specifying what types of limitations that can be imposed. The ACIA also has a provision on the prohibitions of TRIMS performance requirement. Thus, the liberalization components of the ACIA are much broader in scope than the AIA Agreement. As far as the dispute settlement provisions are concerned, apart from the state-to-state dispute settlement under the ASEAN Protocol on Enhanced Dispute Settlement Mechanism, the ACIA also has much comprehensive provisions on Investor-State Dispute Settlement (ISDS) as compared to the AIA. The ACIA also introduces a new provision on consultations which can be invoked by the disputing parties in the event of an investment dispute. Challenges on Investment Law Harmonization within ASEAN The creation of the ACIA is undeniably a positive move of the ASEAN in its effort towards the deepening of its economic integration. Nevertheless, there are some challenges that need to be looked into which could potentially affect the investment liberalization and facilitation in ASEAN. One of the main challenges relates to the implementation of the ACIA itself. One must understand that the process of harmonization does not end with the completion of the texts as the same has to be incorporated into the domestic laws. The ACIA contains provisions which may be expensive to implement and administer and for some Member States may require the enactment of new legislations and regulations or revision of existing ones which will create substantial burden to these Member States, 7

particularly for those countries whose practice differs significantly from international standards. Under the international law of treaties, every treaty in force is binding upon the parties to it and must be performed by them in good faith. Article 27 of the Vienna Convention on the Law of Treaties provides that a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. Thus, all ASEAN Member States must ensure that their existing domestic laws and regulations are in compliance with their obligations set out under the ACIA. If there are existing laws which are not consistent with the terms and conditions of the ACIA, the Member State in question must make the necessary modifications and only then they can fully exercise their rights and comply with their obligations. Such modifications or amendments of laws might need to undergo lengthy and complicated process of approval by the relevant authorities the country. The creation of the ACIA brings benefits to the ASEAN investment environment and the business sector. It provides better protection of investment and thus increases investors confidence to invest in the region. As far as the business sectors are concerned, they gains benefits by receiving non-discriminatory treatment, full protection and security, and cooperation from the governments in respect of promotion and facilitation of investment when they invest in other ASEAN countries. Nevertheless, in order to realize these benefits, the provisions of ACIA must be well understood and implemented especially by government institutions and the business sector in the ASEAN Member States. Effective implementation of the ACIA will very much depend on ASEAN Member States willingness and commitment to undertake both structural and regulatory reform in line with the ACIA provisions. Additionally, regulatory reforms which support the simplification of procedures, licensing and other regulatory requirements would result in a favourable investment environment. 8