ROAD MAP FOR ATTRACTING FOREIGN INVESTMENTS

1. Setting the Legal and Policy Framework

As a first step, policymakers need to assess whether they have the right types of government policies, strategies, and a legal and regulatory framework in place to both attract foreign direct investment (FDI) and ensure that any such investments are sustainable and beneficial to the country.

Government Policies and Strategies: Assess, Formulate and Reform

To attract foreign direct investment and maximize its contribution to the sustainable development objectives of a country, clear government policies are needed to guide and inform the planning, preparation, negotiation, monitoring, and implementation of an investment.

 Such policies include:

• A national development plan, policy or vision that outlines a country’s sustainable development goals and sets out in which sectors foreign direct investment is desirable to achieve those goals.
• Investment policies that are aimed at achieving a country’s development goals and set out the strategic priorities for investment.
• Investment incentives to promote foreign direct investment. Such fiscal, financial, or other investment incentives must be carefully assessed in terms of long-term costs and benefits before they are implemented. The costs and benefits of incentives must be periodically reviewed to ensure they are effective in achieving their desired goals.
• A master infrastructure plan to help identify and prioritize investments into the construction, operation and maintenance of infrastructure.

 Reform and Revise the Legislative and Regulatory Frameworks

A comprehensive and clearly drafted legal and regulatory framework improves the investment climate for investors, promotes transparency and government accountability, facilitates better contract negotiations, and makes it easier to implement and regulate investment projects.

Governments should formulate or revise their laws according to their democratic processes, as a part of which relevant stakeholders, including communities which stand to be affected, should be consulted. A government’s national policies and policy objectives, as well as international and regional best practices should also be taken into account in the formulation or revision of such laws.

If a public-private partnership (PPP) in an investment is envisaged, the PPP legal and regulatory framework may also need to be revised or updated. There may also be scope for leveraging investments in natural resource-related infrastructure (such as power, ports, rail, water, ICT) to address national infrastructure developments goals, which should be considered.

In relation to any investment, comprehensive environmental, social and human rights protections should also be included in the legal framework. Laws and regulations setting out such protections should reflect international and regional standards and best practices. They also need to address such issues as what data should be collected for impact assessments and management plans, which government agency or department should review and approve them, the process for revisions and corrections, and what the penalties are for non-compliance.

Setting out such provisions in the laws governing contracts rather than in the contracts themselves could also limit their (re)negotiation at the contract stage, though some investors may seek to introduce stabilization in the contracts that circumvent some of those standards.

The implementation of model contracts based on best practices and public consultations could further minimize the discretion in the contract negotiating process, with guidance as to which provisions may be amended in the course of negotiations and which may not.

Finally, the implementation of bilateral investment treaties may need to be considered. Where local content legislation is or has been implemented, governments need to ensure that the provisions in the investment treaties and local content requirements do not conflict.

The host government also needs to ensure that it has sufficient information on the sector and resources in respect of which it is seeking to attract investment. The availability of reliable and up-to-date information will improve the prospects of a successful and equitable outcome of a tender process or a contract negotiation.

 Depending on the type of the investment, such information could include:

• Geological information regarding the location, estimated quantity and quality of mineral resources;
• Hydrological information regarding water sources and availability, seasonal fluctuations, and current users of water; or Information regarding the suitability and availability of land for a particular use.

​In relation to extractive industry investments, for example, governments require geological information about the location and estimated quality and quantity of reserves as well as the technical expertise to understand and interpret such information.

An understanding of the infrastructure needs of the investor is also important so that the scope for shared use or third party access to such infrastructure can be assessed. Importantly, the status of land that will be made available for the investment project needs to be ascertained.

Where land rights have not been formalized, informal land uses need to be assessed and taken into account so that adequate in-kind and financial compensation can be made available to land users so as to minimize the prospects of social and community conflict.

At this time, the government should also assess whether it has the requisite skills and in-house expertise and experience in relation to the type of sector investment. If not, it should seek to acquire such expertise in-house or request assistance from support providers or donors to ensure it has access to the requisite skills or expertise in such areas. This will ensure that, when investment opportunities arise, the government is well placed to negotiate, monitor and implement the investment.

2. Pre-Negotiation Stage

The Pre-Negotiation Stage refers to the period during which a government identifies a particular project or investment and conducts feasibility studies and impact assessments. It is also at this stage that a host government should prepare the necessary documentation to carry out a tender or competitive bidding process, if such an application of rights process is being used.

Environmental Impact Assessments, Social Impact Assessments, and Human Rights Assessments need to be conducted to assess the potentially adverse social, environmental, and human rights impacts of a particular investment and be better placed to manage and mitigate the risks. With an understanding of the impacts, site-specific environmental, human rights, and social parameters can then be included in the tender documents and incorporated into the investment contract entered into between the government entity and the investor.

Where a local community stands to be affected by an investment, it is important that a government engages early on with such a community. The internationally-recognized principle of free, prior, and informed consent, or FPIC, provides that indigenous peoples have a right to consultation on matters, like investments, that affect their rights and interests. There is also increasing international consensus that non-indigenous communities have a right to be consulted with and to participate in public decisions that affect their lives. Consulting with communities and obtaining FPIC also reduces the risk of social conflict, which minimizes transactional costs and ensures greater certainty for the project.

The objective of awarding a concession or license through a competitive bidding or tender process is to identify the best contracting party through a sound, competitive, inclusive, and transparent process. Competitive bids are commonly used for the development of infrastructure projects to promote value for money. Competitive bidding is also becoming more widespread in the extractive industries, especially where there is already geological information available on a particular mineral or petroleum reserve. The alternative to a competitive bidding process is to award mineral or petroleum rights on a first come, first serve basis.

The documentation governing the tender process needs to be well-drafted and comprehensive, setting out the material terms and conditions for agreement, pre-conditions and parameters for the investment and ensuring the tender process is conducted transparently.

3. Contract Negotiation Stage

Where an investor is engaged on a first come, first served basis, or has made an unsolicited bid, a contract negotiation over the terms of the investment contract is usually required. It is at this stage that such important contractual terms as profit sharing, the level of taxes, and the breadth of stabilization clauses may be negotiated and the rights and obligations of each of the contracting parties agreed. The contract essentially dictates the relationship between the host government and the foreign investor for the duration of the investment, which makes it crucial for the host government to have a negotiating team that is fully capable of engaging in the discussions on an equal footing with the contracting party. While at previous stages industry-specific information was also necessary, it is also vitally important here to assemble a negotiating team that has the knowledge, expertise, and experience to negotiate the substantive provisions of the contract.

The decision of who will sit at the negotiation table and will represent the different parties is of vital importance to the outcome of the negotiations and the sustainability of the investment. However, there is no one one-size fits all formula as to who should represent the government at the negotiations table. The structure will depend on the governance structure of a country, the way past negotiations were structured and the political will for a particular structure.

It is in the host government’s interest to assemble a multi-disciplinary, multi-sectoral negotiation team that is composed in a professionally balanced manner of relevant experts (legal, commercial, fiscal, technical) as well as of some of the government/ ministerial representatives from the sectors implicated by the investment. These could include, for example, representatives from the ministries of finance, justice, labor and employment, public works, national planning, indigenous peoples, the environment and water, etc. That way, the negotiation is more likely to be equitably balanced and lead to a fair outcome, while at the same time ensuring that the investment is aligned with national and sector development goals.

The government should establish a timeline and roadmap for the negotiations to follow during the negotiation process to ensure that all relevant issues are properly discussed, with relevant technical, legal and commercial experts present, and agreed upon. The members of the negotiation team should also understand and agree an effective negotiation strategy ahead of time to progress the government’s negotiation position. This includes prior agreement on who should lead the negotiation and who in the room is empowered to take decisions on which aspects of the deal.

An effective and smooth negotiation is one where both parties are on an equal footing in terms of access to information, technical expertise and an understanding of the available options. A contract which is well-drafted, responsive to changing circumstances and fair to both parties is most likely to be sustainable and mutually beneficial to both parties.

4. Implementing and Monitoring Stage

For the government to effectively monitor compliance, it should:

• Map out the government and investor obligations in the contract and relevant legislation; and Identify contacts in the relevant ministries and government agencies that will be responsible for ensuring the government complies with its contractual obligations and the investor carries out its operations in accordance with its contractual obligations and the standards it has agreed to meet. This should also include ensuring that the efforts of each government department involved in monitoring the investment are coordinated and inter-linked to maximize the government’s ability to oversee the investment.

To facilitate the effective implementation of an investment project, a government also needs to ensure that applications for permits and licenses are promptly reviewed and accepted/ rejected on the basis of objective and transparent criteria and that all administrative decisions and regulatory actions are subject to transparent review procedures. Given the long terms of many investment projects, flexible review mechanisms also need to be in place to address changes of circumstance that may require the terms of an investment contract to be revised or updated.

In addition to their potential for fostering sustainable development in host countries, large-scale investment projects can sometimes have adverse effects, including employment conflicts or even human rights violations, leading to grievances from third parties, such as workers or local community members. Host country governments should ensure that courts or other judicial processes are accessible to those third parties for addressing investment-related grievances. Governments can also establish non-judicial grievance mechanisms to complement these processes. Such grievance mechanisms can serve as a useful forum for the expression of community and worker concerns or the resolution of disputes, which in turn can help to ensure greater stability and commercial certainty for the investment project. Non-judicial grievance mechanisms might be especially useful when a country’s judicial system is already over-burdened and lacks capacity to resolve disputes in a timely manner.

As well as ensuring adequate judicial remedies and potentially developing state-run non-judicial grievance mechanisms, governments can also require or encourage investors to develop their own operational-level grievance mechanisms. Such grievance mechanisms would be operated by the investor or a designated third party, and can be designed to resolve investment-related disputes or grievances using conciliation and negotiation, or through more adjudicatory processes. In addition to state-based and operational-level grievance mechanisms, individuals and communities seeking redress may also have access to other grievance mechanisms in certain contexts, such as those established by international financial institutions financing part or all of the investment or by relevant multi-stakeholder initiatives.