Investment Facilitation for Development Agreement: Why does it matter?

The more than 110 World Trade Organization (WTO) members participating in negotiations for an Investment Facilitation for Development Agreement (IFDA) announced a major milestone on July 6: the conclusion of the talks on the accord’s text. In recognition of this important step, this article provides an overview of how the IFDA negotiating process—known as a joint statement initiative (JSI) process—has evolved and why the potential agreement matters, especially in terms of the development and sustainable development objectives it seeks to deliver. This article also explores what can be expected next from the process, especially in the run-up to the next ministerial conference (MC13) scheduled for February 2024 in Abu Dhabi.

Genesis of the IFDA Negotiations

WTO members first formally expressed interest in new rules on investment facilitation at the 11th Ministerial Conference in Buenos Aires in 2017. A group of 70 members from developed, developing, and least developed countries (LDCs) said they would pursue structured discussions with the aim of creating multilateral rules on investment facilitation. After 3 years of exploratory discussions, formal negotiations began in September 2020. Now, after 3 years of talks and with more than 40 additional participants joining the process, members have finalized the IFDA’s legal text.

The IFDA should not be construed as an attempt to create a broader set of multilateral rules on investment governance at the WTO.

If the IFDA is eventually integrated, it will become the second investment-related agreement in the WTO’s treaty architecture, following the 1995 Agreement on Trade-Related Investment Measures. Proponents emphasize that the IFDA should not be construed as an attempt to create a broader set of multilateral rules on investment governance at the WTO. The IFDA’s negotiating text includes clarifications on scope, making it clear that traditional investment governance issues, such as investment protection, investor–state dispute settlement, and investment market access, are outside the scope of the agreement.

What’s in the IFDA?

The agreement seeks to facilitate the flow of foreign direct investment (FDI) between members, especially to developing and least developed members, to foster sustainable development. Its provisions focus on investment facilitation and aim to address challenges related to bureaucratic impediments and lack of transparency, together with efforts to promote cooperation on investment facilitation activities.

Its provisions focus on investment facilitation and aim to address challenges related to bureaucratic impediments and lack of transparency.

The rules included in the agreement can be categorized into four pillars. The first is efforts to improve the transparency of investment measures. Governments, for example, must make sure information on FDI measures (such as laws and regulations) are publicly accessible. This will help investors feel less uncertainty and more confident in the environment in which they are investing—a helpful feature for facilitating FDI.

The second pillar is rules that streamline and speed up administrative procedures. The efforts focus on reducing bureaucratic impediments by making sure the authorization procedures for incoming FDI are implemented in an efficient, transparent, and reliable manner.

The third pillar is efforts to improve cooperation, not only among the members themselves but between the government and the investors. For example, governments must exchange best practices and experiences on investment facilitation and maintain contact points responsible for responding to questions from other members or investors. Under this pillar, members have also agreed to promote the flow of “sustainable investments” by, for example, undertaking commitments to develop anticorruption policies and encouraging foreign companies operating in their jurisdiction to incorporate responsible business conduct (RBC) practices.

The final pillar focuses on providing special and differential treatment (SDT) to developing and LDC members. The SDT approach, modelled on the WTO Trade Facilitation Agreement, recognizes that developing and LDC members may lack the resources and capacity to implement the measures of the agreement right away. While developed country members are expected to implement all the rules by the time the agreement enters into force, developing and LDC members can choose to schedule implementation of the measures in a more staggered manner and depending on the availability of capacity-building support.

Sustainable Development and Development Dimension

The rules in these pillars are expected to not only facilitate FDI flows but also help developing and LDC members participate more in global FDI flows and support the broader goal of fostering sustainable development.

On the sustainable development dimension, the expectation is that implementing the agreement will promote the facilitation of FDI, which will lead to sustainable development outcomes. The inclusion of specific “sustainable investment” provisions is also expected to be beneficial due to their focus on facilitating higher-quality investments.

A recent analysis by N. Jansen Calamita, however, notes that there are no operative provisions in the agreement that aim to simplify investment for sustainable development. Instead, the primary purpose of the provisions is to facilitate all FDI, with no special regard to whether such investments would deliver on sustainable development objectives. Calamita acknowledges the focused sustainable investment provisions that have been included but questions the logic of applying the RBC obligation on host countries instead of home countries (given that capital-exporting countries are more affluent and therefore can monitor and enforce). He also notes that the RBC provision is the only discipline that cannot be raised through a dispute settlement proceeding and therefore functions as a minimal obligation on members.

On the development dimension, the hope is that establishing a binding global framework will help developing and LDC members commit to comprehensive reforms valuable for facilitating FDI. Some of these participants, however, are concerned about agreeing to binding disciplines subject to dispute settlement proceedings. Rather, they wonder if their reform efforts should instead continue to be guided by international frameworks that can be implemented on a voluntary basis, such as the United Nations Conference on Trade and Development Global Action Menu for Investment Facilitation.

Another development concern involves capacity-building support. As mentioned above, the measures in the IFDA do not cover market access. Most of the provisions are commitments relating to behind-the-border governance. These types of obligations require time-consuming reforms that entail building cooperative structures and capacity building at all levels of government.

IFDA members have agreed that one function of the agreement’s Committee on Investment Facilitation will be to discuss and explore the possibility of setting up an investment facilitation facility, similar to the Trade Facilitation Agreement Facility, to coordinate the voluntary contributions to support the IFDA’s implementation. Some members, however, are wary of the WTO becoming increasingly responsible for coordinating financial contributions and argue that better-suited international organizations such as the World Bank should manage coordination. Other members say the WTO Secretariat needs to manage the facility to ensure that capacity-building resources are dedicated and well-matched to support the agreement’s implementation. It will be interesting to see how this issue is resolved should the agreement become operational and once the committee engages in the discussion.

Unresolved Aspects of the Negotiating Text and the Next Phase

The co-coordinators initially hoped the legal text would be finalized by the end of 2022. That deadline was pushed to July 2023 and has now been met. While the finalization of the text is a major milestone, it does not mean the end of the process. After the summer break, participants will start a new phase, focusing on three tracks of work.

While the finalization of the text is a major milestone, it does not mean the end of the process.

The first is to tackle the issue of legal architecture, which is to find a way to legally incorporate the IFDA within the WTO’s existing treaty architecture. Members have agreed on principles to guide how they approach this issue. Members want to incorporate the agreement into the WTO treaty architecture, preferably as a stand-alone deal and agree the measures should apply horizontally to all sectors (services and non-services). They also favour an open agreement, so its benefits can be extended to all WTO members (even if they are not a signatory) and want it to be open for accession.

Based on these guiding principles, members are likely to consider two legal options for integration. The first is integrating the IFDA as a multilateral agreement under Annex 1 of the Marrakesh Agreement establishing the WTO. This option would require all WTO members—even those not participating in the current process—to sign onto the IFDA. The second (and perhaps the more politically feasible option of the two) is to integrate the IFDA as a plurilateral accord under Annex 4 of the Marrakesh Agreement. In this case, the obligations and benefits would only apply to signatories. Though not required, as per the guiding principles, the signatories may extend the benefits of the IFDA without the conjoining obligations to non-signatories. The only benefit that would not be opened is the right to dispute settlement recourse.

However, advancing on either of these options requires the consensus of all WTO members. Getting this buy-in is likely to be difficult given that some non-participants, such as India and South Africa, have objected to the agreement. They have long questioned the legal basis of JSIs at the WTO and argue that plurilateral initiatives have become a distraction, taking members’ attention away from the multilateral mandate of concluding negotiations on the Doha Development Agenda.

To resolve the legal architecture issue, the co-coordinators have emphasized that “outreach and close dialogue with the entire WTO membership—and notably with non-participants—will take center stage” in this next phase. Whether these outreach efforts will successfully garner the buy-in needed for either of the two options, especially in the run-up to the MC13, remains to be seen.

The second stream of work will focus on the legal scrubbing process, under which members may make technical textual adjustments to ensure clarity and coherence within the agreement, but also with existing WTO agreements. For example, members are weighing some amendments that would have to be made depending on the legal architecture option that is ultimately chosen. They are also discussing adding some “final provisions” that can help slot the IFDA within the WTO treaty architecture. New provisions on accession, amendments, and withdrawal procedures are being considered. The language of these provisions will also depend on the final legal architecture option.

The last track of work will focus on developing and LDC members and encouraging them to carry out needs assessment studies that can be valuable for the SDT scheduling process. A self-assessment toolkit that has been shared would allow interested members to determine the extent to which their domestic regulatory framework already complies with the measures set out in the IFDA. The analysis, in turn, can be used to categorize and schedule the provisions as a part of the SDT process. The WTO Secretariat is engaging in coordination support to understand which members are interested in carrying out needs assessments and whether they need financial support to do so. This last workstream is important to start as soon as possible. Such countries, at the very least, should engage in internal consultations, especially with investment agency counterparts, to understand what the implementation implications would be, and to understand how the agreement would fit within their broader trade and investment agreements strategy.

While concluding the IFDA negotiating text is an important achievement, participants are entering a challenging new phase given the need to tackle the difficult issue of legal architecture. It remains to be seen whether the buy-in of non-participants can be secured, to be able to legally integrate the IFDA in the WTO’s existing treaty structure.

Rashmi Jose is a Senior Policy Advisor at IISD.