This is an abridged version of a report that was compiled by Medicine Masiiwa, Shantal Munro-Knight, Bibiane Mbaye Gahamani, Jane Nalunga and Christian Weller. The report was compiled with support from Christian Aid, AIPAD Trust, CPDC, ENDA, and SEATINI.

Introduction
The European Commission (EU) is determined to secure World Trade Organisation (WTO) rules on how countries manage investment, government procurement, competition and trade facilitation (the Singapore issues). This determination in the face of opposition from developing countries – was in large part blamed for the breakdown of WTO talks at the Cancún Ministerial in 2003.
In 2003, developing countries succeeded in stopping talks on the issues, which would have constrained their choices in crucial policy areas for managing their domestic economies. African countries warned of the serious implications the issues have for their economies, the complexity of their relationship to trade and the lack of consensus on how they should be handled in trade agreements.

Many of the same countries that stood up to EC pressure in Cancún now face a more unequal battle in Economic Partnership Agreement (EPA) talks on the same issues. Since these issues are no longer on the table at the WTO, the EC continues to pursue discussions on investment and competition in other international fora. The objective is to persuade countries, especially developing countries, of the value of these rules for their growth and development. In regional negotiations with the EU, the political leverage of African Caribbean Pacific (ACP) regions and individual countries is reduced, and the prospect of development assistance makes it harder to resist agreement. Problems relating to negotiating capacity are compounded as EPA negotiations run concurrently with WTO talks.

Developing countries have expressed their worry over the EU approach in the EPAs. The unequal power relationship in EPA talks is leading to imbalanced outcomes, as the Singapore issues continue to be on the negotiation table despite the repeatedly stated reluctance of ACP ministers to negotiate on these issues. The EC is also pushing for the issues to be handled in a way that suits them, ignoring ACP proposals. In the Caribbean region, negotiators presented the EC with a clear agenda on investment. However many of their proposals are off the table in negotiations.

Civil society organizations have called on European member states to revise the EC’s negotiating mandate on EPAs and remove the imperative to negotiate the Singapore issues, placing the initiative squarely with ACP negotiators. This demand was based on concerns that differences in negotiating capacities would result in a lopsided agenda and inequitable outcomes in EPAs, at the disadvantage of developing countries. Although some EU member states – including the United Kingdom – supported this position, the EC’s reaction has been strongly defensive of their advocacy for agreement on these issues.

What the EC says about investment in EPAs
In the face of opposition from Non-Governmental Organizations (NGOs), ACP and its own member states, the EC justifies itself arguing that:

• The Cotonou Agreement already contains provisions relating to investment and mandate to negotiate further. The EC approach is to ‘fine tune’ provisions that already exist.
•  It is crucial to attract investment to ACP regions. Today investors avoid Africa, Pacific and Caribbean states; even investors from other ACP states. This has to change and predictable, transparent rules are essential
• None of the regions and no one in Kenya has said that it is not in the interest of Kenya to negotiate on these issues.
• The EC’s intentions can only be altruistic: the EU has no commercial interest in ACP markets

Analysis

The Cotonou Agreement already contains provisions relating to investment and mandate to negotiate further. The EC approach is to ‘fine tune’ provisions that already exist

The CPA does not stipulate that an investment agreement should be part of an EPA, nor is there any WTO obligation to include investment provisions in a regional trade agreement. Within CPA, substantive provisions on investment appear only under the heading of financial cooperation, a section that deals mainly with capacity building assistance and financing.
Although the parties agree in the CPA to ‘take measures and actions which help to create and maintain a predictable and secure investment climate’ and ‘enter into negotiations on agreements which will improve such climate’, the precise nature of such agreements is not defined. They do not need to form part of a binding trade agreement, nor be of the traditional variety of investor rights and freedoms guaranteed by the state. The CPA objectives clearly indicate that the overriding emphasis of any agreement must be on the development objectives and priorities of ACP states, with a main focus on support for institutional capacity building, regional integration and the ability of ACP states to attract investment. This would allow a radical departure from the EC’s focus on rules-based commitments and a return to the focus on development cooperation and assistance implied in Cotonou.

Finally, circumstances have changed since the CPA was drawn up in 2000. After the Cancun Ministerial stand-off the Singapore Issues, including investment, were formally removed from the negotiating agenda of the WTO Doha round in July 2004. Even the EC's own negotiating directive recognises that negotiations should be adapted to take into account outcomes at the WTO

It is crucial to attract investment to ACP regions. Today investors avoid Africa, Pacific and Caribbean states; even investors from other ACP states. This has to change and predictable, transparent rules are essential.
The EU and ACP countries agree on the potential value of investment and of sound, well-functioning regulatory regimes for development. What is in dispute is the added value of a rules-based investment agreement between the regions.
Many ACP states already have ongoing domestic reforms relating to their investment regimes. The added value of an ACP-EC agreement could only be the EC’s belief that it   would ensure implementation and ‘locking in’ of reforms – thus increasing attractiveness to EU investors – or that it would act as an additional impetus for this reform agenda. This thinking is wrong on both counts.

Agreements that require regulatory changes – such as investment agreements – demand technically trained personnel and significant institutional and financial capacity and carry potentially high costs for governments. While the EU can help address implementation costs to ensure that the benefits of reform are not foregone because of finances, we have to question how useful external pressure is in locking in such reforms, if countries do not have the capacity to implement them. It would be advisable for ACP countries to hesitate before entering into binding agreements that commit them to expensive reforms.

Rules-based investments do not help governments to address the poor track record of investment in contributing to development.  Rather, they risk acting as a hindrance by constraining a government’s ability to regulate investment, without helping them to better enforce standards of investor behaviour.

None of the regions and no one in Kenya has said that it is not in the interest of Kenya to negotiate on these issues.

In claiming that the ACP states are willing to negotiate on investment, the EC is deliberately conflating the different aspects of investment cooperation, which are:

• EU financial assistance, capacity building and technical assistance on
  investment measures to promote inward investment into ACP states
• EU support to regional integration processes
• EU-ACP agreements on investment rules.

In the joint draft report on phase one of the ‘all ACP-EC’ level negotiations, both sides agreed on the importance of trade-related issues and the need to support ACP development of infrastructure and institutions. However, they differed with regards to:

• the scope and coverage of the issues ;
• the relative importance of the different aspects of investment cooperation to development agreements; and,
• how they interrelate and consequently how they should or should not be prioritised.

They also disagreed on ‘the sequencing of EPA negotiations with both WTO negotiations and building of regional capacity in ACP states to deal with trade related subjects, legal and institutional capacities before considering negotiating rules-based agreements with the EC. The EC, on the other hand, believes that capacity building and agreement of rules could run in parallel. This would force the pace of reform and deny ACP states the opportunity to sequence commitments with building capacity. This runs counter to the advice of the Commission for Africa and commitments by the G8 in Gleneagles to allow countries to ‘pace and sequence’ their economic reforms in line with their development strategies.
ACP states face other difficulties in negotiating EPAs that help to explain the apparent discrepancy in ACP ministers’ statements and the willingness of some regional negotiators to talk about investment. These are:

• The relative newness and undeveloped nature of regional negotiating bodies: these institutions often lack the mechanisms to consult and constantly engage with their member states. This problem is compounded by the rush to meet the 2007 deadline for issues of market access arrangements for trade in goods. This deadline is irrelevant for investment. Even EC officials have expressed concerns at the divorce between the regional negotiators’ activities and the level of buy-in of ACP member states, fearing that in some regions they would end up with ‘paper EPAs’ that nobody implements.
• the lack of information with which to negotiate: the paucity of impact assessment for the liberalisation of trade in goods under EPAs has already been documented; the situation for investment reform or the closely related area of services liberalisation is even worse.

The EC’s intentions can only be altruistic: the EU has no commercial interest in ACP markets
A corollary argument often made by the EC as a justification for including investment in EPAs on development grounds is that they have no self-interest in these talks. The EC's internal strategy documents reveal that this is not the case and that justifying investment agreements on development grounds is in fact self-serving. The EC actively pursues the inclusion of investment provisions within its regional trade agreements (RTAs) to ensure its strategic objectives and maximum economic gains. The EC explicitly recognises that it is in direct competition with trade rivals, such as the United States, in negotiating investment agreements to establish strategic relations and to ensure that any regimes in those markets are more compatible with those in operation in its own member states, noting that if countries ‘...were to align their regulatory practices with those of the United States, this would place the EU at a competitive disadvantage.’

The opportunity and conditions for investment are especially important in the service sector, where consumer and supplier often need to be physically close for trade to occur. The EU’s economy is highly dependent on the success of its service suppliers, which contribute 77 per cent of its GDP and employment. In a draft document on improving the EU's external competitiveness, the EC explains that it needs to further strengthen the presence of EU companies in third countries through a permanent establishment.  The EC believes that ‘“physical”’ presence in a foreign country consolidates the image of the firm and that of the country of origin; adds predictability to the flow of trade, not relying on local importers; and facilitates the access of EU companies to more business opportunities.” 

As tariffs cease to be a hindrance to EU companies, other barriers to trade and investment become more important: the EU now considers looking at the whole operating environment in third countries and reducing the barriers and transaction costs derived from the fragmentation of the productive process.

Divided interests on international investment rules
Of the Singapore issues, investment is arguably the most controversial. There is a chequered history of attempts to establish multilateral rules on how countries regulate investment. In 1998 the Organisation for Economic Cooperation (OECD) hit the headlines after abandoning its multilateral agreement on investment, following protests and formal withdrawal of support by member governments. While multilateral rules on investment exist to a degree at the WTO, their existence is highly controversial, as is their treatment of developing countries.

Underlying the controversy surrounding international investment rules is the fact that countries have very divided interests. Companies investing overseas are generally based in developed countries, which therefore seek to use investment agreements to protect the rights of their investors, optimise their profitability and increase their opportunities to invest. Within this group, different countries and blocs – notably the EU and US – have different domestic investment regimes, and it is in the interest of investors to encourage other countries to develop systems that are compatible with their own. This has resulted in competition between the EU and the US to introduce favourable regimes through their regional trade agreements.

Investment and development: the case for flexibility
Developing countries want to attract inward investment, and manage such investment through regulation to minimise costs and maximise benefits. The usefulness of binding international rules on investment for developing countries is controversial, as they tend to limit these policy choices and do little to attract new investment.
Investment has the potential to contribute to a country’s development by providing:

• a source of capital for cash-strapped governments
• services and infrastructure to fill gaps in the domestic economy, creating new export opportunities
• opportunities for transferring technology, upgrading skills and training the workforce
• jobs and tax revenue 
• opportunities for local firms to sell goods and services, learn new techniques and encourage entrepreneurialism.

Standard advice to developing countries from the World Bank, International Monetary Fund (IMF) and donors has been to pursue liberalisation and deregulation to attract foreign investment. Investment agreements were deemed useful, as they help make these changes ‘predictable and transparent’. This is certainly the EC's thinking behind seeking investment provisions in EPAs.

However, foreign direct investment (FDI) does not automatically follow an investment agreement. In 2003, a World Bank study concluded that investment treaties had little impact on investment decisions and warned that these could ‘expose policy makers to potentially large-scale liabilities and curtail the feasibility of different reform options. Although Africa has joined the rush to sign bilateral investment treaties, levels of Foreign Direct Investment there have generally declined. Angola has proved more attractive in per capita terms than Egypt and Nigeria, indicating that there are other pull factors other than a ’predictable and transparent environment’.

In many cases new investment has not necessarily resulted in capital accumulation, growth or economic diversification. ‘Enclave development’ has been a problem in the extractive and tourism sectors, limiting links and benefits to local companies. Governments do not benefit from increases in revenue, as generous incentives and liberal tax regimes mean companies repatriate, rather than reinvest, their profits. Inward investment has also been in the form of takeovers of privatised state assets, mergers and acquisitions rather than ‘green field’ investment in new enterprises.
Benefits from investment are not automatic: they can be undermined and even reversed, depending on the conditions in place and the behaviour of investors.
On the other hand, if a government actively intervenes to manage investment, this can help ensure the transfer of technology, the creation of decent local jobs and linkages with the local economy. It can also prevent too much repatriation of profits, manage competition with local firms, impose export requirements (to diversify exports and protect balance of payments) and ensure maximum income from foreign firms. These policy options have been used successfully in the past, but many are now jeopardised by investment agreements.  
The content of investment agreements has been too skewed toward the interests of foreign investors.  The interests of local entrepreneurs and the rights of the host government are usually neglected. Although traditional investment agreements give companies rights against the excesses of governments and recourse to dispute settlements if these are not respected, there are no comparable rights for governments. This imbalance already exists in bilateral treaties and has created situations where smaller country governments in particular cannot effectively discipline companies, but risk being sued by them for implementing legitimate regulatory changes.  Even the USA has faced these situations.

Without an explicit, overarching development objective to investment agreements, and with no recognised right to regulate for governments, there is no compulsion for arbitrators to make a judgement based on the balance of public interests versus investors’ interests. Nevertheless, this has not dampened the EC's enthusiasm for traditional binding investor protection agreements.

The EC’s approach to investment: limiting flexibility
Until now, EU investment provisions in RTAs with developing countries have been extremely limited, but are showing increasing ambition. The latest EU-Chile association agreement is the most far-reaching in both scope and depth.It prevents the Chilean government from imposing entry requirements on EU firms, bans legal entity requirements such as joint ventures, and adopts a ‘negative list approach’ for market access to outside services.

This lack of ambition is mainly a reflection of the division of competence between the EC and its member states on investment, greatly reducing the EC’s potential scope of activity. However, this is set to change. The Commission, frustrated at the EU’s ‘empty’ investment agreements compared to the US’s NAFTA-style agreements, has recently  made proposals the Article 133 Committee (C133) – the body where member states debate the EC’s trade policy – to change how it can negotiate investment. In the document presented to C133, the EC calls for an improved mandate in RTAs to improve benefits for EU companies: ‘In comparison to NAFTA countries’ agreements, EU agreements and achievements in the area of investment lag behind because of their narrow content. As a result, European investors are discriminated vis à vis their foreign competitors and the EU is losing market shares.’

In this document the EC also proposes to establish a ‘minimum platform’ for investment provisions in RTAs that incorporates and builds on current practice, encompassing the following principles:

• most-favoured nation treatment (MFN) on pre- and post-establishment rights
• non-discrimination/national treatment
• free flow of payments and investment-related capital movements
• basic principles of investor protection.

This agenda has failed to draw lessons from the experience of FDI and investment agreements in developing countries

An alternative ACP agenda for investment in EPAs
Research shows that investment tends to follow growth and not investment agreements. UNCTAD found that factors such as good institutions, sound infrastructure, skilled human resources and goods services (especially financial, transport and public) are key to attracting investment. Therefore, rather than push for a rules-based agreement on investment, the EC would do better to help ACP countries develop such factors. This would encourage more investment and influence the type of impact that investment has on local development, and corresponds more closely to the objectives of the CPA and the ACP negotiating groups. Countries would reap the benefit of investment as the result of a good growth and development strategy (of which investment policy is one part), and not the reverse.

Conclusion and recommendations
We believe that the EC should stop advocating for the inclusion of investment in the EPAs for two reasons: the ACP states’ unwillingness and limited capacity to negotiate the issue, and the implications it would have on the CPA’s goals of sustainable development and poverty eradication.

Despite the rhetoric and undertakings of EU commissioner for trade, Peter Mandelson and the UK government, there is evidence that the EC is pushing its own agenda on the ACP, promoting European interests despite competing interests and opposition from ACP states. While both parties agree on the potential value of investment and the importance of sound regulations and regimes, the EC is pushing for rules-based agreements, while the ACP wants investment promotion, technical assistance and capacity building.

The EC must improve the process surrounding investment talks to ensure that there is no ambiguity around any discussions on investment, and to ensure that ACP countries are not forced into rules-based agreements that are potentially detrimental to their development objectives. This would involve removing the imperative to negotiate on investment, leaving the initiative squarely and solely with the ACP. There is no WTO deadline or CPA compulsion to finalise investment provisions in EPAs, so talks on the issue should only proceed on the instigation of ACP states and regional negotiators. Given the potential costs of any agreements, the lack of evidence on which to base talks, and the limited negotiating capacity of the ACP, any talks must clearly reflect ACP priorities.

Where ACP states and regional bodies invite discussion on investment cooperation, but do not wish to discuss rules-based agreements, the EC must consider discussing cooperation agreements under the ambit of the CPA and outside EPA trade agreements. This avoids conflation of these issues and the difficulties associated with binding rules agreements for the ACP.

This shift in process is important, as the wrong kind of agreement will have serious implications for the ability of ACP states to manage investment as part of their development strategies.

If countries wish to discuss investment rules, then these should not be of the traditional investor protection variety, but should rather have a more developmental approach. This would mean agreements that:

• have an explicit over-arching development objective
• provide a greater balance for the rights and obligations of all parties, including:
• the host country’s right to regulate in order to achieve development objectives, even when these have an adverse impact on investors
• the EU states’ responsibility to ensure that investors respect laws and standards in ACP countries
• the EU states’ obligation to use the OECD guidelines and other mechanisms to highlight and address bad behaviour
• have stronger provision for investment promotion – agreements to date have achieved little in this respect
• do not excessively limit the policy options of ACP states to manage investment, including their ability to prioritise the interests of local and regional investors.

The EC should abandon its rigid approach to rules-based agreements, and make a positive contribution to enabling development through investment in ACP countries by:

• incentivising and actively promoting EU investment in ACP states and regions
• providing assistance and support to regional integration initiatives without seeking equal treatment for EU states and investors, and without forcing the pace of these processes
• providing assistance to develop local institutional capacity, which is key to encouraging and regulating investment
• building skills, infrastructure and key service provision to enable ACP countries to attract investment and facilitate benefits from linkages and technology transfer to local producers and service providers
• undertaking to discipline EU companies operating in ACP markets to ensure respect of international and local regulations and standards on labour and the environment
• using the OECD guidelines to highlight and address bad behaviour.