*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues by
the Vale Columbia Center on Sustainable International Investment
No. 125 July 7, 2014
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Shawn Lim ([log in to unmask])
*Withdrawing incentives to attract FDI: Can host countries put the
genie back in the bottle?*
by
Anna De Luca*
Many governments offer incentives to attract foreign direct investment
(FDI). For example, the renewable energy sector has benefitted from large
national incentive schemes in the past decade. However, the withdrawal of
such incentives can lead to investors bringing investment treaty claims
against host countries. This *Perspective *looks at some claims host
countries face from investors in the renewable energy sector and their
implications.
Since 2010, some countries have significantly revised their energy sector
incentive schemes, substantially withdrawing incentives and linking the
remaining incentives to local content requirements. The alleged detrimental
effects of these changes for investors in solar energy generation have been
the basis of a wave of investment treaty claims. At least seven cases have
been brought against the Czech Republic[1] and another seven cases against
Spain.[2] A case against Italy was registered at ICSID in February 2014.[3]
Solar investors claim that their businesses are no longer viable because of
these measures, which they allege are contrary to pre-reform legislative
and regulatory commitments. As such, countries that have passed these
measures are said to be in breach of the fair and equitable treatment (FET)
standard and, possibly, treaty provisions on expropriation.
These cases—particularly those claiming that there has been a violation of
the FET standard—raise a classic issue in investment arbitration, pitting
foreign investors' reliance on stable regulations that provide a framework
for their long-term investments against the host country’s right to adapt
regulations to new needs.[4] What measure of protection, as a matter of
international law, should be granted to investors' expectations that they
will continue to receive the same level of incentives? This might be
difficult for a tribunal to determine, especially when investors'
expectations arise out of legislative provisions and/or normative
regulations of general application that are not shielded from subsequent
amendments, and there are no specific “promises” or clear and unambiguous
guarantees of stability specifically addressed to investors.[5]
In the cases against the Czech Republic, investors are challenging the
introduction of a new retroactive tax on solar arrays and other
sector-specific measures as contrary to the standards of protection under
international investment agreements (IIAs).
Most European IIAs concluded in the 1990s did not include carve-outs for
tax measures, but the Energy Charter Treaty (ECT) is a prominent exception.
Cases brought under the ECT can raise questions related to the scope of the
taxation carve-out in ECT Article 21. That Article begins with providing
that: "[e]xcept as otherwise provided in this Article, nothing in this
Treaty shall create rights or impose obligations with respect to Taxation
Measures of the Contracting Parties. In the event of any inconsistency
between this Article and any other provision of the Treaty, this Article
shall prevail to the extent of the inconsistency." Article 21 creates an
exception by providing that the most-favored-nation obligation in Article
10(7) does not apply to certain tax arrangements and measures (paragraph
3), but no exception for the FET standard. Furthermore, Article 21(5)
establishes a special procedural mechanism for investors to claim the
expropriatory or confiscatory nature of tax measures. Respondents in ECT
cases can therefore be expected to rely on Article 21, arguing for a broad
interpretation of Article 21(1) and a narrow application of the exceptions
thereto.
The cases on solar energy incentives illustrate the pros and cons of
national incentive programs. On one hand, generous national incentive
schemes may help attract FDI; on the other hand, subsequent changes to
incentive schemes affecting foreign investors might be challenged under
IIAs, with host countries facing the risk of being overwhelmed with
investment arbitration claims.
------------------------------
* Anna De Luca ([log in to unmask]) is a Research Fellow in
International Law at Bocconi University in Milan, member of the Milan Bar
and practices in the field of investment arbitration. The author wishes to
thank Jorge A. Huerta Goldman, Giorgio Sacerdoti for their comments on an
early version of this draft. The author is also grateful to Christina
Binder, Tarcisio Gazzini, Tomoko Ishikawa, and Lise Johnson for their
helpful peer reviews*. **The views expressed by the author of this
Perspective do not necessarily reflect the opinions of Columbia University
or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579)
is a peer-reviewed series.*
[1] Under the ECT: *Voltaic Network GmbH v. Czech Republic*; *ICW Europe
Investments Limited v. Czech Republic*; *Photovoltaik Knopf Betriebs-GmbH
v. Czech Republic*; *WA Investments-Europa Nova Limited v. Czech
Republic*; *Natland
Investment Group NV and others. v. Czech Republic*; *Antaris Solar GmbH and
other v. Czech Republic*; *Mr. Jurgen Wirtgen and others v.* *Czech
Republic*.
[2] Under BITs: *Eiser Infrastructure. v. Spain* (ICSID Case No.
ARB/13/36); *Antin Infrastructure Services Luxembourg v. Spain* (ICSID Case
No. ARB/13/31); *RREEF Infrastructure (G.P.) Limited. v. Spain* (ICSID Case
No. ARB/13/30). Under the ECT: *The PV Investors v. Spain*; *Charanne (the
Netherlands) and Construction Investments (Luxembourg) v. Spain*; *Isolux
Infrastructure Netherlands B.V. v. Spain*; *CSP Equity Investment S.à.r.l.
v. Spain*.
[3] Under the ECT: *Blusun and others v. Italian Republic* (ICSID Case No.
ARB/14/3).
[4] *See* Rudolf Dolzer and Christoph Schreuer, *Principles of
International Investment Law* (Oxford: OUP, 2012), 2nd ed., pp. 145-149. In
case-law, see, *inter alia*, Total S.A. v. Argentina, ICSID Case No.
ARB/04/01, Decision on Liability, December 27, 2010, paras. 115-117 and
cases cited therein; and Ioan Micula and others v. Romania, ICSID Case No.
ARB/05/20, Award, December 11, 2013, paras. 528-529, and 666-673.
[5] *Total S.A. v. Argentina*, ICSID Case No. ARB/04/01, Decision on
Liability, 27 December 2010, paras. 123-124, and 308-310; *Electrabel S.A.
v. Hungary*, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable
Law and Liability, November 30, 2012, paras. 7.77-7.78.
The material in this Perspective may be reprinted if accompanied
by the following acknowledgment: “Anna De Luca, ‘Withdrawing incentives to
attract FDI: Can host countries put the genie back in the bottle?’
Columbia FDI Perspectives, No. 125, July 7, 2014. Reprinted with permission
from the Columbia Center on Sustainable Investment (
www.www.ccsi.columbia.edu).” <http://www.ccsi.columbia.edu).”> A copy
should kindly be sent to the Columbia Center on Sustainable Investment at
[log in to unmask]
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Shawn Lim, [log in to unmask] or [log in to unmask]
The Columbia Center on Sustainable Investment (CCSI), a joint center of
Columbia Law School and the Earth Institute at Columbia University, is a
leading applied research center and forum dedicated to the study, practice
and discussion of sustainable international investment. Our mission is to
develop and disseminate practical approaches and solutions, as well as to
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