Opening the Door to Foreign Investment? An Analysis of Bolivia’s New Investment Promotion Law
On April 4, 2014, Bolivian President Evo Morales promulgated a law establishing the general legal and institutional framework to promote domestic and foreign investment in Bolivia, while contributing to socio-economic development. Enacting an investment promotion law is in line with the international trend to reform domestic regimes considering broader policy objectives, as reflected in the Investment Policy Framework for Sustainable Development published in 2012 by the United Nations Conference on Trade and Development (UNCTAD), and with Bolivia’s revised investment policy. This note provides an overview and analysis of the main features of Bolivia’s new law, within the context of the country’s investment law and policy, and international trends.
From privatization to renationalization
Net foreign direct investment (FDI) inflows to Bolivia went from over US$1 billion in the late 1990s, at the end of the wave of privatizations, to a negative US$223 million in 2005, with investors leaving the country for fear of renationalizations. Despite the nationalizations that did follow and other steps taken by the government to reform its investment policy, FDI inflows to Bolivia have steadily increased, reaching an unprecedented peak of US$1.75 billion in 2013 (CEPALSTAT, 2014).
On May 1, 2006, his 100th day in office, President Morales (reelected in 2009 for a second term to end in 2015) renationalized the oil and gas production chain. Other nationalizations followed in the energy, mining and telecommunications sectors (Bonnefroy Miralles, 2014).
In 2007 Bolivia became the first State to withdraw from the convention establishing the International Centre for Settlement of Investment Disputes (ICSID), arguing that the widely-used forum for investor-State dispute settlement was biased towards investors (Diaz Balbuena, 2014).
In line with this policy, the 2009 Bolivian Constitution established that domestic investment has priority over foreign investment, and that foreign investors may not be treated more favourably than domestic investors. It subjects foreign investment to Bolivian jurisdiction, laws and authorities exclusively, and rejects diplomatic complaints as a means to obtain more favourable treatment. It appears unclear whether disputes would nevertheless be permitted at the international level, for example, in regional forums. Also of note, the Constitution rejects international arbitration as a means to settle disputes with foreign investors in the oil and gas sector.
Accordingly, the Bolivian Government launched a diplomatic task force to review its bilateral investment treaties (BITs), following the constitutional mandate to denounce and, if necessary, renegotiate all treaties that were contrary to the Constitution (AFP, 2010). According to a task force member, the new BITs would protect the interests of the people; balance public and social interests with private property and profits; account for indigenous, social, human and environmental rights; and promote socio-economic development (La Razón, 2011).
According to a May 2014 interview by Walter Clarems Endara Vera, Bolivian Vice-Minister of Foreign Trade and Integration, in 2006 Bolivia started to systematically refuse to renew every BIT that reached its expiration date. On May 6, 2013 the country collectively denounced all its remaining BITs (Orellana López & McDonagh, 2014).
As Bolivia denounced its BITs, it also advanced proposals to reform international dispute settlement in investment issues. The government has highlighted the need to overcome existing deficiencies in investor-State dispute settlement under investment treaties, including the one-way route of investment arbitration (in that only investors may initiate proceedings against a State), the lack of public access and transparency, the presumption of culpability against respondents, and the small and impartial universe of arbitrators (La Razón, 2011; ABI, 2014).
Overview and analysis of the investment promotion law
The latest development in restructuring Bolivia’s investment regime was the promulgation of Law No. 516, the investment promotion law (Ley de Promoción de Inversiones—LPI). Resulting from a drafting process that included consultations with domestic private sector and diplomatic representatives, the law consolidates principles, protections, conditions and (to a lesser extent) incentives regarding domestic and foreign investment.
Principles (Article 3)
Sovereignty and dignity are the first principles mentioned by the LPI, which highlights the State’s role in conducting social and economic planning, directing the economy and controlling its strategic sectors, to promote development, eliminate poverty and reduce economic, social and regional inequalities. “Strategic sectors” can be understood as those listed as strategic in the Constitution, including minerals, hydrocarbons, the electromagnetic spectrum, genetic resources, and water and energy sources (Constitution, Art. 348 (I) and (II)).
Other principles that must guide the investor-State relationship are the development of non-traditional sectors, industrialization, independence, mutual respect, equity, legal certainty and transparency. In addition, the LPI replicates the constitutional principle of prioritizing domestic over foreign investment, as a mechanism to strengthen the domestic market. Although the law does not directly refer to sustainable development, it enlists the principle that investments “must guarantee the integral development of the activity in harmony and equilibrium with the Mother Earth, ensuring the sustainability of biodiversity.”
Treatment of investments
The LPI determines that the Ministry of Development Planning (Ministerio de Planificación del Desarrollo—MPD) will orient investments towards activities that promote economic and social development and create jobs (Art. 5(I)).
The State reserves itself the exclusive right to develop economic activities in strategic sectors (Arts. 6(I) and (II)). Only subject to the rights granted by the State may private investors develop economic activities in strategic sectors (Art. 6(III)). In case of a “mixed investment,” in which the State operates in association with a private party (whether domestic or foreign), the State must be a majority owner, with the right to control and direct the investment (Art. 16).
Apart from the protection of strategic sectors, the law does not restrict investment in any other economic sector, as long as they respect the State’s economic planning role and comply with Bolivian law (Art. 5(II)).
In short, the law formalizes and publicizes Bolivia’s strategic investment policy priorities, presents the role intended for private and foreign investment in the country’s development strategy and priorities, and sends a signal to investors and other relevant stakeholders, namely: investors are welcome, as long as they play by the rules dictated by the State, particularly in strategic sectors.
Conditions for investment
In a positive indication of Bolivia’s intent to prioritize investment with the potential for creating jobs and transferring skills, technology and know-how, the law demands that private investments contribute to economic and social development and strengthen economic independence (Art. 7). For example, technology transfers must factor in at least one of the following elements: building the capacity of Bolivian personnel, transferring cutting-edge equipment and machinery to Bolivian entities, or developing applied research that improves industrial processes or contributes to public well-being (Art. 14).
Investor obligations and performance requirements (Article 11)
The LPI provides that all investments must comply with domestic laws and regulations on labour, tax, customs, environmental and other matters. This is an important recognition, emphasized recently by UNCTAD, that “regulatory standards should not be lowered as a means to attract investment, or to compete for investment in a ‘regulatory race to the bottom’” (UNCTAD, 2012, Guideline 2.4.13).
However, the LPI could have gone further by endorsing or even incorporating international codes of conduct for foreign investors and standards of responsible investment; corporate accounting, disclosure and reporting; governance; and social responsibility.
The LPI does not explicitly mention that investment must comply with internationally recognized core labour standards, such as the protections under the relevant conventions of the International Labour Organization (ILO). Neither does it refer to environmental impact assessments (EIA) requirements, environmental licensing procedures or international standards for environmental protection and against environmental dumping. However, a more in-depth analysis of Bolivian law would be required to determine whether these aspects are already covered by specific environmental and labour laws and regulations.
Freedom of transfers
The LPI guarantees that foreign investors may freely transfer abroad their net profits, the capital resulting from the liquidation of companies or from the sale of shares, dispute settlement awards, among other amounts, in freely convertible currency. Financial transfers to or out of Bolivia must be channelled through the Bolivian financial system, as well as registered with the country’s Central Bank, a requirement that did not exist under Law No. 1182 of 1990, the previous investment law. The LPI subjects the transfer to the investor’s compliance with the investor’s tax and other obligations under Bolivian law (Arts. 11, 13 and 15). Transfers must also be in line with the regulation on transfer prices, to be drafted by the Ministry of Economy and Public Finances within 90 days of the publication of the LPI (Art. 11(b) and First Transitory Provision).
However, missing from the LPI are provisions on the possibility to restrict transfers in cases of balance of payment and other macroeconomic crises, in recognition of the potential need for such prudential measures and to safeguard Bolivia’s right to control capital flows to mitigate such crises. For example, the LPI could have expressly reserved Bolivia’s right to restrict transfers in accordance with its laws, mentioning an illustrative list of restriction scenarios, such as the protection of the rights of creditors, criminal offences, compliance with judicial orders or administrative decisions, and the prevention of money laundering.
Investment incentives (Articles 21 to 23)
The LPI outlines very broadly how Bolivia will grant general incentives, applicable to all types of investment projects, and specific incentives, targeted to preferential investments, defined as those in strategic sectors, such as natural resources or activities that contribute to a change in the production matrix. The law defines incentives as fiscal or financial benefits or advantages granted by the State on a temporary basis (1 to 20 years) and other investment promotion policies, and may include tax reductions or exemptions and production stimuli.
The ministry that oversees the sector of a particular investment may submit a request for an incentive to the MPD, which evaluates the project, decides whether it qualifies as a preferential investment (in the case of specific incentives), and issues a recommendation to the Council of Ministers on whether the incentive should be granted. Upon request by a sectoral ministry, the MPD may also recommend suspending or cancelling an incentive in case of investor noncompliance with contractual obligations concerning the investment.
To be eligible to receive specific incentives, a project must factor in technology transfer and job creation, and must fall under one of the following categories (Art. 22):
a) Value-added generating activities in the oil and gas, mining, energy or transportation sector;
b) Value-added generating activities in the tourism, agroindustry or textile sector, with a high potential for innovation and human resource development; or
c) Activities generating development poles and reducing regional socio-economic inequalities.
By allowing the government to condition incentives to specific obligations, the LPI explicitly provides for the use of performance requirements, which may help to promote the positive developmental contribution of investment.
Notably, requests for specific incentives to Bolivian investors have priority over requests for incentives to foreign investors in like circumstances (Art. 22(IV)). This discrimination is based on the country’s development strategies, which prioritize domestic over foreign investment as a means to strengthen the domestic market. Specific measures prioritizing Bolivian vis-à-vis foreign investors in granting incentives to investments in the tourism sector might be considered to breach Bolivia’s national treatment commitment for that sector under the World Trade Organization’s General Agreement on Trade in Services (GATS). However, given that the LPI is vague on the criteria for specific incentives, assessing GATS compliance will depend on how each particular measure is designed.
Positively, the law demands that ministries periodically assess whether investments that received general or specific incentives comply with the conditions under which the incentives were granted, based on expected economic results, and report on their assessment to the MPD (Art. 23).
However, the LPI lacks clear criteria for determining eligibility for incentiveshave highlighted the importance of pre-determined, uniform, objective, clear and transparent criteria for granting investment incentives, for example, in terms of long-term costs and benefits (OECD, 2006; IC-WBG, 2010; UNCTAD, 2012, Guideline 2.4.14). While the sectoral ministries are responsible for monitoring the effectiveness of investments in achieving the desired objectives and their compliance with contract-based performance requirements, the LPI does not clarify how deeply or how often monitoring and reporting must occur. Furthermore, to the exception of the 20-year limit to incentives, no phase-out period seems to be embedded into the incentive structures, to promote self-sustainability and avoid granting incentives to non-viable investments. The implementing legislation should deal with these issues.
Investment promotion (Articles 24 and 25)
The MPD is mandated to promote investment within the framework of the LPI. It may request information from the sectoral ministries on preferential investment projects they have identified, on the monitoring of investments and on the incentives granted to projects in their respective sectors; it may also request investment-related information to any private or public entity. It must evaluate the administrative procedures for establishing investments, and, where applicable, recommend their simplification. It may also recommend investment promotion laws and policies to the Council of Ministers.
Under the LPI, the MPD is in charge of promoting a culture of investment within the government. It is in a position to interact on investment matters with regulatory agencies (such as the Central Bank of Bolivia), and to bring cross-ministerial issues (facing the different sectoral ministries) to a high level of government (the Council of Ministers). However, its mandate could have been expanded or a new entity could be created with the mandate of an investment promotion agency (IPA), with explicit responsibility and accountability to assist investors in establishing, operating and developing their investments, in light of national policy objectives. The role of an IPA is wider than MPD’s as it stands, in that it would be intended to be “the prime interface between Government and investors,” and include functions such as “image building, targeting, facilitation, aftercare and advocacy” (UNCTAD, 2012, Guidelines 2.4.1 to 2.4.8).
However, the major disadvantages of the MPD’s investment promotion mandate are the potential conflicts of interest arising from the MPD’s role in monitoring investments and assessing their eligibility to incentives. Concentrating promotion and regulatory functions in the same entity is not desirable, as it could create opportunities for interference with investor affairs, rent-seeking behaviour and market distortions (IC-WBG, 2010). Granting incentives “should be the responsibility of an independent entity or ministry that does not have conflicting objectives or performance targets for investment attraction” (UNCTAD, 2012, Guideline 2.4.12).
Guidance on BIT negotiations
The LPI provides guidance to the (re)negotiation of BITs: all of them must now conform not only to the Constitution, but also to the LPI (First Additional Provision).
According to Vice-Minister Endara Vera, when Bolivia denounced its BITs, it invited the countries to negotiate new agreements once the LPI was promulgated. He stressed that Bolivia’s new model BIT would focus more on investment promotion, as investment protection is already covered in both the Constitution and the LPI (Orellana López & McDonagh, 2014).
Dispute settlement in the LPI and the new conciliation and arbitration law
The LPI states that “disputes arising from the relationships between investors shall be settled in the manner and conditions established under laws and regulations in force” (Art. 26).
While the law is vague on dispute settlement, it mandates the Bolivian Ministry of Justice and Office of the Attorney-General to draft a new law on conciliation and arbitration within 90 days from the promulgation of the LPI (Third Transitory Provision), that is, by early July 2014. The new law is to include specific regulations for the settlement of investment disputes and must be in line with the LPI. Disputes arising before the new law is enacted are subject to Law No. 1770 of March 10, 1997, the current arbitration and conciliation law (Ley de Arbitraje y Conciliación).
For two days in early June, a working group formed by officials from the two bodies mandated with the drafting of the new law met to analyze proposed language, discuss relevant aspects and consolidate a first draft. According to Jorge Mercado, Director-General of Constitutional Development of the Ministry of Justice, the work has centered so far on creating a culture of peace in dispute settlement, generating legal and institutional conditions for their accessibility to the population, and ensuring compatibility of the new conciliation and arbitration law with international law (Bolivian Ministry of Justice, 2014). Moreover, according to the Office of the Attorney-General, the new law will reflect the Constitution, allowing international arbitration between private investors, but not in disputes involving the State or the strategic sectors under its control (Paredes, 2014).
Bolivian perceptions regarding the LPI
The LPI is perceived by critics to reflect the economic model established in the Constitution, in which the State directs economic planning and controls investment in strategic sectors, such as oil and gas. With its focus on the aspects of State control and regulation, the law is seen as failing to create clear and precise tax and other incentives for sectors not considered strategic, such as agriculture, and for small and medium enterprises (Azcui, 2014; FEPC, 2014).
Economist Armando Méndez, former president of the Central Bank of Bolivia, argued that the law will hinder foreign investment: “The spirit of this law presupposes that foreign investors are desperate to enter Bolivia and don’t know the areas in which to invest, but that the Bolivian State does. Big and serious foreign investment will not come to Bolivia as a consequence of this law” (FEPC, 2014).
Others highlight that the effectiveness of the law depends on further legislation, such as the LPI regulation and the new conciliation and arbitration law. Some express doubts as to whether Bolivian courts could equitably settle disputes, such as those involving expropriation, and whether foreign investors would have sufficient incentives and legal certainty if disputes are to be settled in Bolivia (Chipana, 2013; Azcui, 2014; Ochoa Urioste, 2014).
Concluding remarks
Along with the restructuring of its investment treaties, Bolivia took a major step in redesigning its domestic legal framework on investment by adopting the LPI. The law’s effectiveness in promoting foreign investment while ensuring the resulting socio-economic benefits will largely depend on further legislation to address uncertainties left by the LPI. The implementing legislation should detail how and what types of incentives will be granted. It should also provide how the MPD will be insulated from political pressures and corruption as it reconciles its investment promotion and regulatory functions. Importantly, the new conciliation and arbitration law should establish a clear approach for investment disputes. Ultimately, effectiveness will also depend on how closely and transparently the government and civil society will engage in foreign investment processes, and on how sectoral legislation will be implemented, such as the Law No. 535 of 2014 on Mining and Metallurgy (Ley de Minería y Metalurgia).
Finally, Bolivia’s criticism of the current dispute settlement system and the quest for alternatives are worthy of note. The country’s bold stance on the matter—such as its withdrawal from ICSID and the non-renewal and renegotiation of its BITs—provides space for new thinking. Further developments at the national level, including in the context of dispute settlement options, could place the Bolivian Government in a prominent role as a proponent of alternatives to existing investor-State mechanisms.
Author: Martin Dietrich Brauch is an international lawyer and associate of the International Institute for Sustainable Development’s program on foreign investment and sustainable development, based in Brazil.
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