Overview
On 18 January 2024, Steptoe and the British Institute of International and Comparative Law (BIICL) held a launch event for their joint empirical study on performance requirement prohibitions (PRPs) in international investment agreements (IIAs) (recording and publication available here).
The main focus of this empirical study is PRPs. PRPs are a distinct type of treaty provisions that appear in many IIAs and that seek to curtail States’ ability to impose performance requirements.
According to UNCTAD, performance requirements are “stipulations, imposed on investors, requiring them to meet certain specified goals with respect to their operations in the host country”. Performance requirements come in the guise of either: (i) conditions precedent to that State’s authorisation for an investor to make, expand or operate an investment in its territory; or (ii) conditions for an investor receiving a State advantage (e.g., a tax credit, a subsidy or other form incentive). Some of the most common forms of performance requirements include local content requirements, local sourcing requirements, export performance requirements, import restrictions, export controls/restrictions, and technology transfer, licensing and/or local R&D requirements.
On 4 January 2024, the IMF published a Working Paper entitled “Return of Industrial Policy in Data”. Its authors stated that:
“Industrial policy has gained increased prominence in … the past several years … This renewed interest comes as governments have sought effective tools and strategies to remedy the fallout from multiple, compounding crises – sluggish post-financial crisis growth, the COVID-19 pandemic and associated supply disruptions – coupled with intensifying geopolitical tensions and conflicts, including over … resources … and new technologies … The pursuit of industrial policy by some countries has also raised alarm in others over loss of economic and national security and a vortex of tit-for-tat retaliation”.
A good number of recent measures the IMF authors track in the Working Paper are indeed performance requirements.
The IMF Working Paper refers in particular to the following categories of industrial policy measures, along with examples of measures adopted in 2023, all of which may be characterised as forms of performance requirements:
- Export barriers (e.g., China’s export control measures of 9 January 2023 targeting drone-related products);
- Import barriers (e.g., India’s import licensing requirements of 11 January 2023 on laptops, computers, and servers);
- Export incentives (e.g., Brazil’s September 2023 loans to aircraft manufacturer Embraer to support export operations);
- Favouring local firms in procurement (e.g., U.S. procurement measures of March 2023 that favour domestic firms in government contracts for circuit boards);
- Localisation incentives or requirements (e.g., local content requirements in the US Inflation Reduction Act).
Arguably, the last time performance requirements were such favoured policy options was the 1970s, when many developing countries resorted to similar measures in a bid to enhance the beneficial impact of inward FDI on their national development goals – seeking to implement the New International Economic Order. Developing countries notably aimed to enrol FDI in support of local industrialisation and technology transfers.
Such measures led quickly to a backlash on the part of capital exporting States, as part of a broader push to enhance protections available to their cross-border investors. States notably negotiated PRPs into their IIAs in the 1980s, 1990s, 2000s and beyond, in a bid to curtail host States’ ability to impose performance requirements with impunity. PRPs in this way echoed broader trends in favour of globalisation and international economic liberalisation.
As a result, and as confirmed in Steptoe’s survey of more than 500 IIAs across a broad cross-section of States, close to half of those 500+ IIAs contain PRPs in one form or another. With more than 3,000 IIAs now in existence, PRPs are to be found in IIAs between signatory States covering much of the world economy. Such IIAs continue to protect investors against the imposition of performance requirements by States – despite the current policy U-turn in favour of such measures.
Indeed, in many instances, countries have enacted performance requirements notwithstanding PRPs in their existing IIAs – many of which offer limited or no exceptions. This disjuncture suggests that PRP-based investor-State dispute settlement (ISDS) proceedings stand a good chance of increasing in coming years.
PRPs have featured in approximately a dozen publicly known investor-state disputes thus far. A few of these disputes have resulted in multi-million-dollar awards or settlements in favour of investors to compensate their losses flowing from PRP breaches. PRP-based disputes to date have involved local R&D expenditure requirements; local content broadcasting requirements; taxes applicable to particular categories of consumer goods, intended to incentivize local consumption; government procurement; and restrictions on the export of raw materials.
Given the impacts performance requirements may have on the efficient management of an enterprise, investors should pay close attention to the protections PRPs afford. When a State adopts a performance requirement that negatively affects an investor’s business activities, and such a performance requirement runs afoul of a PRP, investors may seek recourse to ISDS – either in a bid to bring a host State to the negotiating table, or ultimately as a mechanism for obtaining financial compensation, should the measure remain in place.
Given the current policy environment and disputes seen to date, the protections PRPs afford may be particularly relevant to businesses in the extractive industries, including oil and gas and mining; renewable energies (solar, wind, etc.); car manufacturing (including electric cars); commodities (including sugar and lumber); semiconductors/microchips and other IT hardware components; and the broadcasting sector (including radio and television).
States in turn should closely scrutinise the PRP commitments in their existing networks of IIAs, as part of their wider management of FDI and of related potential claims risks. States also should take stock of any carve-outs and exceptions in their existing IIAs, to determine whether or not they afford sufficient regulatory flexibility, or should instead be revisited through renegotiation in light of current policy.
We invite you to consult the Steptoe-BIICL joint empirical study on PRPs in IIAs and the recording of the launch event presentation (recording and publication available here) to find out more.
