Multilateral Agreement on Investment
Draft, Distributed January 13, 1997

PART TWO:

CONSOLIDATED COMMENTARY

II. SCOPE AND APPLICATION

DEFINITIONS

1. The definitions of "investor" and "investment" need to be carefully reviewed for consistency with text elsewhere in the agreement, and for grammatical precision, including the use of the words "and" and "or".

Investor

2. Some delegations expressed concerns relating to the inclusion of permanent residents in the definition of investor. If permanent residents are included, it would be necessary to specify that permanent residents would be those that are recognised as such under the applicable law of each Contracting Party. Concerns relating to their standing for purposes of dispute settlement could be addressed in the MAI provisions dealing with dispute settlement.

3. It was noted that branches in Switzerland have the legal capacity to invest. However, this specific situation would be covered by the definition of investor even after deletion of the word "branch" since the list of "legal and other entities" covered by the definition of "investor" is not exclusive.

4. Some delegations called attention to the Belgian suggestion in the EG5 report to add the phrase "provided it has the legal capacity to invest" at the end of the definition of investor. Most delegations considered that this approach was unnecessary and could create legal uncertainty.

5. Some delegations would like to include "Contracting Parties" in the definition of investor arguing that, for consistency, the definition should include all entities with the capacity to invest. They were concerned that a Contracting Party may itself make an investment without being a legal person that is owned or controlled privately or by the government. Most delegations thought that the concept of a legal person or the definition of state-owned enterprises would cover the situation where a State was an economic actor, and consider that the State as such would otherwise be protected by diplomatic processes under international law.

6. The Czech Republic raised the question whether a legal person organised under the applicable law of a Contracting Party but constituted under the law of another State is covered by the text of the definition of investor in paragraph 1. (ii). According to the Czech Commercial Code, a legal person constituted under the law of a foreign country for the purpose of conducting business activities with its permanent seat abroad, may transfer that seat to the Czech Republic provided that the law of the country in which the seat is now located allows relocation. The transfer of the permanent seat shall be effective from the day on which it is entered into the Companies Register. Such an entity is regarded as a Czech resident. However, its internal legal relations, including the liability of the entity's partners (members) towards third parties, shall be governed by the law of the country under which the legal entity was originally constituted. In the opinion of the Czech Delegation, a possible solution could be found in adding the words "or otherwise established" after "constituted or organised" in the definitions of investor and investment. The Drafting Group considered that the concern raised by the Czech Republic is covered by the definition as currently drafted.

7. Austria suggests adding to the definition of investor the words "who acquires, owns or controls an investment in another Contracting Party" and some elements presently addressed by the definition of investment.

Investment

8. Drafting Group No3 examined a definition of investment on the assumption that the MAI would contain a single, broad definition covering all forms of assets, including tangible and intangible assets. The consideration of such a definition does not prejudge the scope of its application to the various MAI rights and obligations.

9. While the question of the scope and application of the MAI is still to be resolved, the Drafting Group made the following observations. There was consensus in favour of applying a broad definition with respect to the MAI obligations to protect existing investments; however, several delegations expressed concern over how the MAI obligation concerning national treatment would apply in the pre-establishment phase. Some delegations consider that an unqualified application of this obligation to a broad range of assets could interfere with regulations of financial markets and other operations which are not meant to be covered by the MAI. Japan also considered that an unqualified application would cause confusion with respect to the precise contents of obligations in the pre-establishment phase.

10. To address this concern while maintaining a broad and single definition under the MAI, specific reservations could be lodged wherever a country is not in a position to fully accord national treatment or other MAI obligations.

11. The draft definition of investment defines investment in terms of assets and includes an illustrative list of assets so as to cover all recognised and evolving forms of investment. The definition would include the products of an investment.

12. DG3 agreed on the structure of the article on the definition of investment, i.e. a broad positive list and a limited negative list.

13. Some delegations are concerned that a broad definition of investment might result in a proliferation of dispute settlement claims. If necessary, this concern can be addressed by limiting access to the MAI dispute settlement mechanism, either through a provision in the dispute settlement article or through limitations in the definition itself.

14. Views differ on whether the definition of investment should cover investments indirectly owned or controlled by investors of a Party. Some delegations are of the opinion that covering such investment offers maximum protection to investors, including access to MAI dispute settlement. In addition, those delegations believe that this approach offers the most flexibility to investors in managing their capital flows, and avoids diverting investment flows from developing countries. The Group considered four cases:

(a) investment by an investor established in another MAI Party, but owned or controlled by a non-MAI investor

(Example: an investment in Austria by a Belgian subsidiary of a non-MAI parent)

(b) investment by an investor established in a non-MAI Party, but owned or controlled by a MAI Party investor

(Example: an investment in Canada by a non-MAI subsidiary of a Danish parent);

(c) investment by an investor established in another MAI Party, but owned or controlled by an investor of a third MAI Party

(Example: an investment in France by a German subsidiary of a Hungarian parent); and

(d) investment in a MAI Party by an investment there covered by the MAI

(Example: an investment in Italy by an Italian subsidiary of a Japanese parent).

15. There was a broadly shared view that case (a) investments should be covered by the MAI. Most delegations favoured providing for certain exclusions in a denial of benefits clause which would permit, but not require, exclusion. Some delegations were concerned about possible abuse of this provision. It was suggested that the condition for exclusion would be where the MAI investor lacked substantial business activity in the MAI Contracting Party. One delegation suggested limiting this to cases in which the investor was constituted "for no other purpose than obtaining MAI benefits" (exact wording not finalised).

16. There was wide support for covering case (b) investments; however, whether to do so was considered a policy issue to be considered by the Negotiating Group.

17. Related to it was the question of standing for MAI dispute settlement on which the Negotiating Group might provide guidance to Expert Group Nol. Under investor-state proceedings, most delegations considered that only the parent MAI investor would have standing, but some delegations were open to allowing the intermediary entity to have standing as well. Under state-to-state proceedings, all delegations suggested, as a matter of principle, giving no standing to the non-MAI government of the intermediary.

18. There was consensus that case (c) and case (d) investments would be covered by the MAI. There was no further debate on the legal implications.

19. Related to each of these cases was the question of which entities and states have standing for MAI dispute settlement, an issue for consideration by Expert Group No1. This includes which tier or tiers of investors have standing in investor-state dispute settlement and which MAI Party (state or states) have standing in state-to-state dispute settlement.

20. The European Commission considered that the inclusion of indirectly controlled investments might pose serious problems to the EU Members states as far as their present level of liberalisation is concerned as this normally also applies to companies established in the EU, but under control of a non-EU country. The European Commission suggested that such problems could eventually be effectively addressed by a general MAI provision on measures taken within Regional Economic Integration Agreements.

Item (i)

An enterprise (being a legal person or any entity constituted or organised under the applicable law of a Contracting Party, whether or not for profit, and whether private or government owned or controlled, and includes a corporation, trust, partnership, sole proprietorship, branch, joint venture, association or organisation).

21. The term "enterprise" is defined in parenthesis in the proposed text but could be defined separately. It was agreed that the definition covers, inter alia, scientific research institutes and universities. Most delegations favoured the same definition of enterprise for "investor" and "investment". It was also proposed to define "enterprise of a Contracting Party".

Item (ii)

Shares, stocks or other forms of equity participation in an enterprise, and rights derived therefrom:

22. This item, as well as item (iii), includes portfolio investment and minority holdings. It is for consideration whether the definition covers strategic alliances and other arrangements involving know-how, intellectual property, or technology or the joint conduct of research and development programmes. This item is also understood to cover an interest in an enterprise that entitles the owner to share in income and profits of an enterprise and its assets. The extent to which the substantive obligations of the agreement will apply to this item and to item (iii), in particular portfolio investment and foreign exchange operations, will need further examination in the light of concerns expressed by some delegations.

Item(iii)

Bonds, debentures, loans to and other forms of debt [of an enterprise] and rights derived therefrom;

23. This item would cover loans of all maturities and debt securities of a state enterprise.

24. DG3 noted that the relation between this obligation and national legislation may need to be considered further. Mexico wishes to exclude loans of less than three years, other than loans between affiliates of an enterprise. Many delegations considered, however, that such an exclusion would be contrary to the objective of a broad definition. If there is no consensus on this issue it will have to be referred to the Negotiating Group.

Item (iv)

rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts:

25. Some delegations wish to retain, for further consideration, a previous text for item (iv) which would read as follows:

"an interest arising from the commitment of capital or other resources in the territory of a Contracting Party to economic activity in such territory, such as under

-- contracts involving the presence of an investor's property in the territory of a Party, including turnkey or construction contracts, or concessions, or

-- contracts where remuneration depends substantially on the production, revenues or profits of an enterprise."

Item (v)

claims to money and claims to performance

26. "Claims to money" includes bank deposits. Most delegations consider that this item covers derivatives which are not covered elsewhere in the list of assets.

27. Claims to money may also arise as a result of a sale of goods or services. These claims are not generally considered as investments. The NAFTA excludes such claims unless they are associated with the investment interests which are set out in its definition. The ECT also requires that these claims be associated with an investment. Similar questions arise with respect to "rights under contracts" (item iv).

28. Some delegations supported the following alternative text:

"Claims to money and claims to performance pursuant to a contract [associated with an investment] having an economic value, with the exception of:

(a) Commercial contracts for the sale of goods or services by a national or enterprise in the territory of a Contracting Party to an enterprise in the territory of another Contracting Party;

(b) the extension of credit in connection with a commercial transaction, such as trade financing, other than a loan covered by item (iii); or

(c) any other claims to money that do not involve the kinds of interests set out in items (i) through (ix)"

Item (vi)

Intellectual property rights;

29. All forms of intellectual property are included in the definition of "investment," including copyrights and related rights, patents, industrial designs, rights in semiconductor layout designs, technical processes, trade secrets, including know-how and confidential business information, trade and service marks, and trade names and goodwill. Views differed on whether it is necessary to specifically refer to some of these elements in the definition as part of the illustrative list of assets. Some delegations consider that "literary and artistic property rights" should not be included. Mexico wishes to cover intellectual property rights under the MAI only when acquired in the expectation of economic benefit or other business purposes.

30. Further work is necessary to clarify the relationship of the MAI to other international agreements that relate to intellectual property, particularly where these conventions might require standards of treatment which differ from the MAI or where these conventions provide for dispute settlement mechanisms.

Item (vii)

rights conferred pursuant to law or contract [such as] or [by virtue of] concessions, licenses, authorisations, and permits

31. Rights such as concessions, licenses and permits are generally meant to cover rights to search for, cultivate, extract or exploit natural resources. Most bilateral treaties, and the ECT, refer to rights conferred by law or under contract and extend protection to such rights. Switzerland considered that this item covers public law contracts.

32. Most delegations preferred to keep concessions in the definitions and to require reservations by any country wishing to discriminate in granting concessions. Some delegations were of the opinion that the issue of the granting of concessions should be kept outside the definition of investments.

33. Some delegations indicated that certain aspects of concessions raised issues related to monopolies in general and to cross-border government procurement, which might require some special provision or clarification in the MAI. France submitted a note on this matter [DAFFE/MAI/RD(96)55]

34. Further work will be necessary, bearing in mind that some delegations believe it is necessary to determine whether the rights conferred by virtue of concessions, or the concession as such, are separate elements under the definition of investment.

35. Norway points out that the granting of authorisations, licences and concessions in both the petroleum and fisheries sectors involve measures relating to the conservation and management of natural resources. In the petroleum sector it also involves the exercise of property rights over hydrocarbon resources. The conservation and management of the living resources in the exclusive economic zone is regulated in the United Nations Convention on the Law of the Sea of 1982. The management of hydrocarbon resources is inter alia regulated in the Energy Charter Treaty and in the EU Directive on the conditions for the granting and use of authorisations for the prospection, exploration and production of hydrocarbons. This directive is incorporated into the Treaty establishing the European Economic Area. In the view of Norway, these issues fall outside the mandate for the negotiation of the MAI.

Item (viii)

any other tangible and intangible, moveable and immovable property, and any related property rights, such as leases, mortgages, liens and pledges.

Negative List

Item [(i) public debt;] [debt securities of and loans to a state enterprise or Contracting Party;]

36. Some delegations consider that sovereign debt should not be part of the definition of investment, while others believe that including sovereign debt (which includes state-owned enterprise debt) requires further consideration. One element to be considered in this respect would be the sovereign liquidity issue. Some delegations pointed out that confiscatory measures by a debtor state entail international responsibility which should be dealt with in the MAI.

Item [(ii) financial assets;]

[unless the transactions [to which such debt or other assets relate] otherwise have the characteristics of an investment; or]

[unless the respective claims are assets of an enterprise mentioned in paragraph (a) (i); - or]

[unless such assets are acquired for the purpose of establishing lasting economic relations with an enterprise; or]

Item [(iii) derivatives where the underlying asset is not regarded as an investment],

37. These items are under review by EG5.

Item [(iv) real estate or other property, tangible or intangible, not acquired in the expectation or used for the purpose of economic benefit or other business purpose]

Item [(v) movable or immovable property, and any related rights acquired for personal use];

38. Real estate is a common form of property protected under BITs, the ECT and NAFTA. There are different views on how to treat summer residences or second homes. NAFTA excludes real estate or other property which is not acquired in the expectation, or used for the purpose, of economic benefit or other business purposes, and some delegations prefer such an approach which is reflected in item [iv].

-- Other Elements

39. Some delegations consider that the MAI should include "returns, or "reinvested returns" as part of the definition of investment as in the ECT.

GEOGRAPHICAL SCOPE OF APPLICATION

40. Expert Group 1 identified two approaches for addressing the issue of the geographical scope of application of the MAI; the "geographical" and the "functional" approach, i.e. referring to economic activities relating to investments.

41. Various draft texts were considered reflecting one, or the other, approach. Delegations agreed that it would be difficult at this stage to make a final recommendation to the Negotiating Group, which would attract the full support of the Expert Group, as to which approach should be followed. Many delegations were of the opinion that this question would have to be re-examined once other substantive issues in the MAI, including the definition of investment, and the nature and content of the reservations and exceptions had been examined.

42. Some delegations wish to include in paragraph b) of the proposed text the words "the seabed, its subsoil and the natural resources of the superjacent waters". Other delegations stated that they would need to review the acceptability of the reference to the 1982 United Nations Convention on the Law of the Sea. One delegation wished to exclude the maritime areas from the scope of the agreement.

III. TREATMENT OF INVESTORS AND INVESTMENTS

General

It was understood that the drafting of articles 1 and 2 was without prejudice to other aspects of the Agreement, including definitions, reservations, exceptions, standstill and rollback. and the role of the Parties Group.

NATIONAL TREATMENT AND MOST FAVOURED NATION TREATMENT

1. While some delegations would have preferred separate articles on pre- and post-establishment, the majority of delegations felt that a single text would better capture the intended coverage of the agreement and avoid the difficult task of defining the boundary between pre- and post-establishment. It was agreed, as a starting point, to work on the basis of a single text. Some delegations pointed to the links between a single text covering treatment of investors both pre- and post-establishment and the issues of definitions and the scope of the Agreement. Two delegations reserved their position pending the outcome of the discussion on these issues. The Drafting Group also felt that the scope of the commitments by individual countries could be identified by using precise language in any agreed reservations to National Treatment/MFN and perhaps by including references to relevant laws or regulations. The Group agreed that all diversification activities are covered by the references to "establishment, acquisition and expansion".

2. Including the words "in its territory" in Articles 1.1 and 1.2 was suggested for two reasons: i) to define the scope of application of national treatment and MFN; and ii) to provide an appropriate benchmark for assessing national treatment and MFN. Adding these words would make it clear that the Contracting Parties do not have obligations with regard to investors of another Contracting Party in a third country. One delegation suggested that a third reason for including "in its territory" would be to underline the need to avoid conflicting requirements on multinational enterprises. At the same time, however, it was important not to unduly limit the scope of the agreement, for example by excluding the international activities of established foreign investors and their investments. The place of this term in these paragraphs is still to be determined. It was also suggested that a solution might be found, as in NAFTA, in the article dealing with the scope of the Agreement. Whatever should be decided on this matter, it should be treated consistently throughout the Agreement.

3. Some delegations proposed the "same" or "comparable" treatment as the appropriate standard rather than "no less favourable" treatment. The purpose would be to prevent unlimited competition for international investment funds with consequential costs and distortions to investment flows. However, most delegations considered that this would unacceptably weaken the standard of treatment from the investor's viewpoint.

]4. Different views were expressed on the value of a "closed" or "open" list of investment activities to be covered by the National Treatment and MFN provisions, before and/or after establishment. A closed list had the advantage of certainty, but risked omitting elements that could be important to the investor. An open list would cover all possible investment activities, including new activities. But it could also create uncertainties as to the scope of the Agreement and might have adverse effects on the operation of existing bilateral and other investment agreements using a closed list. Several Delegations believed that the list "establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment and sale or other disposition of investments" should be considered a comprehensive one whose terms were intended to cover all activities of investors and their investments for both the pre- and post-establishment phases. In their view, this was the preferable approach. It was also suggested that the term "sale or other disposition" should replace "disposal" in Article 1.2 of the draft articles on selected topics on Investment Protection.

5. National treatment and MFN treatment are comparative terms. Some delegations believed that the terms for national treatment and MFN treatment implicitly provide the comparative context for determining whether a measure discriminates against foreign investors and their investments; they considered that the words "in like circumstances" were unnecessary and open to abuse. Other delegations believed that the comparative context should be spelled out and thus inclusion of the phrase "in like circumstances". Examples of the inclusion of a specific reference are found in the NTI, some BITs and NAFTA. Examples of no specific reference are found in some other BITS and the ECT (although the United States and Canada made a Declaration concerning the term "in like circumstances").

6. DG3 considered two options: "In like circumstances" deleted (option A) and: "In like circumstances" included (option B).

Regarding Option A. National treatment and MFN treatment are comparative terms. They permit fair and equitable difference in treatment justified by relevant differences of circumstances. In this context, nationality is not relevant. Some delegations may wish to modify this text in the light of the commentary on Option B below which was not discussed.

Regarding Option B. The U.S. delegation provided the following commentary:

"National treatment and most favoured nation treatment are relative standards requiring a comparison between treatment of a foreign investor and on investment and treatment of domestic or third country investors and investments. The goal of both standards is to prevent discrimination in fact or in law compared with domestic investors or investments or those of a third country. At the same time, however, governments may have legitimate policy reasons to accord differential treatment to different types of investments.

"In like circumstances" ensures that comparisons are made between investors and investments on the basis of characteristics that are relevant for the purposes of the comparison. The objective is to permit the consideration of all relevant circumstances, including those relating to a foreign investor and its investment, in deciding to which domestic or third country investors and investments they should appropriately be compared, while excluding from consideration those characteristics that are not germane to such a comparison."

7. The question was asked whether the treatment accorded to foreign investors by a sub-federal state or province would meet the national treatment test only if it were no less favourable than the treatment accorded to the investors of the same state or province, or whether it would be sufficient to accord treatment no less favourable than that accorded to the investors from my other state or province. The question will need to be answered by the Negotiating Group in due course.

8. Switzerland made a written proposal to refer, in the treatment of investors/investments article, to the concept of "equivalent competitive opportunities" analogous to that of GATS (Article XVII) [DAFFE/MAI/DG2/RD(96)1]. This was presented as a means of strengthening the national treatment provision by requiring that foreign investors and their investments have the opportunity to compete on terms equivalent to those enjoyed by domestic investors. This proposal was considered by some delegations to have positive elements particularly with respect to the treatment of branches of foreign financial institutions. "Equivalent treatment" was the basis of comparison, in the OECD Code of Liberalisation of Current Invisible Operations, between domestic financial institutions and branches, agencies, etc., of foreign financial institutions. Several delegations considered, however, that the introduction of the concept of "equivalent competitive opportunities" into Article 1 might create confusion on how to apply the national treatment and MFN obligations, and might even go beyond what these obligations were intended to cover. Other delegations suggested that issues concerning branches might be solved in the definition of "investments".

9. As indicated by the Negotiating Group [DAFFE/MAI/M(95)2], Article 1 is intended to address any problem of de facto as well as de jure discrimination.

10. Switzerland also suggested the addition of a distinct provision on "market access", modelled on the GATS (Article XVI), to deal with situations where the same restrictions apply to both domestic and foreign investors. Such measures may include both quantitative restrictions (e.g. economic need tests or numerical quotas) and qualitative measures (e.g. restrictions on the legal form of the activities permitted in a given sector). It was considered that this subject raised issues outside the traditional domain of National Treatment and MFN and required prior discussion in the Negotiating Group.

11. Some delegations expressed the view that Article 1.3 was not strictly necessary since it does not add any substantive obligation to Articles 1.1 and 1.2. Article 1.3 underlines, however, that, taken together, the purpose of Articles 1.1 and 1.2 is to give the investors and their investments the better of National Treatment and MFN.

PRUDENTIAL MEASURES

1. The proposed Article applies to measures taken with respect to financial services. Given the coverage of the MAI, the Article will apply to measures affecting investors and their investments in the financial services area and not all aspects of international trade in financial services. The Expert Group considered that there was no need to make this point explicit in the proposed Article.

2. The proposed text recognises the right of a Party to take prudential measures which do not conform with National Treatment, MFN and the other provisions of the Agreement, provided that the measures are not used as a means of avoiding Party's commitments and obligations. One delegation suggested that a requirement that prudential measures be not more restrictive than necessary to meet the prudential objective might be included in the proposed Article.

3. One delegation asked whether restrictions on transfers taken in connection with orders or judgements related to civil, administrative and criminal proceedings, etc. would be covered by paragraph 1 of the proposed article, subject to the anti-abuse provision of paragraph 2. This question may be related to paragraph 4.6 in the "Transfers" Article of the Agreement.

4. In paragraph 1 of the proposed Article, the Expert Group opted for the term "enterprise". This term was understood to be broader than "institution" which is generally only an entity expressly authorised to do business and regulated or supervised under the law of the party in whose territory it is located.

5. Except for one delegation (Australia), EG5 took the view that the exercise of a Party's right to take prudential measures which do not conform with the provisions of the Agreement should in principle be subject to the dispute settlement mechanism of the MAI. Most delegations were of the view that financial services expertise should be required for any arbitration panel for disputes on issues relevant to "financial services."

6. EG5 felt it would be desirable that the Agreement define certain terms including the term "measure".

TRANSPARENCY

1. Public dissemination of measures affecting foreign investment was considered essential to the operation of the MAI. Nevertheless a balance should be struck between this objective and the administrative burden of implementing it.

2. When sub-national, local or other authorities publish or otherwise make publicly available information on matters under their jurisdiction, this would be considered sufficient to meet the obligation of Article 2.1. There would be no obligation to duplicate this information at the federal or central government level.

3. The second sentence of Article 2.1 refers to situations in some countries where governments choose to establish policies that are not expressed in laws, regulations or other measures listed in this paragraph. However, as the legal standing and recourse to these policies varies among Member countries, it was agreed that they should be subject to transparency obligations only for governments which use this approach.

4. Regarding Article 2.2, a majority of delegations considered the establishment of specific enquiry points to be unnecessary. Other delegations considered that these enquiry points could contribute to the effective functioning of the MAI. They could also be useful to foreign investors by making available information of interest to them.

5. Article 2.3 addresses the concerns that may arise with respect to the disclosure of information in the context of law enforcement or laws protecting confidentiality. Such concerns are addressed in other international agreements (GATS, Energy Charter, NAFTA). It was felt unnecessary, however, to add a reference to national security and public order since this issue would be addressed in the general exception article.

6. Mexico, supported by other delegations, proposed to add an additional sentence to article 2.3 and an additional paragraph on Special Formalities and Information Requirements as follows:

[Nothing in this paragraph shall be construed to prevent a Contracting Party from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law.]

["Nothing in Article 1.1¹ shall be construed to prevent a Contracting Party from adopting or maintaining a measure that prescribes special formalities in connection with the establishment of investments by investors of another Contracting Party, such as a requirement that investors be residents of the Contracting Party, or that investments be legally constituted under the laws or regulations of the Contracting Party, provided that such formalities do not materially impair the protections afforded by a Contracting Party to investors of another Contracting Party and investments of investors of another Contracting Party pursuant to this Agreement."]

7. Some delegations expressed concern that the additional texts could be used to circumvent the non-discrimination obligations of the Agreement. There were serious concerns as to the substantive implications of the paragraph, in particular relating to the residency requirements.

8. DG3 considered including a notification obligation along the following lines:

"Each Contracting Party shall notify the ("Parties Group ") promptly, and in any case no later than 60 days after their entry into force, of any new measures or any changes to existing measures which significantly affect the performance of its obligations under the Agreement."

9. Such a provision could play a role in support of the possible activities of the Parties Group in connection with non-conforming measures subject to review and rollback, and general exceptions or any temporary derogations. It was agreed that this matter could be revisited once the MAI obligations in these areas had been clearly defined.

10. DG3 noted the suggestion that any Contracting Party should be entitled to notify to the Contracting Parties Group any measure taken by any other Contracting Party which it considers affects the operations of the Agreement. This too may be relevant to the functions of the Parties Group.

11. Japan suggested that consideration be given to an article based on Article 5 ("Controls and Formalities") of the OECD Codes of Liberalisation.

begin footnote

¹General Treatment Article.

end footnote

SPECIAL TOPICS

KEY PERSONNEL

A. Temporary entry and stay of investors and key personnel

Paragraph I

1. While several delegations supported including a requirement of a "substantial amount of capital" in this paragraph, others considered it would create uncertainties and could represent an important barrier to certain forms of investment. It was noted that Drafting Group 3 has developed a provision on Denial of Benefits in the context of indirect ownership or control using the concept of "substantial business activity". DG3 decided that it was not necessary to define this term.

2. Some delegations do not think it necessary to include "essential" in this paragraph and emphasise the difficulties associated with defining this term.

3. Delegations are considering whether subparagraphs a) and b) should refer to an "enterprise" or more broadly to "investment".

4. There are alternative texts proposed for subparagraph b). The first alternative is the approach submitted by the US. The second alternative includes a prior employment requirement. Some delegations think this requirement can distort the investment process by impacting unfairly on new investors and small/medium enterprises without any corresponding benefit to the "admitting" country. Furthermore, these delegations believe that it may not correspond to the real needs of an investment and should not be as a measure of whether an individual is essential to an investment.

5. While there were different views as to the length of a prior employment requirement, if included, several delegations thought it necessary to retain such a requirement if only because there is a corresponding requirement in their national immigration laws. One delegation thought it might be necessary to specify that the prior employment relation must be continuous and should immediately precede entry. Another delegation questioned whether the use of prior employment requirements to avoid circumvention of national immigration laws was effective.

Paragraph 2

6. This paragraph is in brackets pending consideration of its relation to the chapeau clause.

Paragraph 4

7. Some delegations believe this issue to represent a de facto barrier to the movement of key personnel and would be willing to grant temporary entry and stay to spouses and minor children. Some countries would go further and grant the right for spouses to work under the MAI. A difficulty would be to agree on what is meant by "spouse" and by "minor" children.

8. Other delegations might consider a best efforts provision as concerns the temporary entry and stay of spouses and minor children but would have strong objections to authorising work permits. They are of the opinion that an MAI provision to grant work permits to spouses to work anywhere in the economy would create a "common labour market for MAI spouses" and give rights to the spouse that go beyond what the agreement grants to the investor. One delegation pointed to the need to ensure subsistence for spouses and children in order to grant temporary entry and stay. Some delegations expressed concern that not authorising work permits for spouses might reduce significantly the effectiveness of the Article.

Paragraph 6 Natural person of another Contracting Party

9. There are different views as to whether, for the purposes of these provisions, natural persons covered should be restricted to nationals or permanent residents of another MAI Contracting Party. There was a discussion that for key personnel, nationality should not be a criteria as long as the key personnel is an employee of an MAI investment. Some delegations do not think it necessary to define this term here since it would be covered by the definition of investor elsewhere in the agreement. One delegation clarified that it could not accept the inclusion of permanent residents as concerns the provisions for temporary entry and stay although it agrees with the inclusion of residents for the purpose of the general definition of "investor" in the agreement.

10. The United States Delegation made a proposal for consideration which would multilateralise their bilateral treaty practice, as follows:

"Investors who are nationals of countries with whom we have certain treaty obligations (including our bilateral investment treaty partners) may, if they meet certain criteria regarding the nature of the investment, obtain visas to the United States that permit them, and certain of their key employees who are also citizens of the same country, to enter and remain in the United States while they are actively involved with the investment. There are known as E-2, or "treaty investor", visas.

In the context of the Multilateral Agreement on Investment, it would seem inconsistent with its liberalising goals to require that key personnel of an investor be of the same nationality as the investor in order to qualify for a "treaty investor" visa. One approach we would be prepared to explore would be to permit issuance of a "treaty investor" visa to any key employee of a qualified MAI-country investor who was himself or herself a national of an MAI-country, whether or not an employee has the same nationality as the investor. Thus, assuming that Germany, France and the United States all join the MAI, a French key employee of a German company would be eligible for a "treaty investor" visa if the German company were to make a qualifying investment in the United States.

We do not propose expanding the criteria for eligibility for a "treaty investor" visa, either in terms of the nature of the investment requires, or in terms of the types of personnel who qualify. We merely are suggesting that nationality not be a limiting factor, provided that the investor, and the key employee seeking the visa, are both nationals of MAI-member countries. Nevertheless, such a change in the "treaty investor" programme would require an amendment to the legislation that authorises such visas."

Enterprise

11. Most delegations did not think that these provisions should include a definition of the "enterprise" of another Contracting Party since it is already defined in the general definitions of the agreement.

Executive, Manager, Specialist

12. The Expert Group thought the definition of the categories of executive and manager were generally appropriate, except that there might be some overlap between the two. The category of "Specialist" will need some further reflection and may need to refer to the possibility of verifying professional qualifications. One delegation would like to include "trainers" in this category.

B. Employment requirements

13. This provision would permit an investor to hire persons without regard to nationality. While the MAI should prevent the application of national employment quotas or labour market (economic needs) tests, it should not be used by a foreign investor to circumvent the application of certain national laws such as anti-discrimination laws. It should also not prevent a Party from ensuring compliance with its laws as concerns the conditions it attaches to the granting of sejour and work permits. However, any administrative practices necessary for purposes of verification should not be used to undermine or nullify the provision.

PRIVATISATION

General

14. Some delegations question the need for a separate article confirming the application of the National Treatment/MFN obligations to privatisation operations. Other delegations feel, on the contrary, that it was worthwhile to underline this important addition to OECD obligations. Privatisation can be a complex and politically sensitive matter. There is thus a need to specify how the MAI obligations would interrelate to particular privatisation transactions or schemes. Foreign investors attach particular importance to transparency. While acknowledging differences of opinion over the best approach to this issue and leaving its options open, the Expert Group agreed to work on the basis of the proposed text.

Paragraph 2

15. Some delegations questioned how this provision would interrelate with the MAI provisions on expropriation and compensation.

Paragraph 3

16. One delegation doubted whether the provision was fully consistent with the National Treatment/MFN Treatment obligations. Another delegation considered there is a lack of balance, and thus discrimination, inherent in special share arrangements in that they would allow a Contracting Party to retain control while devolving business risks to private investors. Some delegations considered that special share arrangements will remain a feature of individual privatisation schemes and that the MAI should provide some flexibility in this area. A large majority shared the view that these special schemes should not be considered to be inconsistent with the National Treatment and MFN Treatment obligations unless they explicitly or intentionally discriminate against foreign investors. There might be a need, for instance, to set aside a proportion of initial sales to private persons or institutes. As in the case of monopolies, there is also a link with the room of manoeuvre the Contracting Parties would have in regard to the lodging of country specific reservations/exceptions: precautionary reservations would be necessary. Some delegations expressed reservations about the idea of special consultation procedures in this area in addition to those that might be contemplated under the consultation/dispute settlement provisions of the MAI.

Paragraph 5

17. The proposed definition was considered to be a good starting point for discussion. However, as it stands, the definition would cover sales from one government to another or between a government and a state enterprise. These sales do not result in increased participation from the private sector and may thus not be compatible with the concept of privatisation. The expression "transfer of control" may not be appropriate for partial sales. Account should be taken of the definition by the Expert Group:

"Privatisation was generally understood to mean the transfer of the partial or complete control² of publicly-owned assets to an investor or investors³. Privatisation may concern a public monopoly or a public enterprise. It may take effect in one single operation or spread over time in tranches. Methods of privatisation include: public offering in domestic and international markets, direct sale to investors, management and employee buyout and mass privatisation through distribution of vouchers to the population."

begin footnote

²The concept will require further consideration.

³The question of how to capture the privatisation of service activities remains to be determined. A number of delegations suggested that the word "private" be added before "investor" or "investors".

end footnote

INVESTMENT INCENTIVES

18. The discussion on investment incentives was based on a Note, including a proposal for draft provision, by the New Zealand [DAFFE/MAI/EG3/RD(96)7] and a proposal by the European Commission [section 6 of DAFFE/MAI/EG3/RD(96) 10].

19. Many delegations believed that disciplines on investment incentives would be important for the overall credibility of the MAI while at the same time recognising the role of investment incentives with regard to the aims of policies, such as regional, structural, social, environmental or R&D policies.

20. New Zealand argued that a definition of investment incentives is a necessary prerequisite for increased transparency and disciplines regarding such measures. It suggested a definition of investment incentives based largely on the definitions of subsidies and "specificity" found in the WTO Agreement on Subsidies and Countervailing Measures (ASCM). New Zealand also provided text for a specific transparency provision.

21. Several delegations, however, considered the nature and scope of the disciplines proposed by New Zealand and others to be too ambitious. Since WTO members were still grappling with related issues, it would be premature to include disciplines in the MAI that could duplicate or detract from WTO obligations. They also took the view that there has been insufficient analysis of the nature and impact of incentives and of the nature and extent of any disciplines which would be required given the objectives of the MAI. One delegation believed more work was necessary to identify fully the degree of the negative effect of individual incentives in relation to the policy goals, often beneficial, implemented through those incentives. Problems need to be clearly identified prior to drafting disciplines aimed at addressing those problems.

22. Several delegations also questioned the viability of creating, at this stage, standstill and rollback provisions on non-discriminatory investment incentives. Subjecting investment incentives to the NT and MFN obligations would already constitute a major step forward. One delegation felt that this would also imply submitting investment incentives to transparency obligations and subjecting non-conforming measures to standstill and rollback.

23. Most delegations believed that any plans for disciplines on tax incentives should be taken up by EG2. Some delegations thought that tax measures should be excluded.

24. Some delegations expressed concern that any additional disciplines on investment incentives in the MAI could divert foreign investment to non-Members and place MAI Contracting Parties at a disadvantage relative to non-Members in their ability to retain or attract investment. Such disciplines could also constitute an obstacle to accession to the MAI by non-Members. On the other hand, some delegations noted that it was always envisaged that the MAI, as a high standards agreement, would mandate more liberal FDI regimes among Parties than typically maintained by non-Members, and disputed claims that disciplines on incentives presented any special problems in this regard.

MONOPOLIES/STATE ENTERPRISES

Paragraph 1

25. There is consensus that the right of governments to create, allow or maintain monopolies could not be challenged under the MAI. But there is no consensus on the need to make it explicit in the MAI. Several delegations supported the language confirming the right of governments to designate new monopolies, although this could also be done through an interpretative note. One delegation was of the view that, without such a provision, there would be uncertainties about the scope of application of the MAI in this field. Some delegations remained unconvinced, however, of the need to mention this right explicitly in the Agreement. One delegation noted that government prerogatives on monopolies also apply to their elimination; inclusion of the word "eliminating" at the end of the phrase would make this clear and produce a more balanced provision. Some delegations noted the link between the designation of new monopolies and the MAI article on Expropriation and Compensation. One delegation pointed out that the need for paragraph 1 would be enhanced by the inclusion of market access disciplines in the MAI.

Paragraph 2

26. A large majority of delegations considered that the National Treatment and MFN Treatment obligations should apply to the designation of new monopolies. Several delegations pointed out the difficulty of applying such obligations to every situation that may arise in the future, notably in the context of the introduction of new technologies and felt that a "best endeavour" undertaking would be more appropriate. Delegations also noted the link with the demonopolisation issue and, in particular, that of the lodging of country-specific reservations or exceptions.

Paragraph 3

27. A large majority of delegations considered that the provisions of the Monopolies article should apply to government-designated monopolies at all levels of government and not be limited to those designated by central governments. One delegation suggested that in the case of privately-owned monopolies, the obligations should apply only to those created after the entry into force of the MAI and not to existing ones. This delegation argued that would be difficult to apply the obligations retroactively to existing privately-owned monopolies while such practical difficulties would not arise with respect to existing government monopolies.

28. Several delegations considered desirable to confirm in subparagraph (a) the application of the MAI obligations, notably that of National Treatment and MFN, to the delegation of regulatory powers. Some delegations felt this problem could be addressed in the context of a general anti-circumvention clause covering all provisions of the MAI. One delegation wondered if the language not being "inconsistent with the Contracting Parties obligations" was precise enough to avoid different interpretations. A few delegations questioned the need altogether for an anti-circumvention clause in the Agreement.

29. There was general agreement in favour of an obligation along the lines of subparagraph b) requiring government-designated monopolies to provide non-discriminatory treatment in their sales of monopoly goods or services. This obligation would not apply, however, to the sale of goods or services produced in competition with private operators.

30. Concerning the coverage of purchases of monopoly goods and services in paragraph c), the desirability of excluding procurement transactions covered by the GATT Agreement on Government Procurement (GPA) was not disputed, but it remained unclear what remaining procurement practices would be captured by the MAI as a result of this exclusion. One clear-cut example was marketing boards with monopsony powers over particular commodities. It was also noted that GPA covers the monopsony purchases of government-agencies but not those of government-designated privately-owned monopolies. This matter would need to be discussed further. One delegation mentioned that the plurilateral character of this GPA could give rise to a free-rider problem. One delegation suggested the term "monopsony" should be used when referring to the purchase of "a monopoly good or service". Some delegations felt that this was an intrusion of the MAI in the area of competition policy giving cause for concern.

31. Concerning subparagraph d), it was recognised that monopolies have the capacity to introduce market distortions, notably by cross-subsidising their business activities in competitive sectors. It was also acknowledged that abuse of dominant position was a competition policy issue. Further thought will also need to be given to the meaning of the "abusive use of prices".

Paragraph 4

32. Demonopolisation operations are generally favourable to liberalisation since they open up new investment activities. Demonopolisation operation would have the effect, however, of extending the obligations of the MAI to a new area. Several delegations felt therefore that the MAI should provide the Contracting Parties with the possibility to lodge new country-specific reservations/exceptions when this situation occurs. This would not be contrary to standstill since country-specific reservations/exceptions introduced at the time of demonopolisation, would, in principle, be subject to standstill. These delegations welcomed, as a result, the flexibility in paragraph 4. An alternative to this approach would be precautionary country-specific reservations/exceptions lodged at the time of the entry into force of the Agreement, an avenue resisted by the Negotiating Group. This problem clearly belongs to the broader issue of liberalisation and balance of commitments.

33. Some other delegations considered that the possibility of lodging country specific reservations or exceptions should be limited to the time a Contracting Party adheres to the MAI. In the absence of such reservations or exceptions, the National Treatment/MFN obligations would apply to demonopolisation operations. One delegation thought that the combined ability to designate new monopolies and to cover by reservations or exceptions new non-conforming measures could be used to evade MAI obligations.

Paragraph 5

34. The desirability of introducing a notification requirement for existing and new monopolies was found by some delegations to be closely related to the issue of country-specific reservations/exceptions and to a MAI article on Market Access. One delegation wondered what use the Parties Group could make of this information and feared the administrative burden. One delegation suggested that a best endeavour undertaking to provide, wherever possible, prior notification of any newly designated monopoly, along the lines of article 1502(a) of NAFTA, might offer a more palatable approach. Another delegation recalled the proposal made in the context of the negotiations of the Supplementary Treaty to the Energy Charter Treaty which limits reporting requirements for government-designated monopolies at the sub-national level to classes of monopolies as opposed to individual monopolies.

Paragraph 6

35. A few delegations proposed to exclude from investor-state arbitration matters arising out of paragraphs 3(b), 3(c), 3(d) or 3(e) of this Article. Other delegations felt that this could set a dangerous precedent for other MAI obligations. One delegation suggested that governments should keep control over the dispute settlement process because the disputes that may arise between government-designated monopolies and foreign investors are most likely be a function of the manner in which these monopolies are regulated than to their own behaviour.

B. State enterprises

36. Several delegations questioned the need for specific provisions on state enterprises. The problem of anti-circumvention of the MAI obligations could be addressed in the context of a general article on the subject or in the context of corporate practices. State enterprises operating in the competitive sector should be treated no differently than private enterprises. One delegation considered, however, that it is not always certain that governments can divorce themselves from the activities of their state enterprises. Foreign investors may, in any case, entertain this suspicion, particularly where such enterprises play a significant role. A balance should be struck between their rights under the MAI as investors and their obligations as suppliers of goods or services to domestic and foreign investors. One delegation felt that the best way to ensure this balance is to submit state enterprises to the same rights and obligations than private enterprises.

C. Definitions

37. The Expert Group agreed to pursue its discussion of the definition of "Monopolies" on the basis of the proposed text. One delegation suggested brackets around the word "local". A number of delegations considered that the concept of government-designated "monopolies" should also cover that of "exclusive suppliers" as in the case of Article VIII of the GATS. One delegation suggested that it be discussed whether enterprises with special concessions, for example banks, should be included or not. It was also noted that the possibility of having a GATT article XVII-type definition relating to "any enterprise" to which a party "formally or in effect" has given exclusive or special privileges", could be considered. Finally. it was recalled that Article 22 of the ECT covers state as well as "privileged enterprises".

38. While the concept of "relevant market" was considered to be more appropriate than that of "given market", some delegations felt that the term "commercial market" needed to be discussed further.

39. One delegation suggested the insertion of the words "subject to Annex..." to allow, as in NAFTA, that country specific characteristics be taken into account.

CORPORATE PRACTICES AND SENIOR MANAGEMENT AND BOARD OF DIRECTORS

A. Corporate Practices

Option A

Paragraph 1

40. A number of delegations expressed a clear preference for the first option which would limit the obligation of a Contracting Party to that of not encouraging or requiring a company to engage in certain practices. A difference could be introduced between shares traded in the stock exchange and other types of shares. Other delegations felt, however, that this provision amounts to an anti-circumvention clause, an article under consideration for the MAI as a whole. One delegation suggested that the term "other government measures" would need to be defined.

41. Some delegations specifically questioned the merits of including an illustrative list of corporate practices. Other delegations expressed reservations to the inclusion of some of the practices listed (such as residency requirements and issuance of different classes of shares). One delegation warned that "negative pledges" are common practices in certain countries and limiting their use could negatively affect the commercial interests of those which make use of them.

Paragraph 2

42. Delegations recognised that corporate practices can constitute an impediment to international investment. It was also felt that the MAI should not fall behind the GATS.

Paragraph 3, Alternative 1

43. Several delegations considered that the prohibition of discriminatory provisions in company statutes, articles of association and by-laws proposed in alternative 1 goes too far in limiting the freedom to contract and infringing upon the autonomy of the business sector. It would require legislative action in all OECD countries on a politically delicate subject. A best endeavour provision in this area would appear to be more realistic approach.

Paragraph 3, Alternative 3

44. With regard to the "best endeavour" provision, contained in this alternative, a number of delegations considered that it would intrude too much into the private sector domain and should not be pursued. Some delegations wondered how the "de facto" concept would be interpreted.

IV. INVESTMENT PROTECTION

1. GENERAL TREATMENT

1. Reference to "encouragement and promotion of investments", usually found in BITs does not constitute a principle of general treatment but may be included at some other place of the MAI.

2. Depending on the definition of investment/investor adopted in the MAI, the wording of Article 1 ("investments of investors") and subsequent articles may have to be changed.

3. Reference to international law is critical in this article and worded in the most simple manner. This may be a general issue to be discussed when other references to international law are made in other articles of the MAI.

4. The link between general treatment and NT/MFN was underlined as critical. However, since general treatment was considered as an 'absolute" principle as opposed to NT/MFN considered as "relative" principles, it was agreed that it was justified to separate the articles on General Treatment and NT/MFN respectively.

5. In the course of discussions it was agreed to suggest that special commitments entered into by a Contracting Party vis-a-vis an investor should be addressed in the MAI in a manner to be discussed at a later stage.

6. Obligations apply in all circumstances (i.e. "at all times"), although specific language was not considered necessary on this point.

7. Regarding Article 1.2, three formulations were suggested which have in practice three different implications. The Swedish proposal is reflected in a footnote and calls for no additional standards with respect to which a government's actions would be measured, but makes clear that the standards in the first paragraph apply to all activities relating to an investment. The other two formulations are shown in brackets and provide either: (i) that a government's actions would be measured as against either one of the two concepts (unreasonable, discriminatory), applied independently or (ii) that a government's actions would be measured against both concepts, applied conjunctively. The group stresses that this choice will have to take into consideration the choices to be made on other aspects of the MAI, such as National Treatment and taxation. DG3 believes that this question is a policy matter for the Negotiating Group which cannot be resolved through a drafting exercise. Sweden subsequently submitted a new proposal to help resolve article 1.2 [DAFFE/MAI/DG3/RD(96)9].

2. EXPROPRIATION AND COMPENSATION

1. The terms "public purpose" and "public interest" derive from different legal traditions but have very similar meanings. The term chosen "for a purpose which is in the public interest" is considered consistent with both legal traditions; it was previously agreed in the Energy Charter Treaty (ECT).

2. The Drafting Group understands that the violation of criminal laws could result in the loss of an investment (or part thereof which would not be deemed expropriation, provided those laws and their application are non-discriminatory and otherwise consistent with the standards of this agreement.

3. In cases where the investment consists in total or in part of shares, the rights of the shareholders, if an expropriation takes place, have to be defined. This should derive from the definition of investments in the MAI, if not, a special provision may be needed in Article 2.

4. Expropriation in cases where the investment consists in total or in part of intellectual property rights was seen as critical. It was decided not to suggest specific language on this issue and that it would need to be further revisited in a global context.

5. "Creeping expropriation" in general is covered by the words of Article 2: "measures or measures having equivalent effect". "Creeping expropriation" through tax measures were mentioned but no specific wording was suggested (see Commentary on "Taxation").

6. Austria proposed additional text on blocking, freezing, sequestration or any similar measures having expropriatory effect [DAFFE/MAI/DG1/RD(95)4]. After discussion, it was agreed that these concerns were already addressed: temporary actions, when ended, would result in restitution of the property, and, any unlawful aspects of the temporary measure could give rise to damages for breach of other articles, such as Article 1. Should the measures take on a permanent or expropriatory character, they would, (i) if lawful, be subject to Article 2, or (ii) if unlawful, give rise to a right to restitution under customary international law.

7. The Drafting Group considered the problem of exchange rate risk only in the case of delay in the payment of compensation for expropriation to the exclusion of other exchange rate risks to which the investor may be exposed.

8. It identified four options for calculating compensation in order to protect the investor against losses from currency fluctuations before date of payment. In each case, the text would replace the text currently shown in article 2.5

Option A - Investor's Choice

The compensation to be paid shall be calculated by summing:

(a) the fair market value of the expropriated investment on the date of expropriation, expressed, at the option of the investor on the date of expropriation, in either:

(i) the currency of the host state;

(ii) the currency of the investor's home state;

(iii) a freely usable currency; or

(iv) any other currency acceptable to the host government

at the market rate of exchange prevailing on that date, plus

(b) interest, at a commercial rate established on a market basis for the currency of valuation, from the date of expropriation until the date of actual payment.

That sum shall be expressed in the currency of payment at the market rate of exchange prevailing on the date of payment for the currency of valuation.

Option B - Government Choice: Multiple currency option

The compensation to be paid shall be calculated by summing:

(a) the fair market value of the expropriated investment on the date of expropriation, expressed, at the option of the host government on the date of expropriation, in either:

(i) a freely usable currency,

(ii) the ECU, or

(iii) any other currency acceptable to the investor

at the market rate of exchange prevailing on that date, plus

(b) interest, at a commercial rate established on a market basis for the currency of valuation, from the date of expropriation until the date of actual payment.

That sum shall be expressed in the currency of payment at the market rate of exchange prevailing on the date of payment for the currency of valuation.

Option C - Government Choice - Freely Convertible Currency specially defined¹

The compensation to be paid shall be calculated by summing:

(a) the fair market value of the expropriated investment on the date of expropriation expressed in a Freely Convertible Currency chosen by the host government on the date of expropriation at the market rate of exchange prevailing on that date, plus....

(b) interest, at a commercial rate established on a market basis for the currency of valuation, from the date of expropriation until the date of actual payment.

That sum shall be expressed in the currency of payment at the market rate of exchange prevailing on the date of payment for the currency of valuation.

The following would be inserted in the definitions article: "A Freely Convertible Currency is a currency which is, in fact, widely used to make payments for international transactions and is widely traded in the principal exchange markets".

Option D - No Explicit Coverage of Exchange Loss Provision

Compensation shall include interest at a commercially reasonable rate established on a market basis for the currency of payment from the date of expropriation until the date of actual payment.

begin footnote

¹The definition of "Freely Convertible Currency" would need to be the same as that adopted for the "Transfers" provision (article 4.2).

end footnote

9. A majority of delegations favoured Option D. Some delegations considered that the international law standard of compensation, set out in Article 2, which requires payment of full market value in fully realisable form and without delay, has implicit within it the requirement of offsetting declines in the currency of valuation between the valuation date and the payment, where there was a delay. Others considered this approach to be too vague or to leave the issue open for later dispute. They therefore favoured an explicit provision on the method to be used in calculating expropriation compensation including the choice of reference currency.

10. A number of delegations favoured giving the investor a choice of currency. Some favoured limiting the choice to the currencies of the home or host government. Others favoured broadening that choice somewhat. There was a consensus among them that the choice could not be unlimited. Option A illustrates their approach.

11. A number of other delegations considered that the choice of currency should be with the host government. Several of those delegations supported Option C. One delegation preferred Option B and requested its inclusion in this report.

12. One delegation noted that it could only accept an option which did not allow its currency to be used for calculation if the same limitation were imposed on all MAI parties. It suggested the inclusion of the words "other than its own" after the words "a freely usable currency" in Option B. The same delegation mentioned that another option would be to calculate exchange rate changes on the basis of a basket of currencies.

13. It will need to be borne in mind, when considering the accession of non-OECD Members, that the convertibility of the national currency will be important with respect to the transfer obligations of the agreement, including transfers of compensation for expropriation.

14. The Austrian delegation asked whether the drafting of Article 2 was adequate to avoid excessive scope, raising as an example the case of an investor which had received a permit or authorisation for an investment but then ceased to meet the necessary conditions for it. The Drafting Group was of the opinion that this should pose no problem under Article 2 as drafted: cancellation or withdrawal of the permit or authorisation in these circumstances by the Government would not constitute a direct or indirect expropriation or nationalisation of the investment. Comment 2 to Article 2, on loss of an investment through proper application of criminal laws, was not exclusive.

15. The Mexican delegation, supported by the United States delegation, believes it is important to provide guidance to arbitrators on how to determine the "fair market value". This paragraph could read as follows:

"Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine the fair market value."

4. TRANSFERS

1. All delegations agreed that the free transfer of returns was a critical element of the protection of the investors. Therefore a clear preference was voiced for listing the main categories of returns in Article 4.1(b) and in particular: "profits, interest, dividends, capital gains, royalties, fees and return in kind". However it was finally agreed not to lengthen the text of Article 4.1 (b) provided that these categories are explicitly listed in the definition of returns in the article on definitions of the MAI.

2. The free transfer obligation applies to earnings and other remuneration net after deduction of any withholding for tax or social security purposes. Dispute resolution would be available to investors but not their personnel.

3. The Drafting Group heard a presentation on transfers by an expert from the International Monetary Fund regarding the rights and obligations of countries under the Fund Agreement. It recommended that the Negotiating Group deal with this matter, for example, under general provisions concerning the relationship of the MAI to other international agreements.

4. Delegates wished to see no "balance of payments" clause in Article 4. The Negotiating Group will nevertheless need to address the question of general exceptions and temporary derogations for reasons such as balance of payments, public order and preservation of monetary union, including their possible relation to this article. However, it was mentioned that any such provision should not apply to payment of compensation under Article 2.

5. Articles 4.2 and 4.3 ensure -- without imposing it -- the freedom to make transfers in a freely [convertible] currency at a market rate. The reference to the exchange rate in Article 4.3 pertains only to cases where the conversion of funds occurs on the date of transfer.

6. Most delegations considered that the draft Article 4.4 would provide greater investor protection in extreme circumstances. Others thought the provision should not rule out a different solution mutually agreed by the Parties.

7. Conversely, a few delegations considered that it would not be useful or necessary to include such a text because: a) the extreme circumstances envisaged were very unlikely to arise in OECD countries; b) it is unlikely that a country without a functioning foreign exchange market would want to join or be able to meet the criteria for joining the MAI; and c) if a provision were included for these cases, the SDR rate may not be the most appropriate or most advantageous rate for the investor.

8. It was broadly agreed that this specific matter was independent of the general issues linked to the accession of non-Members to the MAI, although the conditions of non-Member accession to the MAI could possibly include a requirement that all MAI countries should meet the requirements of Article VIII of the IMF Agreement and should maintain functioning foreign exchange markets.

9. In order to emphasise the freedom of transfer, Japan proposed the following text for the first sentence of Article 4.5: "The freedom of transfer of returns in kind under Article 4.1(b) does not derogate from the rights of a Contracting Party under the Agreement established by the World Trade Organisation to restrict or prohibit the export or the sale for export of what constitutes the return in kind".

10. Article 4.6 is indirectly but closely linked with the issue of free transfer. It allows satisfaction of two important objectives. It is comparable to the language in the Energy Charter Treaty (ECT). Some delegations would include additional specific objectives, such as bankruptcy, insolvency or the protection of the rights of creditors; issuing, trading or dealing in securities; and records of transfers.

11. Other delegations questioned the need and desirability of Article 4.6. To help bridge these different views, Canada proposed the following language: "Nothing in Article 4 shall be construed to prevent a Contracting Party from the equitable, non-discriminatory and good faith application of measures to protect the rights of creditors, ensure compliance with laws on the issuing, trading and dealing in securities, reports or records of currency transfers and the satisfaction of judgements in civil, administrative and criminal proceedings, provided that such measures and their application shall be consistent with the provisions of Article l".

12. The United States proposed: "Notwithstanding articles 4.1 to 4.5, a Contracting Party may prevent a transfer through the equitable, non-discriminatory and good faith application of its laws relating to:

(a) bankruptcy, insolvency, or the protection of the rights of creditors;

(b) issuing, trading, or dealing in securities;

(c) criminal or penal offences;

(d) reports or records of transfers; or

(e) ensuring compliance with orders or judgements in adjudicatory proceedings."

13. Another important objective concerns taxation but this matter will need to be considered in the context of the general treatment of taxes in the MAI (see Commentary on "Taxation").

14. One delegation suggested adding the following text on forced transfers: "A Contracting Party shall not require the transfer of, or penalise the failure to transfer, the income, earnings, profits or other amounts derived from, or attributable to, an investment in the territory of another Contracting Party by one of its investors." This proposal did not attract a consensus.

5. SUBROGATION

1. It was discussed whether to include reference to private insurance companies in the recognition given in Article 5. A special provision to this effect was considered unnecessary since a Contracting Party may designate its "designated agency" regardless of its private or public status.

2. The question of subrogation is very directly linked to the settlement of disputes: it will have to be borne in mind as discussions on the latter subject take place. In particular, a key question will be the respective rights of the investor and the Contracting Party or its designated agency subrogated in the rights of this investor.

3. The second paragraph of Article 5 could be placed elsewhere in the agreement, possibly in the dispute settlement section.

6. PROTECTING EXISTING INVESTMENTS

1. There was broad support for inclusion in the MAI of a provision stipulating that the MAI would apply to pre-MAI investments. The debate was not conclusive as to whether to restrict the coverage to investments that were "consistent with the legislation" of the host state.

2. Some delegations wish to specify that the Agreement would not apply to claims arising out of past events or which had already been settled. This is reflected in Option A in the draft text. Another delegation questioned the need for the second sentence in view of Article 28 of the Vienna Convention on the Law of Treaties and proposed the text in Option B, which avoids implying retroactive effect.

7. PROTECTING INVESTOR RIGHTS FROM OTHER AGREEMENTS

1. Expert Group 1 reviewed this issue and found that a number of delegations continued to support the inclusion of a "respect" clause, a number continued to support the so called "zero option" and one delegation supported a middle ground "procedural option" of including investment agreement and authorisations expressly within the scope of the investor-state dispute settlement mechanism. Some delegations noted that, even under the "zero" option, as far as contracts and authorisations are concerned, those were in the asset based definition of investment and covered by the investment protection standards of general treatment, including the international law standards, and expropriation and, therefore, to that extent also covered by dispute settlement.

2. There were differing views in the Expert Group as to whether the general protection standards of the MAI would be sufficient to cover their concern. The Expert Group agreed, without prejudice to other possible solutions, that it would be useful to explore a compromise based on the "procedural option" with the terms "investment agreement" and "authorisation" to be defined, together with a review of the general standard of treatment in relation to the international law on respect for a state's investment commitments.