By Martin Khor
Director, Third World Network


A Multilateral Agreement on Investment (MAI) is currently being negotiated by the OECD countries. The negotiations began in May 1995 and were scheduled to be completed by May 1997. However, due to still unfinished business and some disagreements among members that could not be sorted out in time, it was decided to postpone completion of the MAI for another year. Thus, the new target for the MAI's completion is May 1998.

The core objectives of the MAI are "to establish a broad multilateral framework for international investment with high standards for the liberalisation of investment regimes and investment protection and with effective dispute settlement procedures." The MAI seeks to radically broaden the scope of freedom of movement and operation of foreign investors and their investments, and to provide more rights for them. Correspondingly, the MAI severely narrows and restricts the rights and powers of states to regulate the entry, establishment and operations of foreign companies and their investments.

Although only the 28 member countries of the OECD are negotiating the text of the MAI, it is meant to be a multilateral treaty, as its name suggests, open to all countries that can meet its provisions. Indeed, the OECD has made it clear that most barriers to foreign investments are located in developing countries, where also investors have greatest need for protection of their rights. Thus, although the negotiations are among only the OECD countries, the real target is to get developing countries to sign on.

This paper provides a preliminary review of the contents of the MAI, and comments on its main features. A description is given of  the main articles and provisions of the MAI, followed by comments on their implications for developing countries. It is beyond the scope of this paper to draw general conclusions or to provide general options.

The main text referred to is the draft text of the MAI dated 1 October 1997 ("Multilateral Agreement on Investment: Consolidated Text and Commentary"). Other OECD documents explaining the MAI were also referred to.


The draft MAI has the following structure:

I: General provisions
II: Scope and application
III: Treatment of investors and investments
IV: Investment protection
V: Dispute Settlement
VI: Exceptions and Safeguards
VII: Financial Services
VIII: Taxation
IX: Reservations
X: Relationship to other international agreements
XI: Implementation and operation
XII: Final provisions

Sections I and II provide the general provisions and objectives, and maps out the scope. Since the definition of investment is very broad, there is therefore a correspondingly broad coverage of the MAI, including foreign direct investment, portfolio investment, loans, intellectual property rights, etc.

The next three sections are the core of the MAI. Section III deals with how foreign investors and investments should be treated, in terms of the main principles (national treatment, most-favoured- nation treatment, transparency), the rights of foreign investors to establish themselves and be treated at least as well as national enterprises, and special topics, including the prohibition of performance requirements such as technology transfer, the right of foreign companies to bring in foreign managers and other personnel, and their right to participate fully in the host country's privatisation programmes.

Section IV covers the other main category of issues: the protection of foreign investors' rights. This includes effective compensation for expropriation and the right and freedom to transfer funds into and out of the host country. Since "expropriation" is also broadly defined, this strengthens the rights of foreign investors considerably.

Section V deals with the MAI's strong dispute settlement system, the aim of which is to ensure that the foreign investors' rights spelled out in Sections III and IV can be effectively enforced. Not only can a state bring up a dispute against another state for non-compliance, but for the first time in an international treaty, private corporations are given the legal standing to take up cases against governments. The cases can be heard in international arbitration panels, and if found in violation of their MAI obligations, the government concerned is liable to pay monetary compensation.

The remaining sections deal with issues such as general and temporary exceptions to the MAI rules and provisions for parties to draw up a list of reservations for sectors or activities where they are unable to apply the principles, at least initially. Accession by non-OECD countries is also discussed.


The following is a brief description and comment on many of the main articles and sections in the draft text of the MAI.


1. This contains a preamble affirming the decision of signatories "to create a free-standing Agreement open to accession by all countries."

2. The agreed points include: emphasising that fair, transparent and predictable investment regimes complement and benefit the world trading system; wishing to establish a broad multilateral framework for international investment with high standards for the liberalisation of investment regimes and investment protection and with effective dispute settlement procedures; recognising that the agreed treatment to be accorded to investors and investments will contribute to efficient use of economic resources, creation of employment opportunities and improving living standards.

Comment: The basic assumptions are that the MAI regime is fair and equitable for all parties; that the targets of "high standards for liberalisation and protection" backed by an effective enforcement mechanism will lead to the goals of efficient resource use, job creation and higher living standards. These are only assumptions and have to be tested out in line with existing knowledge of the investment-development nexus. For example, so-called "high standards" of liberalisation in countries where local firms are not yet able to compete could result in net loss of jobs.

3. Other points not yet agreed to include: proposals that the agreement be implemented consistent with environmental protection and with the Rio Declaration and sustainable development; and renewing the commitment to observe internationally recognised core labour standards. There is a sub-bracket noting the ILO is the competent body to promote labour standards.

Comment: These proposals by some countries are in response to growing opposition by environmental and labour groups in the North to the MAI who argue that investment liberalisation will cause TNC relocation to countries with lower environmental and labour standards. If accepted, these points could open the road for future development of side agreements on these two topics.

4. A further agreed point is to affirm support for the OECD Guidelines for Multinational Enterprises, which are non-binding and voluntary.

Comment: The Guidelines contain social obligations of corporations. They are mentioned here as a response to criticisms from NGOs that the MAI is imbalanced as it only provides strong rights for investors but does not spell out any obligations on their part. However, by emphasising the non-legal and voluntary nature of the Guidelines, the preamble in effect stresses the low status (and non-enforceability) of the Guidelines and thus of the corporations' obligations, in contrast to the legally-binding and enforceable nature of the MAI and thus of the implementation of foreign investors' rights.


1. The agreed definition of "investor" includes a natural person who is a national of or resident in a contracting party; and a legal person or entity constituted under the law of a contracting party, whether or not for profit, whether private or government owned and includes a corporation, trust, sole proprietorship, partnership, joint venture, association or organisation.

Comment: This is a very broad definition, which includes any commercial OR non-commercial organisation, including non-profit groups and institutions. This has significant implications beyond economic considerations as the broad definition can also include, for example, political, social, religious organisations of all types.

2. The agreed definition of "investment" is "every kind of asset owned or controlled, directly or indirectly, by an investor." Eight categories are specifically included, including an enterprise (defined as a legal person or entity as above); shares, stocks and equity participation; bonds, loans and forms of debt; rights under contracts (turnkey, construction, management, production, revenue- sharing); claims to money and performance; intellectual property rights; rights conferred pursuant to law or contract (concessions, licenses, authorisations, permits); any other property and property rights (eg leases, mortgages, liens and pledges).

Comment: This is an extremely broad definition, deliberately chosen to go "beyond the traditional notion of FDI to cover virtually all tangible and intangible assets and which applies to both pre- and post-establishment." (OECD 1997b: p4). Significantly, its coverage includes IPRs and "any portfolio investment that an investor has acquired or may wish to acquire."

The broad coverage has serious implications. It implies that the liberalisation and protection provisions, and the dispute settlement system (which includes the right of investors to sue states) extends to all these areas, and not only to FDI. Moreover, as it implies rights of foreigners to freely take in and out funds in all forms (through loans, portfolio investment, FDI, etc), there are serious implications with regard to money supply and financial policy, exchange rate and balance of payments (BOP).


This is the main section in the MAI dealing with liberalisation and deregulation of investments. It has a first section on Basic Obligations (national treatment, MFN, transparency) and then deals with Additional Disciplines under "special topics" (the most important being movement of personnel, performance requirements, privatisation, monopolies and state enterprises, investment incentives, intellectual property, "not lowering standards").

1. Basic Obligations: National Treatment.

The MAI has the following agreed text: "Each contracting party shall accord to investors of another contracting party and to their investments, treatment no less favourable than the treatment it accords (in like circumstances) to its own investors and their investments with respect to the establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment and sale or other disposition of investments."

Comment: This is perhaps the most significant of the MAI's principles, articles and provisions. It is broad in scope: covering pre- and post-establishment phases (as explained in the MAI text commentary, most delegations felt a single text covering pre and post establishment would better capture the intended coverage of the agreement and avoid the difficult task of defining the boundary between pre and post establishment); it would forbid de facto as well as de jure discrimination. It also covers a very wide range of activities, including establishment, acquisition, operation, management and sale of investments. Foreign investors cannot be treated less favourably than local investors; however they can be treated better.

This article has very serious implications for developing countries. The article makes it mandatory for member states to allow the entry and establishment of any foreign company or institution in all sectors (unless specifically covered by a reservations list of the country), and that the foreign investors be treated at least as well as local investors. At present, most developing countries have foreign investment committees that screen investment applications against certain criteria in line with national goals and development objectives. Many of these are aimed at protecting local enterprises from stronger foreign enterprises, until such time that the local firms are strong enough to compete on more equal standing. Some restrictions are for reasons of monetary and financial control and policy and for protection of the balance of payments. Certain strategic sectors are also protected or partially protected for social, cultural or political and strategic reasons, for example in the food-producing agriculture sector with a predominance of small farms, foreign ownership of land may be prohibited or restricted to protect the resources and livelihoods of a large and vulnerable segment of the population. The financial sector is protected because of its crucial economic role. In many countries, the media, health and educational sectors are protected for cultural and social reasons. In some countries, in some sectors where local enterprises already have the required technology and marketing channels (eg plantation export crops, mining), foreign investment may not be encouraged or is restricted. These restrictions would be removed through the national treatment article, either immediately or in due course (for sectors included in a reservations list).

Moreover, most developing countries have policies and laws that promote or favour local enterprises. The rationale is that, partly due to the colonial experience, local farms and firms have not been given the full opportunity to develop to a level where they can compete with the large foreign enterprises. Also, the development of local enterprise capacity is important for national development, in terms of upgrading local technology and skills, retention of income within the economy, linkages within and between sectors in the economy, employment generation and for economic, social and political security. Therefore, most governments, whilst welcoming foreign investments, also take positive measures to promote local enterprises through general provisions (for example, equity requirements, research and development grants, preference to locals in government business and expenditure) or through specific sectoral policies (for example, subsidy to local farms, permission for local banks to open more branches, state financing or encouragement for local-owned or joint-venture industrial enterprises, etc).

The national treatment principle that underlies the whole MAI would seek to deny the validity of past and present state policies and actions in developing countries in providing assistance to local enterprises to protect and promote their survival and growth. Such policies have been the underlying assumption in much of development economics.

Countries will have to review the basic assumptions of their existing development strategies and plans and either reaffirm them or change them drastically, in the process of making a decision whether to join the MAI. The existing (explicit or implicit) policies that favour or assist local enterprises will have to be listed and re-examined for their desirability and validity, and the implications of changing the policies.

The exercise has to be taken seriously, since joining the MAI, even with reservations on a list, would oblige countries to accept the national treatment in principle, and to have standstill in and rollback of the present restrictions on foreign investors and of the present policies in favour of local enterprises. If a mistake is made, and reservations are not entered (or are entered but at a particular level that later proves inappropriate), it would not be possible to return to an earlier level of protection.

On the other hand, the national treatment principle would also make it easier for investors from a developing country to be established and compete on more equitable terms (vis-a-vis locals) in other countries. In reality, only a few existing big enterprises from developing countries will be able to take advantage of this, at the moment. The numbers could of course grow in time. However the interests of outward-bound investors can also be protected through bilateral investment treaties; thus the MAI is not the only instrument for investor protection.

Countries have to weigh the benefits and costs of joining the MAI in terms of the effects it will have on the domestic economy and on the position of local enterprises, and in terms of the benefits that may accrue to its outward-bound investors.

2. Basic Obligations: Most-Favoured Nation Treatment.

The agreed text states that each contracting party shall accord to investors (and investments) of another contracting party treatment no less favourable than it accords to investors (and investments) of any other contracting party or of a non-contracting party. This is with respect to the same range of activities (establishment, operation, etc) as in the national treatment article.

Comment: This MFN principle would prohibit (or at the least restrict the ability of) a country from developing more favourable relations with certain other countries in relation to investment. This could be a drawback for policies by developing countries to establish closer links with other developing countries at the same stage of development, or in the same regional area. Thus, an Asean country that participates in preferential arrangements for investors and investments within the ASEAN region, would have to offer the same terms to investors from MAI countries, should it join the MAI. The article might also pose a problem for a developing country that has developed special links with particular countries, for example some Asean countries have put in resources to develop links with China or with African and Latin American countries, in promotion of South-South investments. Should those other countries join the MAI, the special relationships with the Asean countries could be called into question. For example, investors from other countries could challenge (in court) decisions made by a state to award contracts or projects to investors from "friendly countries," on the ground that they were more deserving. In general, the prospects for more special South-South or regional investment links would be made more difficult.

3. Basic Obligations: Transparency.

The MAI text obliges parties to publish its laws, regulations, procedures, administrative rulings and judicial decisions that may affect the operation of the agreement. Parties shall promptly respond to specific questions and provide information to other parties on request. However, no party shall be required to allow access to information on particular investors or investments contrary to its laws protecting confidentiality.

Comment: Notification requirements and response to information requests could be taxing on resources of some countries, as the WTO experience shows. Also, whilst the transparency article requires states to reveal their regulations and rulings, it exempts home states from cooperating with host states in providing information on their investors or their investments if this violates confidentiality. Thus whilst corporations are given widely increased new rights in the MAI (through changes in law in MAI countries), their home governments are not obliged to provide information about them, on grounds of existing confidentiality laws.


4. Temporary Entry, Stay and Work of Investors and Key Personnel.

The MAI states that contracting parties shall grant temporary entry, stay and authorisation to work to a foreign investor (who is seeking to establish an investment) and to key personnel (defined as executives, managers, and specialists). Spouses and minor children of these persons shall also be granted entry and stay, and countries are also "encouraged" to give work authorisation to spouses. No contracting party may deny entry, stay or work authorisation for reasons relating to labour market, other economic needs tests or numerical restrictions in laws or procedures.

5. Senior Management

No party may require that a foreign investor from other MAI countries appoint individuals of any particular nationality to senior management positions. (There is also a non-consensus proposal to extend this article to membership on boards of directors).

6. Employment Requirements

A contracting party shall permit other MAI-party investors to employ anyone of their choice regardless of nationality, provided the person holds a valid work permit.

Comment: Many developing countries have regulations restricting the number (and functions) of foreign staff a foreign investor can bring in. Also, they have policies, especially in joint-venture arrangements, that local citizens should occupy certain senior managerial positions as well as membership and positions on the Board of Directors. The aim of these policies is to ensure that there should not be a dominance of foreign personnel and that there be a transfer of managerial and professional skills to local people, as well that in joint-ventures, local citizens be able to occupy key leadership positions. The existing restrictions have created job opportunities for local managers and professionals in foreign and joint-venture firms. The MAI provisions prevent or severely restrict governments from acting towards these goals. Instead, governments would be obliged to allow the entry of a large number of foreign personnel, since numerical restriction is specifically forbidden and since the definition of key personnel is broad. The opportunities for locals will likely be reduced.

6. Performance Requirements.

A contracting party shall not impose performance requirements or to enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, operation or conduct of an investment of an investor of a contracting party or of a non-contracting party. The prohibited requirements that are specified are:

(a) to export a given percentage of goods or services;
(b) to achieve a given level of domestic content;
(c) to purchase, use or accord a preference to locally-made goods and services, or to buy goods and services from local persons;
(d) to relate the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment;
(e) to restrict the investor's sales in its territory by relating these to its exports or foreign exchange earnings;
(f) to transfer technology, a production process or other proprietary knowledge to local persons or enterprises, unless this is enforced by a court or competition authority to remedy violation of competition laws;
(g) to locate its headquarters for a region or world market in the party's territory;
(h) to supply its goods or services to a region or the world market exclusively from the contracting party's territory;
(i) to achieve a level or value of production, investment, sales, employment or R&D in its territory. (Note: This para is still under discussion, in recognition that governments can have legitimate employment programmes or employment discrimination laws);
(j) to hire a given level of local personnel/nationals;
(k) to establish a joint venture;
(l) to achieve a minimum level of local equity participation.

The MAI however allows government to offer an advantage to investors to comply with some of the requirements or commitments, i.e. (a) and (f) through (l). Also, government can offer an advantage to investors to comply with commitment to locate production, provide particular services, train or employ workers, construct particular facilities, or carry out R&D.

There is also a non-agreed article that paras (b) and (c) do not prevent government from adopting measures to protect human, animal or plant life and health and to conserve natural resources.

Comment: This is a very significant article with serious implications for development. The coverage of the prohibited performance requirements is very broad: it includes not only foreign investors from MAI countries, but also from non-MAI countries, as well as local investors and firms. This means that the performance requirements are banned for all foreign and local firms. Also, the MAI list goes far beyond the "trade-related" measures of the TRIMS Agreement in the WTO.

Many countries have regulations or policies obliging foreign investors to follow many or most of the performance requirements specified as prohibited in the MAI. Most of the requirements are imposed so that foreign investors meet their obligations to help host countries fulfil their development or national goals, such as upgrading technology, stimulating the business of local enterprises and the domestic sector, establishing or strengthening linkages with the domestic sectors, and earning or saving foreign exchange so as to protect the balance of payments. Without fulfillment of these goals, development may not take place or be sustainable. The removal of the right of governments to impose these requirements would deprive host countries of key economic instruments to pursue macroeconomic policies as well as longterm industrial policy and development strategies.

The prohibition of requiring joint ventures and minimum local equity participation is also very significant. This implies that foreign firms (whether or not from MAI countries) must be allowed 100 percent equity ownership. Many countries now have regulations limiting the equity participation of foreign firms. This could be aimed at increasing local ownership, limiting foreign monopolisation, as well as retention of profits and revenues within the country so as to protect the balance of payments; objectives that are seen in many countries to be important for maintaining social and economic stability.

The prohibition of imposing these performance requirements could thus have serious adverse effects on the ability of a host country to reach development goals, and on the attainment or preservation of economic, social and political stability.

7. Privatisation

The MAI states that national treatment and MFN treatment applies to: (a) all kinds of privatisation, whether by public offering, direct sale or other method; (b) subsequent transactions involving a privatised asset. However, a contracting party is not obliged to privatise. It is also proposed that special share arrangements which explicitly discriminate (i.e. de jure) against foreign investors are contrary to national treatment/MFN treatment; and when they lead to de facto discrimination they are also contrary. (Another proposal defines these special share arrangements as retention of golden shares by contracting parties; stable shareholder groups assembled by a party; management/employee buyouts; voucher schemes for the public; and describes them as holding "strong potential for discrimination against foreign investors). Contracting parties must publish features and procedures for participation in each privatisation. Privatisation is defined as the sale or other disposal by a contracting party, in part or in full, of its equity interest in or assets of an enterprise or government entity.

Comment: The inclusion of privatisation considerably broadens the scope of the MAI since current investment rules (including in the OECD) do not cover this subject. The MAI does not oblige states to privatise, but once a publicly owned enterprise is offered to private investors, then national treatment and MFN applies. Foreign investors would have the same (or better) rights as local investors to acquire government-held assets.

The application of national treatment and MFN treatment has serious implications for developing countries. Many countries are in the process of privatisation. In this process, it is often the case that preference may be given to local investors, or a certain percentage of shares (or even all) may be reserved for locals. The protection of local interests is seen as needed in order that there be a retention of significant local participation in what are often key economic and social sectors or activities previously owned and controlled by government. Also, if privatisation is opened up equally to foreigners, the stronger foreign investors would have an advantage by virtue of the resources they command. This section of the MAI prohibiting advantageous treatment to locals would open the road for significant foreign purchase of privatised assets, including what a country may consider its strategic sectors or industries.

Moreover, the additional restrictions placed by the MAI on special share arrangements would make it difficult or impossible for government to retain a fair amount of control over privatised or partially-privatised enterprises and activities (which it may now exercise through "golden shares"). These provisions may also prohibit (or at least make very difficult) the reservation of certain percentage of shares (or shares at preferential prices) for certain groups in the local society, or even reservation of shares for the management and staff of the privatised entity. These prohibitions have the potential to prevent the benefits of privatisation to accrue to broader sections (or selected sections) of the local population. Since privatisation is often a socially and politically sensitive topic, the sale of a lot of the "family silver" to foreigners or foreign firms (without the state having the ability to reserve some shares for locals) could generate controversy and discontent and increase the unpopularity of privatisation in general.

8. Monopolies/State Enterprises/Concessions.

According to the MAI, a contracting party has the right to maintain, designate or eliminate a monopoly. However it shall accord non-discriminatory treatment when designating a monopoly. Contracting parties shall ensure that any privately-owned or public monopoly designated or maintained by government should not act in a manner inconsistent with the agreement's obligations. The monopolies must provide non-discriminatory treatment to investors in their sales of the monopoly good or service, and provide non- discriminating treatment in its purchase of the monopoly good or service (with the exception of government procurement).

There is also a proposal that each contracting party ensure that any state enterprise acts in a manner not inconsistent with the party's obligations under the MAI when the enterprise exercise regulatory, administrative or other governmental authority. Another proposal prefers "any entity" instead of "state enterprise."

There is a proposal that for concessions, conditions of participation in awarding procedures shall be published in due time and written in at least one official OECD language.

Comment: The MAI does not challenge the right of states to designate or maintain monopolies. It however insists that government-designated monopolies should not be allowed to treat foreign investors less favourably than local enterprises. These monopolies should act in line with the national treatment and MFN obligations, when it exercises regulatory powers in connection with a monopoly good or service. The above provisions would prevent government monopolies from selling its goods or services cheaper to local enterprises, or to buy from them at favourable rates.

9. Investment Incentives

There is still no consensus on how to treat investment incentives in the MAI text. Several delegations think no additional text is needed. Many however want provisions on incentives but differ as to their nature and scope. Some proposed a built-in agenda for future work.

There is consensus that contracting parties confirm that the articles on national treatment, MFN and transparency apply to investment incentives.

There are differences on whether to have obligations on non- discriminatory investment incentives. Some are concerned about the increasing use of incentives, with governments having to engage in costly competition with others to attract investments. Some delegations believe investment incentives "may have distorting effects on the flow of capital and investment decisions". Some propose that a contracting party whose investors are adversely affected by an incentive of another party and having a distorting effect may request consultations, and may also bring the incentive before the Parties Group for its consideration. Several delegations point out not all incentives are bad, and that the distorting effects of incentives on investment decisions and capital flows should be balanced against their possible benefits in achieving legitimate social objectives (eg regional, structural, social, environmental or R&D policies).

The MAI draft has a bracketed article that to avoid and minimise distorting effects and avoid undue competition to attract or retain investments, parties shall negotiate (within three years) to establish additional MAI disciplines after signature of the MAI. The negotiations would recognise the role of investment incentives with regard to the aims of policies (regional, structural, social, environmental or R&D policies). They shall in particular address issues of positive discrimination, transparency, standstill and rollback.

Comment: The immediate implication is that countries joining the MAI that are now providing investment incentives would have to provide them on a national treatment and MFN basis. Countries could still request reservations in order to continue discriminatory application of incentives. However the trend of thinking within the OECD members is clear, that gradually (if not now), disciplines would also be imposed to curb or limit non- discriminating incentives. The extension of incentives on a non- discriminating basis might be costly for countries in terms of subsidies or taxes forgone. The limitations or curbing of incentives, if not now then in the near future, could reduce the ability of countries to use incentives as an added attraction to foreign investments.

10. Corporate Practices
11.Technology R & D
12. Intellectual Property
13. Public Debt

The texts and issues relating to the above are still being debated and negotiated.

14. Not Lowering Standards

Several delegations have proposed an article on the need to not lower standards to attract investments, but this has been opposed by four delegations. The proposed text is that parties recognise it is inappropriate to encourage investment by lowering health, safety or environmental standards, or relaxing (domestic) (core) labour standards. Accordingly a Party should not waive or derogate from such standards to encourage investment. A Party that considers another has offered such an encouragement may request consultations with a view to avoid such encouragement.

Comment: This proposal is still being discussed. It does not appear to be legally binding and obliges a complained against party to only enter consultations.


1. General Treatment

The MAI draft states each party shall accord to investments of investors of another party "fair and equitable treatment and full and constant protection and security" and the treatment should not be less favourable than required by international law. Also, a party shall not impair by (unreasonable and/or discriminatory) measures the operation, management, maintenance, use, enjoyment or disposal of investments of investors of another party.

2. Expropriation and Compensation

A party shall not expropriate or nationalise directly or indirectly an investment of investors of another party, or take any measure or measures having equivalent effect (hereinafter referred to as "expropriation"), except for a public-interest purpose, on a non- discriminatory basis, in accordance with due process of law, and accompanied by payment of prompt, adequate and effective compensation . Compensation shall be paid without delay, shall be equivalent to fair market value of the investment immediately before the expropriation, and shall be fully realisable and transferable. Compensation should include interest at a commercial rate from the date of expropriation until the date of actual payment. (An interpretive note may provide that the host country bear any exchange rate loss arising from delay in paying compensation).

3. Protection from Strife

An investor which has suffered losses to its investments due to war, emergency, revolution, civil disturbance shall be accorded by the host party (as regards restitution, compensation or other settlement) treatment no less favourable than accorded to its own investors or any third State, whichever is most favourable to the investor. Notwithstanding this, an investor suffering a loss in the above situations resulting from the forces or authorities requisitioning its investments, or destruction of its investments which was not required by the necessity of the situation, shall be given restitution or compensation which is prompt, adequate and effective (similar to that for expropriation).

4. Transfers

All payments relating to an investment may be freely transferred into and out of the host country without delay. The specified transfers include: (a) initial capital and additional amounts to maintain/increase an investment; (b) returns; (c) payments made under contract, including a loan agreement; (d) proceeds from sale or liquidation of investment; (e) payments of compensation; (f) payments from settlement of a dispute; (g) earnings of personnel engaged from abroad.

Each party shall ensure the transfers may be made in a freely convertible currency, at the market rate of exchange on transfer date.

5. Subrogation

The MAI adopts the principle that in case the home government of an investor pays compensation for a loss the investor suffered in the host country, the home country is entitled to all the rights and claims the investor has vis-a-vis the host country.

6. Protecting Existing Investments

The MAI shall apply to investments existing at the time of entry into force as well as to those established or acquired thereafter.

Comment: These provisions give maximum protection to the interests of foreign investors. Then general treatment article is sweeping in scope in that the host country may not take measures that impair the operations, use, enjoyment or disposal of investment of the foreign investor. An investor that feels his rights are violated under this article can take legal action against the host state. This puts the host country on the defensive in its creation or use of measures or policies that may cause the foreign investor to feel aggrieved.

The definition of expropriation (that is to be prohibited) is very broad, going beyond the usual meaning as in expropriation of physical or monetary assets. The commentary explains that "expropriation in cases where the investment consists in total or in part of intellectual property rights was seen as critical." Moreover, it also says that "creeping expropriation" in general is covered by the words of article 2: "measures or measures having equivalent effect." "Creeping expropriation" through tax measures was also mentioned but no specific wording was suggested. The implication of this is that investors can make use of a broad interpretation of the term "expropriation" in order to bring complaints to or against the host government for "measures" that the investor perceives to have caused him loss or damage. An investor who feels that he has been unfairly taxed, or that his IPR has not been adequately protected, or that his rights to resources or business opportunities have not been adequately respected, could charge that his investment has been expropriated.

The conditions for legitimate expropriation are limited, and the terms of compensation are strict and yield the maximum rate for the foreign investor (including the host country having to bear interest charges and foreign exchange loss for late payment). The commentary includes detailed notes on how compensation is to be calculated.

Damage during conditions of strife need not be compensated for, but if compensation is to be paid, then the foreign investor is entitled to the most favourable treatment vis-a-vis nationals. The article on transfers is most significant, as it obliges host countries to have the most liberal policy towards capital inflows and outflows as regards to foreign investors. Many developing countries have previously imposed or are presently imposing controls on the inflows of foreign funds either into banks or stock markets or other investments, as well as some limitations on funds repatriation. Countries that have liberalised may want the option to reimpose some controls if the situation requires this. The MAI would prohibit such restrictions, except during balance-of-payments or foreign exchange crises, in which case stringent IMF conditions and approvals would be necessary (see section on temporary safeguards). Thus, host countries would be prevented from having measures which they believe may be needed to prevent balance-of- payments or foreign exchange difficulties, but can ask for temporary suspension of obligations only when crises have occurred and can be proven to be prevailing.

Also, the MAI investment protection articles would apply not only to new investments after the host country has joined the agreement, but also retrospectively apply to all existing investments, thereby superseding the agreements or arrangements made previously between these investors and the state.


In order to make the MAI effective, the drafters have given a high priority to give it "bite" in enforcement capability through its dispute settlement system. The MAI has a dispute settlement system that covers two types of action in the event of an alleged breach of the agreement: state-to-state and investor-to-state. The second type is innovative in that there has been no international trade/investment agreement containing this type of dispute settlement, although it exists in NAFTA.

1. State-State Procedures

A party may request another party to enter consultations regarding any dispute between them. If the consultations fail within 60 days of the request, the Parties Group may be asked to consider the matter, and if this fails they may have recourse to mediation. If this in turn fails, the dispute can be submitted to an arbitral tribunal for decision. Within 30 days, the parties to the dispute shall appoint three tribunal members, or else the Secretary General of ICSID (international center for the settlement of investment disputes) shall appoint the tribunal. The Parties Group shall maintain a roster of individuals (for renewable five-year terms) to serve on arbitral tribunals.

The tribunal may award the following forms of relief: (i) a declaration that a party's action contravenes the agreement; (ii) a recommendation that a party brings its actions into conformity with its obligations; (iii) pecuniary compensation for loss or damage to the requesting party's investor; (iv) any other form of relief, including restitution in kind to an investor. Tribunal awards are final and binding. Either party to the dispute can request the annulment of an award on one of five grounds, to be submitted to a tribunal.

Failure of a party to comply with its obligations as determined in the award can lead to the other party taking responsive measures or suspending the application of its obligations to the other party. The effect of any such responsive action must be proportionate to the effect of the other party's non-compliance. The Parties Group shall also consider the matter on request, and can make recommendations, suspend the non-complying party's right to participate in decisions of the Parties Group, or decide that some or all the responsive measures (intended by the contracting party) shall not be taken.

2. Investor-State Procedures

Under this article, an investor can bring for arbitration a case against the host country (a) concerning an alleged breach of obligation of the host country under the agreement, causing loss or damage to the investor; (b) for violating any obligation the host country entered into for a specific investment of the investor through an investment authorisation or a written agreement granting rights to the investor.

The investor can choose to submit the dispute for resolution to any competent courts of the host country; or in accordance with any dispute settlement procedure agreed upon prior to the dispute arising; or by arbitration in accordance with this Article under the ICSID Convention, the rules of the ICSID Additional Facility, the Arbitration rules of the UNCITRAL (UN Commission on International Trade Law), or the arbitration rules of the International Chamber of Commerce. The investor may submit a dispute no later than five years from the events giving rise to the dispute, and should specify the basis for the claim and the relief sought, including the amount of damages claimed. The tribunal will have three members appointed by the disputing parties or failing that by the ICSID Secretary General. They are encouraged to select persons on the MAI arbitration roster. A party may request for the consolidated consideration of two or more disputes if they have common elements in law or fact. The tribunal may request a report of a scientific or technical review board on any factual issue raised in a proceeding. The tribunal can recommend an interim measure of protection to preserve the rights of a disputing party.

The tribunal in its award shall set out its findings and provide the following forms of relief: (i) a declaration the party failed to comply with its obligations; (ii) pecuniary compensation, including interest from the time the loss or damage was incurred until time of payment; (iii) restitution in kind in appropriate cases or pecuniary compensation in lieu; (iv) any other form of relief agreed to by the parties. Awards will be final and binding and shall be carried out without delay. Any arbitration under this article shall be held in a state that is party to the New York Convention.

Comment: The dispute settlement system has serious implications. Firstly, by enabling cases to be brought up against parties, in which non- compliance can result in heavy monetary fines, the host governments will have to take the MAI seriously as there is serious enforcement capability.

Second, the investor-to-state actions mandated by the MAI establishes new rights for corporations and investors to sue governments for failure to comply with their MAI obligations. As the MAI obligations are so many and so broad, this can result in a developing host country facing a long series of expensive legal cases brought on by many foreign companies on a wide variety of charges. This possibility alone would put the host government very much in the defensive in dealings or policies towards foreign companies, for fear that they could intimidate it with tribunal cases. The hands of the big corporations would be very much strengthened whereas the government would be made to be in a much weakened position.

The MAI will be the first multilateral treaty that grants a legal standing to private investors to sue states. The WTO rules only permit state-to-state disputes and do not allow for investor-state disputes to be heard. The only place in international commercial law enabling private companies to sue a state is in one narrow provision of NAFTA. The example of a US company suing the Canada government under the NAFTA illustrates the problems host countries are bound to face under the MAI. In early April 1997, the Canadian Parliament banned the import and inter-provincial transport of the gasoline additive MMT, a dangerous toxin (Preamble 1997). Ethyl Corporation of US (the only producer of MMT) filed a lawsuit against the Canadian government under NAFTA rules, claiming the ban violates NAFTA provisions and seeking restitution of $251 million to cover losses from the "expropriation" of its MMT production plant and its good reputation. Canada had banned MMT because its emissions poses a significant health risk. The US has banned its use in reformulated gasoline, whilst California has imposed a total ban on MMT. NAFTA requires member countries to compensate investors when their property is "expropriated" or when governments take measures "tantamount to expropriation". Ethyl claims the ban will reduce the value of its MMT plant, hurt its future sales and harm its reputation. According to ICSID (International center for the Settlement of Investment Disputes), the $251 million Ethyl is seeking is higher than any amount in an ICSID investor-to-state case.

As pointed out by Preamble (1997), the Ethyl case raises a host of issues: (i) It could set a precedent where a government would have to compensate investors when it wishes to regulate them or their products for health or environmental reasons; (ii) effective limitations on the frequency and impact of lawsuits are removed when investors are granted the right to sue governments; (iii) if claims like Ethyl's are successful and proliferate, the costs to governments could be burdensome; (iv) the threat of suits like Ethyl's could be used to pressure governments or lawmakers who are considering new regulations; (v) in cases like Ethyls', international panels, not domestic courts, will have ultimate legal authority; (vi) the Ethyl case suggests these agreements could pose a threat to national sovereignty. All these points should be carefully borne in mind when assessing the impact of the MAI, since the Ethyl case is an illustration of the type of investor-state disputes that can be expected to occur under the MAI.


1. General Exceptions

The MAI contains general exceptions for:
(a) a Party taking any action necessary for protecting essential security interests, including in time of war, relating to agreements on non-proliferation of nuclear weapons, and relating to arms production;
(b) action needed for maintenance of public order; These may not be invoked to evade the MAI's obligations.

2. Transactions in pursuit of monetary and exchange rate policies

The articles on national treatment, MFN and transparency do not apply to transactions carried out by Central banks in pursuance of monetary or exchange rate policies.

3. Temporary safeguards.

The MAI recognises the following temporary safeguards.

A party can have measures inconsistent with obligations under Transfers and National Treatment for cross-border capital transactions in the event of a serious balance-of-payments and external financial difficulties or threat; (b) where capital movements cause serious difficulties for operation of monetary or exchange rate policies.

These measures shall be consistent with IMF articles, shall not exceed what is necessary, shall be temporary and be eliminated as soon as conditions permit, and shall be promptly notified. They shall be subject to review and approval within six months and every six months after. The IMF is to be given a key role in assessment of the necessity and adequacy of the measures.

Comment: There are only very few exceptions, made only for security reasons and maintenance of public order. Thus the coverage of the MAI is almost all-encompassing.

The temporary safeguard is on the ground of balance-of-payments and external financial difficulties. The temporary suspension of obligations is only when the crisis has occurred, and when the IMF has certified that the situation is in compliance with IMF principles. Exception from the rules in order to take measures to prevent a crisis from developing is not permitted.


The MAI draft text indicates that the following issues relating to taxation will be included: (i) The article on expropriation will apply to taxation measures. A draft provision states that taxation measures may constitute an outright expropriation or may have the equivalent effect of an expropriation (so-called "creeping expropriation"); (ii) The article on transparency shall apply to tax measures, although the MAI does not require information to be disclosed that is covered by tax secrecy; (iii) The national treatment article shall apply to taxation measures. There are also proposed provisions on procedures for dispute settlement in disputes relating to tax matters.

Comment: The MAI also has implications for a host country's taxation laws and policies, especially in respect to any differences in the treatment of local and foreign citizens, or of local and foreign firms. Perhaps more importantly, the MAI opens the road for corporations to take legal cases against the host government, claiming the tax measures are equivalent to expropriation, or that the government is in violation of relevant general obligations.


Under this section, the MAI draft states that the articles on national treatment, MFN (and other not yet specified articles) do not apply to: (i) any existing non-conforming measure by a party as set out in its Schedule to Annex A of the agreement; (ii) continuation or prompt renewal of any non-conforming measure; (iii) amendments to any non-conforming measure to the extent the amendment does not decrease the conformity of the measure with the articles on national treatment, MFN, etc. (iv) any measure that the party adopts with respect to sectors, subsectors or activities set out in Annex... of the agreement. There is consensus on points (i), (ii) and (iii) but Point (iv) is still being debated.

Comment: This is a very important provision, as it allows parties to set out reservations in a country list to be annexed to the agreement. The list is expected to have information on the sectors and activities that come under reservations, the extent of compliance and non-compliance, and indications on the expected future progress towards compliance with respect to each sector or activity. The reservations list is now rather long, with more than 600 reservations already submitted by the OECD countries.


Under this heading the MAI draft refers to: (i) the MAI provisions do not alter the obligations undertaken by a party to the IMF's articles of agreement; (ii) the MAI associating with the OECD guidelines for multinational enterprises. The non-binding character of the guidelines (which cover information disclosure, competition, employment and industrial relations, environment) was notably mentioned.


There will be a preparatory group made up of signatories to the Final Act and to the Agreement. The preparatory group's decisions shall be by consensus, or if that fails, by a majority vote. There shall also be a Parties Group comprised of the Contracting Parties, and the Group will be assisted by a Secretariat.


Among the significant "final provisions" are those pertaining to:

- Accession: The agreement will be open for accession to any state, regional economic integration organisation or any separate customs territory, which is willing and able to undertake its obligations on terms agreed between it and the Parties Group.

- Amendment: Any party may propose to the Parties Group an amendment to the agreement. Any amendment will enter into force when all parties ratify the amendment.

- Withdrawal: At any time after five years from the date of joining the MAI, a party may withdraw from the agreement, the withdrawal to take effect six months after receipt of the notice of withdrawal. However, the provisions of the agreement shall continue to apply for 15 years after notice of withdrawal, to an investment existing at that date.

Comment: Countries wishing to join will have to negotiate its terms of entry with the existing members. Amendments to the agreement will be very difficult as these require consensus. The withdrawal rules mean that an MAI country will have to continue meeting its obligations to already existing investments for a period of 15 years, even after withdrawing from the agreement. Thus, joining the MAI would "lock" a country into its rules, for at least 15 years after withdrawal.


From the description and comments on the main articles of the MAI, it is clear that the MAI is very wide in scope and serious in implications. Developing countries are being called upon to decide whether to join this agreement. It will be a difficult choice to make. For a start, each country will have to make a thorough study of the MAI and how joining it will affect the national economy, and in what ways. The decision to join or not to join the MAI will be one of the most important and toughest decisions a country is likely to make for many years. Therefore such a thorough study to assess the benefits and costs, the advantages and disadvantages, for development prospects, is essential.


OECD (1997), Multilateral Agreement on Investment: Consolidated text and commentary (1 Oct 1997). OECD, Paris.

OECD (1997a), Main Features of the MAI (20 Feb 1997). OECD, Paris.

Preamble (1997), Ethyl Corporation v. Government of Canada: Chemical firm uses trade pact to contest environmental law. (Preamble briefing paper, by the Preamble Center for Policy yPolicy, Washington, 1997).