Regional and Bilateral Initiatives
Canada's Foreign Investment Protection and Promotion Agreements
(FIPAs)
Canada’s FIPA Program: It’s Purpose, Objective and
Content
International investment is an essential corporate strategy for
many Canadian companies competing in today’s global economy.
By investing abroad, companies can gain access to overseas markets,
reduce input costs, secure access to key resources, acquire new
technologies and provide better support to foreign customers. On
the other hand, the risks of investing in a foreign country can
be high. Such risks include political instability, weak legal institutions,
uncertain regulatory regimes and the possibility of expropriation.
For this reason, the Canadian government pursues a policy of negotiating
Foreign Investment Promotion and Protection Agreements (FIPAs) in
order to provide a more transparent and predictable climate for
Canadian investors abroad.
FIPAs are part of the expanding global network of bilateral investment
treaties (BITs); there are now approximately 2400 BITs worldwide.
To date, Canada has 21 FIPAs in force (with Russia, Poland, Czech
and Slovak Federal Republic, Argentina, Hungary, Ukraine, Latvia,
Philippines, Trinidad & Tobago, Barbados, Ecuador, Egypt, Romania,
Venezuela, Panama, Thailand, Armenia, Uruguay, Lebanon, Costa Rica
and Croatia). These FIPAs, combined with the investment obligations
contained in Canada’s free trade agreements, provide protection
for approximately 60% of the outward investment of Canadian businesses.
What is a FIPA?
A FIPA is an international treaty providing binding obligations
on host governments regarding their treatment of foreign investors
and investments. By setting out clear rules and an effective enforcement
mechanism, a FIPA provides a stable legal framework to promote and
protect foreign investment. It typically sets out a range of obligations
that host governments guarantee pertaining to non-discriminatory
treatment, expropriation, transfer of funds, transparency, due process
and dispute settlement.
While Canada concludes FIPAs to protect Canadian investment abroad,
the disciplines are reciprocal and serve to reinforce Canada as
a stable and predictable destination for foreign investment. In
this respect, FIPAs help enhance two-way investment flows between
signatory countries.
In the absence of a FIPA, Canadian investors rely primarily on
host country laws and institutions for protection, which adds a
variety of risks to their ventures. While there is a general trend
in favour of greater openness to foreign investment, significant
country risks still exist. For instance, according to the UNCTAD
2005 World Investment Report, an unusually high number
of new policies introduced by host governments in 2004 made conditions
less favourable for foreign companies to enter the market and affects
the domestic investment conditions more generally.
The importance of Canadian investment abroad
The global stock of outward foreign direct investment (FDI) has
experienced phenomenal growth over the past two decades, increasing
more than tenfold from US$600.2 billion in 1982 to US$9.7 trillion
in 2004. Throughout most of this period, FDI has been growing faster
than trade, contributing significantly to global economic integration.
Canada is an active participant in the global economy. Since 1990,
the stock of Canadian direct investment abroad (CDIA) has more than
quadrupled from $98.4 billion to $465.1 billion in 2005.
CDIA is important for Canadian companies to take advantage of global
value chains and maximize efficiencies at every step of the production
process. CDIA is a tool for companies to gain access to foreign
markets (for example by establishing or acquiring international
distribution systems), lower their input costs, secure access to
key resources (both human and natural), and acquire strategic assets
(for example by acquiring leading edge technologies, specialized
skill sets or better management techniques) – thereby increasing
their own productivity and profitability. In the services sector,
CDIA is often the most effective way of meeting the needs and expectations
of foreign customers.
CDIA is beneficial to the Canadian economy, particularly over the
long term. For example, CDIA contributes to increased R&D and
technology spillovers to the home economy leading to productivity
improvements. It can also lead to increased exports of goods and
services from Canada.
Most CDIA is concentrated in the services sector and natural resources.
In 2005, 44% of CDIA was in finance and insurance, 12% in energy,
12% in service and retailing, and 11% in metallic minerals. The
majority of this investment is in the U.S. and the U.K, but it is
diversifying (from 1990 to 2005 the US share declined from 61% to
46% and the UK share fell from 13.7% to 9.2%). CDIA in non-OECD
countries has been on the rise (from 1990 to 2005, the share of
CDIA in non-OECD countries increased from approximately 10% to 24%).
The majority of this non-OECD investment (in 2005) is in the Americas
(77%), followed by Asia (14%), Europe (6%) and Africa (2.5%), though
these numbers are approximations given the available statistics
tend to underestimate actual investment.
How are FIPA countries selected?
The Government identifies FIPA partners primarily on the basis
of commercial factors. Countries are selected where Canadian investors
would benefit most from the protections of a FIPA, for example where
Canadian investment might be vulnerable given the host country’s
existing investment climate. To make this assessment, a series of
criteria are considered. The criteria include: commercial and economic
interests, such as the current level of and future prospects for
CDIA; existing investor protection, such as application of the rule
of law, regulatory quality and corruption; the likelihood of engagement
and of achieving a quality agreement; and trade policy or other
foreign policy interests.
An instrument of protection for Canadian investors
Given the importance of international investment to the market
strategies of Canadian firms, it is now more important than ever
to promote a fair, open and secure environment for Canadian investment
abroad. The protections provided by FIPAs address a number of key
issues facing Canadian firms when investing abroad.
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FIPAs protect investors from discrimination on the basis of
nationality. This guarantee is important to ensure that a Canadian
investor can compete on equal footing with other investors,
both national and foreign.
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FIPAs provide for fair and equitable treatment and full protection
and security in accordance with the principles of international
law. This is an undertaking to ensure that treatment does not
fall below a basic international minimum standard, for example
in cases where there is a lack of due process.
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FIPAs protect against expropriation without compensation. It
requires that an expropriation be for a public purpose and provides
for payment of prompt, adequate and effective compensation when
expropriation does takes place.
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FIPAs guarantee the free transfer of capital and other payments
relating to an investment into and out of the host country.
This allows Canadian firms to make payments and repatriate their
profits and capital without delay in hard currency using a market
rate of exchange.
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FIPAs address a number of other issues that can affect the
operation of Canadian investments such as the right to appoint
individuals to senior management positions or to use suppliers
of choice.
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FIPAs provide access to international arbitration to resolves
disputes. This allows an investor to pursue a claim before an
international tribunal.
While FIPAs typically contain the same type of general protections,
investors should be familiar with the specific treaty provisions
relating to the foreign market in which they are operating.
How FIPAs are used
It is difficult to measure the economic benefits of FIPAs, as the
positive impacts of FIPAs are realized over time, whether in the
form of enhanced investment flows or bilateral relations in general.
The presence of a FIPA, however, is adding security for Canadian
investors, and does enhance the investment climate of the host country.
Recent studies analysing the impact of investment treaties find
they are most effective in promoting governance and improving investor
perception of the host country.
In practical terms, the existence of a FIPA and its investor-state
dispute settlement mechanism reduces risks and allows an aggrieved
investor to prosecute their claims before an international tribunal.
More generally, FIPAs open a channel of communication with the
host country regarding measures that may affect a Canadian investor.
Over the years, Canadian investors have used FIPAs to make representations
to host country authorities and engage the host country in constructive
consultations towards resolution of the dispute. Recourse to investor-state
dispute settlement has also been made in some instances to seek
redress for damages incurred.
Bottom line
FIPAs are part of the growing body of international law governing
foreign investment, and Canadian investors can benefit from their
protections. A Canadian investor relying on a FIPA can look to a
comprehensive and specific set of obligations with recourse to international
arbitration for their enforcement. The added security and predictability
provided by a FIPA supports and enhances Canadian investment activities
in foreign markets.
Questions and Answers about FIPAs
The answers to the following questions reflect the nature of most
of Canada FIPAs. Investors should review the details of each FIPA
relating to the foreign market in which they are operating.
What types of investments are covered by a FIPA?
Various forms of investment are usually covered by a FIPA. They
include tangible assets, such as real estate or other property acquired
for business purposes; portfolio investments or other forms of participation
in a company or joint venture; intangible assets, such as goodwill;
and property rights, such as intellectual property rights.
Does the FIPA eliminate restrictions to invest in the foreign
country?
No. The FIPA is not an instrument of liberalization. It can, however,
support the goals of liberalization. For example, most FIPAs, but
not all, contain provisions that commit Parties not to adopt measures
that are more restrictive with respect to investment; and not to
reverse any new liberalization measures that they may adopt. That
said, the FIPA does not prevent Parties from regulating in the public
interest with respect to health, safety and the environment. Parties
may also exempt sensitive sectors from the FIPA’s obligations.
Is minority participation in a joint venture with a local partner
covered?
Yes. An equity security of an enterprise, including a joint venture,
is considered to be an investment. More generally, an interest in
an enterprise that entitles the owner to share in income or profits
of the enterprise is considered an investment under the FIPA.
Is an investment made by a subsidiary via a third country covered?
Yes. Provided the subsidiary is owned or controlled by an investor
in Canada, the investment of the subsidiary would be covered by
the disciplines of the FIPA.
Does the FIPA address taxation measures?
In general, taxation measures are outside of the scope of a FIPA.
Taxation matters are addressed through bilateral double taxation
agreements. Canada has 86 such agreements in force and several others
under negotiation. For further information visit the Department
of Finance website. Canada does, however, negotiate its FIPAs
on the basis that tax measures will be subject to the disciplines
of the FIPA with respect to expropriation and tax measures that
form part of a private investment agreement or contract between
an investor and the host government.
Does a FIPA provide protection across all sectors and industries?
While a FIPA provides protection for investments in general, it
does allow Parties to make exemptions from the FIPAs obligations.
For example, cultural industries are typically not covered by FIPA
protections.
Is the FIPA applicable to actions taken by local governments?
Yes. The FIPA applies to actions taken by all levels of government
- local, provincial and federal.
Does the Department provide assistance to resolve a dispute?
The investor-state dispute settlement mechanism in a FIPA allows
an investor, on its own, to pursue a claim against the host government.
The Government of Canada will not be a party to a dispute launched
by a Canadian investor. The Department of Foreign Affairs and International
Trade, however, can provide assistance to Canadian investors, for
example in the form of diplomatic assistance in dealing with the
host government or in identifying contacts in the host country.
The dispute itself, however, is a legal matter between the investor
and the host government.
Where do I go if I encounter a problem?
The first step in resolving an issue with a host government is
to pursue the issue directly with that host government. Documenting
your complaint and expressing it in clear unambiguous terms are
important steps in this process. If you believe there has been a
breach of a FIPA obligation, you may wish to obtain legal advice
on your options concerning recourse under the FIPA. You can also
contact the local Canadian Embassy. They can provide you with relevant
contacts should you wish to pursue the matter further.
How long does it take to get a matter resolved by international
arbitration?
Each case is different, so it is it difficult to generalize, but
resolving a matter through international arbitration is a long process
and can take several years.
What is the cost of arbitration?
Arbitral parties are responsible for the costs of the arbitral
tribunal, payable in advance. Costs depend on the amount of time
needed by the tribunal to hear and decide the case. In recent cases,
the investor’s 50% share of tribunal costs has ranged between
$500,000 and $1.5 million. In addition, the investor would be responsible
for its own legal costs. A tribunal may award costs. For example,
it may order the losing party to pay some or all of the successful
party’s costs.
What countries is Canada negotiating FIPAs with?
Canada is currently negotiating with India, China and Peru and
considering negotiations with others. For more information on the
status of current negotiations please
view the site.
Are there any complementary instruments available to protect Canadian
investors?
Export Development Canada (EDC) is a Crown Corporation that provides
financing and risk management services to Canadian exporters and
investors in up to 200 markets worldwide.
EDC
provides political risk insurance to Canadian businesses investing
in emerging markets, including countries with which FIPAs have not
yet been negotiated, protecting investors against the effects of
unpredictable political events that can have an adverse impact on
their foreign operations. Examples of such events include war, civil
strife, terrorism, restrictions on the conversion and transfer of
currency, breach of contractual obligations by foreign governments,
and other foreign government interference that affects investors’
ownership rights or business operations.
EDC can also provide financing to Canadian investors or their foreign
investments in support of CDIA. EDC
financing support can be at the time of the investment or through-out
the term of the investment.
If you have further questions about Canada's FIPA program, or want
to see the text of Canada's existing
FIPAs or Canada's current model FIPA,
please consult the website or contact the Investment Trade Policy
Division (tel: 613-996-3324 or fax: 613-944-0679).
Further Reading
C.D. Howe Institute, Investor Protection in the NAFTA and
Beyond: Private and Public Purpose, Toronto, 2006.
Conference Board of Canada, “The Benefits of Foreign Direct
Investment: How Investment in Both Directions Drives our Economy”
Ottawa, March 2006.
Kinnear, Meg, Bjorklund, Andrea K, and Hannaford, John F.G., Investment
Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11.
Kluwer Law International, 2006.
Salacuse, Jeswald and Sullivan, Nicholas, “Do BITs Really
Work? An Evaluation of Bilateral Investment Treaties and Their Grand
Bargain”, Harvard International Law Journal
Vol 46, 2005.
UNCTAD, Investor-State Disputes arising from Investment
Treaties: A Review. New York and Geneva, United Nations,
2005.
UNCTAD, World Investment Report 2005: Transnational Corporations
and the Internationalization of R&D. Geneva, United
Nations, 2005.
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