Reducing Policy Uncertainity to
Enable Investment
Panel by CUTS International and Institute for Economic
Affairs at the World Investment Forum, 2014, Geneva
on 16th October.
Dr Prabhash Ranjan
South Asian University, New Delhi, India
Significance of Policy certainty
• Policy certainty is crucial to investment flows –
sudden policy upheavals deter foreign
investors.
• Policy certainty includes within its ambit both
– policy certainty at domestic level i.e.
instruments regulating investment at the
domestic level; and policy certainty at the
international level i.e. instruments regulating
foreign investment at the international level.
Uncertainity Impeding Investment?
• Empirically, it has been found that policy-related
uncertainity is negatively related to firm and industry
level investment.
• UNCTAD’S World Investment Report (2013) noted that
policy uncertainity in areas crucial for investor
confidence might lead to decline in FDI inflows.
• Evidence from India, on causes of low gross fixed
capital formation in 2012-13, suggests that heightened
uncertainty and deteriorating business confidence have
played a key role in the recent investment slowdown.
Why Uncertainity Impedes
Investment?
• High uncertainty gives firms an incentive to delay
investment and hiring.
• Uncertainty raises the transaction and
adjustment costs associated with investments –
(Retrospective imposition of taxation)
• Presence of uncertainty and given the
irreversibility of investment decisions, investors
may choose to forego or delay investment to
avoid bearing the cost of investing in the wrong
activity – Example of FDI in Multi-Brand Retail in
India.
Causes for Policy Uncertainity at
Domestic Level
• Lack of Transparency in rules and procedures –
such as granting environmental on ad-hoc basis.
• Change of government/political differences
between major political parties can give rise to
policy uncertainity (FDI in multi-brand retail in
India).
• Policy-confusion on allotment of natural or state
resources, which are later challenged in Courts
leading to long-litigation and eventual
termination or cancellation of licenses (telecom
spectrum, coal blocks etc)
Contd
• Role of Judiciary – overly activist approach such as
enforcement of international commercial arbitral
awards or foreign awards domestically (White
Industries arbitral award against Indian Public sector
company Coal India).
• Lack of clarity and understanding on how international
instruments regulating foreign investment impact
domestic economy
• Lack of coordination between different government
departments/ministries on major policy issues (such as
policy on Bilateral Investment Treaties).
Policy Uncertainty at International
Levels
• Most important regulatory tool impact foreign
investment regulation at the international level
are BITs and investment chapters in Plurilateral
Trade Agreements.
• Currently we are witnessing a backlash against
the BIT regime, which has added to the policy
chaos.
• Examples of this backlash – Some Latin American
states and countries like South Africa have
denunciated their BITs.
Contd.
• Denunciating BITs implies that foreign
investors will not be able to rely on treaty
protection to safeguard their investment
• Reliance on local judiciary is not an attractive
proposition for many foreign investors
• Suggestions not to accept investor-state
dispute settlement mechanism in BITs – also
creates uncertainty in minds of foreign
investors
Conclusion – how to overcome policy
uncertainity?
• Overcoming policy uncertainity will require
different approaches and methods in different
countries.
• Overall, forging a political consensus on core
economic policy issues at the domestic level, in
every country, is very important.
• Need to have clearer, transparent rules dealing
with foreign/private investment.
• Need to cut-down red-tape and repeal archaic
laws that are not needed any more.
Contd
• Need to re-define the role of judiciary, curb the
overly-expansionist zeal and undue-interference
in policy-making, which is the domain of the
Executive.
• Need to evolve a clear policy on international
instruments such as BITs, investor-state dispute
settlement and linkages between different
investment treaties (such as BITs and investment
chapters in free trade agreements).