House of Commons - Trade and Industry

Select Committee on Trade and Industry Third Report

APPENDICES TO THE MINUTES OF EVIDENCE

TAKEN BEFORE THE TRADE AND INDUSTRY COMMITTEE

Memorandum submitted by MAI Coalition

POTENTIAL IMPACTS ON LOCAL ECONOMIC DEVELOPMENT AND POVERTY ISSUES IN THE UK

This study is an independent piece of research commissioned by Oxfam UK and Ireland, and undertaken by Robert Nurick. The views expressed in this report do not necessarily reflect those of Oxfam.

The report seeks to contribute to informed public debate on the MAI. It does not provide an exhaustive study of the likely implications of the MAI for the UK. The implications of the MAI for environmental policies, for example, are not covered by the report.

Thanks to Audrey Bronstein, Barry Coates, Mike Geddes, Christopher Johnson, Ruth Mayne, Sol Picciotto, Julie Richardson, Emily Scharf and Martin Stott for their helpful comments on earlier drafts. All errors and omissions are the sole responsibility of the author.

1. EXECUTIVE SUMMARY

1.1 The objective of this study is to assess the impact of the provisions of the Multilateral Agreement on Investment (MAI) on existing and proposed programmes designed to tackle poverty and social exclusion in the UK, and to indicate its likely impact on poverty and inequality. Based on this assessment, the report will indicate those aspects of the MAI that have the potential to conflict with economic and social policies in the UK, and suggest essential reforms if the MAI is to go ahead.

1.2 The proposed MAI is aimed at establishing ". . . 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 motive for signing the MAI reflects the growth of Foreign Direct Investment (FDI) in promoting the growth of the world economy.

1.3 For the UK flows of FDI are a significant source of economic growth and activity. In 1995, the stock of outward investment (investment by UK institutions abroad) amounted to £214 billion, making the UK the world's second largest outward investor. By the end of 1996 FDI into the UK amounted to £154 billion, representing 21 per cent of the UK stock of capital. According to DTI figures, for the 1996-97 a total of 46,179 direct jobs were created by FDI, with an additional 93,724 associated jobs. Figures from the Invest in Britain Bureau suggest that FDI has created or safeguarded 77,000 jobs since 1979 representing 18 per cent of manufacturing jobs.

1.4 However, the effectiveness of FDI in helping to stimulate economic and social development depends on many factors. This includes, among other factors, the nature of the investment (for example, whether it is a greenfield investment creating new jobs or a takeover resulting in job losses), its quality (whether it offers low wages or high skill jobs, whether it sources locally or overseas, whether it employs and trains local people etc), as well as the nature of the national and international regulatory regime.

1.5 Despite the success of FDI in creating jobs and stimulating economic activity over the last 2 decades, many social indicators have worsened over the period. Concerns have been raised over the extent and depth of poverty and increasing inequality across a whole range of social indicators. Those particularly hardest hit are ethnic minorities and women.

1.6 A central goal of the MAI is to reinforce and extend the liberalisation of flows of FDI throughout the OECD. Other goals include the establishment of strong investor protection, and the creation of a disputes settlement procedure. A key question which is addressed in this report is to what extent will the MAI facilitate the flow of appropriate forms of FDI into the UK such that it promotes economic growth with equity. Specifically, does the MAI conflict with current policies designed to promote economic development and/or address social concerns of exclusion and deprivation. Also of concern is the possible effect that the MAI may have on future policies currently being discussed and developed.

1.7 In other OECD countries, particularly Canada and the USA, there has been much public debate and research into the possible impact of the MAI on provincial and local development policy designed to promote economic and social well-being. In these countries many possible inconsistencies have been identified. Consequently, the lobby arguing to abandon the MAI or to reform it, is strong. This situation reflects the large degree of autonomy in decision-making and regulation that provincial and local government has traditionally had in these countries.

1.8 The DTI position is that the UK regulatory regime is already highly liberalised such that the MAI will have little or no negative impact on local economic development or poverty alleviation policies and strategies in the UK. This position is reflected by the fact that the UK has asked for the least number of reservations in the Agreement, in comparison with other OECD members.

1.9 Associated with the deregulated regime, is the increased centralisation of policy-making that has occurred over the period. Within the UK, the powers of local government in setting the regulatory framework in which FDI operates have become extremely limited. The boundaries in which local government operates are set not only at the national level, but also the European Union (EU) level.

1.10 Nevertheless, there is concern over possible adverse impacts of the MAI on existing local authority practice in promoting economic and social development. Areas of concern relate to Part II of the Local Government Act 1988 and the Section 33 of the Local Government and Housing Act 1989. Specifically, it is not clear yet how far the MAI will affect local authorities' existing powers in: imposing local purchasing conditions for goods and services: placing conditions of local employment on investors (including FDI): establishing joint ventures with domestic participation. Concern has also been raised over possible inconsistencies between the MAI and local authorities' powers to use approved lists of contractors when tendering for contracts.

1.11 In relation to future policy, the new Labour government has stated its commitment to addressing issues of poverty and social exclusion within a framework of economic growth. This report has identified the following areas of potential policy inconsistency with the MAI: likely reform of existing programmes of Compulsory Competitive Tendering (CCT), specifically the introduction of Best Value as a pilot scheme: likely reform of the Private Finance Inititative (PFI); the new deal for regeneration; and the establishment of Regional Development Agencies. Elements of these policies could conflict with the National Treatment or expropriation clauses of the MAI.

1.12 The major concern over these areas of policy reform is that the MAI will formalise and entrench many existing rules and regulations regarding FDI. This may have the effect of restricting development of future policy aimed at improving the effectiveness of FDI in addressing both economic and social priorities, as well as having the potential for limiting the scope of policies designed to that end. The MAI cold serve to "lock in" the UK on a particular development path which it will become extremely difficult to break out of. Once signed, the MAI's provisions are effectively binding for 20 years.

1.13 There are also concerns about the possible negative indirect effects that the MAI could have on national and local policies. Precedents under NAFTA suggests that powerful foreign investors may use the powers provided by the MAI dispute settlement mechanism to bring claims against the UK government of de facto discrimination, whether there is any substance to the claim or not. The wide base of the anti-expropriation undertakings will also make it easier for multinational national enterprises to claim unfair treatment. This could lead to a situation where foreign investors takes the UK government to the "disputes panel", claiming unfair treatment if planning applications are turned down by local authorities. The threat of such action may even influence local authority planning decisions.

1.14 The MAI has been criticised for being unparticipative and untransparent. Recently, however, the DTI (representing the UK government in negotiations) has shown a greater degree of openness and willingness to discuss the MAI with other stakeholders. Nevertheless, the process of agreeing the text of the MAI should certainly not proceed without the genuine involvement of a broader group of stakeholders.

1.15 Partly due to the lack of broader participation, the MAI, as currently proposed is unbalanced, focusing on foreign investor concerns and their priorities for an FDI framework. It is acknowledged that the MAI makes reference to the Guidelines on Multinational Enterprises and the Rio declaration on sustainable development but these will only be aspirational, rather than binding measures. Moreover, other elements of an FDI regulatory framework need to be incorporated into the text. Notably, regulation around anti-competitive practices, bribery and corruption. Its flaws suggest that it will not create a conducive framework of rules for poverty reductions in the UK.

1.16 If the MAI is to go ahead, specific reforms would be needed to safeguard national and local policies for addressing poverty. The National Treatment (NT) and Most Favoured Nation (MFN) provisions would need to be moderated with language to ensure they cannot be used by powerful foreign investors to challenge legitimate national and local policies. In regard to the investment protection provisions, clear definitions of de facto discrimination and expropriation would also need to be drawn up. Rules would need to be included on financial incentives, creating transparency and reducing the uncertainty currently created by the MAI text. The Dispute Settlement procedures would also need to be reformed to allow other stakeholders (in addition to state and foreign investors) access to dispute settlement. The UK should also include an open reservation on future regional and local government legislation, and specific reservations on CCT, "best-value", and PFI.

1.17 In conclusion, it is recognised that FDI has a potentially important role to play in promoting economic development and social well-being in the UK. Whether it does or not depends on part on the regulatory framework. This needs to be designed such that foreign (and domestic) investors can operate in an economic, social, (and environmentally) sound manner. If the MAI is to achieve this objective it will need to be substantively reformed. Some suggested reforms are outlined in this report.

2. BACKGROUND

2.1 The objective of this study is to assess the impact of the provisions in the MAI on the existing and proposed programmes designed to tackle poverty and social exclusion in the UK and indicate the likely impact on poverty and inequality. To this end, it will assess the role of FDI in promoting growth with equity, through job creation and enhancing social indicators. It will assess the institutional and policy context in which FDI operates and locates within the UK, and will appraise the positive and negative impacts that this type of investment has on economic and social indicators. The study will assess the extent to which the MAI will affect poverty-related policies, highlighting any potential policy inconsistencies, and likely impact on poor communities. Finally, this report will list those aspects of the MAI that have the potential to conflict with economic and social policies, and suggest reforms to the MAI.

2.2 The proposed Multilateral Agreement in Investment (MAI), currently being negotiated within the OECD, is aimed at establishing ". . . 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".[2]

2.3 The motive for signing the MAI by OECD governments reflects the importance of Foreign Direct Investment (FDI) flows in promoting the economic growth of the world economy. Negotiators anticipate that if the MAI is signed it will facilitate continued and increased flows of FDI throughout the OECD, thereby increasing economic activity and growth. One of the key concerns has been to increase access to and security of investments, in the fast growing newly industrialised countries.

2.4 For the UK in particular, FDI is a significant source of economic growth and activity. In 1995, the stock of outward investment (investment by UK institutions abroad) amounted to £214 billion, making the UK the world's second largest outward investor.[3] Outward investment adds to the national income of the UK economy as profits from overseas investments return to UK shareholders, pensions funds. The income generated is then spent by UK nationals, thereby increasing economic activity in the UK and stimulating economic growth. A major motivation for the UK to sign up to the MAI therefore, is to reduce barriers to investment and provide greater protection for its investments overseas.

2.5 At the same time FDI into the UK amounted to £154 billion[4] representing 21 per cent of the UK stock, capital of £747 billion.[5] According to DTI figures, for the year 1996-97 a total of 46,179 direct jobs were created by FDI , with an additional 93,724 associated jobs.[6] According to the Invest in Britain Bureau (IBB), FDI has created or safeguarded 770,000 jobs since 1979 representing 18 per cent of manufacturing jobs.[7] It is also often assumed that foreign investment will bring new technologies, skills and management practices to the UK.

2.6 The potential economic benefits of FDI are clear—job creation and contribution to Gross Domestic Product (GDP). However, the focus of this report is to highlight the role of FDI in directly addressing poverty, and to assess the extent to which the MAI will change the regulatory regime in which policies addressing social issues are designed. For example, in cases where foreign investment has been attracted by low wages, it may not necessarily make a significant contribution to povery reduction. Similarly, incomes from outward investment directly accrue to those with equity, eg shares. Those living in poverty are unlikely to hold shares in outward investments.

2.7 In the UK concerns have been raised over the extent and depth of poverty and social exclusion that has occurred over the last 10 to 15 years, despite the increasing eonomic growth and inflows of FDI that the UK has experienced over this period. As well as widening income equality, with low pay on the one hand and rising profits and rewards to managers and directors on the other, inequality across the range of social indicators appears to be widening eg death rates and infant mortality rates.[8] Widening inequality is also reflected in the high incidence of certain types of death found in socially deprived groups of society—alcohol and drug-related deaths, accidents and violence. [9](Social exclusion is also reflected in housing conditions, with those with the lowest incomes and suffering the greatest difficulties, occupying public sector and social housing.) This increasing concentration of deprivation may replicate problems of lawlessness and social exclusion described by observers in the United States. [10]

2.8 Evidence shows that ethnic minorities experience the greatest burden of poverty and social exclusion, with Bangladeshis and Pakistanis suffering very high rates of unemployment, living in overcrowded conditions, and experiencing poor health. [11]In 1994, black people were four times as likely to be homeless as white people, with white male full-time employees earning 17 per cent more than their ethnic minority counterparts. [12]There are also inequalities between the sexes with woman making up 70 per cent of the UK's lowest earners with women's work characterised by part-time and low-paid work, insecure employment, and no proper holidays and pensions. [13]

2.9 The new Labour government is committed to addressing issues of poverty and social exclusion within the context of a growing economy (and has established a Social Exclusion Unit). In attempting to address these issues the government has initiated a number of proposals. These include the New Deal for Regeneration and the introduction of "best value" in the provision of local services (explained below). In order to effectively identify and design policies and programmes for the alleviation of poverty the government is proposing that political power and decision-making is devolved to the English regions through Regional Development Agencies (RDA). It is through these agencies and their regional chambers, comprising stakeholders from across society, including local authorities, that appropriate policies will be formulated to address both economic and social priorities and needs.

3. THE ROLE OF FDI

3.1 This section examines the role of FDI in promoting growth with equity and reducing poverty. It draws attention to some of the limitations and problems associated with FDI and the associated regulatory regimes that either limit the potential contribution of FDI to poverty reduction, or actually undermine poverty reduction strategies. The following Section (Section 4) examines the policies being developed to address these problems and how these may conflict with the MAI. (A subsequent piece of research could examine positive experiences with FDI with a view to replicating them).

Nature of Investment

3.2 There are 2 categories of FDI that are commonly defined (i) greenfield investment where a new plant is created, and (ii) mergers and acquisitions where a foreign investor combines with or takes over an existing operation.

3.3 Greenfield investment by multinationals has become an important component of government strategy to stimulate economic growth and eradicate poverty through job creation. In Scotland. Wales and the north of England, this type of investment has become the central policy tool to address structural unemployment brought about by the demise of traditional industries such as coal-mining, iron and steel production and ship-building. [14]

3.4 Large multinationals, particularly those from the USA and Asian countries (Korea, Taiwan and Japan) dominate this type of investment. Of a total of £4,000m of FDI in 1996-97, 80 per cent came from the USA and Asian countries. [15]

3.5 Whilst "greenfield" FDI captures the headlines, mergers and acquisitions (M & A) also represent a significant source of FDI into the UK. In 1996 net acquisition of share and loan capital (M & A) amounted to £8,277m, or 46 per cent of all FDI. [16]The economic rationale for M & A is that they increase economic efficiency and productivity. However, this can often lead to job losses, rather than job creation. [17]

Policy Regime

3.6 The DTI position is that the UK regulatory regime is already highly liberalised such that the MAI will have little or no negative impact on local economic development or poverty alleviation strategies in the UK. This position is reflected by the fact that the UK has asked for the least number of reservations in the Agreement, in comparison with other OECD members.

3.7 Increased centralisation of policy making has occurred in parallel to the process of deregulation. The powers of local government in setting the regulatory framework in which FDI operates, have become extremely limited. The boundaries in which local government operates are set not only at the national level, but also the European Union (EU) level.

3.8 In the UK, the Invest in Britain Bureau (IBB) (attached to the DTI) is the principal inward investment agency, and works with its regional partners to attract FDI and facilitate its location in the different regions. The IBB, in conjunction with the regional partners, provides information packages to prospective investors containing details of locations, financial incentives, product sectors, availability of labour costs and skills, tax, as well as providing assistance in identifying suppliers and dealing with planning regulations. [18]

3.9 UK Regional aid packages in the form of investment grants are available to those investors locating in an "assisted area". Typically, the prospective investor is offered a capital investment grant that has conditions linked to it. Conditions mainly focus on job creation. In Wales and Scotland proposals from multinationals are gauged according to the number of jobs the project will create per £m of investment grant. Typically, no other employment conditions are attached to the grants. It is assumed that it will be local jobs that are created. [19]Under the EU State Aid Rules (Competition Rules), regional development organisations are permitted to attach performance requirements (ie level of job creation) to investment subsidies that they may offer to FDI. However, the rules are such that any incentive should not lead to economic distortions. A recent example of the application of the EU State Aid Rules in practice, concerned the selling of land at below market price to Toyota in Derbyshire. The EU ruled that this was in breach of competition rules and ordered Toyota to pay the full market price for the land. [20]

Nature of Jobs

3.10 Concern has been expressed over the appropriateness of the types of jobs created by such greenfield FDI in addressing issues of poverty. In Wales, while FDI has created around 160,000 jobs since 1983, it has been argued that FDI has brought with it low-paid and low-skilled jobs (social security is still the major source of income in Wales, and per capita income is still well below the UK average). [21]Indeed, in the IBB publicity brochure sent out to prospective investors, low labour costs feature as a major attraction for FDI to locate in the UK. [22]Jobs in management, finance and research and development are frequently maintained at foreign headquarters or filled by foreign nationals. R&D in Wales is reportedly one-third of the UK average and declining. [23]Whilst the declining traditional industries in Wales had male labour forces, many of the FDI jobs created were filled by semi-skilled female labour. It is thought that this change in employment patterns has created intra-household and social conflict. [24]The failure of inward investment in Wales to close the poverty gap with England and Scotland has prompted a growing debate about the need to put stronger emphasis on promoting the growth of Welsh enterprise. [25]

3.11 Concern has also been expressed over the "footloose" nature of FDI. A reliance on FDI to promote economic and social development means that UK prosperity becomes very much dependent on the fluctuating fortunes of the global economy. For example, around 35 per cent of manufacturing jobs in Wales are accounted for by foreign investment. This very success has caused concern about their vulnerability to external events. This has been highlighted by the recent financial crises in East Asia, and the corresponding suspension and withdrawal of FDI. Hyundai has just announced its suspension of its £4 billion project in Scotland as a result of the crisis in East Asia, leading to fears that the project may be cancelled. [26]Samsung has suspended a £450 million investment at its plant in Newcastle. [27]

Investment Subsidies

3.12 Some argue that the power and influence of multinational enterprises distorts the allocation of scarce financial resources within the UK, as they acquire large incentives in the form of grants, subsidies and the provision of infrastructure. [28]For many deprived areas in the UK, particularly Scotland, Wales, the north and north-east of England, few alternatives to foreign investment have been developed in order to create jobs, thereby creating a dependence on FDI. [29]One issue that needs to be addressed is whether the resources targeted on incentives would be better spent on UK-based job creation and training schemes, designed to explicitly address poverty and social exclusion. This is an area that requires further research and investigation.

3.13 European Union Competition Rules were drawn up in the 1950s and designed to create a level playing field for firms, such that firms in one region of the EU could not get an advantage from a subsidy that was not available to firms in another region. More recently these rules have been applied to dealing with FDI and the conditions under which subsidies and financial incentives can be offered to FDI to locate within a particular region of the EU. [30]Specifically, they are applied to prevent competition between regions in securing FDI. However, this has not prevented serious concerns being expressed in the UK that competition between regional development organisations for FDI is taking place, leading to large incentive packages being awarded by the highest bidder. [31]The size of the financial incentive for LG's £1.7 billion electronics complex of £247 million by the Welsh Development Agency (WDA) compared to the bid from the Northern Development Company (NDC) (representing the north-east) of £80 million[32] highlights the fierce competition as well as the differing access to resources of regional development organisations. This has led to claims that the WDA has access to unfair levels of funding to attract investment away from other parts of the UK. The NDC claims it was "gazumped" by Wales. This project is now being investigated by the Commons public spending watchdog. [33]There is also evidence that intense competition also takes place between different regions across Europe in attracting FDI. [34]The MAI, in its present form, will do nothing to address this problem and will serve to reinforce the competition.

3.14 Evidence suggests that in some cases financial incentives provided to FDI by regional development organisations were not necessary to attract such investment. The WDA has come under criticism from some quarters for promoting FDI location in south-east and north-east Wales, areas that are relatively well-endowed with infrastructure, communications and available labour, and therefore additional financial incentives to foreign investors were probably not necessary. Indeed these areas, particularly around the M4 corridor and close to Bristol, now suffer from congestion. In contrast remote and extremely deprived rural areas of north-west Wales have had little positive effect from the WDA's FDI promotion strategies. [35]

Compulsory Competitive Tendering

3.15 At the local level a major issue around FDI and economic development and poverty alleviation strategies concerns the acquisition of public services by the private sector, eg environmental services such as refuse collection, housing and support services, such as cleaning and catering. The Local Government Act of 1980 set the framework for the contracting out, or market testing of public services by local authorities to the private sector. Since the Local Government Act of 1988, the process of Compulsory Competitive Tendering (CCT) has continued throughout the UK with large sections of public services now in private hands. CCT has been initiated against the background of large-scale, sweeping budgetary cuts to local authorities.

3.16 A major feature of the process of privatisation of local services has been the concentration of service provision into the hands of a few, very large and powerful multinational enterprises. "Now, as a direct consequence of privatisation policies, a small group of multinationals are beginning to dominate public services..." [36]For example, in Bristol, the water is supplied by Generale des Eaux, and the refuse is collected by Lyonnaise des Eaux. The largest waste management company in the USA, WMX Technologies, is responsible for refuse collection in the Wirral, supplies water in Wessex, and also runs the Derby Royal Infirmary. The works department of Wycombe, South Wight and Brighton councils are all run by Bouygues, the largest construction firm in France. [37]

3.17 The rationale for CCT is based on arguments that privatisation will lead to greater competition, more private finance and less bureaucracy. Indeed, many managers in local government embraced the policy, expounding the virtues of CCT. The policy enabled managers to promote changes in working conditions and use of market-based instruments in the provision of local services. [38]However, experience shows that privatisation of local services in the hands of multinationals, including FDI, has actually led to the creation of cartels, combines and corruption, public guarantees for private companies, and the avoidance of competition from the public sector. [39]

3.18 CCT obliges local authorities to accept the private sector bid that offers the greatest cost savings and reliability of services to the users, ie the bid that has the lowest cost. Local authorities are prohibited from taking into account issues of local employment and employment of socially excluded groups when choosing between bids. [40]The emphasis of CCT on financial costs rather than social costs has had several adverse effects. Privatisation of local services throughout the UK has been characterised by large job losses and erosion of pay and conditions of remaining employees. It has been estimated that 114,000 manual jobs from councils were lost between 1988 and 1991, with women bearing the greatest burden of the job losses. For those remaining in employment, pension schemes have been abolished, women providing cleaning and catering in schools have had retainers for school holidays cut, bonus schemes have been abolished and shift patterns have been altered. [41]At present, the MAI does not have binding provisions for the safeguard of pay and working conditions, and therefore fails to address the social issues highlighted in this paragraph.

3.19 The evidence presented above highlights that privatisation of local services has been associated with job losses and low pay. Any future changes in government policy around local service provision, in particular policies that limit the power of private operators in this sector, as well as policies designed to address job losses and improve working conditions, will affect multinationals (including FDI) operating in this sector. Any changes in the business environment in the provision of public services could therefore be deemed as de facto discrimination under the MAI, and illegal, either in relation to expropriation and/or National Treatment (see Section 5, below). Indeed, there are discussions currently underway within government over new proposals that will enable local authorities to place local employment conditions on public service contracts. [42]It is exactly these types of changes that could conflict with the MAI.

Private Finance Initiative

3.20 The previous government introduced the Private Finance Initiative (PFI) as a means to privatise the last remaining public services such as hospitals, schools and roads. The stated principle underlying the PFI ". . . is that, while the government may need to be responsible for the delivery of a particular service, there are advantages to be gained if the private sector assumes the responsibility for managing the service and for undertaking the investment".[43] PFI is based on the premise that private sector enterprise and discipline can bring gains in efficiency and reduction in costs. [44]However, concerns have been raised that such efficiency gains are associated with declining quality of service provision. [45]

3.21 The new labour government has confirmed its support for PFI. "Under PFI, the private sector pays for replacing or refurbishing public assets, such as a computer system or a new hospital and is given a long contract to operate the assets or run the associated services, and the jobs involved are transferred to the private company. . . . The private sector usually keeps the assets it has provided, and in this way, PFI enables the private sector to take over hospitals, computers and schools, which are currently publicly owned and which have been politically difficult for the government to privatise".[46] As in the case of CCT it is a few, powerful multinational actors that are involved in existing and proposed PFI schemes. [47]

3.22 Whilst the new government has expressed its commitment to continue with PFI, it is possible that there will be a desire to change the conditions under which PFI currently operates. This possibility is reinforced by the recent events surrounding the collapse of London and Continental Railways' (LCR) failure to build a high-speed rail link from London to the channel tunnel. Despite the criterion for PFI projects, that the private sector must genuinely assume risk, [48]the collapse of the LCR project has left the present government with liability of £420 million, "it (the collapse) calls into question government procedures for monitoring LCR's progress and is likely to lead to a re-examination of PFI projects to ascertain whether comparable risks are being run elsewhere." [49]

3.23 At the local level, many local councils are suspicious that PFI represents "nothing more than a government ruse to cut public expenditure . . . During the summer of 1996 . . . Unison called on Scottish councils to boycott the PFI insisting that it was a means of forcing `cash-strapped councils to open up public services for exploitation and commercial gain.'"[50]

3.24 There may be political pressure to alter not only future PFI projects but also existing projects where the loss of public assets to the private sector, or the risk being borne by the government in PFI projects is deemed politically unacceptable. For those PFI projects involving FDI, under the MAI changes in terms and conditions for the private sector partners could be regarded as expropriation and or de facto discrimination.

Competition Policy

3.25 The final aspect of FDI that is a cause for concern, relates to illegal behaviour such as anti-competitive practices, bribery and corruption. Whilst it is argued that FDI liberalisation (which the MAI seeks to do) can promote competition, competition law becomes increasingly necessary to ensure that liberalisation of a once-restrictive FDI regulatory regime is not replaced by anti-competitive practices of firms. [51]Without such measures there is no assurance that investment will flow more efficiently to facilitate economic growth. Several factors have been identified which limit the role that competition law currently plays in preventing or remedying harmful effects resulting from anti-competitive practices—in particular, is the possible non-enforcement of such law. [52]For example, in the UK, the Monopolies and Mergers Commission (MMC) has extensive powers to deal with anti-competitive practices, but rarely enforces them. [53]

3.26 Despite many multinationals being investigated or found guilty of various forms of corruption, such investors continue to bid for and win UK contracts under CCT and PFI. [54]This continues despite EU Directive on Public Services which allows public authorities to exclude a company from bidding for any contract if it is known to have engaged in corrupt behaviour. This issue needs to be addressed and sanctions in regard to illegal behaviour could be included within the MAI. This should cover not only those multinationals that are found guilty of such behaviour within the OECD, but also in third countries (non-OECD). The OECD Bribery Convention recommends that in the area of public procurement "members countries' laws and regulations should permit authorities to suspend from competition for public contracts, enterprises determined to have bribed foreign public officials." [55]

3.27 The preamble to the MAI makes reference to the OECD Guidelines for Multinational Enterprises. " . . . [Noting] [Affirming their support for] the OECD Guidelines for Multinational Enterprises and emphasising the implementation of the Guidelines, which are non-binding and which are observed on a voluntary basis . . .". [56]The Guidelines do cover issues of competition and bribery by multinational enterprises. However, noting or affirming support for such voluntary guidelines is not adequate to deal effectively with these issues. At present, the MAI is an unbalanced agreement that emphasises the liberalisation dimension of FDI and investor protection, without adequately addressing other equally important components of FDI required to ensure economic and social development.

4. ASSESSMENT OF EFFECTS OF THE MAI ON UK POVERTY-RELATED POLICIES, AND POTENTIAL POLICY INCONSISTENCIES

The UK Government's Position

4.1 The DTI position is that the UK is deregulated to the extent that the MAI will have little or no negative impact on local economic development or poverty alleviation strategies in the UK. The major motivation, therefore, for the UK to sign up to the MAI is to secure greater access to overseas markets for UK investors by reducing barriers to investment, and to a lesser extent to provide an environment of security and certainty for UK investors overseas. (This is the case in relation to other OECD countries, at present the only countries that will initially sign up to the MAI. However, it is expected that some developing countries will also sign up, and in this case security of investment issues may play a more significant role in investor decisions).

4.2 In regard to local economic development and poverty issues in the UK, the DTI's position may be partly true, given the preferential treatment often afforded to foreign investment by regional development organisations. The erosion of autonomy and power of local government over the past 10-15 years in determining their own pattern of development also leads one to the conclusion that currently the MAI will have little significant impact on the role of FDI in promoting local economic development and poverty alleviation. However, this position does not address the issue of whether the current state of affairs is desirable, nor the possibility that powers and autonomy of local government may be increased in future devolution plans creating potential conflicts with the MAI.

4.3 Nevertheless, concern exists over the potential adverse impact of the MAI on current local authority practice in promoting economic and social development. The Local Government Association (LGA) recently sought legal counsel over the possible impacts of the MAI on local government practice. Areas of possible concern relate to Part II of the Local Government Act 1988 and Section 33 of the Local Government and Housing Act 1989. Specifically, it is not clear whether the MAI will affect local authorities powers in: imposing local sourcing conditions for goods and services; placing conditions of local employment on investors (including FDI); establishing joint ventures with domestic participation. Concern has also been raised over local authority powers in tendering for contracts with approved lists of contractors. Consequently, the LGA is seeking further clarification on these issues. [57]

4.4 The potential danger of the MAI is that it will formalise and entrench many existing rules and regulations regarding FDI. This may have the effect of restricting development of future policy aimed at improving the effectiveness of FDI in addressing both economic and social priorities, as well as having the potential for limiting the scope of policies designed to that end. The MAI will serve to "lock in" the UK on a particular development path which it will become extremely difficult to break out of. The MAI text states that governments will have to give five years notice to withdraw from the agreement. FDI will then have a further 15 years of operation under MAI rules. The potential of a number of proposed political developments may be limited as a result of the UK signing up to the MAI in its present form.

4.5 The current position in the UK is in contrast to that in the USA and Canada. Although provincial and local authorities have more powers, there are some pertinent lessons to be drawn from this experience. The Western Governors' Association in the USA has identified a wide range of potential effects of the MAI on state and local government. [58]Potential conflicts range from those relating to economic regulation, to land use and the environment, to economic development. In Canada there is also strong opposition to the MAI and concern over its implications for local development issues. In Canada "many of the matters addressed in the MAI fall squarely within the areas of shared or exclusive provincial jurisdiction".[59]

Devolution

4.6 The proposed Regional Development Agencies (RDA) are part of the government's drive to devolve power to the English regions. Whilst the present proposals for regional devolution are somewhat limited—each RDA will comprise about 12 members, of which only four will be local councillors, and all appointed by central government[60]—it is anticipated that this development represents the beginnings of a devolution process. The speed of this process will be influenced in part by the demand for autonomy coming from the regions themselves. For example, in the north-east of England, there is growing pressure for an elected assembly from representatives of local government, MPs, the voluntary sector and some sections of the business community. [61]It is further proposed that local government will have new and more general powers to address social as well as economic development issues. [62]These "new" powers have yet to be specified, but the concern is that by signing up to the MAI local government may be prevented from fully utilising these new powers in the future. For example, local authorities may wish to give priority to local investors or companies in the provision of public services, which could be deemed as discrimination under the MAI.

4.7 The White Paper on RDA also emphasises that policies and development programmes should reflect local and regional concerns and priorities. This feature may lead to divergent policies and regulations, legislation between RDA (and Welsh and Scottish Assemblies), given the differences in economic, social and natural resource endowments between the regions. [63]In the future, development proposals will have to be assessed against regional criteria and concerns. This may lead to circumstances where different RDA attach different conditions to the private sector, including FDI (eg performance requirements, criteria on eligibility to tender for local government contracts). Such developments may conflict with the MAI that requires a "common set of rules" within national boundaries, ie within the UK.

The New Deal

4.8 Another government initiative is the "New Deal on Regeneration". The government's regeneration policy and programmes are part of the drive to tackle the combination of local needs and priorities associated with poverty and deprivation, including long-term and youth unemployment, poor health and education, and ethnic minority disadvantage. The New Deal is explicitly aimed at addressing these social aspects of economic development. The government's discussion paper on "Regeneration Programmes—the way forward", emphasises the need for programmes which are based on partnerships between local government, the private and voluntary sectors and the local community itself. [64]This may require conditions being put on investors, eg local employment conditions and local purchasing of goods and services. Under the MAI foreign investors, faced with such conditions, may claim de facto discrimination under National Treatment provisions (see Section 5, below).

4.9 The "New Deal" is another example of a potential shift to a more devolved decision-making framework envisaged by the new government. It offers partnership between central and local government, enabling local government to specify what is needed and then to seek central government funding, rather than promoting national initiatives. [65]Conditions and criteria for private sector involvement in future regeneration projects can only be decided on a programme to programme basis, determined by the partners involved. FDI may become significant private sector partners in the future, given the experience of FDI penetrating the public sector over the last decade. Signing up to the MAI may restrict the design of future partnerships, in regard to FDI.

4.10 The Labour Party Manifesto stated that a Labour government "will place on councils a new duty to promote the economic, social and environmental well-being of their area. They should work in partnership with local people, local business and local voluntary organisations. They will have the powers necessary to develop these partnerships".[66] Building on this commitment the Labour government has published a consultation paper on modernising local government. [67]The document states that ". . . New powers or dispensations from existing legislation could be given to local authorities to meet local priorities and aspirations that have been developed at local level—from the bottom up. . . . Local authorities would be able to frame proposals or initiatives to meet local concerns or priorities which would require changes to the law to enable different ways of working or convey additional powers, for example where private rights were to be affected or charges levied". These "`new powers'" have the potential to conflict with the MAI, specifically with regard to de facto discrimination and expropriation if FDI was affected by local government policy.

Best Value

4.11 The government has committed itself to the abolition of CCT. To this end, it has initiated a two year pilot programme of "best value", which is designed to replace CCT. The government has identified 12 principles of "best value".[68] One of the principles (no. 2) states that "Achieving Best Value is not just about economy and efficiency, but also about the effectiveness and quality of local services". Clearly, this opens up the possibility that social indicators around poverty and social exclusion can be included in the setting of targets and performance of "best value". These issues have yet to be fully developed, and the government is producing a series of consultative papers on "best value" and local government related issues later in the year. [69]Best Value may well lead to changes in conditions placed on private sector companies involved in local service provision, of which many are multinationals (as outlined in section 3). Again, the danger of signing up to the MAI is that it may limit the extent to which local authorities place such conditions on FDI.

4.12 Under the rules of CCT the public sector is often prohibited from bidding for local service contracts. The rationale for this exclusion was explained by Michael Heseltine: it was necessary "in order to give the private sector a chance to practice doing high quality work".[70] Under Best Value this philosophy may change, as stated in Principle 4. There is no presumption that services must be privatised, and once the service is in place there will be no general requirements for councils to put their services out to tender. The possible conflicts with the MAI relate to the change in conditions and environment in which private investors (i.e. FDI) find themselves as a result of the move from CCT to Best Value. This may well be viewed as "creeping expropriation" or the imposition of unacceptable performance requirements by FDI.

Conclusion

4.13 In concluding this Section, it is important to note that the policy frameworks discussed are still evolving and being developed. The important point is that the UK should not sign up to international agreements, such as the MAI, until the policy debates have been discussed fully and openly within the UK, and future directions and options in regard to FDI have been decided. The parameters of this debate need to concentrate on the design of policies and progammes that enhance and promote growth with equity, with particular emphasis on addressing the serious problems of poverty and social exclusion that blights UK society. It would be unwise to limit our options by signing up to the MAI before such a process of debate has been completed.

5. RECOMMENDATIONS ON THE MAI AND BROADER INVESTMENT FRAMEWORK

Process Issues

5.1 The MAI process has been criticised for being unparticipative and untransparent. The agreement has been under discussion within the OECD for the last six years. There were a series of preparatory meetings before the final negotiation phase began in 1995. The first international forum for NGOs to comment and discuss the MAI with those responsible for its drafting was at a meeting held in Paris in October 1997.

5.2 Within the UK, whilst the NGOs welcome and appreciate the greater openness recently shown by the DTI (responsible for the UK negotiations), they are concerned that some of their concerns have been introduced too late in the day to be adequately addressed. At this late stage of the negotiation process, there is also limited scope for effective and genuine participation by other interested and affected parties.

5.3 In regard to local development concerns and the MAI in the UK, there has been no effective participation of local government in the process, and little dialogue between the DTI and local government representatives on the subject. For many local authorities, awareness of the MAI has come not from the DTI, but from the World Development Movement (WDM), an NGO campaigning for the rights of the poor. WDM sent out a letter to all Local Agenda 21 officers of local authorities on 18 November 1997, and to all Chief Executive Officers on 24 November 1997. The letter highlighted some of the NGO concerns with the MAI as it relates to local development issues. In response to approaches from DTI, the Local Government Association (LGA) sought legal counsel on the MAI in December 1997. [71]It was not until 4 February 1998 that the MAI was an item on the agenda of the Policy Board meeting of the LGA. [72]

5.4 Clearly, the process of inclusion of local government stakeholders and representatives is at a preliminary stage. Therefore, it is extremely inappropriate to proceed with the existing timetable of completing MAI negotiations and signing the agreement in April 1998. Much time is needed for these stakeholders to assess the implications of the MAI for their goals, policies and operations, and to feed their input into the negotiating process.

5.5 Concern over lack of stakeholder participation is reflected also within the European Parliament. As recently as 16 January 1998, the Committee on Legal Affairs and Citizen's Rights produced a "draft opinion" on the MAI. Amongst its findings, the report states its hope "that a broad public debate on the impact of the MAI will take place" (emphasis added). It further "Calls upon the Commission . . . to submit the definitive draft of the MAI to the Court of Justice for full examination".[73] If either of these recommendations is to be fulfilled the MAI negotiation process will need to be extended.

The Need for a Balanced Agreement

5.6 In part, because of the limited inclusion of stakeholders in the process, the MAI text is currently unbalanced. In particular, issues around competition policy and bribery and corruption need to be integrated into the text and made legally binding. (The reference to the voluntary OECD Guidelines on MNEs is not sufficient to cover these important issues.)

5.7 Within the context of the general recommendation for a broadening and delay of the MAI process, and the inclusion of other aspects of an FDI regulatory regime included in the MAI, there are a number of specific comments and recommendations relating to the details of the text itself.

Treatment of Investors and Investments

MFN and NT

5.8 The MAI is based on three principles: foreign-owned investments are protected from expropriation or taking; and they must be given Most Favoured Nation (MFN) and National Treatment (NT). The latter two conditions require governments to treat foreign investors from any MAI member country at least as favourably as foreign investors from any other country (MFN), and at least as favourably as domestic investors (NT). Proponents of the MAI in its present form claim that these principles do no more than create "a level playing field". In fact they give foreign investors a guaranteed minimum level of treatment, backed by special rights of access to dispute-settlement, which would allow them to object to any local laws or requirements which they might argue are in breach of MAI rights. Foreign investors are generally large and powerful companies, and their international range means that they are often in a position to play off different local authorities against each other, which smaller local firms cannot do. The MAI does nothing to prevent this, in fact it gives them an additional weapon to do so. For example, an American waste-disposal company called Metalclad has brought an action for $90 million under provisions similar to those of the MAI, claiming that a local authority in Mexico has taken its property by preventing the opening of its waste disposal plant following an environmental impact audit. Such actions may be the tip of an iceberg of cases where foreign investors pressurise governments by threatening legal consequences. [74]It is therefore important that the favourable treatment afforded to foreign investment is bounded. [75]

5.9 The broad definitions and top-down nature of these three principles also leads to the risk that powerful foreign investors will use monopoly positions to bring claims of discrimination against the UK government on the grounds of NT, whether there is any substance to the claim or not. The wide base of the anti-expropriation undertakings will also make it easier for multinational national enterprises to claim unfair treatment. [76]This could lead to the situation where FDI takes the UK government to the "disputes panel", claiming unfair treatment if planning applications by local authorities are turned down. The threat of such action may even influence local authority planning decisions. [77]

5.10 It is therefore recommended that the NT and MFN provisions need to be moderated with language to ensure they cannot be used by powerful foreign investors to challenge legitimate national and local policies.

Investment Incentives

Investment incentives are not covered in the MAI. The failure to include any discipline regarding the offering of investment incentives is a serious omission. The lack of clear rules on the granting of incentives potentially has a twofold impact. One potential impact relates to the "better than national treatment" issue discussed above that is perpetuated under the MAI. "Footloose" FDI can continue to take advantage of the competition between regions to attract investment. Ironically, rather than reduce inequalities between regions, the status quo, it has been argued, can actually accentuate inequality. Those regions that are relatively better endowed with resources can offer greater incentives and therefore attract more FDI compared to even more disadvantaged regions. [78]The experience of competition between the WDA and the Northern Development Company gives support to this argument. The WDA was in a position to offer a much greater incentive to LG. As a result LG located in Wales. [79]

5.11 The second potential impact also results in an advantage for FDI. The lack of clear rules around investment incentives creates an environment of uncertainty that FDI can exploit. If national, regional or local authorities offer incentives to domestic investors (eg small businesses), foreign investors may argue that they are receiving less than National Treatment.

5.12 It is recommended that the investment incentives provisions are clarified and clear rules are drawn up on the use of investment incentives for different types of investors. Such rules can only be drawn up within a broader consultative process with relevant stakeholders.

Investment Protection

5.13 The Investment Protection provision cover 6 areas: general treatment, expropriation and compensation, protection from strife, transfers, subrogation, and protecting existing investments. [80]

5.14 Presently, under CCT, local authorities are committed to paying private investors a fixed fee for the local services that they provide for the duration of the contract. This situation limits the powers of local authorities to save money in the face of unanticipated public expenditures or budgetary cuts. In such circumstances local authorities can only make savings by cutting back on those other services that remain in the public sector. This situation may well lead to greater economic hardship for the most vulnerable and socially excluded in society. It may well be the case that this situation becomes increasingly untenable to local authorities. As commitments and budgets evolve, so too will be the importance of different management options for the provision of public services. Therefore, local authorities may wish to alter existing and future contracts of private operators. Under the MAI this would most likely be contested by FDI as a form of de facto expropriation.

5.15 Currently, under CCT local authorities are powerless to prevent private investors that are currently providing local services from withdrawing the service, winding up the operations and liquidating their assets. Under such circumstances, the local authority would be left to provide the service, as legally obliged to do so. The MAI further legitimises this situation through the free transfer of capital provisions, and further erodes local and national authority powers to prevent it. "Best value" may try to seek limitations on the powers of private operators to act in this way. Such developments would conflict with the MAI, and multinationals could appeal against such actions on the grounds of de facto discrimination. It may also be contested in relation to the Transfers provision.

5.16 In regard to the investment protection provisions, clear definitions of de facto discrimination and expropriation also need to be drawn up.

Dispute Settlement

5.17 Currently, local authorities and other stakeholders have little effective jurisdiction over multinational enterprises. The global nature and power of multinationals means that it is very difficult to bring charges of collusion and anti-competitive practices in a national court. For example, Thames Water was involved in bidding with P&O in China for a water contract in Shanghai, whilst at the same time bidding against P&O for a water and sewage contract in Adelaide, Australia. It is difficult for the Australian authorities to investigate whether any collusion between P&O and the other multinationals involved had actually taken place. [81]The dispute settlement procedure should allow relevant stakeholders to seek redress against such problems.

5.18 Evidence of corrupt practices of multinationals, including bribes, necessitates the need for a wider disputes panel to allow interested and affected parties to call multinationals to book. Research into corrupt activities by FDI involved in the provision of public services in the UK concluded that "corruption goes hand in hand with government contracting and privatisation".[82]

5.19 The MAI allows FDI the option of taking grievances through national courts or the disputes panel. It is recommended that local authorities also have the option of seeking redress through the disputes panel. This is particularly necessary given the experience in the UK where foreign investors who have been involved in corruption in one country or another, still being invited to bid for government contracts. [83]

5.20 Whilst some argue that issues of anti-competitive behaviour, bribery and corruption are addressed within national legislation and EU directives, there remains the need to include provision for their redress in the disputes settlement panel forum. The creation of an international disputes settlement procedure originates in the WTO and was established in recognition that the operation of the legislative and legal systems were less effective in some countries than in others. International disputes panel were established to address this problem. [84]Whilst the disputes panel was established for addressing weaknesses in developing country systems, if such weaknesses are apparent in the UK and EU legislative frameworks, the Disputes Panel should be open to address these.

Reservations

The US and Canadian governments are demanding a reservation for all existing provincial and state legislation. It is possible that this reservation will extend to future legislation. [85]

5.22 It is recommended that the following reservations should be included in the agreement: (i) an open-ended reservation on future regional and local development policies (Welsh and Scottish Assemblies, the Regional Development Agencies and Local Authorities), ie a reservation for all future regional and local legislation. (ii) a specific reservation for CCT and "best value" schemes at the local authority level. (iii) a specific reservation for PFI and regeneration projects and programmes.

Conclusion

5.23 In summary, the findings of this report are that there may be specific concerns over the possible impact of the MAI on existing local authority powers (according to legal counsel commissioned by the LGA). The major concern, however, is that the MAI has the potential to conflict with future policies currently under discussion to address issues of poverty and social exclusion. The danger is that the MAI will formalise and entrench many existing rules and regulations regarding FDI. This could have the effect of restricting development of future policy aimed at improving the effectiveness of FDI in addressing both economic and social priorities.

5.24 The MAI consultation process should be delayed and broadened to include all relevant stakeholders. The process needs to become genuinely participative such that stakeholders have an opportunity and the means to discuss the MAI and the potential links between such an agreement and local economic development and poverty issues in the UK. Associated with this, is the recommendation that the MAI is broadened to include legally binding rules on anti-competitive practices, bribery and corruption.

5.25 If the MAI is to go ahead, specific reforms would be needed to safeguard national and local policies for addressing poverty. The NT and MFN provisions would need to be moderated with language to ensure they cannot be used by powerful foreign investors to challenge legitimate national and local policies. In regard to the investment protection provisions, clear definitions of de facto discrimination and expropriation would also need to be drawn up. Rules would need to be included on financial incentives, creating transparency and reducing the uncertainty currently created by the MAI text. The Dispute Settlement procedures would also need to be reformed to allow other stakeholders (in addition to state and foreign investors) access to dispute settlement. The UK should also include an open reservation on future regional and local government legislation, and specific reservations on CCT, "best-value", and PFI.

5.26 In conclusion, it is recognised that FDI has a potentially important role to play in promoting economic development and social well-being in the UK. The regulatory framework around FDI needs to be designed such that foreign (and domestic) investors can operate in an economic, social (and environmentally) sound manner. If the MAI is to achieve this objective it will need to be reformed along the lines highlighted in this report.

March 1998

2 OECD (1997) Multilateral Agreement on Investment: Consolidated Text and Commentary, October. Back

3 DTI (1997) Briefing Paper, November. Back

4 Government Statistical Service (1997a) UK Balance of Payments: The Pink Book. Table 8.1. Office for National Statistics. The Stationery Office, London. Back

5 Government Statistical Service (1997b) UK National Accounts: The Blue Book. Table 14.7. Office for National Statistics. The Stationery Office, London. Back

6 IBB (1997a) Review of Operations. Invest in Britain Bureau. Back

7 Quoted in OXFAM (1997). The International dimensions of work. Section 3. OXFAM. Oxford. Back

8 DETR (1997) Regeneration Programmes-The Way Forward. Department of the Environment, Transport and the Regions. Back

9 Wilkinson, R (1997) Times Higher Education Supplement, May. Back

10 Best, R (1996) Successes, Failures and Prospects for Public-Housing Policy in the UK, Housing Policy Debate, 7(3). Back

11 DETR (1997) op cit. Back

12 TUC Analysis of 1994 Labour Force Survey. Back