Evolution Of The Formal Requirements For Investment Treaty Protection Of “Investments” In Malaysia.
Legal News & Analysis - Asia Pacific - Malaysia - Dispute Resolution
13 February, 2016
In Philippe Gruslin v. Malaysia (ICSID Case No. arb/99/3, award, 27 November 2000), the first fully-argued1 ICSID case involving malaysia as a respondent, the tribunal declined jurisdiction on the ground that the claimant’s investment in securities listed on the Kl Stock exchange did not constitute an “investment” within the meaning of the bilateral investment treaty (BIT) between the belgo-luxembourg economic union and malaysia as it was not an “approved project” classified as such by the appropriate ministry in malaysia. Signed in 1979, the Belgium-Luxembourg-Malaysia bit was one of the earliest investment treaties that malaysia had entered into.
Since then, much has happened with Malaysia’s investment treaty practice alongside the rapid development of its economy. this article surveys the evolution of malaysia’s investment treaty practice in terms of the formal requirements to be fulfilled for foreign investments to benefit from investment treaty protections, assesses the current situation, and suggests recommendations related to those formal requirements so as to make malaysia even more attractive as a destination for foreign investment.
In particular, it was intended that bits would foster the implementation of the national development plans of developing countries. under the Germany-Pakistan bit, to take an early example, Pakistan limited its obligation under article 1(1) to endeavour to admit investments of German investors by granting necessary permissions “with due regard also to their published plans and policies”, presumably a reference to how the german investors’ published plans and policies cohere with Pakistan’s national development plan. it is thus not surprising that, particularly in the case of the early bits, the relatively less economically developed of the two treaty parties would seek to assert some measure of control and oversight over the foreign investments that would be admitted into and protected within its territory in accordance with its bits, so as to achieve its national development goals.
There are many ways in which bit provisions can be drafted to preserve for one or both parties the desired degree of control and oversight over the foreign investments that would be admitted and protected under the bits. one way is to restrict the scope of protections under the bit to cover only those investments for which specific approval has been granted by the relevant authorities of the host state. this was the means by which pakistan restricted the scope of protection under the Germany- Pakistan bit. by way of an exchange of letters signed on the same day as the Germany-Pakistan bit, the parties recorded their understanding that the term “investment” in respect of pakistan refers to investments “approved by the Government agencies authorizing such investments”, and that, significantly, if “at any time later free investment is allowed in Pakistan, the term ‘investment’ will cover all investments made in the territory of Pakistan”.
Perhaps drawing inspiration from the exchange of letters between germany and pakistan, the Germany-Malaysia bit also restricted the term “investment” in respect of investments in the territory of malaysia (then known as the federation of malaya) to “all investments made in projects classified by the appropriate Ministry of the Federation of Malaya in accordance with its legislation and administrative practice as an ‘approved project’.” this was the model adopted in each of the 13 malaysia bits signed between December 1960 and January 1992, for which the official english texts are publicly available.3
One of these 13 bits is the UK-Malaysia bit, signed in London on 21 may 1981. In the respondent’s Comments on the issue of “investment” Within the meaning of article 25(1) of the ICSID Convention filed in relation to Malaysian Historical Salvors, Sdn. bhd. v. The Government of Malaysia (ICSID Case No. arb/05/1), which was an investment dispute under the UK-Malaysia bit, Malaysia explained that by virtue of the mechanism of the classification of “approved project”, the host country reserved the right to screen the establishment of individual investments. this way, the host country could exclude any specific investment. it ensured that “only those investments that have been approved by the host country are entitled to protection under the investment treaty”, and approval of an investment “signifies, in principle, conformity to the host country’s development goals”. further, Malaysia drew attention to the fact that the UK-Malaysia bit was concluded in 1981, at a time when malaysia was in need of foreign direct investment and long term capital investments in fixed assets in labour-intensive manufacturing and other manufacturing-related infrastructure, and thus wanted to “create favourable conditions for greater investments in these sectors”.4
This means of restricting the foreign investments to which investment treaty protections would apply was similarly adopted in the 1987 aSeaN agreement on the promotion and protection of investments (the 1987 ASEAN IGA), to which malaysia is a State party, being an ASEAN member State. under article ii, the 1987 ASEAN IGA applies only to investments that are “specifically approved in writing and registered by the host country and upon such conditions as it deems fit for the purposes of this Agreement”. Where investments are made prior to its entry into force, the 1987 aSeaN iga shall also apply to such investments provided they are “specifically approved in writing and registered by the host country and upon such conditions as it deems for purposes of this Agreement subsequent to its entry into force”.
In yaung Chi Oo Trading Pte Ltd. v. Government of the Union of Myanmar (ASEAN I.D. Case No. arb/01/1, award, 31 march 2003), the tribunal noted that the requirement of specific approval and registration already existed under the legislation of certain parties to the 1987 ASEAN IGA, “especially those with centrally-managed economies”.5 this was the situation in myanmar where no foreign investment could be made without specific approval of the government of myanmar acting through the foreign investment Commission under the foreign investment law.
In that case, the tribunal declined jurisdiction because the claimant’s investment, most of which effectively had been made before 23 July 1997, had not been specifically approved in writing by Myanmar subsequent to that date, when the 1987 ASEAN IGA entered into force for Myanmar.
The middle treaties: Compliance with local Laws, Regulations and national policies apart from the requirement of specific approval in writing, another common means of limiting the scope of protections under investment treaties is to define “investments” as those which have been made “in accordance with the laws, regulations and national policies” of the host country.6 this was the means adopted in the 18 bits that Malaysia entered into between February 1993 and October 2000, for which the official english texts are publicly available,7 as well as the investment Chapter of the agreement between pakistan and malaysia for a Closer economic partnership signed in November 2007. these investment treaties do not require covered investments to be made in “approved projects”, even though foreign investments are still subject to review and approval in malaysia. as a broad generalisation, in contrast with the more economically developed treaty partners with which Malaysia entered into bits between 1960 and 1992,8 Malaysia’s treaty partners between 1993 and 2000 were at a stage of economic development comparable to malaysia’s at the time they entered into the bits with Malaysia.9
Investment arbitration tribunals have interpreted this requirement of conformity with the laws, regulations and national policies of the host country as directed at the validity of the investment, the aim of which is to prevent the investment treaty from “protecting investments that should not be protected, particularly because they would be illegal”.10 this requirement has not been interpreted to mean that the term “ investment” under investment treaty should be defined according to the host country’s local laws and regulations. thus, it appears that under the bits that incorporate this requirement, a foreign investment need not be affirmatively approved in writing or made in projects classified by the appropriate malaysian ministry as “approved projects” in order to benefit from the investment protections under those bits, provided the investments are not prohibited under malaysia’s local laws and regulations.
Another way of drafting an investment treaty to limit the scope of investment protections is to preclude an investor whose investments are not made in compliance with the laws and regulations of the host country (which are not inconsistent with the investment treaty) from submitting an investment dispute to binding arbitration or other dispute settlement procedures under the investment treaty. this is the case in the investment Chapter of the Japan-Malaysia economic partnership agreement, which does not otherwise restrict the definition of “investment” covered by the investment Chapter.
In 2009, the 1987 ASEAN IGA was revised and replaced by the ASEAN Comprehensive investment agreement (the ACIA). under article 4(a) of the ACIA, “covered investment” is defined as an investment that “has been admitted according to [the host country’s] laws, regulations and national policies, and where applicable, specifically approved in writing by the competent authority”. in Yaung Chi Oo Trading v. Myanmar, the tribunal observed that a State party to the 1987 ASEAN IGA could create a separate register of protected investments for the purposes of the 1987 ASEAN IGA, in addition to or in lieu of approval under its internal law, or at the least notify the ASEAN Secretariat of any special procedure. Yet, Myanmar had done none of these things. thus, the tribunal held that if a State party unequivocally and without reservation approves in writing a foreign investment proposal under its internal law, that investment must be taken to be registered and approved also for the purposes of the 1987 ASEAN IGA.11 perhaps as a reaction to the tribunal’s observations inYaung Chi Oo Trading, the ACIA includes an annex 1 (approval in Writing), which specifies the procedures relating to specific approval in writing for the purpose of investment protection under the aCia. these procedures are as follows:
- where specific approval in writing
- is required for covered investments
- by a Member State’s domestic laws, regulations and national policies, that Member State shall:
(a) inform all the other member States through the ASEAN Secretariat of the contact details of its competent authority responsible for granting such approval;
(b) in the case of an incomplete application, identify and notify the applicant in writing within 1 month from the date of receipt of such application of all the additional information that is required;
(c) inform the applicant in writing that the investment has been specifically approved or denied within 4 months from the date of receipt of complete application by the competent authority; and
(d) in the case an application is denied, inform the applicant in writing of the reasons for such denial. the applicant shall have the opportunity of submitting, at that applicant’s discretion, a new application.
Based on the model of the ACIA, the definition of “covered investment” under article 1(c) of the ASEAN-Korea investment agreement signed in June 2009 is identical in all material respects to that under article 4(a) of the aCia, including a reference to annex 1 (approval in Writing).
However, unlike the ACIA and the ASEAN-Korea investment agreement, two other investment treaties signed in 2009 between ASEAN and major trading partners do not incorporate an option to require “specific approval in writing” in the definition of “covered investments”.
First, under article 2(a) of the investment Chapter of the ASEAN-Australia-New Zealand FTA (AANZFTA) signed in February 2009, “covered investment” is defined as an investment that “has been admitted by the host Party, subject to its relevant laws, regulations and policies”. a footnote to this definition provides that for greater certainty: (a) in the case of Thailand, protection under this Chapter shall be accorded to covered investments that have been specifically approved in writing for protection by the competent authorities; and (b) in the case of Viet Nam, “has been admitted” means “has been specifically registered or approved in writing, as the case may be”. No such qualification has been entered in respect of Malaysia.
Second, under the ASEAN-China investment agreement signed in August 2009, the term “investment” is defined to mean every kind of asset invested by the investors of a party “in accordance with the relevant laws, regulations and policies of another Party”. under article 3(3), Thailand qualified that the ASEAN-China investment agreement shall apply only in cases where the investment in the territory of Thailand has been admitted and specifically approved in writing for protection by its competent authorities (the name and contact details of which shall be informed to the other parties through the ASEAN Secretariat), in accordance with its domestic laws, regulations and policies. No similar qualification is entered in the case of Viet Nam, unlike under the ASEAN-Australia-New Zealand FTA. Nor is there any such qualification in the case of Malaysia under the ASEAN-China investment agreement.
Perhaps not surprisingly, the investment Chapters of the ftas that malaysia entered into with New Zealand and Australia in October 2009 and May 2012, respectively, define “investment” in terms similar to those in the AANZFTA. under both the Malaysia-New Zealand FTA and the Malaysia-Australia FTA, “covered investment” is defined as an investment that “has been admitted by the former Party, subject to its relevant laws, regulations and policies”. Just as under the AANZFTA investment Chapter, the Malaysia-New Zealand and malaysia-australia ftas do not include any requirement for investments in the territory of malaysia to be specifically approved in writing to be covered by their investment Chapters.
The latest treaties: having the characteristics of An Investment in a slight variation from malaysia’s previous investment treaty practice, the investment Chapter of the Malaysia-India fta signed in February 2011 employed a characteristic-based definition of “investments”. thus, under article 10.2(d), the term “investments” is defined not only as “every kind of asset ... invested in accordance with the latter Party’s laws, regulations and national policies” (so far, consistent with Malaysia’s previous investment treaty practice), but also “has the characteristics of an investment, such as the commitment of capital, the expectation of gain or profit, or the assumption of risk”.
Similar language found its way into the ASEAN-India investment agreement, which was signed in November 2013 but has not yet entered into force. under article 2(e), “investment” is defined as “every kind of asset ... that has the characteristics of an investment, including such characteristics as the commitment of capital, the expectation of gain or profit, or the assumption of risk”. a footnote to this definition makes it clear that the definition of “investment” shall be read in accordance with subparagraph 1(b) of article 1 (Scope), which provides that the ASEAN-India investment agreement shall apply to investment that “where applicable, has been admitted by that Party, subject to its relevant laws, regulations and policies”. in the case of Thailand, protection under this agreement shall be accorded to investments that have been “specifically approved in writing for protection by the competent authorities”. in the case of Cambodia and Viet Nam, “has been admitted” means “has been specifically registered or approved in writing, as the case may be”. No similar qualification is entered in respect of investments in malaysia.
Interestingly, malaysia is among the States parties to the prospective Trans-Pacific Partnership (TPP) that have agreed on a similar characteristic-based definition of “investment”. under article 9.1, “investment” means every asset that “has the characteristics of an investment, including such characteristics as the commitment of capital, the expectation of gain or profit, or the assumption of risk”. in order for an investment to be covered under the tpp, there is no requirement that an investment be admitted in accordance with or subject to a State party’s laws, regulations and policies. Nor is there a requirement that an investment has to be specifically registered or approved in writing to be covered by the tpp investment protections. this is consistent with Malaysia’s practice in relation to its most recent investment treaties, namely the AANZFTA, the Malaysia- Australia FTA, the Malaysia-New Zealand FTA, the ASEAN-China investment agreement, the Malaysia-India FTA and the ASEAN-India investment agreement.
Where Malaysia stands now and possible future directions - the survey of Malaysia’s investment treaty practice above shows that Malaysia has taken bold steps in moving away from the requirement in its earliest bits that protected foreign investment be made in projects classified by the appropriate ministry as an “approved project”. beginning in the early to mid 1990s, Malaysia has required instead in its investment treaties that covered investments be made “in accordance with” Malaysia’s laws, regulations and national policies. it thus progressed from positive selection of certain preferred foreign investments in projects classified as “approved projects” (seemingly on a case-by-case basis) to which the promotion and protections under its investment treaties would be offered, to negative filtering of foreign investments that did not comply with Malaysia’s laws, regulations and national policies, to which investment treaty protections would not apply. this development in malaysia’s investment treaty practice is clear from the absence of any qualification in respect of investments in malaysia under its most recent investment treaties, including the AANZFTA, the ASEAN- China investment agreement and the ASEAN-India investment agreement.
In contrast, Thailand has consistently qualified in these same investment treaties that in the case of investments in its territory, only investments that have been “specifically approved in writing for protection by the competent authorities” would be accorded protection.) as a sign of further maturity in its investment treaty practice, as an aspect of its prospective membership of the TPP, malaysia has agreed to accord investment protections under the TPP investment Chapter to foreign investments that have the characteristics of an investment, without any requirement for the investments to be made in “approved projects” or in compliance with its laws, regulations and national policies.
This evolution in malaysia’s investment treaty practice appears to have taken place in tandem with its liberalisation of its investment regulatory regime. Since its establishment in 1967 under the malaysian industrial Development authority (MIDA) act to attract foreign investment and to serve as a focal point for legal and regulatory queries, MIDA (which has since been renamed the Malaysian Investment Development authority in 2011) has become internationally recognised as an effective investment promotion agency, particularly for foreign investors at the establishment phase.12 MIDA guides foreign investors interested in the manufacturing sector and in several service sub-sectors including tourism and hospitality, healthcare, education and industrial training, information technology, environment management and business services (including regional establishment and supply chain services), in respect of which malaysia has begun allowing 100% foreign ownership since 2011.13
To be clear, such liberalisation does not mean that malaysia has removed its internal approval processes in respect of foreign investments. in the manufacturing sector, under the industrial Coordination act 1975, an investor seeking to engage in manufacturing will need a licence if the business claims capital of rm 2.5 million (approximately US$ 690,000) or employs at least 75 full-time staff. the malaysian government’s guidelines for approving manufacturing investments, and by extension, manufacturing licences, are generally based on capital-to-employee ratios. projects below a threshold of rm 55,000 (approximately US$ 15,000) of capital-per-employee are deemed labour-intensive and will generally not qualify for a manufacturing licence. manufacturing investors seeking to expand or diversify their operations are required to apply to do so through MIDA.14 in the services sector, foreign investments are subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors.15 more generally, the ministerial functions act 1969 grants the relevant ministries broad discretionary powers over the approval of specific investment projects. in practice, this review and approval process also serves as a means for the Malaysian government to assess whether the proposed investment meets the criteria for the various incentives available in sectors and regions targeted by its national development plans.16
Notwithstanding the evolution surveyed above, Malaysia still requires in several bits that investment be made in an “approved project” for protections to be accorded. in practice, all foreign investments are still subject to review and approval by the Malaysian government. in MIDA’s media release on growth of investments in the first half of 2015, it was reported that the “total investments approved were in 2,487 projects” [emphasis added], of which rm 1.9 billion worth of investment in the manufacturing sector originated from Europe.17 So as to enhance the attractiveness of Malaysia’s investment environment, especially for those foreign investors that would seek protections for their investments under the relevant investment treaties (including those with the “approved project” requirement), the following recommendations may be considered by the malaysian investment policymakers.
First, where investment protection is contingent on compliance with Malaysia’s laws, regulations and national policies, it is important to ensure that these laws, regulations and national policies are transparent and readily available. one such commendable example in malaysia’s investment treaty practice is the explicit provision in the investment Chapter of the Japan- Malaysia EPA that in respect of Malaysia, investments not made in compliance with the laws and regulations include investments not made in compliance with transparent national policies: policies “endorsed by the Cabinet and announced and made publicly available in a written form by the Government of Malaysia”. Similarly, in the ASEAN-China investment agreement, a footnote to the definition of “investment” provides that for greater certainty, “policies” shall refer to those affecting investment that are “endorsed and announced by the Government of a Party, and made publicly available in written form”. Such innovations in investment treaties go some distance toward achieving greater transparency and certainty in determining whether an investment is in compliance with malaysia’s laws, regulations and national policies.
Second, where investment protection is contingent on specific approval in writing, it is important for the approval process also to be transparent. Contracting parties and their investors should be made aware not only that they must specifically obtain written approval from the host country to benefit from treaty protections, but also be informed how to apply for such approval and to whom. in this regard, the inclusion of annex 1 (Approval in Writing) in the ACIA and the ASAEN- Korea investment agreement is an encouraging step toward providing safeguards against arbitrariness and discrimination in the process of granting written approval. to go further, MIDA and the other ministries dealing with the promotion of investment in malaysia may wish to include information about the approval mechanisms in their provision of information to a prospective foreign investor. as an important first step in this direction, as required under paragraph (a) of annex 1 (approval in Writing) to the ACIA and the ASEAN-Korea investment agreement, malaysia has informed all the other ASEAN member States through the ASEAN Secretariat that MIDA is the Malaysian competent authority involved in administering investment applications.18
As Malaysia continues to negotiate more investment treaties, and enter plurilateral investment treaties such as the regional Comprehensive economic partnership, one can expect Malaysia’s investment treaty practice to keep evolving in ways that reflect and improve its advancing state of economic development and market liberalisation.
Perhaps in time, Malaysia will find itself renegotiating those earliest bits that still limit their protections to investment in “approved projects”, and harmonise those bits with the more recent investment treaties into which Malaysia has entered, bearing in mind the need to enhance transparency in its investment approval processes.
By Lucy Reed & Kenneth Wong, Freshfields Bruckhaus Deringer
1 the very first ICSID case filed against Malaysia was registered in January 1994. it involved the exact same claimant under precisely the same treaty, but it was settled and the proceedings were discontinued on 24 April 1996.
2 See, e.g., professor Sompong Sucharitkul, “fifty Years of bilateral investment treaties with germany: the experience from Thailand’s perspective” in ICSID Review (2009) 24(2): 333-338, at 335.
3 these are Malaysia’s bits with (1) Germany in 1960; (2) Netherlands in 1971; (3) Sweden in 1979; (4) Belgium-Luxembourg economic union in 1979; (5) the United Kingdom in 1981; (6) Norway in 1984; (7) Austria in 1985; (8) Finland in 1985; (9) the Republic of Korea in 1988; (10) the People’s Republic of China in 1988; (11) the United Arab Emirates in 1991; (12) Denmark in 1992; and (13) Viet Nam in 1992. the authors were not able to find official english texts of malaysia’s bits with france, Switzerland, Sri Lanka and Italy, although these were signed in the same period as the other 13 bits identified here.
4 See Malaysian Historical Salvors, Sdn. Bhd. v. The Government of Malaysia (ICSID Case No. arb/05/1, respondent’s Comments on the issue of “investment” Within the meaning of article 25(1) of the ICSID Convention, 22 march 2007), at paras 20 – 21.
5 See Yaung Chi Oo Trading Pte Ltd. v. Government of the Union of Myanmar (ASEAN i.D. Case No. arb/01/1, award, 31 March 2003) at para 58.
6 See, e.g., Inceysa Vallisoletgana S.L. v. Republic of El Salvador (ICSID Case No. arb/03/26, award, 2 August 2006), at para 186.
7 these are Malaysia’s bits with (1) Hungary in 1993; (2) Albania in 1994; (3) Jordan in 1995; (4) Bangladesh in 1994; (5) bosnia and Herzegovina in 1994; (6) Croatia in 1994; (7) Pakistan in 1995; (8) Mongolia in 1995;
(9) India in 1995; (10) Romania in 1996; (11) the Czech Republic in 1996; (12) Ghana in 1996; (13) Egypt in 1997; (14) Macedonia in 1997; (15) Turkey in 1998; (16) Lebanon in 1998; (17) Ethiopia in 1998; and (18) Saudi Arabia in 2000. the authors were not able to find official english texts of Malaysia’s bits with Chile, Poland, Indonesia, Argentina, Spain, Uruguay, Peru, Guinea, Uzbekistan, Cuba, the Democratic People’s Republic of Korea, Burkina Faso, Morocco and Iran, although these were signed around the same time as the other 18 bits identified here.
8 See note 3, above.
9 these include countries such as Hungary, Albania, Jordan, Bangladesh, Bosnia and Herzegovina, Croatia, Pakistan, Mongolia, India, Romania, the Czech Republic, Ghana, Egypt, Macedonia, Turkey and Ethiopia.
10 See, e.g., Salini Construttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco (ICSID Case No. arb/00/4, Decision on Jurisdiction, 23 July 2001) at para 46; Bayindir Insaat Turizm Ticaret Ve Sanayi A.Ş. v. Islamic Republic of Pakistan (ICSID Case No. arb/03/29, Decision on Jurisdiction, 14 November 2005) at para 109; and Inceysa Vallisoletgana S.L. v. Republic of El Salvador (ICSID Case No. arb/03/26, award, 2 august 2006), at para 187.
11 See Yaung Chi Oo Trading Pte Ltd. v. Government of the Union of Myanmar (ASEAN I.D. Case No. arb/01/1, award, 31 March 2003) at para 59.
12 See OECD Investment Policy Reviews: Malaysia 2013, at p 35 of the Summary (available at: http://www.oecd.org/daf/inv/investment- policy/iprmalaysia2013Summary.pdf )
13 See Malaysia Investment Climate Statement 2015, produced by the uS Department of State in may 2015 (available at http://www. state.gov/documents/organization/241858. pdf), at p 4
14 Ibid., at p 5 15 Ibid., at p 4 16 Ibid., at p 8
17 miDa media release dated 19 august
2015: “malaysia Sees modest growth of approved investments in 1H2015” (available at: http://www.mida.gov.my/home/ administrator/system_files/modules/photo/ uploads/20150827124518_media%20release_ Jan_June%202015_investment_performance_ final.pdf )
18 the information is available at: http://www. asean.org/news/item/applications.