DOCUMENT RESUME

02244 - A1452463]

Nationalizations and Expropriations of U.S. Direct PrivateForeign Investment: Problems and Issues. ID-77-9; B-172255. May20, 1977. 59 pp.

Raport to the Congress; by Elmer B. Staats, Comptroller General.

Issue Area: International Economic and Military Programs: DirectInvestment Capital Flows (606); Materials: InternationalPolicies and Practices (Including Seabed Resources, (1803).

Contact: International Div.Budget Function: International Affairs: Conduct of Foreign

Affairs (152); International Affairs: InternationalFinancial Programs (155).

organization Concerned: Department of State; Department of theTreasury; Department of Commerce; council on InternationalEconomic Policy; Overseas Private Investment Corp.

Congressional Relevance: House Committee on InternationalRelations- Senate Committee on Foreign Relations; Congress.

Authority: Foreign Assistance Act of 1961, sec. 620(e) (1}, asamended (22 U.S.C. 2370(e)). Trade Act of 1974, sec.502(b) (4) (P.L. 93-618). Fishermea's Protective Act f i967,.= ~.ende o n. 7,. Foreign Military Sales Act, as

amended, sec. 3(b) (22 U.S.C. 2753(b) (SuFp. III)). EconomicCooperation Act of 1948. Muttal Security Act of 1954.Forqign ssistance Act of 1969. P.L. 92-245. P.L. 92-246.P.L. 92-247. P.L. 92-138. Executive Order 11844.

The wave of nationalizations and expropriations ofprivate foreign investments since World War II by theestabliched, as ell as the recently created, countLies of thedeveloping world has generated serious concern in thecapital-exporting countries. Finding 5/Conclusious:Expropriations and nationalizations of U.S. direct privateforeign investments have increased dramatically since World ParII because of the adoption of communism or socialism as thebasis of some national governments, especially in EasternEurope, and the desires of developing nations to acquire afirmer grip on their own economic destinies. It has beenvirtually impossible to obtain meaningful, complete figures on

the value of expropriated or nationalized U.S. privateinvestments. Prospects for the success of efforts by severalgovernments and organizations to protect private foreigninvestments against expropriation and nntionalizatiGns bydeveloping countries are inconclusive, mainly because of theobjections of those countries. Some capital-exporting countriesare not willing to join in any unified effort that would appearto confront the developing worlds, on which they depend for rawmaterials and as markets for their exports. Recommendations:The Secretary of State should initiate a broad-based effort tonegotiate friendship, commerce, and navigation treaties,emphasizing protection of private foreign investments, with

developing countries here the potential for U.S. privateinvestment exists. ,Author/SC)

REPORT TO THE CONGRESS

BY THE COMPTROLLER GENERAL

OF THE UNITED STATES

Nationalizations AndExpropriations Of U.S. DirectPrivate Foreign Investment:Problems And IssuesDepartment of State andOther Federal Agencies

Prospectc for the success of efforts by severalgovernments and organizations to protectprvate for In investments against e,:propria-tion and nitionalization by developingcountries are ,.iconclusive, mainly because ofdeveloping ijuntries' objections. Also, somecapitalexporting countries are not willing tojoin in any unified effort that would appearto confront the developing world, on whichthey depend for raw matenals and as marketsfor their exports.

Ade, uately protective Lreaties of friendship,comrmerce and navigation are one methodthat the United States could employ mareextensively to better protect its privateforeiin1 investments in developing countries.The ,port recommends that the Secretary ofState take appropriate action along thoselines.

MAY 20, 1977

COMP tO.L O G NEAL OF THE UNITED ISAT*WSHINTON, D.C. MUi4

B-172255

To the President of the Scnate and theSpeaker of the House of Representatives

The wave of nationalizations and expropriations of pri-vate foreign investments since World War II by the established,as well as the recently created, countries of the developingworld has generated serious concern in the capital-exportingcountries.

This report discusses some efforts that have been andcould be made to establish a climate in which fr.S. investorscould risk capital in developing countries with reasonableassurances that their investments could continue operatingwithout the fear of expropriation or nationalization.

We made our review pursuant to the Budget and AccountingAct, 1921 (31 U.S.C. 53), and the Accounting and AuditingAct of 1950 (31 U.S.C. 67).

We are sending copies of this report to the Director,Office of Management and Budget; Secretaries of State,Treasury, and Commerce; President of the Overseas PrivateInvestment Corporation; Executive Director of the Councilon International Economic Policy; and U.S. Executive Direc-tor at the World Bank.

Comptroller Generalof the United States

COMPTROLLER GENERAL'S NATIONALIZATIONS AND EXPROPRIATIONSREPORT TO THE CONGRESS OF U.S. DIRECT PRIVATE FOREIGN

INVESTMENT: PROBLEMS AND ISSUESDepartment of State andOther Federal Agencies

DIGEST

Since the end of World War II, expropriationsand nationalizations of U.S. direct privateforeign investments have increased dramaticallybecause of the (l) adoption of communism orsocialism as the basis of some national govern-ments, especially in Estern Europe and (2) de-sires of-developing nations to acquire a firmergrip on their own economic destinies.

No formal procedure exists for compiling a com-plete list of expropriations and nationaliza-tions of U.S. direct private foreign investments.However, from a series of reports prepared bythe State Department, GAO was able to tabulate260 known major disputes involving such invest-ments that ocurred between January 1961 andthe end of January 1975. Of these, 118 occurredin Latin America, 75 in Africa, 37 in the MiddleEast, and 30 i sia.

The industrial sectors involved were petroleumand related industries, 4i mining and relatedprocessing, 44; banking and insurance, 38;public utilities, 14; manufacturing , 35; andother industries, 45. (See p. 2.)

It has been virtually impossible to obtain mean-ingful, complete figures on the value of expro-priated or nationalized U.S. private investments.

U.S. GOVERNMENT POLICY ON FOREIGNEXPROPRIATIONS OF PRIVATE INVESTMENTS

The United State recognizes the rights of sov-ereign tates to nationalize or expropriate for-eign-owned property, provided such takeoversconform with international law standards whichrequire that the takeovers be for a public pur-pose, do not discriminate against U.S. citizens,and are accompanied by prompt, adequate, andeffective compensation.

TeshMIt. Upon removal, the reportCoversdate should be noted hereon.

i ID-77-9

When an investment dispute develops, the Govern-ment tries to maintain a low profile by keepingthe involved firm out in frcnt during negotia-tion with the host government. In many casfirms have successfully resolved investment dis-putes without significant direct U.S. Governmentinvolvment.

The Congress has enacted numerous laws to imposesanctions against countries which nationalize,expropriate, or seize property owned by U.S. citi-zens without taking reasonable steps to compen-sate the former owners. The sanctions could bewaived if the President determines that it is inthe U.S. national interest to do so.

Sanctions have been imposed in only a few instan-ces. (See pp. 5 to 13.)

EFFORTS TO COPE WITH EXPROPRIATION

Various multilateral and US. unilateral effortshave been and are being made to provide prospec-tive investors with incentives--in the form ofprotection against expropriation and ationali-zation--to risk their capital in develcpincountries.

The reation of an InternatioLal InvestmentInsurance Agency has been considered forsome time, but the idea has been 3helved,at least temporarily, because differences,mainly between developed and the developingcountries, could not be resolved concerning:

--Whether the agency should be linkedorganizationally with the World Bank.

-- How voting rights were to be distributed.

--Participation in the agency's expensesand financial obligations.

--Provisions for subrogation and interna-tional arbitration.

GAO believes that, because of its internationalcharacter, the proposed agency could deter someexpropriations and precipitate prompt, aequate,

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and effective compensation and that the UnitedStates should not abandon its efforts to achieveits creation. However, the United States shouldalso strive tu devise other measures to protectthe interests of its private foreign investors.

Im May 1976 the Secretary of State proposed thecreation of an International Resources Bank tofacilitate private investment in resource de-velopment in developing countries. The WorldBank has agreed to study the idea and preparea report.

The International Finance Corporation's Boardof Directors has recommended that the Corpora-tion's authorized capital be increased from$110 million to $650 million to enable it toprovide more assistance toward financing ofdevelopment-oriented projects.

The Treasurv Department has proposed the estab-lishzment of a special representative for over-seas investment and a commission on investmentdisputes. The special representative's ptinci-pal mission would be to try to prevent expro-priations and to obtain better settlements afterexpropriations have occurred.

Among other alternatives the Government has con-sidered is the establishment of a judicial re-medies convention, through which former ownersof expropriated or nationalized investmentswould be permitted to sue in the courts ofthird-party countries to obtain control ofsuch properties or products derived therefromthat nad been shipped from the expropriatingor nationalizing country.

Numerous attempts have een made over the yearsto develop international codes of conduct. InJune 1976 the Council of the Organization forEconomic Cooperation and Development adopted aDeclaration on International Investments andMultinational Enterprises which included guide-lines setting forth the general conditionsunder which multinational corporations should beable to operate. However, the guidelines arevoluntary and apply only to foreign investmentsmade within the territories of the Organization's

IUfl Sheet iii

member countries, not to investments in non-member countries where most of the recent na-tionalizations and expropriations have occured.

The World Bank and its affiliates maintain acontinuing interest in disputes between membercountries or agencies and nationals and firmsof another member country when such disputesstem from certain international financialtransactions, including disputes over cm-pensation to aliens for expropriated prop-erty.

The Bank will not lend to a country which hasexpropriated alien-owned property if the 'Bankdetermines that the country's stance on com-pensation to the ormer owners is adverselyaffecting the covntry's international creditstanding. (See pp. 14 to 20.)

FRIENDSHIP, COMMERCE, ANDVVIGATiON TREATIES

The United States has treaties of friendship,commerce, and navigation, and similar treaties,with 43 countries. A principal purpose ofsuch treaties is to establish a climate in wichinvestments could be made by nationals and com-pranie of either country within the territoryof the oher without fear of harassment, threats,or other discriminatory actions by host-countrygovernments. Other provisions are included toensure prompt, adequate, and effective compen-sation in the event an investment is national-ized or expropriated by the host government.

Many treaties are outdated and do not provideadequate protection to U.S. private foreigninvestments. Also, there are substantialU.S. private investments in many developingcountries with which the United States doesnot have friendship, commerce, and navigationtreaties. (See pp. 29 to 38.)

A series of adequately protective treatiescould encourage private investment to devel-op supply sources for materials which a-ecritical to the national security and economybut which are either unavailable or cannoteasily be developed domestically.

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The Departments of Commerce, State, and Trea-sury; the Overseas Private Investment Cor-poration; and the Council on InternationalEconomic Policy agreed with GAO's recommenda-tion that the Secretary of State initiate abroad-based effort to negotiate friendship,commerce, and navigation treaties, emphasiz-ing protection of private foreign investments,with developing countries where the potentialfor U.S. private investment exists.

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Contents

DIGEST i

CHAPTER

1 INTRODUCTION 1Purpose of study 4Scope of study 4

2 GOVERNMENT POLICY ON EXPROPRIATIONSOF PRIVATE FOREIGN INVESTMENTS 5

Expropriation legislation 8Foreign Assistance Act of 1961 8Multilateral development bank

legislation 9Fishermen's protective acts 11Foreign Military Sales Act 12Trade Act of 1974 12Sugar Act of 1948 13

3 OTHER EFFORTS TO PROTECT INVESTMENTSAND COPE WITH EXPROPRIATIONS 14

International Investment InsuranceAgency 14

Link with World Bank 14Voting rights 15Financial participation by

developing countries 15Subrogation 15Arbitration 15U.S. support 16Conclusions 17

Intarnationl1 resources bank 17Expanding capital base of InternationalFinance Corporation 18

Special U.S. representative foroverseas investment 18

Conclusions 19Judicial remedies convention 20

4 CODES OF CONDUCT FOR MULTINATIONAJCORPORATIONS 21Conclusions 22

PageCHAPTER

5 WORLD BANK POLICIES ON EXPROPRIATIONS 24

6 BILATERAL AGREEMENTS FOR ESTABLISHINGPRIVATE INVESTMENT INSURANCE PROGRAMABROAD 25

7 FRIENDSHIP, COMMERCE, .AND NAVIGATIONTREATIES 29Treaties entered into force during

19th century 29Pre-World War II treaties 30Post-Wrld War II treaties 30Essentials of FCN treaties 31German Federal Repubic's treaties

in Africa 34National treatment of foreign

investments 35Expropriation and compensation 35Transfer of returns on investment

and capital 35Arbitration of dispuites 36

Trade Act of 1974 36Conclusions 36Agency comments 38Recommendation 38

APPENDIX

I Letter dated January 25, 1977, from theExecutive Vice President, Overseas PrivateInvestment Corroration 39

II Letter dated January 27, 1977, from theAssociate Director and General Counsel,Council on International EconomicPolicy 44

III Letter dated January 28, 1977, from theDeputy Assistant Secretary for EconomicPolicy and Research, Department ofCommerce 46

IV Letter dated January 31, 1977, from theSecretary of the Treasury 48

Page

APPENDIX

V Letter dated February 2, 1977, from theDeputy Assistant Secretary for Budgetand Finance, Department of State 50

ABBREVIATIONS

CIEP Council on International Economic PolicyFCN friendship, conmmerce, and navigationGAO General Accounting OfficeXIIA International Investment Insurance AgencyOECD Organization for Economic Cooperation and

DevelopmentOPIC Overseas Private Investment Corporation

CPAPTER 1

INTRODUCTION

Since the end of World War II, cxpropriations and nation-alizations of U.S. private foreign investments have increaseddramatically because of the (1) adoption of communism or

socialism as the basis of some national governments, especiallyin Eastern Europe, and (2) desires of developing nationsto acquire a firmer grip on their own economic destinies.

In those countries which adopted communism or socialism,government takeover of all foreign and domestic private in-vestment was virtually certain since, under such systems, thestate owns all industry. In non-Communist developing nations,nationalizations and expropriations were usually prompted byone or more of the following factors.

1. The emergence of a nationalistic spirit, especiallyin nations which had attained their independencefrom developed countries since the end of WorldWar II.

2. The increased awareness that certain natural re-sources within their borders have become scarce andmore critical to the needs of the world, particularlyto the major industrialized powers.

3. Their strong resentment toward the economic exploi-tation and political as well as economic dominationof their countries, as they perceive it, by powerfulmultinational foreign investors.

4. Their determination to obtain a larger share of thebenefits derived from the development of theirresources, which, they contend, they were not receiv-ing when the multinationals operated withoutrestriction.

There is no formal procedure for compiling a completelist of expropriations and nationalizations of propertiesformerly owned by U.S. nationals. However, from a series of

reports prepared by the State Department, we were able tomake the following tabulation of the known major disputesinvolving U.S. direct private investment by industry andgeographic area that occurred between January 1961 and theend of January 1975.

Geographic Area

Latin MiddleIndustry America Africa East Asia Total Percent

Petroleum-related 26 23 28 7 84 32Mining and

processing 35 9 0 0 44 17Banking and

insurance 6 17 5 10 38 15Public utilities 13 0 1 0 14 5Manufacturing 20 5 0 10 35 14Other 18 21 3 3 45 17

Total 118 75 37 30 260

Percent 45 29 14 12 100

As the tabulation shows, the highest proportion of in-vestment disputes have occurred in Latin America, and theinvestments most susceptible to takeover b host governmentsare in resource extraction and related industries. Thiscould be explained in part by the popular belief in manycountries that thei valuable natural resources have beenexploited more for the benefit of foreign investors than fortheir own people.

It has been virtually impossible to obtain meaningful,complete figures on the value of expropriated U.S. privateforeign investments. Information on such values is readilyavailable only for the most controversial cases, those in-sured by the Overseas Private Investment Corporation, andthose about which Embassy officials have personal knowledge.Also, most expropriation cases in non-Communist countries aresettled without dir=ct extensive U.S. Government involvement.

Takeovers of private foreign investments by host-countrygovernments can occur through:

--Formal expropriation or nationalization, seizure ofproperty with or without compensation.

-- Intervention, government assumption of managerial con-trol, without ultimate determination of legal owner-ship, which may or may not lead to expropriation.

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-- Requ3.sition, similar to intervention, but iplyingtempo.rary government control for a specific publicpurpose.

--Coerced sale, government effort to induce owners tosell all or part of their properties to a governmententityl or to private citizens of the host country,sometimes at lower than market value.

--Contract/concession renegotiation, government effortto induce owners to accede to substantial changes incontracts or concession agreements, with or withoutcompensation.

These classifications are not legal definitions in thestrict sense, since such concepts as interven .on and requi-sition vary considerably from country to coun_.y and have nogenerally accented meaning under international law.

As shown below, in Asia, Africa, and the Middle East, 78percent of the takeovers were accomplished through formalnationalization and expropriation and only 22 percent throughthe other methods. In Latin America, however, only 29 per-cent of-the takeovers wre accomplished hrough formal ex-propriation and nationalization and 71 percent through theither methods.

National- Contractization Interven- renegoti-and tion or ation orexpropri- requisi- coercedation tion sale Other Total

AfricaNumber 58 1 13 3 75Percent 77 1 17 4 10C

AsiaNumber 29 0 1 0 30Percent 97 - 3 - 100

Middle EastNumber 24 2 11 0 37Percent 65 _5 30 - 100

SubtotalsNumber 111 3 25 3 142Percent 78 2 18 2 100

Latin AmericaNumber 34 30 40 14 118Percent 29 _25 34 12 100

TotalsNumber 145 33 65 17 260Percent 56 13 25 6 100

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The isproportionate number of takeovers by other methodsin Latin America is attributed mainly to the Chilean Govern-ment's frequent use of these methods as a means of implement-ing its socialization program.

PURPOSE OF STUDY

This study was made to find out the magnitude of theforeign investment expropriation/nationalization problem, de-ternine possible solutions, and identify obstacles that mightbe impeding solutions. Once the magnitude of the problem hadbeen determined, we wanted to find out what efforts theGovernment had been making, both unilaterally and in concertwith other nations, to curb the incidence of expropriationsand nationalizations and to ensure tat investors would beadequately compensated.

SCOPE OF STUDY

We examined State Department records of investment dis-putes that occurred over a 14-year period and prejAred appro-priate analyses of the data in those records. We reviewedother State Department records concerning Govermnaent policieson and efforts to cope with the expropriation problem.

U.S. representatives to the Organization for EconomicCooperation and Development and the World Bank were contactedto ascertain the policies of those international organiza-tions toward expropriation and efforts they make to cope withit.

Various laws enacted to impose sanctions againstcountries which expropriate U.S. private investments but makeno effort to compensate formaer owners were reviewed, togetherwith administering agencies' records, to ascertain the extentto which the sanctions were either imposed or waived.

We examined (1) U.S. friendship, commerce, and naviga-tion treaties with 43 countries and dependencies, (2) morethan 100 bilateral agreements for instituting the U.S. in-vestment insurance program and the legislative history ofthe statute pertaining to such agreements, and (3) the GermanFederal Republic's investment protection treaties with 10African countries.

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CHAPTER 2

GOVERNMENT POLICY ON EXPROPRIATIONS OF

PRIVATE FOREIGN IVESTMENTS

The United States traditionally has recognized therights of sovereign states to nationalize or expropriateforeign-owned property, provided such takeovers do not vio-late specific host country international commitments andconform to standards of international law which requirethat the takeovers be for a public purpose, are not discrim-inatory, and are accompanied by jst compensation.

Since World War I, many newly independent staces,aspirLng to achieve economic as well as political independ-ence, have looked upon nationalization and/or epropriationas an attractive device for realizing those aims. TheUnited States has held the position that, regardless of themotivation, inadequately compensated expropriations are notlegal and tend to impede the attainment of those aims.

The problem of inadequately compensated nationalizationsand expropriations received top-level attention when thePresident of the United States, in a policy statement datedJanuary 19, 1972, expressed the administration's generalapproach to the role of private investment in developingcountries, particularly to the problem of expropriationswithout adequate compensation.

It was announced that, to carry out U.S. expropriationpolicy effectively, each potential case of expropriationwould be followed closely and that a special interagencygroup would be established under the Council on InternationalEconomic Policy (CIEP) to do so and to recommend appropriatecourses of action.

The group was established in March 1972, comprisingrepresentation from State, Treasury, Defense, and Commerce.Participation by personnel of the National Security Council,CIEP, and other agencies, as appropriate, was also providedfor. The group's functions are to:

-- Continually review all potential anA active expropri-ation cases and compile relevant facts and analyses,including information concerning economic benefitssubject to potential U.S. action.

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-- Ascertain in each case, for purpose of policy imple-mentation, whether an expropriation has occurred and,if so, whether reasonable provision has bei.. made forprompt, adequate, and effective cmpensation.

-- Recommend courses of action for the U.S. Government,consistent with the President's policy statement ofJanuary 19, 1972.

-- Coordinate policy implementation.

The group meets about every 6 weeks at the chairman'sinitiative or at the request of any member. Meetings arealso held more frequently as necessary, as they were in late!975 d"ing the intensive review of country eligibilityfor generalized preferences under the expropriation andarbitration provisions of the Trade Act of 1974.

Before each meeting an annotated agenda from the chair-man is distributed to the participants and to the ExecutiveDirector of CIEP. The agenda normally reports on develop-ments concerning expropriatory cases in about 15 to 25countries. Although only about half of these are reportedin writing, all cases are intended to be discussed at themeeting. Representatives from the State Department, usuallyincluding officials of the concerned regional bureau andthe Legal Adviser's Office, provide an oral briefing on theparticular case or issue, which is followed by questions anddiscussion.

The group's findings and recommendations--for example,whether (1) an expropriation has occurred, (2) more informa-tion about an expropriatory situation should be sought,(3) a demarche to a foreign government should be prepared,or (4) withholding of economic benefits should be recom-mended--are arrived at by consensus. Interagency disaaree-ments tend to be resolved within the group by direct discus-sions among those with competing viewpoints. Occasionallythe full group is reconvened at a higher level to resolvedifferences, as on the recent issue of Argentina's eligibil-ity for generalized preferences under the Trade Act.

After each meeting, the chairman circulates a summaryreport to the membership, noting actions to be taken duringthe coming weeks and differences, if any, that arose amongthe representatives of the member agencies.

When an investment dispute develops, the U.S. Governmenttries to maintain a low profile by keeping the involved firmout in front during negotiations with the host government.

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Many companies have successfully resolved investment dis-putes through direct negotiations with host governmentsand through local administrative and judicial channelswithout U.S. Government involvement. Some disputes havebeen referred to arbitral bodies such as the InternationalCenter for Settlement of Investment Disputes, a World Bankaffiliate. None of the five disputes referred to the Centerduring its 10-year operating history has been rsolvedthrough Center arbitration.

Overall, State believes that routine, significant, anddirect U.S. Government involvement in the merits of an in-vestment dispute would have the following disadvantages.

--The interests of foreign investors could be dispropor-tionately emphasized, but not necessarily furthered,at the expense of overall national interests.

--Flexibility in dealing with such disputes could benullified by direct involver-,It.

-- Involvement could dilute what leverage the UnitedStates might have toward deterring expropriation orencouraging compensation and thus adversely affectthe investor's interests.

--Involvement could result in governmental confrontation,especially in Latin America where the Calvo Doctrine 1/is adhered to, thus resulting in undesirable politici-zation of the dispute.

Nevertheless, the U.S. Government does become activelyinvolved and seeks to keep fully and currently informed inorder to exercise its "good offices" role in the settlementof disputes. (See app. V.) These activities range from en-couraging the parties to negotiate a mutually satisfactorysettlement to extensive involvement on the merits of a dis-pute when an active mediating effort appears warranted.

1/In the context of expropriations and investment disputes,the Calvo Doctrine asserts that aliens are entitled only tonational treatment; i.e., that there is no internationalstandard applicable to the conduct of the host country, andthat therefore aliens are not entitled to the protection oftheir home governments under any such claimed standard.Their only legitimate procedural recourse is through host-country administrative and judicial processes.

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Examples of this latter approach include the Greene m1issio.in the early 1970s to help settle investment disputes afterthe Peruvian Government expropriated some major U.S. privateinvestments. Also, in 1975 and 1976, U.S. Government repre-sentatives were intensively involved in a dispute concerningthe expropriation of tile arcona Mining Company by Peru.Both disputes were settled, apparently satisfactor£ly, underterms which included an intergovernmental agreement.

State also considers that dic: U.S. Government involve-ment would be appropriate undel c _n circumstances,such as:

1. When one or more investment disputes have 30 impairedrelations with a country that direct government-to-governmentnegotiations are needed to "clean tne slate" and provide abasis for establishing a new constructive relationship. TheState Department has formally espoused some claims of U.S.nationals whose property was seized. Espousal is a govern-ment's formal adoption of the international legal claim of anational, whereupon the dispute Pscomes the concern of thegovernments involved. A claim would not be espoused, however,unless all available legal and administrative remedies hadbeen exhausted and resulted in a clear denial of justice.

2. When U.S. Government and investor interests may notfully coincide. For example, when the U.S. investor in anoligopolistic industry is in a dispute with the governmentof a developing country which itself is trying to exerciseeconomic power.

EXPROPRIATION LEGISLATION

Since the end of World War II, the Congress has enactednumerous laws to impose sanctions against countries whichtake over properties in which U.S. citizens hold 50 percentor more interest but which do not take reasonable steps tocompensate the former owners.

Foreign Assistance Ac of 1961

Section 620 (e) (1) (Hckenlooper amendment) of the For-eign Assistance Act of 1961, as amended (22 U.S.C. 2370 (e)),requires the President to suspend assistance to the governmentof any country which has (1) nationalized, expropriated, orseized ownership or control of property owned by any U.S. citi-zen or by any corporation, partnership, or association at least50 percent beneficially owned by U.S. citizens, (2) repudiated or

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nullified existing contracts or agreements with any citizenor business at least 50 percent beneficially owned by U.S.citizens, or (3) imposed or enforced discriminatory taxes orother exactions or restrictive maintenance or operationalconditions or take other actions which are in effect nation-alizations, expropriations, or seizures and which does not,within a reasonable period, take appropriate steps to makeprompt, adequate, and effective compensation.

Since its enactment in 1962, the Hickenlooper amendmenthas been forn.ally Invoked only once, against Ceylon (now SriLanka) in February 1963. Bilateral aid was suspended untilJuly 1965, when it was determined that Ceylon had fulfilledits obligation to compensate nationalized U.S. oil companies.

According to one Assistant Secretary of State, aid toother countries had been held in abeyance on several otheroccasions after expropriations had occurred, pending clarifi-cation of the positions and intentions of those involved inthe disputes. For example, the amendment was not invokedfollowing Peru's expropriation in October 1968 of theInternational Petroleum Company, a subsidiary of Standard OilCompany of New Jersey. The executive branch justified notinvoking the amendment on the basis that efforts toward asettlement were progressing satisfactorily. During thatperiod, aid to Peru was "carefully considered" and onlyemergency relief loans were approved to relieve the effectsof the devastating earthquake of May 31, 1970. The case wassettled in February 1974.

Multilateral development bank legislation

The United States may withhold its support of loans beingconsidered by the three multilateral development banks ofwhich it is a member. On March 10, 1972, Public Laws 92-245(for the Asian Development Bank), 92-246 (for the Inter-American Development Bank), and 92-247 (for the InternationalBank for Reconstruction and Development (World Bank) and theInternational Development Association) were approved. Thepertinent section (Gonzales amendment) of each of the threeacts directs the President to instruct the U.S. ExecutiveDirector of each institution to vote against any loan orother use of unds of the Bank and the Association for thebenefit of any country which has:

"(1) nationalized or expropriated or seized ownership orcontrol of property owned by any United States citizenor by any corporation, partnership, or association notless than 50 percentum of which is beneficially ownedby United States citizens;

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"(2) taken steps to repudiate or nullify existing con-tracts or agreements with any United States citizen orany corporation, partnership, or association not lessthan 50 percentum of which is beneficially owned byUnited States citizens; or

"(3) imposed or enforced discriminatory taxes or otherexactions, or restrictive maintenance or operationalconditions, or has taken other actions, which have theeffect of nationalizing, expropriating, or otherwiseseizing ownership or control of property so owned;

"unless the President determines that (A) an arrangementfor prompt, adequate and effective compensation hasbeen made, (B) the parties have submitted the dispute toarbitration under the rules of the Convention for theSettlement of Investment Disputes, or (C) good faithnegotiations are in progress aimed at providing prompt,adeauate, and effective compensation under the applicableprinciples of international law."

Because of usatisfactory progress in settling U.S.expropriation disputes, U.S. representatives to the financialinstitutions have six times abstained from voting and twicevoted against loans to expropriating countries. Also, U.S.-representatives abstained twice when non-U.S. private invest-ments were involved. Four of the abstentions took placebefore the Gonzales amendment became law on March 10, 1972.

In each case the loan was approved despite the abstentionor negative vote of the United states. The table below showsthe abstentions and the negative votes.

Percent ofAmount U.S. voteInstitution Date Borrower (millions) Project Vote power

World Bank June 1971 a/Guyana $ 5.4 Sea defense Abstain 24.0June 1971 a/Bolivia 23.25 Gas pipeline Abstain 24.0June 1972 - Iraq 12.9 Education No 23.0Jan. 1973 Iraq 40.0 Irrigation Abstain 23.0Nov. 1973 Peru 24.0 Education Abstain 23.0Dec. 1976 Congo 8.0 Education No 23.5

InternationalDevelopmentAssociation May 1973 Syria 15.0 Water supply Abstain 26.0

Inter-AmericanDevelopmentBank Nov. 1969 Peru 9.0 Electric pwer Abstain 41.9

June 1971 Bolivia 19.0 Gas pipeline Abstain 44.3Apr. 1973 Pei 6.0 Mining Abstain 37.9

!/Non-U. S. investments.

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Fishermen's protective acts

Public Law 83-680, August 27, 1954 (68 Stat. 883), pro-vided for reimbursing owners of U.S. vessels for ines paidto foreign governments to secure the prompt release ofseized vessels and crews.

The Fishermen's Protective Act of 967, as amended(22 U.S.C. 1975), requires the Secretary of State to transferfrom the foreign assistance funds programed for any country--which seizes a U.S. vessel on the basis of rights or claimsin territorial waters or the high seas which are not recognizedby the United States--to the Fishermen's Protective Fund anamount equal to any unpaid U.S. claims against such countryfor amounts reimbursed by the United States to the owners ofseized vessels who have paid fines, license fees, registrationfees and/or other direct chargee to the seizing country. Therequirement is waived if the President certifies to the Con-gress that it is in the national interest not to withholdsuch foreign assistance funds from the seizing country.

The State Department has information concerning theseizures of 287 vessels by foreign governments in territorialwaters not recognized by the United States since passage ofthe Fishermen's Provective Act in 1954.

Number ofCountry vessels sized

Colombia 2E1l Salvador 4Ecuador 113Honduras 11Mexico 68Nicaragua 25Panama 4Peru 60

Other vessel seizures may not have been reported to theDepar m~Ient.

State has certified, and Treasury has paid, 204 vesselowner claims for more than $6.3 million.

11

No claims are pending against countries that seized U.S.fishing vessels, and no amounts have been received from thosecountrie s:.

The governments of Peru and Ecuador were notified, pur-suant to the Fishermen's Protective Act, on three separateoccasions that the U.S. Treasury had reimbursed owners ofvessels seized by them. In each instance it was determinedthat a transfer of foreign assistance funds was not in thenational interest.

Foreign Military Sales Act

Section 3(b) of the Foreign Military Sales Act, asamended (22 U.S.C. 2753 (b) (Supp. III 1973)), prohibitssales, grants or extensions of credits, or guarantees to anycountry for 1 year after such country seizes, takes custodyof, or fines an American fishing vessel for engaging in fish-ing more than 12 miles from its coast.

Military sales to Peru and Ecuador were stopped in thespring of 1969 but resumed in Auiust of the same year pursu-ant to assurances obtained during the four-power fisheriesconference convened that month.

In January 1971, sales to Ecuador were suspended againfor 3 years, after which the President determined that itwas important to U.S. security to lift the suspension.Ecuador has not seized any U.S. tuna vessels since February1975.

Sales to Peru were suspended for a year beginning onMarch 30, 1971. The suspension was not fcrmally announced,but military sales were kept "under eview." Sales wereagain suspended in December 1972 but lifted in May 1973 whenthe President determined that the national security requiredit. Peru has not seized any U.S. tuna vessels since January1973.

Trade Act of 1974

Section 502(b) (4) of the Trade Act of 1974 (Public Law93-618) excludes from the definition of a beneficiarydeveloping country, for the purpose of determining eligibilityfor trade preferences, any country which has taken nation-alization or expropriatory measures, such as those enumeratedin the Foreign Assistance Act of 1961, and has not takenreasonable steps to compensate the former owners.

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When countries eligible for trade preferences weredesignated i Executive Order 11844 published on March 26,1975, Somalia, Uganda, and the People's Democratic Republicof Yemen were not listed because they had not made good faithefforts to negotiate settlements with former owners ofexpropriated or nationalized investments. Subseauently,Somalia and Uganda did make sincere efforts to resolve invest-ment disputes; Somalia then was listed among the eligibles,br.c Uganda has not yet been listed. The People's DemocraticRepublic of Yemen is the only other country presently deniedeligibility for trade preferences.

Sugar Act of 1948

Amendments to the Sugar Act of 1948 (Public Law 80-338)required the President to suspend the auota of any sugar-exporting country which nationalizes, expropriates, or seizesprivate property owned or controlled by U.S. citizens,corporations, partnerships, or associations and does not takeappropriate steps to compensate the former owners. The actof October 14, 1971 (Public Law 927138), further amendedthe Sugar Act by (1) making the Presidential action dis-cretionary instead of mandatory, (2) permitting suspensionof part, as well as all, of an expropriating country's quota,and (3) authorizing the President, either in addition to anysuspension or as an alternative thereto, to levy a duty ofnot more than $20 a ton against any such country.

No sanctions were ever imposed under either the earliermandatory provisions or under the discretionary amendmentof 1971, and the Sugar Act expired on December 31, 1974.

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CHAPTER 3

OTHER EFFORTS TO PROTECT INVESTMENTS AND

COPE WITH EXPROPRIATIONS

Various multilateral and U.S. unilateral efforts toprotect against expropriation mnd nationalization have beenand are being made to encourage prospective investors to'risk their capital in eveloping countries. A number ofthese efforts are discussed in the following sections.

INTERNATIONAL INVESTMENT INSURANCE AGENCY

Proposals for the establishment of a multilateral in-vestment insurance scheme have been considered for some time.The World Bank made an initial survey in 1961 at the requestof the Organization for Economic Cooperation and Development(OECD). 1/ In June 1965, OECD prepared a report which servedas the basis for a draft set of "Articles of Agreement ofthe International Investment Insurance Agency" (IIIA) whichwere prepared by the World Bank in 1966. A second draft ofthe articles was prepared by the Bank staff in 1968.

Discussions of the second draft left a number of majorissues nresolved, and in 1972 a new draft was distributedto the Bank's executive directors. The directors concludedthat unless enough developed and undeveloped countries ex-pressed positive interest, the Bank would do no further Fcrkon the proposal.

The issues which led to failure of the negotiationsfor establishment of the IIIA are described briefly below.

Link with World Bank

The World Bnk's executive directors could not agree onwhether the IIJA articles should link the Bank and the IIIAthrough common membership, representation on the IIIA'splenary body, chairmanship of the IIIA's board of directors,

1/Members are Australia, Austria, Belgium, Canada, Denmark,Finland, France, the Federal Republic of Germany, Greece,Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands,New Zealand, Norway, Portugal, Spain. Sweden, Switzerland,Turkey, the United Kingdom, and the United States.

14

or through staff. Some regarded the link as essential forreasons of convenience and efficiency and to lend the Bank'sprestige to the new agency. Others thought that a linkwas not essential, at least initially but that, since sucha link might become desirable, the articlef should be neutralon this score.

Voting rights

It was agreed that the agency's capital-exporting andcapital-importing countries, as separate groups, should berepresented on the agency's board. However, il the electionof directors, views were divided as to whether each countrywithin each group should have one vote or whether votesshould be weighted and on what basis and whether votingarrangements for both groups should be the same.

The distribution of voting rights in the beard ofdirectors involved the issues of how voting power was to bedistributed between capital-exporting and capital-importingcountries and whether and how to weight the votes of direc-tors.

Financial participation bydeveloping countries

The issue was whether and to what extent developing-country members should participate in the expernses anlobligations of the IIIA. Representatives of some developingcountries were opposed to any financial participation bydeveloping countries.

Subrogation

Some representatives objected to any provision for sub-rogation on the grounds that it would lead to a confronta-tion between the agency and a member country.

Arbitration

The representatives of some less developed countriesobjected to the provision for binding international arbi-tration on the grounds that it was inconsistent with theconcept of sovereignty as understood in their countries andthat it increased the possibility of a confrontation betweena host country and the international community in the personof the dgency.

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The principal objectors to subrogation and arbitrationunder the proposed multilateral insurance scheme were cer-tain Latin American countries. (See ch. 6.)

U.S. support

The United States has generally favored establishmentof the IIIA. In its July 1971 report to the Pres-ident, theCommission on International Trade and Investment Policyfavored U.S. membership in an international insuranceagency such as the proposed IIIA. The Commission thoughtthat payments under the OPIC investment insurance programwere virtually guaranteed; therefore investors and expropri-ating host countries would have little incentive to negoti-ate and, as a result, the U.S. Government, rather than theinvestors, would more likely become a principal participantin 'restmsnt disputes.

Thne view would not necessarily hold, however, if theexpropriated investment's replacement value had increasedas a result of inflation over the years and if the enter-prise had been and was likely to continue to be profitable.The investor, in such case, would have a strong incentiveto negotiate with the host government for more compensationthan he would receive under his OPIC insurance contract.

OPIC atively encourages its insured investors andforeign governments to esolve disputes to avoid expropria-tions, but if they occur, it helps the investor obtainacceptable compensation from the host government.

Also, under OPIC's insurance contract, the expropria-tory action must continue for at least a year as a conditionof recovely, thereby affording the investor ample opportunityto ,ty to negotiate a settlement.

In the policy statement on economic assistance toand investment security in developing nations, the Presidenton January 19, 1972, called for early establishment of theIIIA.

In a speech delivered on behalf of the Secretary ofState on September 1, 1975, to the seventh special sessionof the U.N. General Assembly, the U.S. Permanent Represen-tative stated that insurance for foreign private investorsshould be multilateralized and should include financialparticipation by developing countries to reflect the mutual

16

stake in encouraging foreign investment in the service ofdevelopment.

The State Department requested comments on the Presi-dent's January 19 statement from the governments of otherindustrialized countries. Our review of the commentsreceived from some of these countries indicates that,although they generally favored establishment of an IIIA,their own national interests precluded them from joiningin any unified effort that would appear to confront thedeveloping world, on which they depend for raw materialsand as markets for their exports.

Conclusions

We believe that the proposed IIIA, in large partbecause of its international character, could effectivelydeter some expropriations and could precipitate prompt,adequate, and effective compensation when expropriationsdo occur. Although numerous obstacles presently preventits establishment, we believe the United States shouldcontinue to work toward its creation. However, the UnitedStates should also strive to devise other measures to pro-tect the interests of its private foreign investors.

INTERNATIONAL RESOURCES BANK

In an address before the fourth ministerial meeting ofthe U.N. Conference on Trade and Development at Nairobi,Kenya, on May 6 1976, the Secretary of State proposed theestablishment of an international resources bank. Thebank's objective would be to facilitate private investmentin resource development in developing countries where suchventures are more economically justified but where theunfavorable investment climate discourages private invest-ment.

The bank's principal function would be to guaranteeinvestments against non-commercial risks specified in indi-vidual trilateral contracts (between the investor, the hostcountry, and the bank) within general guidelines whichwould be established.

In response to a request from the Secretary of theTreasury, the World Bank has agreed to study and reporton the idea of such a bank.

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EXPANDING CAPITAL BASE OFINTERNATIONAL FINANCE CORPORATION

In May 1976, the International Finance Corporation'sboard of directors recommended that the board of governorspropose an increase in the Corporation's authorizedcapital from $110 million to $50 million. This is intendedto overcome a continuing shortage of 'nvestment capitalwhich is inhibiting the Corporation's ability to participatewith private investment in sound, development-oriented proj-ects.

In February 1976 the dministration submitted legisla-tion which would have authorized the U.S. Governor in theCorporation to vote for increasing the capital base andauthorized the proposed U.S. subscription to the increase inthe Corporation's capital stock.

SPECIAL U.S. REPRESENTATIVEFOR OVERSEAS INVESTMENT

In February 1975 the Treasury Department transmittedto the State Department a proposal that the Government playa more active role in investment disputes by establishinga special representative whose principal mission, as arepresentative of the Secretary of the Treasury, would beto prevent expropriations and exprcpriatory actions by:

-- Creating an office to provide more centralized andhigh-level leadership and coordination to improvethe existing early warning system.

--Encouraging a framework for the negotiatedsettlement of investment disputes which wouldminimize confrontation and mediate competinginterests in an orderly fashion.

--Establishing an independent body to provide theGovernment with relevant facts.

--Creating a framework in which the Government couldexpress its views on the merits of competingclaims.

--Supporting U.S. companies in negotiations, whereappropriate.

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The proposal included also the establishment of anindependent fact-finding commission on investment disputeswhich, on request of either the expropriated company or thespecial representative, would try to make an independentjudgment based on the facts underlying competing caims inan investment dispute. The commission would have statutorysubpoena powers and access to the records of a parent com-pany and, where local law allowed, to those of the foreignsubsidiary.

The proposal was evaluated by the interagency staffcoordinating group on expropriations and was opposed bythe representatives of the other departments and agenciesin the group on the grounds that insufficient support hadbeen presented to warrant a recommendation for approval.Concern was expressed that it would result in a lessflexible and balanced expropriation policy without increas-ing its effectiveness.

In August 1975, meetings were held with 35 executivesof major U.S. multinational firms to obtain their viewson the role the Government should play in investment dis-putes involving foreign subsidries of U.S.-based parentcompanies. A draft report on tnat study, prepared for CIEP,stated that

--most of the responding executives opposed thecreation of an office such as the proposed specialrepresentative; 66 percent believed the Governmentshould play an indirect rather than a directlyinterventionist role;

-- 60 percent believed the State Department shouldtakE the initiative and the responsibility forrepresenting the Government in private businessinterests in foreign countries;

-- only 10 percent felt that an agency other thanState should do so.

Conclusions

We believe that a need for the proposed permanentspecial representative for overseas investment and the com-mission on investment disputes remains to be demonstrated.It appears that the functions of the existing interagencystaff coordinating group largely parallel some of the func-tions of the proposed new offices with substantially less

19

visible U.S. Government involvement, a condition preferredby the business community, which has the most direct andprincipal interest in investment disputes.

We believe that designation of a special representativemight be desirable on an ad hoc basis, when the implicationsof an actual or impending nationalization or expropriationcould significantly affect the overall interests of theUnited States. The resolution of the disputes with Peru,discussed on pages 7 and 8, illustrates the successful employ-ment of special representatives on an ad hoc basis.

JUDICIAL REMEDIES CONVENTION

The United States has revived its efforts to establisha judicial remedies convention, under which former ownersof expropriated or nationalized investments would be per-mitted to sue in the courts of third-party countries toobtain control of expropriated or nationalized propertiesor products derived therefrom that had been shipped fromthe expropriating or nationalizing country. A previouseffort made in 1972 ailed due to British and German objec-tions.

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CHAPTER 4

CODES OF CONDUCT FOR MULTINATIONAL CORPORATIONS

Various private and intergovernmental attempts havebeen made over the years to develop international codes ofbusiness conduct. In June 1976, the council of the Organi-zation for Economic Cooperation and Development adopted aDeclaration on International Investment and MultinationalEnterprise which included guidelines encouraging multi-national enterprises to:

--Consider host-country general policy objectives,aims, and priorities for economic and socialprogress, industrial and regional development,environmental protection, employment, and tech-nological advancement and technology transfer.

--Provide host-country authorities, on rec-.est,with information relevant to their activities,subject to legitimate requirements of businessconfidentiality.

--Cooperate closely with local community and businessinterests.

--:'ree their foreign subsidiaries to develop theiractivities and to exploit their competitive ad-vantages in foreign and domestic markets, consis-tent with the needs of specialization and soundcommercial practice.

--Avoid discrimination in filling responsible positionsin the foreign enterprise.

--Refrain from paying bribes or other improper bene-fits to public officials or employees and, unlesslegally permissible, from contributing to politicalcandidates or parties or other political organiza-tions.

--Abstain from any improper involvement in localpolitical activities.

Other detailed guidelines pertain to (1) the disclosureof operating, financial, and related information, (2) compe-tition, (3) financing, (4) taxation, (5) employment andindustrial relations, and (6) science and technology.

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The guidelines are voluntary and are not legallyenforceable. They apply only to foreign investments madewithin the territories of the OECD member countries andare not for implementation in developing countries.

OECD member countries are generally the world's mostadvanced and industrialized societies and are both capital-exporting and capital-importing. Thus they are acquaintedwith the problems on both sides of the foreign investmentpicture. About 70 percent of total U.S. direct privateforeign investment at yearend 1975 was in OECD membercountries. The OECD guidelines probably will help toresolve some of the present problems between investors andOECD host countries.

The most contentious private foreign investment prob-lems exist in the developing countries where privateforeign investment is welcomed as necessary for economicdevelopment but is often also looked upon with suspicionand resentment and frequently nationalized and/or expropri-ated as these countries demonstrate their economic national-ism.

Generally, developing host countries want foreign com-panies to ensure that their investment plans will (1) har-monize with host-government economic and development plans,(2) permit advancement of local nationals to policymakingmanagerial and technological positions, (3) arrange formore local ownership of the enterprises, (4).help balance-of-payments positions through increased production forexport by the foreign enterprises, and (5) use locallyproduced materials and supplies to the extent practicable.

Multinational corporations, on the other hand, wouldlike (1) freedom from harassment, discriminatory taxation,and other forms of "creeping" expropriation, (2) assurancesthat concessions and other operating rights would notbe arbitrarily revoked, (3) unrestricted rights to transferprofits, (4) full or majority ownership and control of theenterprises, and (5) a stable investment climate and reason-able assurance that investment disputes will be resolvedfairly.

CONCLUSIONS

The OECD's recently adopted code of conduct might pro-vide the broad principles under which foreign investmentsare to be conducted. However, we believe that it will not

22

of itself generate the healthy climate over the long runthat reasonably prudent prospective investors would requireas a precondition o risking substantial resources inforeign ventures. OtiLrz elements essential to attractforeign investment, especially to developing countries in-clude:

-- Reasonable assurances of political stability in thepotential host country over the long run.

-- An adequately protective bilateral treaty betweenthe host country and the prospective investor'sh,tne government. (See ch. 7.)

--Complete understanding between the host countryand the prospective investor on a myriad of issues;the more that issues are identified and agreedupon, the better the chances will be of establishinga climate in which an investment could be made andcontinued without harassment or disputes. Forexample, agreement on possible adverse effects ofthe investment on the environment and responsibilityfor correction, employment of host-country nationalsin higher level technical and managerial positions,use of host-country products, and host-countryrequirements for partial divestiture of ownershipto local nationals.

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CHAPTER 5

WORLD BANK POLICIES ON EXPROPRIATIONS

According to its stated policy on expropriations theWorld Bank and its affiliates maintain a continuing interestin disputes between a member country or one of its agenciesand nationals and firms of another member country whensuch disputes stem from certa'i kinds of international fi-nncial transactions, including compensation to aliens forexpropriated property. Because the Bank's resources arelimited, developing countries also must look to publicinstitutions, the private capital market, and direct privateinvestment to finance their development.

The Bank also relies on the world's capital sources forits own lending funds, and its status could be severelydamaged if it made new loans to countries which do not makereasonable eff, rts to resolve nvestment disputes. Conse-quently, a developing country with disputes outstandingbecause of uncompensated expropriations would have diffi-culty obtaining capital for its planned development projects.

The Bank will not lend to a country which has expropri-ated alien-owned property if it determines that the country'sstance on compensation to the former owners is adverselyaffecting the country's iternational credit standing.

Even though an expropriated alien investor may havebeen adequately compensated through an investment guaranteeor insurance plan, the Bank's position toward the expropriat-ing country might be determined as though compensation hadnot been paid, unless extenuating conditions dictate other-wise.

We did not review the Bank's implementation of itsstated policy.

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CHAPTER 6

BILATERAL AGREEMENTS FOR ESTABLISHING PRIVATE

INVESTMENT INSURANCE PROGRAM ABROAD

When the investment quarantee program was initiatedunder the Economic Cooperation Act of 1948, the Government'sinterests were protected by a statutory requirement thatwhen a cliinl was paid under a guarantee against inconverti-bility of a host-country's currency the insured investor'sholdings of and credits in that currency beceme the propertyof the U.S. Government. (The Act of 1948 insured againstinconvertibility only.)

* The 1949 amendments amplified that requirement byadding "and the United States Government shall be subrogatedto any right, title, claim, or cause of action existing inconnection therewith." The provision was retained by the1950 amendments, which broadened coverage under the programto include expropriation of qualified investments, and bythe Mutual Security Act of 1954, which revamped foreign aidlegislation.

The administering Federal agencies (Economic CooperationAdministration and its successor agencies) interpreted theprovision as requiring bilateral agreements, which institutedthe investment insurance program in host countries, to spe-cifically (1) recognize U.S. ownership and nondiscriminatoryuse of local currency transferred to the U.S. Government uponpayment of convertibility claims, (2) recognize U.S. Govern-menit ownership of property turned over to it and claim towhich it would be subrogated as a result of expropriationclaims paid, (3) agree to direct negotiation and arbitrationof such claims, and (4) agree to most-favored-nation treat-ment for the United States and its nationals in the distri-bution of war damage payments, reparations, etc., concerningproperty turned over in connection with a war risk guarantee.(Coverage of investment losses sustained by reason of warwas authorized by the Mutual Security Act amendments of1956.) Practically all bilateral agreements currently inforce contain these or similar provisions.

However, constitutional and statutory provisions pre-vented some Latin American countries from accepting theseprovisions. For example, some Latin American countriespreclude foreign governmental ownership of real property;consequently, they could not recognize transfers of

25

properties to the U.S. Government. Also, because of theiradherence to the Calvo Doctrine some Latin American countrieswill not agree to subrogation, negotiation, or internationalarbitration of claims.

These obstacles have made it almost impossible for theU.S. Government to execute satisfactory bilateral agreementswith som; Latin American countries. For example, the agree-ment with Chile, entered into force definitively in February1961, provides that the U.S. Government has subrogationrights concerning only the transfer and use of Chilean cur-renc- and credits therein which shall be available for meet-ing .S. administrative expenses; subrogation to physicalor real property comprising a U.S. Government-insured invest-ment is specifically excluded.

In December 1963 the U.S. Secretary of State and theChilean ambassador exchanged notes which constituted anagreement incorporating subrogation and international arbi-tration provisions, subject to approval under Chilean consti-tutional procedures. To date, however, that agreement hasnot been entered into force either provisionally o defini-tively.

The agreement with Argentina is essentially the sameas the one with Chile. The definitively in-force agreementof May 5, 1961, provides for currency transfer and use only;a supplemental agreement which provides for subrogation andinternational arbitration is not in force either provision-ally or definitively.

The agreement with Colombia merely provides that theUnited States and Colombia will consult on any investmentthe United States may guarantee and that it will not guar-antee an investment unless Colombia approves. The agreementcontains no specifics on subrogation, international arbitra-tion, or convertibility of Colombian currency.

The agreement with Venezuela is identical in its sub-stantive provisions to the one with Colombia.

The agreement with Peru covers only guarantees againstinconvertibility of investment receipts and provides for thetransfer to and use by the U.S. Government of Peruvian cur-rencies acquired by the U.S. Government pursuant to suchguarantees. Investments made in Peru are not insured againstlosses from expropriation or from war, insurrection, or re-volution under the U.S. investment insurance program.

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To facilitate insuring of investments in Zatin America,the Foreign Assistance Act of 1961 eliminated the firm re-quirements for (1) transferring to the U.S. Government therights in expropriated investment properties and host-country currencies and (2) subrogation of the U.S. Govern-ment to such rights. Substituted therefor was the moreflexible provision which directed the President to

"make suitable arrangements for protecting theinterests of the United States Government in con-nection with any guaranty issued * * [under theact] including arrangements with respect to theownership, use, and disposition o the currency,credits, assets, or investment on acco.nt of whichpayment under such guaranty is to be made, andany right, title, claim, or cause of action exist-ing in connection therewith."

This relaxatioL of the statute permitted the insuring of pri-vate investments in advance of final agreement with hostcountries on subrogation and property transfer rights if theadministering agency and the Secretary of State determinedthat satisfactory final agreement could be expected withina reasonable period following issuance of such insurance.

From the passage of the Foreign Assistance Act of 1961through about the end of calendar year 1970, a number ofprivate investments in Argentina, Chile, Colombia, Peru,and Venezuela were iared under the relaxed statute. Thefollowing table shows the maximum coverage in force in throsecountries as of December 31, 1976, issued durina thA-_ period.

Number of Inconverti- Expropria- War, insurrec-Country contracts bility tion tion, revolution

Argentina 45 $151,930,081 $73,012,880 $57,573,734Chile 18 E ,,522,125 37,009,740 34,442,834Colombia 40 57,417,413 58,237,738 46,809,793Peru 13 17,289,653 -0- -0-Venezuela 41 34,689,588 34,788,588 30,576,688

Total 157 $316,848,860 $203,048,946 $169,403,049

The Foreign Assistance Act of 1969 created the OverseasPrivate Investment Corporation (OPIC) and transferred the in-vestment insurance program to it. OPIC was directed toconduct its financing operations on a sif-sustaining basis

27

and its insurance operations with due regard to the princi-ples of risk management. These two provisions apparentlygenerated a more cautious approach to the insuring of in-vestments in the five Latin American countries. Since itcommenced operations in January 1971, OPIC has issued noinsurance in Chile, Colombia, or Peru through December 31,1975, and has insured only one investment in Argentina.However, 12 ventures were insured in Venezuela during thesame period.

To minimize the objections of host governments whichrefuse to recognize subrogation of other national governmentsto claims concerning expropriated properties, OPIC has ne-gotiated some agreements under which it, as a separate en-tity, not the U.S. Government, would be subrogated to therights of former owners.

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CHAPTER 7

FRIEDSHIP, COMMERCE, AND NAVIGATION TREATIES

The United States has treaties of friendship, commerce,and navigation (FCN) and similar treaties with 43 countries.The general objective of these treaties is to establish bi-lateral reciprocal bases for protecting the personal secur-ity, rights, and property of nationals of each country whoare residents in the territory of the other. A specificpurpose of such treaties, especially those entered into afterWorld War II, is to establish a climate in which nationalsand companies of either country can make direct investmer- :swithin the territory.of the other without fear of harassment,threats, or other discriminatory actions by host-countrvgovernments. Other provisions are designed to ensure prompt,adequate, and effective compensation in the event an invest-ment is nationalized or expropriated by the host-countrygovernment.

We found, however, that many FCN treaties are outdatedand do not provide adequate protection to the extensive U.S.-owned private investments that are not insured against ex-propriation by OPIC. Also, there are substantial U.S.private foreign investments in many developing countries withwhom the U.S. Government does not have FCN treaties.

TREATIES ENTERED INTO FORCEDURING 19th CENTURY

Treaties with 12 of the 43 countries 1/ were entered intoforce during the 1800s when U.S. private foreign investmentswere negligible ompared with current investments. Probablyas a result of that earlier condition, 8 of the 12 treatiesdo not address the question of reciprocal protection offoreign investments.

1/Argentina MoroccoBolivia ParaguayBrunei SwitzerlandColombia Uni --' KingdomCosta Rica YugoslaviaMalagasy Republic (originally with France)Malta (originally with the United Kingdom)

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The treaties with Argentina, Bolivia, and Columbiaprovide for reciprocal rights of establishment and host-government protection of trading businesses but not ofmanufacturing or resource-related industries. Only thetreaty with Switzerland provides specifically for the re-ciprocal establishment of manufacturing and otItr industriesas well as trading businesses. It is also the nly onethat provides for compensation in the event of an expropri-ation. However, compensation is not ensured as the treatymerely places foreign investors on an equal footing withcitizens of the host couJtry; if host-country citizenswould not be compensated after being expropriated, neitherwould foreign investors.

PRE-WORLD WAR II TREATIES

Treaties with 10 of the 43 countries 1/ we.e etcredinto force during the early part of the 20Th century; 8 ofthe treaties provide for reciprocity of investment freedomand host-country assurances of protection equal to thataccorded national investors. The treaty with Iraq containsno provisions for private foreign investments, and thetreaty with Turkey provides for most-favored-nation treat-ment of investors. Compensation in the event of expropria-ti.on is provided for in seven of the treaties; those withSpain, Turkey, and Iraq coitain no-such provisions.

POST-WORLD WAR II TREATIES

Treaties with the remaining 21 countries 2/ were enteredinto force after World War II, the earlest with NationalistChina in 1948, and the latest with Thailand in 1968.

I/Spain NorwayEsthonia TurkeyLatvia FinlandHonduras LiberiaAustria Iraq

2/Belgium Iran Muscat and OmanChina Ireland The NetherlandsDenmark Israel NicaraguaEthiopia Italy PakistanFrance Japan ThailandGermany Korea Togolese RepublicGreece Luxembourg Vietnam

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Each of these treaties provides for national treatment(see p. 32) and/or most-favored-nation treatment of nation-als and companies of both contracting parties in matterspertaining to:

-- Recognition of their juridical status and right offree access to courts of justice and administrativeagencies.

--Protection nd security of direct and indirectproperty interests.

--Establishment and acquisition of interests incommercial and industrial enterprises.

--Protection in exclusive use of inventions,trademarks, and trade names, consistent withlocal law.

-- Assessment of taxes, fees, and other charges.

The treaties also prohibit takeovers of propertiesof nationals, corporations, and associations of eithercontracting party, except in accordance with due processof law or for a public purpose, and provide that such take-overs be accompanied by just, prompt, and effective compen-sation.

Each treaty also provides for the free transfer, inthe currency of the country of which the recipient is anational, corporation, or association, of returns frominvestments, including profits and dividends, as well asof compensation paid for expropriation or nationalization.

Most of the treaties provide for settling disputesbetween the contracting parties as to the interpretation orapplication of the treaty via diplomatic efforts, and ifnecessary, by submittal to the International Court ofJustice. The treaty with Thailand provides for such sub-mittal to a panel of arbitrators. The treaty with Muscatand Oman does not provide for arbitration of disputes.

ESSENTIALS OF FCN TREATIES

One essential of any FCN treaty is a provision fornational treatment of foreign investments. Such aprovision should be included to ensure that foreign firms

31

of either country operating within the territory of theother are granted treatment not less favorable under compar-able circumstances than that accorded firms of the hostcountry.

State Department officials said that some developingcountries would grant most-favored-nation treatment but notnational treatment to foreign firms because of (1) expresseddesires to favor domestic firms, (2) fears of the power offoreign multinational firms, and (3) beliefs that reciprocalnational treatment by developed countries would be ofonly academic value because their own firlmls don't have thecapital to invest abroad.

State officials told us that they would not accept lessthan national treatment because (1) a national treatmentprovision sets the climate for a secure operating environ-ment and affords better protection against host-countrydiscriminatory actions than would most-favored-nation treat-ment and (2) acceptance of less than national treatmentwould set a bad precedent by undermining future negotiationswith countries that otherwise might be willing to grantnational treatment.

FCN treaties should also provide for adequately compen-sating the foreign owners in case the investment environmentdeteriorates and the venture is nationalized or expropriatedby the host government. These other provisions shouldspecify that:

--Expropriation or nationalization shall not bediscriminatory and shall be only for a publicpurpose, accompanied by rompt, adequate, andeffective compensation.

--Compensation shall amount to the investment'smarket value immediately before the expropria-tion or before the host government's officialannouncement that expropriation would occur,whichever is earlier.

--Disputes between a foreign investor and the hostcountry shall he submitted to international arbi-tration for settlement.

--Disputes between the treaty countries concerninginterpretation or application of the treaty shall

32

be submitted to international arbitration ifdiplomatic setLlement efforts fail.

--Investors shall be granted national treatment

and most-favored-nation treatment in the

transfer of funds between the territories of

the treaty countries and neither country shallimpose exchange restrictions.

The Congress, by implication, recognized the need for

treaties that would adequately protect the interests of U.S.

private foreign investors in developing countries and,

thereby, provide U.S. firms with the needed incentive to

invest in the development of third-world countries.

In section 402 (c) of the Economic Cooperation Act of

1950 (64 Stat. 204), the Congress expressed the view that:

"Technical assistance and capital investment can

make maximum contribution to economic development only

where there is understanding of the mutual advantages

of such assistance and investment and where there

is confidence of fair and reasonable treatment and

due respect for the legitimate interests of the

peoples of the countries to which the assistance is

given and in which the investment is made and of

the countries from which the assistance and invest-

ments are derived. n the case of investment this

involves confidence on the Fart of the people of

the underdeveloped areas that investors will conserve

as well as develop local resources. will bear a fair

share of local taxes and observe local laws, and will

provide adequate wages and working conditions for

local labor. It involves confidence on the part of

investors, throgh intergovernmental agreements or

otherwise, t at they will not be deprived of their

property wthout prot, adequate, and effective

compensation; ithati thwill be given reasonableop ortunity to remit their earnings and withdraw

their capitaI; that they will have reasonable ree-aom to manage, oerate, and control their enter-

prises; that the wi eno ecurity in t- h protection

of their persons and property, iinc ua nlnustrai

andintellectual propert_y, and nondiscriminatorytreatment in taxation and n the conduct ofohelr

business afaiTrs."I ! 'nderCSorlnC supplied.)

3

The above language, which contains several of theessential elements of an adequately protective FCN treaty,is not in the current Foreign Assistance Act of 1961, asamended, which superseded the Economic Cooperation Actof 1948 and the Mutual Security Act of 1954. We believe,howercz, that the congressional view is still valid.

GERMAN FEDERAL REPUBLIC'S TREATIES IN AFRICA

The situation on the African continent exemplifies theneed for an effort to negotiate adequately protective FCNtreaties. Statistics compiled by Commerce's Bureau ofEconomic Analysis show that at yearend 1975, U.S. firmshad investments in at least 790 affiliates and branches in47 developing African countries. These investments hadreported values of about $2.4 billion, excluding investmentsof less than $2 million each. However, the United Stateshas FCN treaties only with Ethiopia, Liberia, the MalagasyRepublic, Morocco, and the Togolese Republic. Only thetreaties with Ethiopia (1953) and the Togolese Republic(1966) provide for adequate protection of foreign invest-inents.

On the other hand, the Federal Republic of Germanyhas enjoyed considerable success in negotiating treatieswith African countries for the protection of its privateforeign investments and as of June 30, 1974, had suchtreaties with 26 African countries. 1/ Egypt, Ethiopia,Ghana, and Kenya had not ratified their treaties as of thatdate. English translations were readily available for 10 ofthe treaties (identified by the letter E in the footnote),and we used them to review and analyze certain essentialprovisions.

1/Cameroon(E) Ivory Coast Sierra Leone (E)

Central African Kenya(E) Sudan (E)Republic Liberia (E) Tanzania (E)

Chad Malagasy Republic Togolese RepublicCongo Mauritius (E) TunisiaEgypt Morocco Uganda (E)Ethiopia Niger ZaireGabon Rwanda Zambia (E)Ghana (E) SenegalGuinea

34

National treatment of foreign investments

Eight of the 10 treaties we analyzed provide essentiallythat neither country shall subject investments owned orcontrolled by nationals or companies of the other countryto conditions less favorable than those it imposes on itsown or third-country nationals or companies.

The treaties with Kenya and Tanzania, however, providethat neither country shall subject nationals or companiesof the other country--concerning ownership, management, use,or enjoyment of their investments--to conditions lessfavorable than it imposes on other similar investments inits territory. In effect, these provisions reserve to thehost countries the right to discriminate among industrialsectors and to impose restrictions and/or requirements thatmight not be imposed on other industries. Examples wouldinclude payment of royalties to the ost government basedon production, such as barrels of oil extracted, tons ofore mined, etc. But so long as such requirements areapplied uniformly and without discrimination as to nation-ality of ownership, the provision could be construed asgranting, in principle, national treatment to all invest-ments. On the other hand, the provision could be used todiscriminate against industries that are totally owned byforeigners.

Expropriation and compensation

Each of the 10 treaties provides that investments by na-tionals and companies of either country shall not be expro-priated, except for a public purpose. An expropriation mustbe accompanied by compensation representing the fair value ofthe investment expropriated. The compensation shall beactually realizable, made without delay, and transferable.

Transfer of returns on investmentand capital

Treaties with 8 of the 10 countries impose no limitson the transferability of returns on investments andcapital. The treaty with Sudan does not allow free trans-fers of inconvertible foreign currency imported by foreigninvestors into the host country. The treaty with Ghana per-mits either country to restrict the free transfer of invest-ment returns and liquidaticn proceeds to the extent requiredby its balance-of-payments position. However, minimum

35

transfers are guaranteed--20 percent annually on liquidationproceeds and 12 percent annually of value of investment onreturns. The treaty also provides that if the allowed trans-fers are not made within 1 year, transfer of the balancesis guaranteed in the following year.

Arbitration of disputes

Each treaty provides for international arbitration ofdisputes concerning its application or interpretation.

TRADE ACT OF 1974

The United States depends almost totally on foreignsources for various materials, some of them critical tothe national security and economy. A principal objectiveof section 102 of the Trade Act of 1974 is to assure theUnited States fair and equitable access to those essentialproducts which either are unavailable or cannot be easilydeveloped domestically. A series of adequately protectiveFCN treaties could encourage investment to develop supplysources for such commodities.

CONCLUSIONS

We believe that the United States will have to make itsown arrangements for protecting U.S. private investments indeveloping countries because:

--Efforts to organize an international investmentinsurance agency appear to be stalled.

--Other capital-exporting countries are not enthu-siastic about joining the United States in anycommon effort against expropriation and nationali-zation of private foreign investments by developingcountries.

-- The OECD's code of conduct, if adopted, would applyonly to investments made among the capital-exportingcountries, not the developing world.

FCN treaties are one type of device that could help toestablish the kind of investment climate needed to induceprivate investcrs to risk their capital in developingcountries.

36

FCN treaties that provide for adequate protection ofprivate foreign investment could result in substantialbenefits to industry, the U.S. Government, and hostcountries.

1. The economic and industrial development of adeveloping country could be hastened by theincreased foreign investment that such atreaty could generate by improving the invest-ment climate.

2. The improved investment climate could persuadesome firms to make investments without OPICexpropriation insurance that otherwise wouldnot have been made unless expropriationinsurance was available. Also, some companiesmight terminate OPIC expropriation insurancecarried before such a treaty was entered into.

3. The possible reductions in OPIC's exposurefor expropriation coverage would reduce theU.S. Government's contingent liability forexpropriation losses.

We are aware that an adequately protective FCN treatydoes not of itself ensure a healthy investment climateeither permanently or for even a relatively long term.The instability and insecurity of the governments of somemore recently formed developing countries might discourageforeign investment because of the threat posed by possibleoverthrows of constitutional governments and the abroga-tion of international agreements by radical successorgovernments.

We believe, however, that such possibilities shouldnot deter the U.S. Government from making the effort toenter into adequately protective FCN treaties with develop-ing countries where investment potential exists. Also,the Government should keep current on events in a hostcountry which miqht affect investment climate. Thus, itwould be in a better positi3n to relay such information toprospective investors who rquest it.

Such activity would be onsistent with the Goveinment'scurrent practice of maintaining a low profile and minimalinvolvement in private investFrent matters. Prospectiveinvestors should make the ultimate judgments about the

37

desirability of the investment climate and whether to makeinvestments.

AGENCY COMMENTS

This report was submitted for comment to the Depart-ments of Commerce, State, and Treasury and to CIEP andOPIC, Each agency offered criticisms intended to lendcompleteness and precision to the report, and practicallyall of the suggestions have been incorporated into thefinal report. (See apps. I to V.) All five agenciesagreed with our recommendation.

RECOMMENDATION

The Secretary of State should initiate a broad-basedeffort to negotiate treaties of friendship, commerce, andnaviagation, emphasizing protection of private foreigninvestments with developing countries where significantpotential for U.S. private investment exists.

38

APPENDIX I APPENDIX I

JAN 2 1977OVESEASPRIVATEINVESTMbENT Mr. J. K. Fasick

CO 1RAKMON DirectorInternational Division

2' itg Se7 N527 General Accounting OfficeVOS' �Ogr DC 2527

TeeC C NsS C 3J9 Washington, D. C. 2054b

Dear Mr. Fasick:

Thank you for affording OPIC an opportunity to comment on the GAO's

draft report entitled "Nationalizations and Expropriations of U. S.

Direct Private Foreign Investment: Problems and Issues."

'Y:ce of e PeJe- '

We would like to preface our specific remarks with several general

observations on the Report. First, we believe that the Report

unfortunately follows a somewhat outdated approach in its examination

of this subject. Its emrhasis on the negotiation of treaties with

developing countries tv provide for the protection of private U. S..

investment does not allow for much attention to the political and

economic factors that have mrde U. S. efforts to negotiate such

treaties so unsuccessful in recent years and which promise even

greater difficulty for future negotiations. The Report does not

display adequate appreciation of the newer and more flexible invest-

ment protection techniques, such as those that OPIC has develped as

well as various investor "self-help" practices. We therefore feel

that the Report should acknowledge that it concentrates on oneapproach to.the problem (i.e., international agreements and organi-zations% and that other approaches, such as OPIC programs, are notexamin. i1t similar detail.

Second, -'F naote that the Report does not address the substantial rolethat OPTI, nas played in seeking prompt, adequate and effective com-pensation in a large number of the non-petroleum expropriation casessince 1961. We would be happy to furnish information on our claimssettlement record. In any event, there now seems to be wide recogni-tion that OPIC is one of the U.S. Government's more effective disputesettlement mechanisms and some mention of our activities in thisfield should be made in Chapter 3. You may want to refer readersto the Comptroller General's July 1973 reuort on "Management ofInvestment Insurance, Loan Guaranties, and Claim Payments by theOverseas Private Investment Corporation."

Third, the Report is not sufficiently critical of shortcomings in therather inadequate fabric that now exists for the protection of U.S.investments. It does not, for example, impart to a reader the WorldBank'a general reluctance to use its considerable influence to urgemoderation inLDC treatment of foreign investors. There appears tobe more optimism than circumstances warrant in the Report's portrayalof prospects for the IIIA and a code of conduct going beyond the OECDto the LDCs.

GAO note: Page number references may not correspondto the pages of this report.

39

APPENDIX I APPENDIX I

Mr. J. K. Fasick

Our more specific cosents are as follows:

1. The paper fails to identify the Congressional Directive underwhich it was preDared and which defines the scope and purpose of theinquiry.

2. The word "international" shoul' be inserted prior to"Icomitamnts" in the first sentence on page 6 in order to make thisan accurate statement.

3. At the top of page 8, the Report i plies that most invest-ment disputes have been resolved by companies throug. administrativeor judicial channels. Although we have not kept a tally on thisquestion, it is our impression that most disputes have been resolvedthrough negotiation rather than formal channels. The first paragraphalso suggests a more significant ICSID role than has been the caseso far. Only five investment disputes have been referred to ICSIDin the Centre's ten-year operating history, and none of these dsputeshas been resolved through ICSID arbitration. We suggest that it bepointed out on page 8 that the requiresment under international lawfor prior exhaustion of local remedies bars official home governmentinvolvement of official standing at the early stages of such disputes,but that investment insurance provides the basis for early and effec-tive OPIC involvement (even if behind the scenes) at the stage ofearly negotiations when these matters can be most effectively resolved.

4. The discussion of U. S. statutory sanctions in Chapter 2lacks critical analysis of the standards pplied in the administra-tion of these statutes, i.a., just what kind of host government conducthas been found di.-ectly or impliedly to be "reasonable" or "adequate."Doesn't the desire to avoid imposing sanctions risk debasing theprinciples enunciated in the statutes?

5. The discussion of the liA concept ignores the basic pointthat national investment insurance schemes have proliferated andgrown since the IIIA proposal was propoted in 1962, presumably basedupon the perceived self-interest of the investing nations involved.This makes it ossible that there may be even less incentive now toaccommodate o the requirements of other coultries (LDC or otherwise)with respect o the organization and operation of a multilateralinsurance scheme. Also, the sentence at the end of the paragraphin the middle of page 19 refers to a 1971 study indicating that OPICinsurance removes an investor's incentive to negotiate. This hasbeen disproved by experience. On this issue, your researchers maywant to refer to conclusions expressed in the House Subcoeittee onForeign Economic Policy's ovember 1973 report on OPIC, specifically

40

APPENDIX I APPENDIX I

Mr. J. K. Fasick

Section VII thereof ("OPIC, Investment Disputes, and the ClaimsSettlement Process"). It should also be pointed out in the discussionon page 19 that the official USG posi:tion has been to favor IIIA asa supplement, not as a replacement for national programs such asOPIC's.

6. Vhe GAO should try to verify its assumption (middle ofpage 21 and elsewhere) that involvement of multilateral financialinstitutions tends to deter nationalization. OPIC's limited claimsexperience with projects involving IFC investments does not supportthis conclusion. We have processed only Lwo claims on projects inwhich IFC had invested, and in neither case did IFC's presence appearto make a difference, It would be helpful to have a statisticalpicture of the incidence of nationalization, forced overnmentalparticipation, ail fundamental revisions of the rules of the gameaffecting Frojects in IFC's portfolio.

7. The Report refers briefly to the IRB on page 20 but doesnot indicate some of the principal objections to t from industry aswell as foreign governments. These might be helpful to the Congres-sional reader who should see and understand the IRB both in termsof concept and feasibility.

8. Chapter 4 should be expanded to include the expectationsfor a code of conduct governing investments in LDCs. The conclusionof code among OECD countries may mislead the reader into believingthat a similar code is feasible with developing countries.

9. The Report seemsa to attribute a more activist role to theWorld Bank in investment disputes than is actually the case. It isour impression that the Bank seldom exerts its efforts in thedirection of urging LDCs to deal fairly with expropriated investors.The Report thus appears to miss t reality of Bank policy.

10. Note at page 32 cites adherence to the Calvo Doctrinefor positions taken by Latin American ountries which were in factbased on a variety of policy and legal considerations.

11. Mention should be made at the top of page 33 of the factthat OPIC negotiated a new full agreement with Chile in early 1976which awaits a USG decision for execution.

12. Line 22 c page 33 implies that the Expropriation Coverageis available in Peru under the OPIC bilateral. The Peruvian bilateralprovides only for Inconvertibility Coverage.

41

APPENDIX I APPEDIX I

Mr. J. K. Fasick

13. Chapter 6's review of OPIC bilateralf is useful but incom-plete and ..- evwhat misleading. It appears to highlight the deficienciesrather than the benefits of th- ilaterals. U.S. rights under thebilaterals should be een in conjunction ::.', not separate from, thetotal body of U.S. rights.

14. On page 34, the last line should be hanged to read "...mostof which was issued during the 1961-70 period." Some of the Peruvianinsurance was issued prior to 1961 and, as noted elsewhere in theReport, coverage was issued in Venezuela as late as 1974.

15 The figures on current level of coverage in the table. onpage 35 are not pertinent and, since they convey "privileged businessinformation" wen broken down by country, should be deleted. Also,the word "rebellion" should be changed to "revolurion."

16. The International Court of Justice is incorrectly referredto at the middle of page 40 as an "arbitral tribunal."

17. The discussion of CN treaties in Chapter 7 ignores (1)the post World War II effort to negotiate FCN treaties with developingcountries, the lack of success, and the reasons therefor; and (2)the more recent evidence from UNCTAD meetings and other multilateralforums that even natio.Ll Lreatmat for foreign investment will beincreasingly difficult to obtain in light of the present third worldattitude toward the rights and responsibilities of multinationals,to ay nothing of the higher standards contemplated by the Reportfor FCX treaties. Despite these difficultiea, OPIC supports thbReport's recommendation that n effort be ade to obtain FCN treatiesin more LDCs.

18. The Report should note on page 44 that the West Germaninvestment insurance progrca is able to insure even in the absence ofan investment guaranty bilateral. The Grman do, however, requirea determination that the rights of foreign investors are adequatelyprotected in the prospective recipient country.

19. Perhaps the Report should point out in Chapter 1 thatdomestic as well as foreign investors have fared badly when populistgovernments came to power. When a governwnt seeks to establishstate control of the "co-anding heights" of an economy, domesticinvestors holding sensitive or large-scale enterprises are frequentlyexpropriated. This has been the case in Chile, Cuba, India, Iraq,Pakistan, Peru and Zambia.

42

APPENDIX I APPENDIX I

Mr. J. K. Fasick

We would very much appreciate n opportunity to discuss this Reportwith your trsearchers if they feel that such discussions might beuseful. Mr, John Gurr of OPIC's Development staff (telephone632-1796) would be happy to make appropriate arrangements.

Sincerely yours,

David Gregg IIIExecutive Vice President

43

APPENDIX II APPENDIX II

EXECUTIVE OFFICE OF THE PRESIDENTCOUNCIL ON INTERNATIONAL ECONOMIC POLICY

WASHINGTON. D. C. 000

January 27, 1977

Dear Mr. Lcwe:

I have been asked to respond to your December 28 lettersto CIEP's Chairman and Executive Director on your proposedreport to Congress entitled "Nationalizations andExpropriations of U.S. Direct Private Foreign Investment:Problents and Issues."

I wish to cou.%end GAO's efforts to review the importantsubject of expropriations and other investment disputes.Having reviewed your draft, my staff and I find it, byand large, a useful factual presentation of th problemsfacing the U.S. Government and American private investorsabroad. I believe your recommendations for broaderutilization of FCN treaties bear looking into as a furthermeans to protect U.S. private foreign investment, and Iunderstand that the State Department also is sympatheticto this approach.

There are a few areas where you may want to consideramending or amplifying your report. First, we believe itwould be useful to describe in somewhat more detail how theU.S. Government assists in helping investors resolvedisputes with foreign governments. Your Chapter 2 des-cxiptlon of U.S. Government activities briefly describesthe framework of USG efforts in this area but mightappropriately delve more into the actual workings ofCIEP's Interagency Group on Expropriations.

Second, we have some difficulty with the wording in themiddle of page 47 of your Conclusions Section. Here, theReport implies that the U..S Government's responsibilitiesin helping to resolve private investor disputes withforeign governments are or should be limited to negotiatingFCN treaties and keeping abreast of events in a host countrywhich might affect the investment climate. While we whole-heartedly agree with the U.S. Government's current low-profile' approach to investment disputes, we believe that

44

APPENDIX II APPENDIX II

your conclusions should indicate -- as does the body ofyour proposed renort -- that the E6Aecutive Branch has alegislative mandate to deny aid and trade benefits toforeiqn governments who do not make prompt and adequatecc apensation to investors whose properties have beenexpropriated.

I trust you will be able to make these corrections forthe purpose of rounding out your useful report, Pleasefeel free to call upon me or my staff if you have anyquestions regarding our comments.

Sincyrely,

Du . MeAssociade Director

Ger.eral Counsel

Mr. Victor L. LoweDirectorGeneral Gcvernment DivisionUnited States General AccountingOffice

Washington, D.C. 20548

45

APPENDIX III APPENDIX III

ep | urTD TATRWS DEPATurrrE OP CoMMRsCE

Wash$nO, D.C. 1(.30* !~j I The -ainhea_ Uewewy 1 Peilay

2 8

Mr. Henry EschwegeDirectorCommunity and Economic

Development DivisionU.S. Genera' ccounting OfficeWashington, .C. 2548

Dear Mr. Eschwege:

We wish to thank you for the opportunity to comment on the GAO draftreport to the Congress on problems and issues in nationalizations andexpropriations of U.S. direct private foreign investment. It is a

comprehensive presentation of U.S. and bilateral efforts to protectprivate foreign investment abroad and to deal with the problem ofexpropriation and nationalization. Of course, all of these takeoversare part of a larger scheme characterized, in short, by the less-developed countries' calling for a revamping of the world economicorde.. In fact, even expropriations and nationalizations are takingmore sophisticated forms such as forced sell-downs to minority ownership,

rapidly rising production and export taxes, and cartelization. Indeed,the whole issue of foreign investmsnt abroad has taken on heated,political overtones in addition to the long-standing economic arguments.

In line with this stance by the LDCs is the undertaking within theUnited Nations organization of the drafting of a code of conduct formultinational corporations. While the process and goal are quitesimilar to the code exercise undertaken by the OECD, the UN effortdiffers in that LDCs and developed countries are both involved. It maybe interesting to note in your draft the difficulty developed countrieshave in trying to convince the developing countries of the importanceof foreign investment to their development and, hence, the necessityof their maintaining a healthy, stable environment for that investment.

While we believe it is unlikely in the current political environmentthat LDCs will be willing to sign FCN treaties with the United States,such an effort may, indeed, be successful with some countries. Further-more, if the projected shortage of investment monies materializes,more LDCs may be willing to reduce their demands and temper their

46 "'-

APPENDIX III APPENDIX III

intractability in order to iprove their investment climate relativeto others. In such a case, it may be helpful to have the mechanismfor FCN negotiation at the ready.

In suImary, your study generally appears to be a concise and fair state-ment of the expropriation/nationalization issue.

Sincerely,

S. Stanley KatzDeputy Assistant Secretary forEconomic Policy and Research

47

APPENDIX IV APPENDIX IV

THE SECRETARY OF THE TREASURYWASHINGTON aO2aO

JAN 3 1 77

Dear Mr. Lowe:

This letter is in response to your request for Treasurycomments on the GAO draft report entitled "Nationak.z-ttionsand Expropriations of U.S. Direct Private Foreign .- t AntProblems and Issues". The report shows a considers ~ auntof effort and adds a great deal to our understandin 4neissue.

My main comment concerns the description in the reportof the past operation of U.S. expropriation policy in specificinvestment disputes (Chapter 2). While it is true that, asstated in the report, the USG has sought to maintain a lowprofile and minimal involvement in investment disputes, attimes it has become actively engaged in the settlementpr)cess. For example, on occasion, the U.S. has taken anindependent position on the merits of a dispute and, in onerecent case, -,ent so far as to negotiate directly with aninvolved U.S. firm and the host government in order to reacha settlement. The USC has also had recourse to various inter-mediate measures, including making suggestions about suitablenegotiating guidelines, expressing dissatisfaction on occasionwith the pace of negotiations, conveying our view of the generalrequirements of U.S. and international law in order to reachacceptable results, etc. 6Ie believe that Chapter 2 shouldaccurately reflect the full range of approaches taken withinthe Fxecutive Branch to promote settlements.

The report's chief recommendation--that the Secretary ofState initiate a broad-based effort to obtain treaties ofFriendship, Commerce, and aviqation (FCN) with developingcountries emphasizing protection of private foreign invest-ments--is an interesting proposal. I might note that my staffis now in the process of reviewing options in the area ofexpropriations policy, including the option of intensifyingour efforts to obtain updated and strengthened FCN treaties.In this connection, it would be helpful to our analysis ifthe GAO could expand Chapter 7 of its report to include adiscussion of how effective FCN treaties have been in ro-viding protection for West German investors or investors ofother developed countries against expropriation or otherunilateral action by host governments.

48

APPENDIX IV APPENDIX IV

The report shows a considerable amount of effort and

should prove helpful to Treasury in the course of our

review of expropriation and investment policy.

sincerely yours,-

W. M ael Elumenthal

Mr. Victor L. LoweDirectorGeneral Government DivisionGeneral Accounting Office441 G Street, N.Vj.Washington, D.C. 20548

49

APPENDIX V APPENDIX V

DEPAfRTMENT OF STATEWaifilton D C. 20

February 2, 1977

Mr. J. K. FasickDirectorInternational DivisionU.S. General Accounting OfficeWashington, D. C. 20548

Dear Mr. Fasick:

I am replying to your letter of December 28, 1976, whichforwarded copier of the draft report: "Nationalizationsand Expropriations of U.S. Direct Private Foreign Invest-ment: Problems and Issues."

The enclosed coaments were prepared by the AssistantSecretary for Economic and Business Affairs.

We appreciate having had the opportunity to review andcuoment on the draft report. If I may be of furtherassistance, I trust you will let me know.

Sincerely,

il L. WilliamsonDeputy Assistant Secretaryfor Budget and Finance

Enclosure: A stated

50

PPENDIX V APPENDIX V

GAO DRAFT REPORT: "NATIONALIZATIONS AND EXPROPRIATIONSOF U.S. DIRECT PRIVATE FOREIGN INVESTMENT:

PROBLEMS AND ISSUES".

We generally find the draft report to be a good reviewof the problems posed by expropriation of U.S. direct privateinvestrmenu abroad, and of current efforts -- as well as otherswhich is'-- ofitably be pursued -- seeking to deal with them.In particular, our preliminary reaction is favorable on itsmajor recommendation, viz., the initiation of a broad-basedeffort in developing countries to negotiate treaties offriendship, commerce, and navigation (FCN) emphasizing invest-ment protection (p.48). Over the coming weeks we intend tointensify considerations already underway as to whether andhow such an initiative might be undertaken.

There are, however, certain portions of the draft reportwhich we believe should be modified, and these are discussedbelow.

1. INR Statistics 'Digest pp. i-ii, pp. 1-4)

Instead of the unqualified use of the terns "expro-priation" and "nationalization" to refer to the variousto-als compiled by the Department's Bureau of Intelligenceand Research, it should be made clear that the statisticsrefer generally to disputes with host governments involv-ing U.S.-owned property abroad, but that these are notnecessarily expropriations or nationalizations in anytechnical or legal sense. This point is made in thesecond full paragraph on page 3, but we believe it warrantsgreater prominence, particularly since the way the numbersare characterized may from the outset affect how they areviewed. For example, the phrase "expropriations andnationalizations" at the top of page 2 could be replacedby "investment disputes," and this change should also bereflected in other appropriate places.

2. Current Implementation of U.S. Expropriation Policy (pp. 7-9)

In our view, the description of the CIEP InteragencyStaff Coordinating Group on Expropriation (ExpropriationGroup) at page 7 inadequately conveys the scope and mannerof the Expropriation Group's operations. A memorandum onthis subject is attached, and portions of it (pp 2-4)might usefully be drawn upon to give a more completepicture of the Group's work.

51

APPENDIX V APPENDIX V

we also believe that the discussion of the currentimplementation of U.S. expropriation policy (pp. 8-9)to some extent mis-characterizes the process by implyingthat it is essentially passive save in cases of formalespousal or in instances where U.S. and investor interestsdiverge in some unspecified way.

It is true that the State Department generally believesthat the most effective policy is one which avoids routinesignificant involvement by the USG in the merits ofparticular cases. In addition to enhancing our abilitiesto play an ongoing and constructive role in such cases,and to respond flexibly to the full range of U.S. interestsinvolved, this approach avoids the risks of politicizingdisputes which in themselves may not have major politicalovertones, and of intruding unduly (and unwelcomely) intothe affairs of private parties.

At the same time, it should be noted that the Depart-ment, both individually and in its roles as chairman andstaff support of t-e Expropriation Group, is activelyinvolved in numerc us cases worldwide (certainly more than100 at any given ime) about which we seek to keep fullyand currently informed to enable us to exercise our "goodoffices." This encompasses a range of functions from,for example, gently encouraging the parties to negotiatea mutually-satisfactory settlement, to considerable involve-ment on the merits when an active mediating effort appearswarranted. Examples of this latter approach include theGreene Mission to Peru in the early 1970's, and the Marconacase in 1975-76, both of which were rsolved satisfactorilyin a manner which included the negotiation of an inter-governmental agreement. Actions along this continuum --all of which fall short of formal espousal -- are farfrom passive, and comprise the great preponderanc ofwork done by the USG in this area.

3. Special Representative for Overseas Investment (p. 21-23)In addition to pointing out that there w no support

for this proposal among the other member agencies of theExpropriation Group, it is noteworthy that the oppositionto it was on the me-its. As reported in a memorandum ofMay 10, 1976 from the Chairman of the Expropriation Groupto the Executive Director of CIEP, the other agencies

52

APPENDIX V APPENDIX V

were concerned that the proposal "would rec'.it in a lessflexible and balanced expropriation policy, without increas-ing its effectiveness," and we believe that language tothis effect should be added to the second full paragraphon page 22.

With respect 'lo the conclusion concerning thedesirability of er -oying a Special Representative on anad hoc basis only (final paragraph on page 23), we believetiat cases such as the Greene Mission and Marcona, notedabove, demonstrate that we currently have the ability todo this, and that we have done so on appropriate occasions.

4. Bilateral Agreements on Investment Insurance (p. 34)

The reference at line 12 to a determination by "theadministering agency" is not accurate since an importantpart of the Secretary of State's "policy guidance" underthe Foreign Assistance Act involves participation in thedetermination of when the requirement for "suitablearrangements" is being met.

5. Miscellaneous

Finally, there are a number of additional pointswhich we believe warrant clarification along the linesindicated.

-- Digest p. i, line 3 and Page 1 lines 1,3 6 8: the various references to "communism" miahtmodified to "communism or socialism" or to "the adoptionof state ownership or control as the basic economic modelof some countries, especially in Eastern Europe."

-- Digest p. ii, text line 10: after "property,"insert (in the ibsence of specific governmental under-takings to the contrary)."

-- Digest p. ii, text lines 18-19: deletelast sentence and substitute "Companies have in many casessuccessfully resolved investment disputes without signifi-cant direct U.S. Governemnt involvement."

-- Digest p. iii text lines 3-5: Subsection(1) is an example of a findig that a country is in compli-ance with the requirements of the law, not of a waiver ofits provisions.

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Digest . v, text lines 6-11: we suggestsubstituting "Among a number of alternatives the Govern-

ment has considered, is an initiative to establish ajudicial remedies convention under which former owners ofexpropriated or nationalized investments would be permittedto sue in the courts of third-party countries to obtaincontrol of such properties or products derived therefromthat had been shipped from the expropriating or nationaliz-ing country."

-- Digest p. vt tent line 18: after "guidelines,"insert "are voluntary ana."

-- Page 6, line 5: substitute "are non-discrimi-

natory, and are accompanied by just compensation."

-- Page 8, line 7: after "referred to," insert"arbitral bodies such as.'

-- Page 9, line 3: substitute "routine signifi-cant and direct" for "deep."

-- Page 10, lines 11-12: insert "formally"before invoked.'

-- Page 10, line 21: the "abeyance" of aid or

of the invocation of HicTenooper?

-- Page 12: the numbers in the first paragraphand the accompanying table should be modified to reflectthat in December 1976 the U.S. voted against an IBRDeducation loan to the People's Republic of the Congo,citing expropriation as the reason for doing so. Theloan was nevertheless approved.

- Page 15, lines 10-13: although Uganda sub-sequently resolved the outstanding expropriation, it hasnot yet been designated an eligible beneficiary.

-- Page 21, text line 13: at the end of thatsentence, add "in which the IFC participates."

-- Page 24t line 4: substitute "expropriatedor nationalized properties or products derived therefrom"for "properties (mainly inventory Froducts."

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-- Pane 25, footnote 1: Turkey, although anOECD member, d not join in the Declaration.

-- Page 27, line 12: after "enterprise," insert"a stable investment climate and reasonable assurance thatdisputes arising with respect to their investments willbe resolved fairly."

-- Paqe 32, footnote 1 this appears to be anincorrect statement of the Calvo Doctrine in the contextof expropriation and investment disputes. In such cases,this doctrine asserts that aliens are entitled only tonational treatment, i.e., so that there is no internationalstandard applicable to the conduct of the host country,aliens are not entitled to the protection of their homegovernments under any such claimed standard, and their onlylegitimate procedural recourse is through host countryadministrative and judicial processes.

ulius L. atzAistant Secretary for

Econ ic and Business Affairs

Attachment:

Purposes and Procedures of theCouncil on InternationalEconomic Policy's (CIEP)Group on Expropriation

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PURPOSES AND PROCEDURES OF TIlE COUNCIL ONINTERNATIONAL ECONOMIC POLICY'S (CIEP)

INTERAGENCY STAFF COORDINATINGGROUP ON EXPROPRIATION

-The Council on International Economic Policy's(CIEP) Interagenicy Staff Coordinating Group on Expro-priation (Expropriation Group) is the primary mechanismwithin the USG for coordinating implementation of U.S.expropriation plicy. The Expropriation Group's origins,purposes, and current procedures are described below.

Formation and Role of the Expropriation Group

In a January 1972 Presidential policy statement on"Economic Assistance and Investment Security in Developing'Nations", it was announced that in order to carry out U.S.expropriation policy effectively, each potential case ofexpropriation of U.S.-owned property abroad would befollowed closely, and that a special interagency groupwould be established under CIEP to do so and to recommendappropriate courses of action for the USG. It was notedin the statement that the Department of State had set upa special office to follow expropriation cases in supportof CIEP (State's Office of Investment Affairs, which pro-vides the Expropriation Group with staff support, and whoseDirector serves as the Group's Staff Director).

Subsequently, in a memorandum of March 8, 1972, fromthe Assistant to the President for International EconomicAffairs to the Secretaries of State, Treasury, Defense,and Commerce, the Expropriation Group was established toinclude representatives of those agencies, with provisionto be made for NSC and CIEP staff participation, as wellas for that of other agencies on appropriate occasions.The Group's functions were described as:

-- Keeping under continuing review all potentialand active xpropriatio. cases; compiling relevant factsand analyses, to include information concerning economicbenefits subject to potential U.S. action;

-- Making a finding in each case for purposes ofpolicv implementation that an expropriation affectinga significant U S. interest has, or has iiot, occurred;and, if so, whether reasonable provision has been made'for prompt, adequate, and effective compensation;

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-- Recommending courses of action for the USG,consistent with the President's January 1972 expropri-ation -.licy statement; and

-- Coordinating policy implementation.

The Secretary of State was directed to designatea senior officer, who would also be responsible to theExecutive Director of CIEP, to chair the ExpropriationGroup. The officer so designated was the AssistantSecretary of State for Economic Affairs (currently"Economic and Business Affairs"), the office whose in-cumbent continues to serve as Chairman.

The Expropriation Group was instructed to deal.expeditiously with any alleged expropriation problems,upon the request of any member and within its terms ofreference. In cases of interagency disagreement -following the failure of urgent efforts to resolve theissue - the Chairman was required to submit a reportpromptly to the CIEP Executive Director setting forththe issue or issues, the conflicting views, the optionsproposed, and a reasoned statement of the advantages anddisadvantages of each proposed course of action. EachDepartment represented was authorized to request theCIEP Executive Director to review a case to attempt toresolve the issue or, if necessary, to submit it forPresidential decision.

Since the Expropriation Group's inception, it hasbeen extremely active, both in coordinating implemen-tation of U.S. expropriation policy in particular cases,and as a forum for continuing interagency considerationand review of broader issues of expropriation policy.It also plays a significant role in the application ofU.S. legislation calling for withholding of economicbenefits (trade preferences, bilateral assistance,and support for loans under consideration in inter-national development banks) from countries whichexpropriate American-owned property without taking therequired steps toward payment of fair compensation. Forexample, by a July 6, 1972 Presidential "Memorandum forthe Secretary of the Treasury," the Secretary of theTreasury is to "(take) into account any advice receivedas a result of CIEP expropriation policy coordination

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and review procedures" before instructing the U.S. repre-sentatives to the Inter-American Development Bank, theAsian Dviopment Bank, and the In:ernational DevelopmentAssociation. More recently, in an exchange of etters inFebruary-March 1976, the Expropriation Group and STRagreed to an ongoing process by which the Group willprovide findings and recommendaticns to STR with respectto outstanding nationalization cases o failures to honorarbitral awards which might affect country eligibilityfor generalized preferences under Sections 502 (b) (4) or502 b) (6) of the Trade Act of 1974. The Group has alsoundertaken to conduct periodic Congressional briefings onexpropriation issues arising in the context of the TradeAct, and has done so on several occasions over the pastfew months.

How the Expropriation Group Operates

The 1972 Presidential statement and the implementingmemorandum of March 8, 1972 continue to provide the basicframework for the Group's operation.

Meetings are onvened at the Chairman's initiative,or at the request of any member. These are normally heldevery six weeks or so, but are also convened as necessaryso that (as in the case of the Group's intensive reviewin late 1975 of country eligibility for generalized prefer-ences under the expropriation and arbitration provisionsof the Trade Act of 1974) they sometimes occur much morfrequently. Participants generally include representativesfrom State, Treasury, Commerce, Defense, CIEP, NSC, CIA,STR, OPIC, AID and OMB. Other agencies, e.g , Exim andAgriculture, participate as appropriate.

The Expropriation Group's meetings are generallyheld at the working-level (i.e., Office Director, althoughthere is occasionally higher-level representation), andare chaired by the Staff Director. Before each meeting,an annotated agenda from the Group's Chairman is preparedand distributed to the participants and to the ExecutiveDirectcr of CIEP. The agenda normally reports on develop-ments in expropriatory situations in some fifteen totwenty-five countries. About half of these are repcctedon in writing only, while the remainder are also intendedto be discussed at the meeting. During the Group'smeetings, hich regularly last for several hours, and may

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take up mcst of the working day), representatives from theDepartment of State (normally including representives ofthe concerned regional bureau and the Office of the LegalAdviser) provide an oral briefing on the particular caseor issue, which is followed by questions directed to thespeaker and by discussion. The Group's findings andrecommendztions--for example, whether an expropriation hasoccurred, or to seek more information about an expropriatorysituation, or to prepare a demarche to a foreign government,or to recommend withholding of economic benefits--arearrived at by consensus, with the formal machinery forresolving interagency disagreement rarely, if ever, broughtinto play. Instead, any such disagreement has tended to beresolved within the Group itself by direct discussions amcngthe agencies with competing points of view. Often this is,accomplished through informal contacts following the meetingsbetween higher level policy officials of the concernedagencies. Occasionally the full Expropriation Group isreconvened at a higher lexel to seek resolution of inter-agency differences, as was the case,for example, on theissue of GSP eligibility for Argentina during the past ear.

Following each meeting, a report is circulated bythe Chairman to the membership summarizing its results, andreflecting what actions are intended to be taken over thecoming days and weeks as a result of the Group's delibera-tions. This report contains a clear and concise statementof any differences of view which may have arisen among therepresentatives of the member agencies.

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