State-owned enterprises, international investment and national security: The way forward

Frédéric Wehrlé and Hans Christiansen, OECD Directorate for Financial and Enterprise Affairs

For most of the past half century, countries around the world have gradually opened up to foreign investment, and with good effect. Investment from other countries has supported growth and development, created jobs and enhanced welfare. Today, as our data show, OECD economies retain only limited traditional regulatory restrictions to inward foreign investment in the form of foreign ownership ceilings and other discriminatory conditions. While many emerging economies are generally less open, they have made their legal regimes for foreign direct investment less restrictive. Ongoing monitoring by the OECD shows that these liberalisation efforts continued after the 2008 financial crisis.

However, since the 2000s, a new and opposing trend has emerged: the screening and review of foreign investment projects, particularly those by state-owned enterprises (SOEs), to mitigate risks to national security. In fact, a recent survey shows that more and more governments are introducing or enhancing screening mechanisms for inbound investment projects to identify and address perceived threats. A third of the 59 advanced and emerging economies that participate in our investment policy dialogue now operate such mechanisms. Several governments are now subjecting investment proposals involving SOEs to greater scrutiny, and at times prohibiting these investments. Some countries have established special rules for the review and admission of investments by SOEs or are considering new policies to address the issue.

Could the precedent offered by the Santiago Principles help to point a way forward? In 2008, following widely publicised concerns in some large OECD countries regarding high profile investment projects by non-OECD sovereign wealth funds (SWFs), the community of SWFs and their government owners adopted a code of good conduct, the Santiago Principles, that was motivated by a desire to ensure that countries would not use national security arguments as a cover for protectionism against foreign SWFs. A decade later, the upsurge of SOEs in global investment and related national security concerns expressed by recipient countries could motivate similar arrangements with respect to investment by foreign SOEs.

International investment by SOEs is a growing concern

The increasing participation of SOEs in the global marketplace, particularly as international investors, makes it all the more important to balance concerns about the good governance of SOEs and to maintain a level playing field. As bearers of state as well as commercial interests, SOEs may place their emphasis on strategic acquisitions, such as advanced technologies for example, on non-market terms. It is fitting therefore that the rise of SOEs should revive interest in investment policies related to national security.

Australia, for instance, screens all SOE investments, whereas it screens private investments only when they exceed a value threshold. Canada applies different trigger thresholds for the application of its net-benefit test if the investor is state-owned. The United States has established specific rules regarding SOEs as part of its national security review mechanism (CFIUS), which require investigation of all government-controlled investments concerning US businesses. Germany has just strengthened its review mechanism. France, Germany and Italy have called for EU policies to address the issue. Strengthening screening of foreign direct investment (FDI) on national security grounds is also under consideration in the Netherlands, the United Kingdom and the United States.

Heightened awareness of the implications of SOE investment has also been evident in more recent international investment agreements. The Trans-Pacific Partnership agreement (TPP), for example, dedicates an entire chapter to SOE investments, whereas in older agreements SOEs were effectively afforded a status broadly similar to that of private investors.

Governments have always been careful to secure policy space to safeguard national security needs. The OECD Codes of Liberalisation, for instance, just as many investment treaties, contain corresponding national security exceptions. These exceptions are typically self-judging, and the term “national security” is intentionally broad.

Because of the discretionary nature of invoking national security as a ground for restricting foreign investment, the OECD Guidelines for Recipient Country Investment Policies relating to National Security were issued as an OECD Recommendation in 2009. These guidelines offer a set of specific recommendations providing for non-discrimination, transparency and predictability, as well as regulatory proportionality and accountability, including effective safeguards against undue influence and conflict of interest.

Internationally agreed rules on SOEs would bring benefits

While concerns relating to SOE investments are legitimate–and many SOEs are less transparent than private firms–the imposition of outright or unqualified restrictions on SOE investments in recipient countries benefit neither host nor home countries as opportunities for mutually beneficial international investment are forgone.

Applying internationally agreed commitments to SOEs and their government owners would help reassure recipient country regulators by offering greater transparency, addressing potential distortions that may arise from state ownership, and ensuring that the SOE owners also observe high standards of governance, disclosure and accountability. In turn, these regulators could be expected to apply the same conditions to SOEs that they apply to investment proposals by privately-owned companies.

A similar outcome to that agreed by SWFs can be achieved for SOE investments today. After all, recommendations on good practices for governance, disclosure accountability and transparency of SOEs have already been agreed under the OECD Guidelines on Corporate Governance of State-Owned Enterprises. These guidelines include specific provisions by which the legal and regulatory framework for SOEs, as well as their practices, should ensure a level playing field and fair competition in the marketplace when SOEs engage in economic activities. If translated to an international market context, and if fully implemented, these provisions could fully address the concerns of investment regulators. The last element required to emulate the “Santiago arrangement” would be to secure a commitment by SOEs to abide by these standards.

This could help convince recipient countries to keep their economies open and to uphold both the letter and the spirit of the principles of OECD guidance on national security.

The OECD stands ready to help forge a mutually beneficial and trusted arrangement for SOEs so that home and host societies can reap the benefits of international investment, while addressing important security concerns that inhibit certain investments proposed by SOEs today.

References and further reading

International Forum of Sovereign Wealth Funds (2008), the Santiago Principles

OECD (2016), State-Owned Enterprises as Global Competitors: A Challenge or an Opportunity?

OECD, OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations, 2012-2017

OECD, Corporate governance of SOEs: Guidance and research, 2011-2017

OECD, Monitoring investment and trade measures, 2008-2017

OECD, Freedom of investment at the OECD, 2007-2017

OECD (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises

OECD (2009), OECD Guidelines for Recipient Country Investment Policies Relating to National Security, Recommendation adopted by the OECD Council on 25 May 2009

OECD, FDI Regulatory Restrictiveness Index, 1997-2017

Shima, Y. (2015), The Policy Landscape for International Investment by Government-controlled Investors: A Fact Finding Survey, OECD Working Papers on International Investment, No. 2015/01, OECD Publishing, Paris.

Wehrlé, F. and J. Pohl (2016), Investment Policies Related to National Security: A Survey of Country Practices, OECD Working Papers on International Investment, No. 2016/02, OECD Publishing, Paris.

Zealots, assassins and insurance companies

The face of the future?

When asked whether Jews should pay taxes to the Romans, Jesus is said to have answered that you should give God what belongs to God, and Cesar what belongs to Cesar. That can be seen as a reasonable separation of the material and the spiritual, but some members of the audience would have interpreted it as support from the Prince of Peace for their uncompromising hostility to the occupying army. For the Zealots, nothing in Israel belonged to Cesar, and they were prepared to free the country by any means necessary, including what we now call terrorist attacks. They failed, and it would be a thousand years before another terrorist sect left its mark on history, again in the Middle East, when the Assassins started to carry out attacks in full public view to reinforce their fearsome, fearless reputation. The Zealots and Assassins targeted individuals and the military. The politically-motivated killing of large groups of civilians was a French invention, when the revolutionary government used “la Terreur” to eliminate or intimidate opponents in the early 1790s.

Since then, this kind of state terrorism has killed millions, but when we talk about terrorists, it’s usually to refer to violent, politically-motivated non-state groups. In fact there is no internationally agreed definition of terrorism, although various attempts have been made since the League of Nations first tried and failed in 1937. Even so, it’s clear that some terrorist acts of recent years represent a new kind of terrorism judging by their aims, targets, agents, and means.

Traditionally, terrorism was the work of organised groups with identifiable political goals, and was used to attain a clearly defined objective, such as freeing prisoners. The new terrorism has declared open-ended war on the “Western system” and its values, citizens, organisations and institutions. Its targets are no longer the military or symbols of the state. Large numbers of civilians may be targeted.

Unlike traditional, nation-based terrorists, modern terrorists are difficult to localise. They do not need to rely upon permanent structures for financial, technical or logistical assistance. Networks such as al-Qaeda can link together numerous highly-autonomous units of varying size and composition. They may still enjoy the backing of states for which encouraging, using and sometimes even organising terrorism is seen as a way to gain diplomatic influence, or a low-cost, low-risk alternative to war.

The vast majority of terrorist acts are committed with conventional means, but critical infrastructures that rely on information and communication technologies offer a new kind of target. Last week, the CEO of the Federal Reserve Bank of Atlanta warned against “the potential for malicious disruptions to the payments system in the form of broadly targeted cyberattacks”. Cyberattacks offer a number of advantages: expertise is readily available; the benefits of a successful attack, in terms of damage inflicted, can be very substantial; the costs, in terms of terrorist lives, risk of capture and even funding, are limited; and a successful attack would gain worldwide publicity whereas failure would go unreported (unless governments and corporations develop a specific communication strategy based on reporting attack failures).

Terrorism in different forms will remain a key feature of conflicts in the coming decades and better understanding and assessment of the threat it poses is imperative. However, terrorism differs from most other types of risk in two ways that make its assessment difficult. First, its risks cannot be quantified using historical data, not least because of the deep changes they have undergone in the past years. Second, they are generated by human behaviour. In other words, the context of terrorism risk is one where damage is not caused by an outside event such as an earthquake or even an accidental human error, but by the deliberate action of persons resolved to exploit every breach in security, and who may be ready to sacrifice their lives doing so.

One of the characteristics of terrorism is that its objectives can be attained while leaving most potential victims untouched and even if most attacks fail. As one IRA member put it, “We only have to be lucky once, you have to be lucky every time”. All forms of terrorism are similar in this respect. States that use terror against their own citizens can’t arrest everybody, but everybody must feel that they might be arrested, so arbitrary imprisonment is a common weapon against dissent. Islamic terrorism has mostly killed Muslims in Muslim countries, but the Eisenhower Research Project calculates that it has cost the US alone $3.2 to $4 trillion for the War on Terror, while according to a report by the International Commission of Jurists’ Eminent Jurists Panel some countries resort to secret detention, imprisoning children and other actions that “undermine cherished values as well as the international legal framework carefully developed since the Second World War”.

Because of terrorists’ ability to continually change their tactics according to the opportunities and obstacles they face, the risk of attacks and the effectiveness of security systems built against them are continuously reassessed. The Second International Meeting on Terrorism Risk Insurance at the OECD on Wednesday will look at how the terrorism threat is evolving, whether organisations are anticipating this risk, and asking if current insurance solutions are adequate. We’ll report on the discussions later in the week.

Useful links

Terrorism Risk Insurance in OECD Countries

Reducing systemic cybersecurity risk

OECD work on insurance

National Security and Public Health—Why the Controversy?

Defending the nation?

This post is contributed by Harvey Rubin, a member of the steering group of the OECD Future Global Shocks project and Director of the Univerity of Pennsylvania Institute for Strategic Threat Analysis and Response, and Nicholas Saidel, a Research Specialist at ISTAR. 

Thinking about certain aspects of public health and infectious diseases as “existential threats” to human security arguably began as early as December 10, 1948, when the General Assembly of the United Nations adopted and proclaimed the Universal Declaration of Human Rights, in which Article 3 states: “Everyone has the right to life, liberty and security of person.” This was reaffirmed in the United Nations Development Programme (UNDP) of 1994 and again in the 2003 UN Commission on Human Security. These efforts conceptualize security as human-centric rather than the traditional state-centric and include protection from the shocks that affect human safety and welfare – such as disease, hunger, unemployment, crime, social conflict, political repression and environmental hazards.  In this formulation, the nature of an existential threat depends in part on the particular threatened sector.

The traditional national security threat is understood to be the threat to the survival of the sovereignty, territory and physical condition of the nation. To the medical community in general, and especially to the public health and infectious diseases sectors, survival clearly refers to taking every action to minimize morbidity and mortality as well as to minimize the effect of disease on the economic, social and political stability of communities, nations and transnational organizations.  HIV/AIDS is frequently discussed in the context of securitizing public health issues.  This discussion originated with the UN Security Council Resolution 1308 (2000), which placed HIV/AIDS squarely in the cross-hairs of the security debate by stating: “Stressing that the HIV/AIDS pandemic, if unchecked, may pose a risk to stability and security.”  More recently, obesity has been identified as a national security issue by retired generals and admirals in the report Too Fat to Fight, concluding:  “If we don’t take steps now to build a strong, healthy foundation for our young people, then it won’t just be our military that pays the price – our nation as a whole will suffer also.”   Even Michelle Obama identified obesity as a national security issue in the announcement of her ‘Let’s Move’ campaign.

Where will the securitizaton of medicine and the medicalization of security lead with regard to the future of public health, and conversely, with regard to the future of national security?   These issues are generally addressed in the literature of the political scientists.  For example, Stefan Elbe’s new book, “Security and Public Health,” analyzes the framing of health problems as security concerns and whether this framing helps or hinders controlling these problems in national and international political, social and economic venues.  Elbe convincingly uses HIV/AIDS, SARS, and H5N1 influenza and bioterrorism as case studies of the effect of medicalizing security. Much like traditional security issues formulated in military language, a responsible reaction to threats is the development of countermeasures.  Widening the security gambit to include an “inflated list of possible medical threats to security (Elbe)” can lead to a corresponding extension in funding for medical countermeasures – new vaccines and therapeutics.   From our point of view—why is this bad? 

The controversy over sovereignty rights concerning epidemiological data and, more specifically, on influenza sequence data that continues to engage the international community, is fascinating.  This issue crystallizes many of the concerns of the national security community, including potentially weakening the traditional military agenda by widening the spectrum of security threats, removing the discussion of policy issues from the biomedical and public health practitioners and placing it in the hands of the diplomats, the military and possibly even the intelligence community, and focusing attention on the needs of the economically and militarily stronger countries and not on global health.

  
Understanding and dealing with the interdependencies of public health and national security spans widely divergent disciplines of clinical medicine, public health, basic biomedical science, economics, political science and international relations and deserves a deep and broad analysis by the interested parties. In this respect, Dr. Lincoln Chen’s comments in his address to the Helsinki Process Track on Human Security are instructive.

Given the perpetual tension between the demands of national security and the need to protect civil liberties, a balance must be struck whereby states can deal with national emergencies efficiently but without an unreasonable erosion of citizens’ privacy rights.  Moreover, an international system that fosters, rather than inhibits, cooperation between states in terms of data sharing and bio-surveillance is required.  For these reasons, we propose the implementation of a Global Compact for Infectious Diseases.

Useful links

OECD work on health

OECD Forum on Neglected and Emerging Diseases

OECD Working Paper on tackling obesity

OECD Observer article on democracy and sovereignty