For several years in a row, Serbia is ranked among the leading destinations for foreign investors. According to the Greenfield FDI Performance Index, in 2019 Serbia was ranked first among 105 states observed by the index. A similar status was maintained throughout the subsequent years as Serbia ranked fifth in 2020, and sixth in 2021. According to the World Bank Doing Business rankings, Serbia is ranked among business-friendly jurisdictions, whose ease of doing business index grows regularly.
The willingness to invest raises concerns regarding the legal and institutional framework of the host economy. Bilateral investment treaties (“BIT”) have been presented as a way to overcome the power disbalances between foreign investors and host economies. But before we get into the nitty-gritty of the BIT world, let us address some of the main concerns of foreign investors.
Foreign direct investment (“FDI”) and BITs work hand in glove since BTIs facilitate FDIs and boost foreign investors’ confidence to invest in the targeted country. Hence, investors may look at BITs as an instrument for their investment protection. On the other hand, host economies may be stretched between the need to attract foreign investments and build a viable investment protection regime on one side, and not impede the development of local businesses on the other side. Developed countries prefer BITs that improve the rights of their (already highly profitable) businesses that aspire to further expansion, whereas less developed countries must secure an influx of foreign capital but not at the expense of their local business. BITs mostly reflect the diplomatic and economic relations between the states, and if there is a significant number of investments from one state to another, then most likely there is a BIT that enables this high level of transactions.
Common issues and topics that are addressed in the BITs are the facilitation of the movement of capital (the investors want assurances that they will be able to dispose of the generated profit), protection from the expropriation and nationalization, the most favored nation clause, and arbitration clause (the investors prefer impartial protection of the investment and not the local judiciary system which might be biased or under the influence of the local government).
The next step is the local legislation. Host jurisdictions may design a very inviting local legislation that also gives confidence to the investor to launch a project. For instance, investors may be granted special subsidies, especially in terms of tax incentives. Transparent, reliable, efficient, easy to navigate and simple proceedings for relevant approvals are also extremely important for investors as they provide for the efficiency of doing business.
As in all things related to any treaty, disagreements are bound to happen. Whether they arise from a sincere misunderstanding or an ill-fated attempt to breach one’s rights or duties, a need for dispute resolution arises. That need was recognized with the establishment of the International Centre for Settlement of Investment Disputes (“ICSID”), an international arbitration institution established in the 1960s for dispute resolution and conciliation between international investors and states. In a nutshell, ICSID is not an investigative body and does not trouble itself with uncovering breaches of BIT’s or investors’ rights, it “only” provides support to bodies that conduct arbitration or conciliation proceedings. The ICSID is an invaluable mechanism in the world of international investment and allows both the investors and states a degree of comfort in legal certainty that their BIT will not be infringed.
BITs do not have a long history, but they do have a bright future since they are only expanding and building an ever-growing structure around them. This is the exact reason why they should be given more time in the spotlight and why investors should look more closely into BITs. In Serbia, the sectors of the economy with the highest potential for foreign investments are the IT, energy, automotive and aerospace industries, the food and textile industries. BITs can be quite a maze for a potential investor in these sectors and that is the precise reason why we will be publishing a series of articles on this topic, a BIT saga sorts. Therefore, stay tuned and buckle up, this is going to be an interesting ride.
Author: Nemanja Sladaković
