Legal challenges and economic development incentives

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Should investors expect to receive incentives, even when the laws guiding those incentives change?  Will more companies that do not receive incentives challenge programs that help finance their competitors?

Several recent cases have addressed these complicated issues.

In a July 7, 2014 paper,* the Columbia Center on Sustainable Investment described how countries that have withdrawn certain incentives in the renewable energy sector are facing investment treaty claims alleging “detrimental effects” for investors. Cases against the Czech Republic, Spain and Italy suggest that changes in certain incentive measures are in breach of the fair and equitable treatment standard and might violate treaty provisions on expropriation.  Of specific interest:

“These cases . . . raise a classic issue in investment arbitration, pitting foreign investors’ reliance on stable regulations that provide a framework for their long-term investments against the host country’s right to adapt regulations to new needs. What measure of protection, as a matter of international law, should be granted to investors’ expectations that they will continue to receive the same level of incentives?

This issue was also addressed in a draft conference paper** from November 2013 in which it was noted that investment treaties “may limit governments’ abilities to amend or remove incentives programs once in place” “irrespective of their efficiency or effectiveness in meeting policy goals or shifts in the needs, priorities and resources of governments" (88). At least one case (Mobil v Canada) is cited as “suggesting that treaties may limit governments’ abilities to alter the incentives programs they had implemented in connection with imposing performance requirements aimed at maximizing the development impacts of foreign investment” (89).

Entirely separate from these claims or potential claims under international treaties are US lawsuits brought by competitors of companies receiving incentives.

  • In Aurora, CO, two separate lawsuits were filed related to incentives offered to the Gaylord Rockies resort hotel and convention center. One suit was filed by taxpayers and argued that the incentives plan was not allowed under two different state provisions, while the other (later dismissed) was brought by other hotels in the area. The judge in the latter case ruled that the hotels did not have standing in the case.

  • In Buffalo, NY, the owner of a property filed a lawsuit against an economic development organization after one of its tenants was offered incentives to move to another property in the city.

  • In Nevada, a think tank filed a lawsuit earlier this year against the governor’s economic development office claiming that incentives offered through the Catalyst Fund are unconstitutional.  The lawsuit was filed on behalf of a business owner who said incentives provided to a competitor put his company at a disadvantage.

We usually think of incentives solely in terms of economic and fiscal impact, but the legal implications are significant as well. 

 

 

* “Anna De Luca, ‘Withdrawing incentives to attract FDI: Can host countries put the genie back in the bottle?’ Columbia FDI Perspectives, No. 125, July 7, 2014. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).”

The Columbia Center on Sustainable Investment (CCSI), a joint center of Columbia Law School and the Earth Institute at Columbia University, is a leading applied research center and forum dedicated to the study, practice and discussion of sustainable international investment. Our mission is to develop and disseminate practical approaches and solutions, as well as to analyze topical policy-oriented issues, in order to maximize the impact of international investment for sustainable development. The Center undertakes its mission through interdisciplinary research, advisory projects, multi-stakeholder dialogue, educational programs, and the development of resources and tools.

** Background Paper for the Eighth Columbia International Investment Conference on Investment Incentives: The good, the bad and the ugly. Assessing the costs, benefits and options for policy reform. November 13-14, 2013. Columbia University (November 8, 2013 draft)

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