# **Box 2. Lessons from FDI Grievance Management Pilot Projects at the WBG**

<mark>The WBG has piloted an FDI conflict management mechanism in eight countries, producing evidence that low-cost solutions exist to promote investment retention and expansion. The WBG developed an institutional conflict management mechanism, called SIRM (Systematic Investor Response Mechanism), to respond to the needs of governments by setting up a minimum institutional infrastructure to coordinate state-wide responses to investor grievances. In pilot projects, WBG teams have supported: (i) the composition and positioning of the Lead Agency as a coordinator; (ii) the design and deployment of the ICT tracking tool to register; (iii) the coordination protocols to ensure inter-agency coordination and collaboration in resolving grievances; and (iv) following-up and measuring the economic impacts of</mark> resolved grievances.

<mark>Although most pilots are still being implemented, 39 grievances from eight pilots have been identified which are serious enough to place investments at risk. Three FDI projects were verified according to the WBG M&E methodology, resulting in US$200 million in investment retained, US$20 million in</mark> reinvestments, and a conservative estimate of US$10 million in public cost savings.

<mark>The most common issues identified by the SIRM pilots are sudden/arbitrary regulatory changes (60%), followed by contract breaches (22%) and expropriation (18%), confirming the findings of the 2009-13 MIGA/EIU and 2017 GIC surveys. SIRM pilots confirm the critical role that specialized and sub-national regulatory agencies play in generating most investment conflicts. Among the 39 contentious cases identified by the pilots, specialized agencies were involved in 64% (25) of instances and sub-national agencies for 15% (6) of them. Pilots also show that while grievances arise in all sectors, service sector cases predominate with 46% of the total, followed by primary/extractive industries (36%) and</mark> manufacturing (18%).

<mark>The SIRM pilots have also shown that institutional conflict management mechanisms can be a low-cost solution to promoting investment retention and expansion. It can also be a practical solution for countries to leverage IIAs in a non-litigious manner and induce desired patterns of behavior among domestic regulatory agencies. From this perspective, SIRMs appear as effective tools to implement IIAs on the ground, and more in tune with their original intent: to mitigate political risks in cross-border investment</mark> transactions.

<mark>SIRM mechanisms could be further adapted to focus on sectors prone to recurring investor-State conflict, such as extractives. A SIRM could also be further developed and adjusted to deal with other types of FDIrelated conflicts in this sector – for example, conflicts arising among investors, local communities and governments. A similar sector-specific approach for SIRMs could be explored to deal with conflicts arising in specific highly regulated services, such as construction, telecommunications or transportation. Given the prevalence of contract-related conflicts, the exploration of contractual conflict management mechanisms (clauses embedded in contracts) to prevent dispute escalation, merits further research and</mark> consideration.

<mark>Source: WBG (2019).</mark> adjudication mechanisms. Moreover, evidence shows that if countries want to foster the effective functioning of non-litigious mechanisms of investor-State conflict management, there is a need to enable a Lead Agency within the host country to “negotiate in the shadow of the law” with other domestic agencies and have a credible possibility for the investor invoking international adjudication as a last resort alternative. IIAs can play a key role in this regard.

30