BRICS Infrastructure in the Context of International Investment Cooperation
The instability of the global economy has led to a search for new ways to ensure sustainable economic and financial development of any country. This is especially important for developing countries, and BRICS in particular. One of the ways of meeting new challenges is to strengthen investment cooperation between the partners.
Dr. Sci. (Econ.), Prof., Department Chair – Moscow State Institute of International Relations, Research Director – National Committee on BRICS Research
Dr. Sci. (Econ.), Prof., Global Finance Department, Financial University
PhD, Deputy Director – MIEP, Moscow State Institute of International Relations
BRICS (Brazil, Russia, India, China and South Africa) investment cooperation is one of the priorities listed in the BRICS Economic Partnership Strategy. The list of objectives of the BRICS Strategy includes, in particular, the following: promoting the development of market relations, expanding market access opportunities as well as investment cooperation, and creating a favorable environment for investors and entrepreneurs in all BRICS countries.
Investment cooperation, along with other areas, is designed to strengthen balanced and inclusive economic growth and increase the level of the international competitiveness of the BRICS economies. It is worth mentioning that in fact BRICS accounts for 17.3% of world merchandise trade and 12% of world trade in services, and together forms 21% of the world gross domestic product (GDP) – and at par of the purchasing power of national currencies, about 30% of world GDP.
The purposeful desire to expand and strengthen ties in the field of investment cooperation requires clear guidelines reflected in all the main documents of BRICS. Thus, the relevant problems of multilateral investment cooperation in the BRICS format were quite widely covered in the Goa Declaration, adopted at the end of the VIII BRICS summit in India. The leaders of the countries expressed confidence in the further stimulation of growth in the scale of regional integration, with the obligatory observance of the principles of openness and equality, in order to ensure the development of multilateral investments in industrial, trade and commercial relations.
The successful cooperation of BRICS in the investment field requires adequate regulation treatment. The existing differences in investment policy and legal regulation impede the administration of projects and development programs. It takes time to overcome the difficulties and to manage risks. Let’s focus on this issue in order to understand it better and to find ways of solving the problem of FDI policy implementation.
The main sources of Russian regulation of investment policy include the Federal Law of February 25, 1999, No 39-FZ, “On Investment Activities in the Russian Federation Carried Out in the Form of Capital Investments”; the Federal Law of July 9, 1999, No 160-FZ, “On Foreign Investments in the Russian Federation”; the Federal Law of April 29, 2008, No 57-FZ, “On the Procedure for Making Foreign Investments in Business Companies of Strategic Importance for Ensuring the Defense of the Country and Security of the State”; and the Federal Law of July 21, 2005, No 115-FZ, “On Concession Agreements.”
The investment policy of the country is based first on the Decree of the President of the Russian Federation of May 7, 2018, No. 204, “On National Goals and Strategic Objectives of the Development of the Russian Federation for the Period up to 2024.” In addition, there are the Action Plan to accelerate the growth rate of investments in fixed assets and increase their share in GDP to 25 percent, as well as various orders and decrees of the government of the Russian Federation, regulations of the Bank of Russia, and other legal acts accompanying their implementation.
Foreign investments in Brazil are controlled, and require a special permit for exploration and mining in border areas, telecommunications, broadcasting, and healthcare. However, the investment regime in Brazil is liberal and allows foreign investors to have a controlling interest in companies. The Foreign Investment Promotion Agency provides information on the permits required to establish this. All foreign investors are also required to appoint a representative in Brazil who, together with the representative of the company receiving FDI, will be responsible for registering the transaction in the Foreign Direct Investment department of the Central Bank of Brazil (RDE-IED) in accordance with the instructions of the Central Bank. The registration and declaration of foreign investors is the responsibility of the Central Bank of Brazil.
There are also some forms of government assistance to investors: the government encourages foreign investment with tax exemptions, aid funding, and agreements that limit double taxation. The Special Customs Regime for the Export and Import of Goods for the Exploration and Production of Petroleum and Natural Gas (REPETRO) is a tax incentive to encourage the import of certain goods by suspending import duties and federal excise taxes.
The basis of the investment policy of the government of India in relation to foreign investors is laid out by the document “Consolidated Policy on Foreign Direct Investment.” The Ministry of Commerce and Industry of India accordingly updates this document every year. Foreign investors have two types of routes for investing in India – automatic and government. Their difference is that the first one does not provide for the prior approval of the government or the Reserve Bank of India. In the second case, the investor draws up a special application, which is considered by the ministries, the Department for the Promotion of Industry and Internal Trade, and the Reserve Bank (applicable for certain areas of industry). In 2021, in order to stop opportunistic takeovers or acquisitions of Indian companies during the pandemic, India introduced a requirement that all investments coming from countries sharing land borders with India must receive prior government approval. Such a measure can mitigate possible risks from the strong influence of foreign investors on the Indian economy.
At the same time, India has made certain new concessions for foreign investors in a number of industries. Relevant changes were made to the FDI policy in civil aviation: non-residents were allowed to own up to 100% of Air India (the previous permissible value was 49%). Investments in the coal mining industry were opened for coal companies (now they are allowed to bid for coal mines). The digital media industry has also been liberalized: foreign ownership is now allowed up to 26%. The FDI ceiling for insurance companies has been raised from 49% to 74%.
China has made impressive progress over the past three decades in developing a regulatory framework to attract and promote investment. Policies to encourage FDI have been highly successful. Over the past few years, the government of China has been following a policy of ensuring political stability. Moreover, the government ensures the predictability of the country’s economic policy, which is an important incentive in attracting foreign capital. The Chinese authorities support and attract FDI inflows by introducing tax breaks and tax holidays for companies with foreign capital. In addition, the government of China has removed many barriers to attracting FDI. For example, before China’s accession to the WTO, TNCs were not allowed to invest through mergers and acquisitions, the most common way for TNCs to operate – so the Chinese authorities removed barriers. The strategy of attracting FDI to the Chinese economy is based on the gradual expansion of the openness of the economy.
The general course of South Africa towards liberalization in the field of foreign investment was begun in the 1990s after the fall of the apartheid regime. Foreign investors are currently able to invest in most areas of activity, although there are restrictions for industries of strategic importance (banking. mining. energy, etc.). Investments in such industries may require obtaining a license from an authorized ministry, to align with the national interests of the authorities.
A unique feature of legal regulation in South Africa, both in the economic sphere in general and in the investment sphere in particular, is the focus on supporting “historically disadvantaged persons” in order to overcome the consequences of the policy of apartheid (“Broad-based Black Economic Empowerment Policy”). Thus, the state obliges employers to allocate special reserved quotas for the black population (at least 80% of employees at the enterprise), to cooperate with black businesses, and to allocate a certain share of revenue to fund investment projects to fight against discrimination. Among foreign companies, the state provides a wide range of benefits and gives priority to those supporting “disadvantaged persons,” for example in the distribution of licenses for the extraction of minerals. This policy of “positive discrimination” is reflected in a number of South African laws (Competition Act, Companies Act, Mineral and Petroleum Resources Development Act, Diamond Mining Act, etc.).
Harmonization of FDI
There are significant contradictions between the legal support of the BRICS investment policy and FDI in particular. An important task that needs to be solved immediately is the harmonization of the legal framework of the foreign direct investment that contributes to the development of the national economies of the BRICS member states.
In reaching the goals of sustainable development, it is advisable to follow the path of liberalization and harmonization of intergovernmental investment policy and foreign direct investment. Various methods and instruments can be used to stimulate FDI, including tax incentives, financial support, and double taxation treaties. The example of China shows the importance of a carefully designed long-term FDI promotion policy for ensuring the advanced development of target industries and sustainable growth of the country’s economy as a whole.
Differences in the foreign investment regulatory framework, taxation, labor legislation, and poor infrastructure development are obstacles to further cooperation of the BRICS countries in the investment sphere. In this regard, it is important to develop investment cooperation in agriculture, medicine, industrial and social infrastructure, green and blue energy production, science and technology.
The analysis conducted confirmed the need for the development of tools and methods for financing the interaction of the parties in order to promote sustainable development within the negotiated short-and long-term strategy for BRICS economic partnership. It is noted that the priority of the long-term strategy for BRICS is strengthening the position of the countries in the global economy, and it is a worthwhile elaboration.
It seems appropriate to expand the usage of infrastructure and green bonds in national currencies related to support for the development of the national economies of the BRICS member countries – and to increase the participation of development banks, along with the participation of BRICS members and institutional investors of all forms of ownership, in the processes of stimulation of partnership cooperation. In this respect, it is reasonable to introduce economic policies that pave the way for economic development, such as better access to loans, government grants to new industries, and tax relief for manufactured exported goods.
Actually, the BRICS member states are involved in achieving the goal of acceleration of the use of national currencies in serving the needs of trade and investment policies. It seems appropriate to speed up the process of the harmonization of financial relations regulation, which contributes to BRICS financial interaction, and expand the participation of economic entities in the progressive development of the national economies.