Land Ownership, Patent Rights And FDI

By Charitha Ratwatte -April 23, 2013 |

Charitha Ratwatte

In nations emerging from a colonial exploitative relationship, the ownership of land by non-nationals has always been an emotional issue.

Within the exploitation by the colonial power, the expropriation of land often owned not by individuals , but by a traditional community and the handing over of the same to foreigners or even local elites from other parts of the country for the opening up of plantations or extraction of minerals, etc., has been an essential part. This applies in whatever continent the colonial powers operated – whether it is Africa, Asia, North or Latin America.

Readers are aware of the Sri Lankan experience with the Waste Lands Ordinance which deemed land for which there were no individual title deeds and owned by a community as waste lands and vested in the colonial government, which was then sold to plantation investors at a pittance.

Even in Europe, landlordism was a major issue. Once the colonial power is ousted, land is often renationalised and vested in State institutions and often mismanaged, putting the nation’s economy into a worse mess. The solution for that economic misery is often bringing back a new colonialist in the guise of Foreign Direct Investor (FDI), getting foreign investment and management capacity to manage the plantation or the mineral exploitation.

Because of the historical animosity to colonial exploitation and the opposition to the revenue concessions foreign investors demand, there is always a trade-off between the investment and the rights and concessions provided to the investor. Due to the important and vital role foreign investment plays in today’s globalised economy, nations are often compelled to provide attractive concessions to investors, who travel the world seeking the most competitive offer for their investment.

Sri Lanka’s stance

In the 2013 Budget, Sri Lanka proposed that the 100% tax on the transfer of property and prohibition of outright transfer to foreigners, applicable for a number of years, be amended in a substantive manner. The new investment regime prohibits the transfer of State-owned or privately-owned land to the following categories of persons: A foreign national, a foreign company, a company incorporated in Sri Lanka of which 50% or more of its share holding is owned by a foreigner or a foreign company.

However the letter imposing these prohibitions also provide for some important variations of the rules. The first is the exception provided in terms of the Diplomatic Privileges Act No. 9 of 1969, where the land transfer is to a diplomatic mission or an intergovernmental or international multilateral or bilateral mission recognised by the obligations under that act.

The second is where a Condominium Parcel situated on the fourth floor (excluding the ground floor) or above of a building coming under the provisions of the Apartment Ownership Law No. 11 of 1973. The third exception is in the case of a company incorporated in Sri Lanka of which 50% or more of its shareholding is held by a foreign national or a foreign company, which has been in operation for at least a consecutive period of 10 years at the time of registration of tile of the land.

The fourth exception provided for is where the minister in charge of the subject of finance in consultation with the minister in charge of the subject of land has in the interest of the national economy, with the prior approval of the Cabinet of Ministers, by order published in the Government gazette, decides to exempt a foreign national or a foreign company from the application of this prohibition, provided there is a substantial foreign remittance for the purpose of the purchase of the land for which the investment is being allowed.

The rules further provide that in the case of the first, second and third exceptions, there will be no land-related tax imposed. But the fourth category will attract a land tax which the minister will determine by order published in the Government gazette. There is a law being proposed which will enact these provisions.

Unfettered discretion unviable

It is important to note that the power to grant exceptions to the prohibition on outright transfer of land to foreigners in the case of a perceived ‘interest to the national economy’ is solely within the authority of the ministers referred to and the Cabinet of Ministers. By what criteria this ‘interest’ will be evaluated is not provided in the letter issued to the Registrar General by the Director General of the Ministry of Finance and Planning.

An unfettered discretion granted by any law is not a viable proposition. Any person who opposes any transfer of land to a foreign entity under this proposed law could challenge the order of the minister before the Judiciary, requesting that the real ‘interest’ to the national economy which the minister feels is manifested by the investment be spelt out in plain language and the criteria in each given case can be challenged.

In the past the courts have held that there is no absolute discretion in dealing with national asset or anything else of value. The discretion must be tempered by reasonableness and objectivity; especially since an ‘interest’ to the national economy is the required factual situation. Given the controversial attitude to foreign investment in land in this country due to our colonial history, nationalisation of land, imposition of legal limits on land holding even by nationals by stringent land reform laws, etc., the effect of this new law spelt out above will be controversial.

China’s promise

As stated earlier, nations are in a competition to attract foreign direct investment. Recently China’s new President Xi Jinping made a categorical promise that he would protect the interests of global companies amid rising concern among foreign businesses about discriminatory policies that their operations in China face.

President Xi, in a meeting with a group of Chinese and international business leaders, said: “We will protect the lawful rights and interests of foreign investment companies in accordance with the law and ensure their rights to equal participation in Government procurement and independent innovation. China will never close its doors to the outside world.”

China’s President also dealt with the important property right relating to intellectual property, which is a key concern to global corporates, which fear that some nations do not recognise intellectual property rights and that pervasive intellectual property theft takes place when foreign investments are made. A recent judgement in India against the Novartis drug company of Switzerland accelerated these fears.

At the meeting with President Xi, the spokesperson for the investors was Zein Abdalla, the President of PepsiCo, who clearly outlined the heightened dissatisfaction with China’s policy environment regarding foreign investment. Abdalla told Xi: “One thing many foreign companies do fear is a rising concern about increasing restrictions on the types of investments we can make. We hope the new Chinese Government can continue to push forward opening up and encouraging foreign investment in more sectors, reform the administrative approval system so businesses will find it easier to enter markets and operate freely and build a more level playing field for foreign investors relative to domestic companies.” Abdalla singled out agriculture and access to land as an area multinationals faced increasing restrictions. Land is an emotive issue in most nations.

The President of the European Union Chamber of Commerce in China was sceptical: “We have heard of similar words from previous leaders in recent years while market access environment in China has not noticeably improved for foreign companies.”

President Xi’s meeting with heads of companies, including Volvo, Unilever, Standard Life, Samsung, Anheuser-Busch InBev, Mars and Sumitomo, was symbolic of the new business and investor friendly image President Xi is trying to cultivate as distinct from his predecessor Hu Jintao, who rarely met foreign business leaders in public life.

Intellectual property protection

Intellectual property protection has come to play an important role, equal or if not more than land rights. The price for a drug from a manufacturer who has a patent in the Indian Supreme Court denying Novartis of Switzerland a patent for a cancer drug has alarmed many foreign investors.

Protection of intellectual rights are placed on par with protection of land investment rights of investors, if not at a higher level, due to the economic rationale that the recognition of patent rights will stimulate investment in research for innovation in development of new medical cures for chronic illnesses. But the Supreme Court pointed out that protection of patent rights which exclude others from producing and marketing a drug leads to inhibition of competition, which lies at the very core of free enterprise.

The Indian Supreme Court said that the time has come to restore the balance in favour of consumers. The Court decided that a patent cannot be protected and consumers should not be forced to pay higher prices for a drug, unless there is a therapeutic benefit to be found in the new drug that a patent is requested.

The Court cleared the way for manufacture of generic drugs in India to make cheaper versions of the drug Glivec, a cancer treatment drug, and make it available to the public. The judgement as it stands is good news for more affordable healthcare and bad news for drug innovation. Both sectors need wide ranging reform.

Foreign investors will be wary of starting manufacturing operations in countries where their intellectual property rights as well rights to land they have invested in are adequately protected. Recently even in the United States the Justices of the Supreme Court have questioned whether isolated DNA per se could be patented. Scientists are worried that rulings against such patents would stultify scientific research. It could negatively affect investments in scientific research by drug companies in emerging nations where patent laws are not strict.

Myanmar

A recent development in Myanmar highlights the correlation between rights of the State, foreign investors and traditional community rights to land. Near the village of Ah Lay Daw, a copper mine is being developed near Letpadaung Mountain, on land the villagers and monks say belonged to their community, which was confiscated from them by the Government. The corporate developer is a joint venture between a subsidiary of the Chinese State-owned company Norinco and another company connected to Myanmar’s military.

As readers are aware, Myanmar is just emerging from decades of military rule which imposed a statist regime on the people, everything worth anything being owned by the State or the military. Resistance to the military dictatorship was led internally by democratic icon Aung San Suu Kyi. Internationally sanctions were imposed in Myanmar. The military seem to have caved in and has gradually allowed elections and some democratic reforms.

China was a strong supporter of the military dictatorship. Chinese State corporates made hugely exploitative investments into Myanmar’s extractive natural resource and infrastructure sectors, mainly with the motive of gaining access to raw material and Myanmar’s Indian Ocean harbours.

When the protests against the exploitative investment at Letpadaung Mountain began by the local monks and villages, the military broke up their protests by force. Then, in a conciliatory gesture, the Government asked Aung San Suu Kyi, now a Member of Parliament and Leader of the Opposition, to chair a Commission of Inquiry into the project.

The community expected some relief. But the Suu Kyi commission decided that ‘stopping the mine would lead foreign investors such as China to think that our country cannot be trusted on the economy’. That would badly affect Myanmar’s growth prospects in a negative manner. But she was able to get the villagers the market price for the land as compensation.

To complicate matters further for China, Myanmar is preparing to sign the Extractive Industries Transparency Initiative, (EITI) which oversees a voluntary transparency regime for the natural resource industry, which has struck fear into exploitative corporates and governments. EITI has stringent requirements for financial transparency, environmental standards and corporate governance. It also gives governments, like Myanmar, compelling reasons to review and renegotiate natural resource exploitation contracts entered into previously. Earth Rights International, which tracks natural resource projects, last year, identified 75 Chinese companies involved in over 90 projects in Myanmar’s infrastructure, telecom and extractive sectors.

Suu Kyi’s commission, in putting the provision of secure property rights for international investors above the property rights of poor members of the country’s population, in effect endorsed an approach to economic development that has a long history, dating back to our Waste Lands Ordinance, the land enclosures in Britain in the 18th century, the forcible removal of native Americans from much of their lands in the 19th century and confined them to small reservations, etc. that secure property rights are a vital ingredient of growth.

But this begs the question – does it matter whose property rights are secure, the investor or traditional land owners? Today increasingly it is being accepted that not only should investors have secure rights, but that also traditional owners of the land should also be protected. International financial institutions such as the World Bank and ADB have strict criteria regarding appropriation of land for development projects. Having being involved in the land acquisition for the Southern Highway, I am aware of the strict procedures which have to be complied with.

High risk enterprise

Giving discretionary power to politicians to decide on exceptions from a total ban on 100% ownership of land by foreigners, without laying down objective and clear criteria, against which concepts like the ‘interest of the national economy’ and ‘substantial foreign remittance’ can be evaluated, is a high risk enterprise. It will be huge opportunity for nationalist and civil society activists and their lawyers, who are bound to challenge, in court, every exception to the 100% tax on investment in land by foreigners, gazetted by the minister!

It is also an open-ended opportunity for rent seeking, which is not sensible in the context of transparent good governance, in nation such as ours in which the Constitution itself extols the rulers to be just: “Devo Vassatukalena, sassasampattihetu ca, phito bhavatu loko ca, raja bhavatu dhammiko.”