3.7 National security legislation: The US example

TABLE 3.9 continued

Public-private partnership laws • Some jurisdictions will also impose specific regulations in connection with public-private partnerships (PPPs), which may apply to SIF activities depending on the structure of the SIF and its establishment legislation (if any). The European Bank for Reconstruction and Development and the Organisation for Economic Co-operation and Development have produced guidelines on the creation of PPP laws and regulations (EBRD 2006; OECD 2012). In particular, the guidelines encourage fairness, predictability, and enforceability of concession agreements used to structure the partnership. PPP legislation may also impose regulations relating to transparency, reporting obligations, guarantees, and security for lenders. • The contours of PPP laws and regulations will shape the ways in which projects are prepared and sourced. Depending on the regulation, this may expand or contract the pipeline of deals for the SIF.

Source: World Bank. Note: SIF = strategic investment fund. a. For SIFs operating in other countries, a major concern of any host country is that the SIF might invest in ways that jeopardize or affect the national security of the host country. A number of jurisdictions, including the European Union, Japan, the United Kingdom, and the United States, have recently revised investment regulations related to national security that may result in increased scrutiny for transactions involving state-owned enterprises. b. Governments also recognize the need to provide taxation frameworks that encourage investments and development. In research on investment patterns in member states of the Association of Southeast Asian Nations, for example, Cevik and Miryugin (2018) conclude that “fair and efficient taxation is pivotal in funding public investment in infrastructure and human capital and thereby stimulating private investment.” c. See, for example, 26 U.S. Code § 892. Income of foreign governments and of international organizations (1990), which in most cases eliminates tax for investment activity by sovereigns, although the immunity does not apply to the investments characterized as commercial activity. Importantly for SIFs, the definition of commercial activity does not include governmental functions, which Internal Revenue Service regulations define as “activities performed for the general public with respect to the common welfare or which relate to the administration of some phase of government will be considered governmental functions.” 26 CFR § 1.892-4T – Commercial activities (temporary regulations) (1988).

BOX 3.7

National security legislation: The US example

In response to increasing investments by statecontrolled entities, many countries have recently introduced or strengthened their regulatory frameworks for reviewing the impact such investments may have on national security. Recent changes to the uS regulatory framework, for example, expand the coverage of national security review beyond transactions that could result in a foreign entity’s control of a uS business. under the new legislation, the Foreign Investment Risk Review modernization Act of 2018 (FIRRmA), transactions that merely include a noncontrolling investment may also be subject to review, if that investment gives the foreign entity access to

• material nonpublic technical information in the possession of the uS business; • membership, nomination, or observer rights on the board of directors; or • Any involvement (except through the normal voting of shares) in substantive decision-making of the board regarding the use, development, acquisition, or safekeeping of personal data of uS citizens; the use, development, acquisition, or release of critical technologies; or the management, operation, manufacture, or supply of critical infrastructure.

In contrast to the largely voluntary process prior to amendment, FIRRmA now requires a mandatory declaration for transactions involving critical technologies in which a foreign government has a substantial interest.

FIRRmA also subjects to review real estate transactions that may have national security implications, including transactions involving ports, real estate in close proximity to uS government or military installations, or real estate that would otherwise provide foreign entities with the ability to conduct surveillance or other intelligence activities.

Source: World Bank.