Investment Arbitration- ICSID

At ICSID this year, there have been investment dispute developments involving African parties to Bilateral Investment Treaties (BITs), such as: South Africa's Mining dispute under the Italy-South Africa BIT and Belgo-Luxembourg-South Africa BIT; Egypt's hotel industry dispute under the Denmark-Egypt BIT; Ghana's cocoa production dispute under the Germany-Ghana BIT. Previously, we considered a working paper by the WTO, which found that stricter dispute settlement provisions in BITs do not necessarily result in higher FDI inflows.

ICSID is the International Center for Settlement of Investment Disputes which is an autonomous international institution, considered the leading international arbitration institution devoted to investor-State dispute settlement. ICSID's Membership consists of one hundred and forty  four (144) member States that have deposited their instruments of ratification, acceptance or approval of the Convention and have become ICSID Contracting States.  Overall however, there are currently 155 signatory States to the ICSID Convention. The ICSID Convention is a multilateral treaty formulated by the Executive Directors of the International Bank for Reconstruction and Development (the World Bank). It was opened for signature on March 18, 1965 and entered into force on October 14, 1966. 

ICSID has released this years caseload statistics Report, which shows that: 

Bilateral Investment Treaties (BITS) have a usage rate of 62% and thereby form the substantial basis for consent invoked to establish ICSID's jurisdiction in registered cases. Other legal basis for consent includes: investment contracts between the host state and investor (22%); investment laws of the host state (5%); free trade agreements e.g. NAFTA (6%) and the Energy Charter Treaty (5% ). 


Click Figures to enlarge.

  

The South American region has the largest number of disputes handled at 30% while Sub Saharan Africa's caseload is 16%, and is the third highest after Eastern Europe and Central Asia (22%).

In terms of sectors, gas, oil, mining (25%) and electricity and other energy (13%) and transport (11%) sectors  have the highest number of disputes.  Other highly disputed sectors are water, sanitation and flood protection (8%), finance (8%) and construction (7%).

The distribution of appointments of Arbitrators, Conciliators and ad hoc Committee Members appointed in ICSID Cases is about three quarters (71%) from the west i.e. North America (23%) and Europe (48%), while the rest of the world shares a quarter. Latin America holds a 10% share while Sub Saharan Africa takes a share of only 2%.

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This Report can be accessed here.

In a previous discussion we considered the EC's proposal to accede to the ICSID Convention as part of its new EC Wide investment policy. However that would require the modification of the Convention which currently, is open only to Member States of the World Bank and any State which is a party to the Statute of the International Court of Justice, on the invitation of the ICSID Administrative Council by a vote of two-third of its members.  

Trade in Natural Resources: A look at Norway

The WTO World Trade 2010 Report on Trade in Natural Resources illustrates that Russia, Saudi Arabia, Canada, United States and Norway are the top five global exporters of natural resources, with Algeria and Nigeria (ranked globally at 13th and 15th respectively) included in the top 15 in the world (data includes intra EU trade).

This is a focus on Norway, an EFTA Member but not part of the European Community EC.  Norway is the fifth highest exporter of natural resources globally and a European country whose exports display some similarities with Africa’s overall export profile. Like many African economies, Norway is particularly rich in commodities and energy resources (oil, natural gas and water for hydro power production).  Commodities include fish, timber, and some minerals, including thorium as a potential resource base for new technologies of nuclear power generation. Norway however has not suffered many of the curses that plague some resource-rich countries, such as corruption, inequitable benefit sharing, capital flight or the “Dutch disease”. Norway has consistently been ranked by the UN Human Development Index as the best country in the world to live in, and the World Economic Forum has ranked Norway as one of the top 15 most competitive countries globally. The small size of the country (population 4.8 million), its geographic location on the outskirts of Europe, makes its development trajectory which is based on sustainable natural resource management, an interesting case study for Africa.

While industrial products typically make up 85 per cent of OECD countries’ total merchandise exports, the OECD figure for Norway is around 28 per cent. Norway’s reputation as raw materials supplier however, should be understood in light of the fact that major segments of its raw materials industry are highly knowledge- and technology-intensive, even though the end products are not considered to be processed industrial goods. A good example is the petroleum industry, in which technology and know-how have in themselves become an increasingly important business sector. In fact, the increase in oil and gas revenues has resulted in a reduction in the share of export revenues attributable to services, from around 28 per cent in 1991 to around 24 per cent in 2004. While services typically account for a growing share of world trade, the opposite trend in Norway is due to the fact that its petroleum exports are growing even more strongly than its services exports.

Norway’s direction of trade is unlike that of most African countries. For geographical and historical reasons Norwegian trade largely takes place with its European neighbors while African countries trade primarily with other continents. Crude petroleum and natural gas remain Norway's most important export products which together account for about 56.8% of the exports, 25.8% of Norway's GDP and 65.1% of the total value of merchandise exports (however Norway is not an OPEC Member). Within the food sector, Norway is the tenth biggest fishing nation in the world in terms of quantity produced, and the world's second largest exporter of seafood in terms of value. Forests cover 38% of Norway's land area, and are mainly privately owned (88%) and export financing in the forestry sector is subject to local content requirements. In addition, Norway is the largest producer of hydropower in Europe; about 96% of electricity generation in Norway is hydroelectric. 

The manufacturing sector is relatively small and is concentrated on industries associated with the production of equipment used in the extraction and processing of natural resources such as aluminium, machinery and transport equipment, followed by chemicals.  However 80% of Norway's imports are manufactured goods.

The Norwegian economy is generally characterized as a mixed economy - a capitalist market economy with a clear component of state influence.  For example, revenues from Norwegian oil and gas activity are invested in the Government Pension Fund, ensuring that the country’s petroleum wealth will benefit future generations. The fund serves as a resource as it makes long-term investments in solid companies throughout the world, with ethical considerations as cornerstones in the fund’s investment strategy. The “oil fund”, as it is known to the general public, is often cited by the IMF as an exemplary sovereign wealth fund which has an average ownership stake of one per cent in the global stock markets, thus securing its right to a considerable share of future profits in listed companies throughout the world. 

What seems to make the difference is the participation of the Norwegian State and her effective management of natural resources in the economy. For instance it is estimated that in 2008, the State owned around one-third of the Oslo Stock Exchange capitalisation and is a major shareholder in several of the larger commercial listed companies.  The State’s ownership contributes to safeguarding the public interest in Norway’s natural resources and the revenues flowing there from.  For instance, the Petroleum Act establishes that the property rights over Norway's petroleum and gas resources are vested in the State. In the same vein, revenue management and taxation in this sector are directly linked to the States responsibility to its citizens which historically is proven to be an important driving force to strengthen accountability- because of the social fiscal contract created between citizens and the government.

Along these lines, we should recall a previous post which highlighted the importance of local content as a basis for sustainable development in Africa. This is relevant since natural resource exports as a share of Africa’s total merchandise exports, are second highest globally at 73%, after the Middle East which holds the highest concentration at 74%. This is according to the WTO Report on Trade in Natural Resources, which also reveals that export taxes on natural resources appear twice as often as export taxes in other sectors. Hence it appears that there is a global fiscal practice where the State intervenes to provide for effective natural resource management, sustainable development and the advancement of comparative advantage in an economy. Despite this, WTO and EPA negotiations continue to push for the elimination of export taxes in Africa’s resource based sectors.  Export taxes could be used to fund research, technology and innovation in resource sectors just like Norway does in the fish and seafood sector. Exporters of fish and fish products have been subject to a levy that varies between 0.2% and 1.05% of the export value depending on the species and the stage of processing.  The levy is used to finance the activities of the Norwegian Seafood Export Council (NSEC) and the Fishery and Aquaculture Industry Research Fund.  The elimination of export restrictions for the sole benefit of importers can also be detrimental to the environment and the development of African resource economies.

July 2010 SACU Summit

SACU continues to enjoy its centenary and uniquely, this year we have seen 2 SACU Summits with a third anticipated by the end of October 2010. The first Summit was held in April 2010, whereby the Heads of State and Government adopted a new mission and vision for SACU.  They also agreed on the institutionalization of the meetings of the SACU Heads of State and Government.

The second summit was held on July 16th 2010, and the Meeting issued a Communique which mandates Ministers to address challenges that SACU needs to resolve. The Summit further reiterated that SACU should be converted into a vehicle for regional integration and also recognized the role that SACU can play in Southern Africa as a building block for deeper regional integration. 

Some of the challenges mentioned in the communique are mandated in the 2002 SACU Treaty (e.g. revenue sharing, common policies, institutions etc). Some were also highlighted in the 2009 WTO Trade Policy Review of SACU. Other challenges highlighted by the Summit include: financing options for cross border projects, increasing intra-SACU trade, new generation issues, reviewing the 2002 SACU Agreement and development of a roadmap for an Economic Community and Monetary Union. 

One observation is that a unified SADC EPA position is not expressly mentioned.

The Communique can be accessed here.

TBT Issues in Bilateral and Regional Trade Agreements: An African Perspective

Study from the OECD on  TBT issues in Africa.

TBT measures in African RTAs are apparently (with few exceptions) only vaguely addressed.  Interestingly, this paper also observes that there is an import-export bias in the sense that generally Africa seems to favour low technical requirements in respect of their imports (i.e. by virtue of their TBT border protection levels) whereas they face high TBT requirements for their exports to more developed regions. Products are often re-tested in export markets, leading to large cost penalties for exporters, whereas products of sub-standard quality often find their way into the markets of the region, because the TBT infrastructure is underdeveloped.

This June 2010 paper  also examines whether and how eight major regional integration agreements within the African region address TBT issues and implement the  WTO  TBT Agreement whose objective is to ensure that technical regulations and other TBT measures do not unnecessarily constitute barriers to trade. However the agreement also recognizes countries’ rights to adopt the standards they consider appropriate and it is acknowledged that domestic regulations and region-wide standards, are essential for protecting economies and common markets, from business practices that may bring harm to humans, plant, animal life, the environment, industry, and to national security.  

While only one of the 8 agreements surveyed by the authors refer explicitly to the WTO TBT Agreement, most of the RTAs refer to the elimination of TBT-related barriers or harmonisation of legitimate measures, but they use broad and non mandatory language. Few of the eight RTAs require or encourage parties to accept as equivalent the other parties’ regulations and conformance procedures. Mutual recognition is envisaged by some, but mostly as a goal and only in broad terms. None of the agreements reviewed require that parties explain the reasons for non-recognition.

Finally, there are no clauses prescribing transparency and no procedures for dealing with disputes over TBT matters.  Existing provisions for eliminating TBT-related barriers or harmonising legitimate technical regulations are formulated mostly in broad and nonprescriptive terms.

The paper provides concrete steps that parties to these RTAs have taken in order to reduce technical barriers. However, while TBT policy reform could be advanced through WTO negotiations, the authors recommend the following measures in order to facilitate TBT policy alignment among countries of the region:

• African RTAs should be revisited, reviewed and amended to include more stringent TBT provisions.
• A targeted review of TBTs should be undertaken in light of the development needs in meeting the basic requirements of standards systems and implementation of current obligations to support expanded trade opportunities with developed economies.
• It should be investigated whether African countries benefit from Mutual Recognition Agreements for national product testing and certification.
• Performance of enquiry points should be assessed throughout the region on an ongoing basis.
• A programme of assistance in infrastructure modernisation should be considered, comprising inter alia a long-term plan for infrastructure modernisation and enhanced access of African countries to the development of voluntary standards activities. 
• More attention should be paid to trade with India and China, with which the RECs in Africa and specifically the tripartite SADC/EAC/COMESA alliance have no trade agreement or TBT arrangements.Because of the sheer size of these economies, trade in unregulated low-priced products may be harmful to consumers and economies of the sub-Saharan region. (a controversial point might I add given the reports of dumping from the west as well).

The publication is useful but I should also mention a few additional facts. African enterprises need to link with global supply chains to market their products internationally however such linkages (beyond the supplies of raw materials) are few and far between. In addition, African exporters are largely small scale- even SMEs, when compared to their  international counterparts. SMEs have inherent difficulties with access to capital, productive capacity, technology and servicing because of resource limitations. Therefore my additional recommendations would be for increased investment in capacity building, testing and technology at the the enterprise level.

This publication can be accessed here.

Programme for Infrastructure Development in Africa (PIDA)

The Programme for Infrastructure Development in Africa (PIDA) was launched on 24 July 2010 in Kampala, Uganda, along the sidelines of the 15th African Union Heads of State and Government Summit.  PIDA is a continent-wide program to develop vision, policies, strategies and programs for the development of priority regional and continental infrastructure projects in transport, energy, trans-boundary water and the ICT sectors.

PIDA is a joint initiative of the African Union Commission (AUC), the New Partnership for Africa’s Development (NEPAD) Secretariat and the African Development Bank (AfDB) Group. PIDA's program scope is quite broad in coverage. It covers transport (air, sea, river and lake, lagoon, rail and road), energy (electricity, gas, petroleum products and renewable energy), ICT, and transboundary water resources (primarily irrigation, hydropower, and lake and rivers transport), and deals with the regional and continental aspects of these sectors. 

The motivation for this initiative is rooted in Africa's infrastructure deficiencies which continue to hamper the continents growth and economic development. Infrastructure deficiencies also lead to increased production and transaction costs which result in decreased competitiveness for businesses and thereby also hinder the implementation of social and economic development policies.  The 3 institutions further recognize that in Africa:

• There is access to electricity for only 30% of the population compared to rates ranging from 70 to 90% for other major geographical zones of the developing world (Asia, Central America and the Caribbean, Middle-East and Latin America)
• Transboundary water resources constitute approximately 80% of Africa’s freshwater resources. However, current levels of water withdrawal are low with 3.8% of water resources developed for water supply, irrigation and hydropower use, and with only about 18% of the irrigation potential being exploited.
• A telecommunications penetration rate of about 6% compared to an average of 40% for the other geographical zones, and a very low penetration rate for broadband services and fixed lines.
• A road access rate of 34% compared to 50% for the other geographical zones.
• The global competitiveness indices calculated by the World Economic Forum indicate that for Africa these indices are lower than those of other regions of the developing world and infrastructure appears to be the underlying factor that contributes most significantly to Africa's relatively low competitiveness.  In fact the 2009 Africa Competitiveness Report concluded that Infrastructure remains one of the top constraints to businesses in Africa.

Other issues to be addressed by PIDA will include: the need to fill information gaps on infrastructure deficits, causal analysis, development of prioritized strategic frameworks, establishment of infrastructure investment programs around RECs strategic priorities and improved implementation strategies for these programs.  All national aspects (including, without exception, physical infrastructure, national policies, institutional and regulatory frameworks, technical standards and benchmarks) will only be considered if they have an impact on, or could be affected by, the regional and continental aspects.

The PIDA initiative requires a total amount of USD 11,391,527, which includes the cost of an independent advisory panel of experts (supported by DFID), regional and sector consultative workshops (supported by NTCF and EU) and implementation of an infrastructure database (supported by the EU). The Sector Studies component alone requires a total amount of USD 7,552,343, with the ADF providing 25.6%; the African Water Facility (AWF) with 24.6%, the Islamic Development Bank (IsDB) with 23.3%, and the NEPAD-IPPF USD 2.0 million grant representing 26.5% of the cost.  

Sources can be accessed here.

The African Trade Insurance Agency

African Trade Insurance Agency, is a trade and political risk insurer with operations in 16 African countries. The political cover ATI provides is proving popular due to the high risk perception that Africa attracts. The products are becoming especially popular among foreign investors who are positioning themselves to take advantage of the growing business opportunities in the continent.

ATI is a multilateral financial institution that provides export credit insurance, political risk insurance, investment insurance and other financial products to help reduce the business risks and costs of doing business in Africa. The Agency also facilitates foreign direct investment into Africa and trade flows within the continent.  

ATI was launched in 2001 and in less than a decade, they have supported over $1.2 billion worth of trade and investments across the continent, and secured an investment grade rating of ‘A’ from Standard & Poor’s.  They have also expanded membership to more than a dozen African countries with plans to attract non-African member states by 2011.  They also have thriving and plans to expand operations into Ghana, Benin, Gabon, Cote d’Ivoire and Cameroon, which is expected to open up the West African market by providing a trade linkage between east and west Africa.

ATI was created to fill a market gap in trade and investment risk mitigation in Africa. In the late 90's, risk mitigation tools for credit and political insurance were not available for many African countries, and where the cover existed, it was very costly. In addition, the relatively small volumes of trade and investments into these countries did not justify the establishment of national export credit agencies. The only viable solution was to form a multilateral agency that would provide more cost-effective use of underwriting capital, reduced over-head costs and the ability to encourage private sector insurers to assume risk in Africa. The investments covered cut across various sectors such as agribusiness, energy, housing and manufacturing.

The ATI Member States include: Burundi, Democratic Republic of Congo, Djibouti*, Eritrea*, Ghana* Kenya, Liberia*, Madagascar, Malawi, Rwanda, Sudan*, Tanzania, Uganda and Zambia. *Pending signature and/or ratification.

Some ATI insurance products include coverage against:

Expropriation

Coverage against confiscation, expropriation, nationalisation and other illegitimate actions of foreign governments which may deprive you of your rights of ownership or control of your assets without appropriate compensation in a freely convertible currency.

Transfer Restriction

Coverage against the inability to both convert local currency into convertible currency and to transfer convertible currency out of the country. Currency inconvertibility and transfer risk policies apply to losses resulting from financial crises, convertible currency shortages or arbitrary political decisions by a government. 

War, Civil Disturbance or Civil Commotion 

Coverage against destruction, disappearance or physical damage to tangible assets caused by politically motivated acts of war or civil disturbance including revolution, insurrection and coups d'etat.

Embargo

Covers against financial loss due to trade embargoes or any other sanction imposed by the Security Council of the United Nations, or by any country or group of countries against the host country.

Proposed West Africa Solar Power Commission

ECOWAS. Tapping into solar energy.  This is useful.

In a previous post we discussed the announcement by the EU Commissioner for Energy on the EU's plans to start importing solar power from Northern African countries; Algeria, Tunisia, and Morocco, through the the Desertec Industrial Initiative, launched in July 2009. 

Along similar lines, West Africa is also gearing up to develop solar resources given the abundance of sunshine and near possession of the largest desert in the world. In this regard, the Heads of State and Government of ECOWAS have endorsed an initiative by President Abdoulaye Wade of Senegal that will enable the region to harness its solar energy potentials through the construction of solar power plants that will provide cheap energy as a complementary source for meeting West Africa’s energy needs. 

The move reiterates a proposal at the Copenhagen World Summit on Climate Change for Africa to commit to solar energy not only because of its availability but also because it is a less expensive source of energy that would help improve the competitiveness of the continent’s industries.

As evidence of support for President Wade’s initiative, the regional leaders urged each Member State to attach technical and financial experts to President Wade ‘in view of establishing the Commission on solar power that shall operate under President's Wade's chairmanship and authority.

New EU-Wide Investment Policy

As a region, the EU is the most significant global investment player. It is the world's leading host of Foreign Direct Investment (FDI) as well as the world's biggest source of FDI outside the EU. By 2008 outward stocks of the EU FDI amounted to € 3.3 trillion while EU inward stocks accounted for € 2.4 trillion. 


According to a recent press statement, the EC has now formulated a comprehensive investment policy which will seek to integrate investment liberalisation and investment protection.  Under the Lisbon Treaty, investment is one of the areas covered by the EU common commercial policy which is developed and managed at the European level giving the EU a strengthened negotiating leverage. However, there are 1200 Bilateral Investment Treaties (BITs) concluded by individual EU Member States and other countries. In addition, the European Commission (EC) as a legal entity is also negotiating investment agreements, for instance with African countries, as part of the Economic Partnership Agreements (EPAs). 

To address this anomaly, the  EC has released a comprehensive investment package which consists of: 

(1) a policy paper titled "Towards a comprehensive European international investment policy" and 

(2) a draft regulation which sets up transitional arrangements offering guarantees to existing or pending BITs concluded between EU and Non-EU countries prior to the enforcement of the Lisbon Treaty. Here, the Commission has provided legal security for European and foreign investors, without hampering the EU's ability to negotiate new investment treaties at EU level.  

The EU Member States together account for almost half of the investment agreements currently in force around the world. However, not all Member States have concluded such agreements, and not all agreements provide for the same high or equivalent level of standards. According to the EC, this leads to an uneven playing field for EU companies investing abroad, depending on whether they are covered as a "national" (granted national treatment) under a certain Member State BIT or not. 

Another feature of the agreements of individual EU Member States is that they relate to the treatment of investors “post-entry” or “post-establishment” only. This implies that Member States’ BITs provide no specific binding commitments regarding the conditions of entry, neither from third countries regarding outward investment by companies originating in EU Member States, nor vice versa. Here the EC might want to be guaranteed non discriminatory pre-establishment MFN Status.  Gradually, the European Union has begun the process of filling the gap of "entry" or "admission" through both multilateral and bilateral agreements at EU level, covering investment market access and investment liberalization, ensuring the non-discriminatory treatment of investors upon entry to a third country market.

The EC recognizes that a one-size-fits-all model for investment agreements with 3rd countries would be neither feasible nor desirable. Therefore the EC will have to take into account each specific negotiating context. However since actual trade and investment flows are in and of themselves important determinants for defining priorities, the EC indicates that they should go where its investors would like to go, through the liberalisation of investment flows. The policy paper identifies some candidates for a full investment agreement including India, Canada, Mercosur and where possible China and Russia, but also states that should a comprehensive, across-the-board, investment agreement with a country, or a set of countries, prove impossible or inadvisable, sectoral agreements may be an option whose desirability, feasibility and possible impact would have to be further assessed.

On the specifics of the approach, the EC would look beyond FDI and protect all the operations that accompany investment and make it possible in practice e.g. payments, the protection of intangible assets such as Intellectual Property Rights, etc. Enforcement is also addressed and identified as a key issue in the new policy. Currently, the EC has included in all of its recent FTAs, an effective and expedient state-to-state dispute settlement system. In addition, investor-state dispute settlement will be featured since it is a key part of the inheritance that the Union receives from its Member State BITs.  

However there is a uniqueness of investor-state dispute settlement in international economic law which impacts the EC's mandate in this area. For example, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention), is open to signature and ratification by Member States of the World Bank or those party to the Statute of the International Court of Justice. The European Commission does not qualify under either.  This new investment policy paper however proposes that the EC could seek accession to the ICSID, but notes that this would require modification of its convention.


A key outcome of this policy is that the EC may request renegotiation of existing BITs by individual member States. "The Commission will review the existing MS BITs. If it finds clauses that are incompatible with EU law (e.g. transfer clauses that would hamper the implementation of EU financial restrictions against a certain third country), it would ask the Member State to renegotiate such clause. If this proves impossible, the authorisation may be withdrawn as a matter of last resort.  Likewise, authorisations can be withdrawn if the EU negotiates an investment treaty at European level, and recourse to Member State BITs with the same third country is not necessary anymore."

While FDI will be within the full competence of the EC, the expectation is that by following available best practices, they would ensure that no EU investor would be worse off than they would be under Member States' BITs. Member States will however have scope to pursue and implement investment promotion policies that complement and fit well alongside the common international investment policy. In addition, BITs maintained by Member States may require amendments in order to bring them in compliance with EU law. The same framework is intended to be available also for Member States that would like to negotiate and conclude new investment treaties with countries, which are not targeted for EU-wide investment agreements, e.g. for foreign policy purposes.  

Overall, this is an interesting development in the wake of the EPA services and investment negotiations and should be studied carefully in light of the scope of the EC's investment text which covers all economic sectors including services i.e.: A) Agriculture, hunting and forestry; B) Fishing; C) Mining and quarrying; D) Manufacturing; and E) Production, transmission and distribution on own account of electricity, gas, steam and hot water. It is therefore useful to note that sectoral agreements rather than comprehensive investment agreements could be considered a viable option where feasible. 


One should also note that on "policy space" the EC's approach will be to ensure that the EU common investment policy fits in with the way the EU and its Member States regulate economic activity within the Union and across its borders. ...."EU investment policy has to be consistent with the other policies of the Union and its Member States, including policies on the protection of the environment, health and safety at work, consumer protection, cultural diversity, development policy and competition policy." African States negotiating investment chapters in the EPA could opt to also ensure compatibility of proposed EPA investment provisions with their own development policies.