Draw up a legal framework to secure and guarantee investments
1. Complex: countries have different legal systems; multiple bilateral treaties exist for protecting investment and conventions made under the Arab League, the Arab Maghreb Union and the Organization of the Islamic Conference;
2. Imprecise: role of most favoured nation clauses in extending application of the clauses of one investment protection treaty to another; arbitrating tribunals apply different case laws;
3. Costly: higher transaction costs; money and time spent in regulating litigation and carrying out decisions made.
In addition, although some risks, like political risk (non-convertibility, non-transfer, expropriation, war, terrorism and civil upheavals, breach of contractual obligations of the state or public companies) are generally likely to be covered by national guarantee agencies, the same cannot be said for other types of risk, which nevertheless play a role in the decision to invest. Systemic risks, like the risk of devaluation or currency depreciation, are not generally covered. Also, covering political risk does not generally benefit local banks, which could be associated with funding projects in local currently and so in some cases contribute to reducing foreign exchange risk.
Clarifying a legal framework for investments in the region is crucial, since investors would be presented with a standardized legal regime for protecting their investments and guaranteeing investor/state disputes based on an integrated body of case law, and in a reasonable timeframe.
This clarification of an applicable standard should be accompanied by a specific system to financially guarantee political risk and certain economic and commercial risks, the cost of which could in some cases be partially covered by public authorities.
In essence, the legal regime in question should define investors’ rights and obligations for the investment projects considered. It should contain standard investment agreement clauses, including:
- Definition of Investment / Investor;
- Admission or pre-establishment;
- Fair and equal treatment;
- Non-discrimination, national treatment, MFN;
- Expropriation and compensation;
- Free capital transfers;
- Dispute settlement (state/state and investor/state);
- The issues of investors’ nationality, and whether the agreement can extend to investors outside the UfM should receive particular attention.
- The protection offered should not be less than existing protection provided by other instruments. It could constitute a modern, uniform investment framework based on recent conventional and case law developments and possibly serve as a model for other sectors and regions.
The legal framework should include a body to settle disputes, providing access to fast, reasonably priced justice and uniform case law. There are various ways to achieve this, which could include making use of existing arbitration centres, e.g. taking the energy charter as a model, once a supreme integrated court is in a position to play the role of final court of appeal.
Adopting a legal framework that provides protection in a clear and general way for strategic investments should bring two types of advantage:
• a direct advantage, through making the region more attractive.
• an indirect advantage, by bringing down transaction costs and making it easier to access financial markets, in particular for funding large projects and/or setting up and financing investment funds focused on the region.
Several options could be envisaged in terms of legal means to set up this kind of investment protection regime. One option that could rapidly be put into place would involve devising a draft agreement defining a uniform legal framework for protecting so-called strategic investments. This text would be subject to simple ratification by states keen to host these projects, following the example of the Cape Town Convention on International Interests in Mobile Equipment.