Download African Regional Regulations and Investor State

The Right to Regulate: Best Practices in Regulatory Reform to Attract
Investment and Minimise Investment Disputes (Case Study from Africa)
Dr. Emmanuel Opoku Awuku1
Introduction
The right to regulate is an inalienable right of each country. Most regulatory bodies in Africa
are set up by an Act of Parliament to ensure the implementation of government policies, and to
coordinate and regulate sectors such as the transmission and distribution of petroleum and
natural gas. Regulatory Authorities are given powers to: make rules and declarations, set rates
and charges, issue licenses and levies, obtain information, hold inquiries, investigate
complaints, institute formal investigation, and also undertake mediation to resolve disputes and
remedies. Most natural resources sectors in Africa, including oil and gas, are areas where
foreign investments are needed. Many African countries have opened up their economies and
dismantled regulatory barriers to foreign investors. However, there is a risk that in cases when
the host state needs to regulate, problems will arise with foreign investors leading to legal
dispute.
This article will give an overview of the legislative framework of selected African countries
and examine the authorities and functions of their regulatory bodies. This article will argue that
alternatives for national regulatory reform could be achieved through regional economic
integration, combined with regionalisation of regulatory bodies and agencies in Africa. This
will allow the sharing of information and the exchange of technical expertise, enhance national
capacity to make credible commitments to maintain sufficient policy space to regulate for the
public good and minimise disputes.
Domestic Regulatory Mechanisms
Regulating bodies and agencies vary significantly in terms of human capacity and financial
resources. In general, governments of smaller developing countries have encountered serious
difficulties in establishing independent regulators. Regulation requires highly specialised
expertise in the regulated sector, and in many smaller countries the pool of such expertise is
too small to establish independent regulators. Some small countries such as Tonga have
resorted to “regulatory contracts”, which lay out the parameters within which power utilities
can operate.
The situation is different in larger countries such as Ghana. There, the Public Utilities
Regulatory Commission (PURC) was established by the Public Utilities and Regulatory
Commission Act of 1997 (ACT 538). The Public Utilities Regulatory Commission and the
Energy Commission are the bodies responsible for regulating the electricity and natural gas
utilities and assessing applications for licenses. The Public Utilities Regulatory Commission is
also mandated by the government to set electricity tariffs, which is done in consultation with
1
PhD, LL.M (University of London, SOAS), Solicitor of England and Wales, UK, Legal Counsel ACP Secretariat.
The views expressed in the paper are those of the author alone and does not represent the views of the ACP
Group. The fact of the author´s employment with ACP Secretariat does not imply any endorsement of his views
by the ACP Group or the Secretariat. E-mail: [email protected].
key stakeholders. The Ghana Energy Commission on the other hand is responsible for technical
regulation and advising the Ministry of Energy on energy planning and policies. It is required
to establish and enforce standards of performance for public utilities in the energy sector, and
promote and ensure uniform rules of practice for the operation of the sector2.
Likewise in Tanzania, the Energy and Water Utilities Regulatory Authority is an autonomous
multi-sectorial regulatory authority. This Regulatory Authority is responsible for technical and
economic regulation of the electricity, petroleum and natural gas pipeline transmission, and
natural gas distribution and also the distribution of water and sewerage. The Authority has legal
status in its corporate name, is capable of suing and can be sued. The function of the Authority
is: (1) to issue, renew and cancel licenses; (2) to establish standards for goods and services; (3)
to establish standards for the terms and conditions of supply of goods and services; (4) to
regulate rates and charges; and (5) to make rules. The Authority also monitors the performance
of the regulated sectors in relation to: (a) levels of investment; (b) availability, quantity and
standard of services; (c) the cost of services; (d) the efficiency of production and distribution
of services; and other matters. In the case of petroleum and natural gas, the Authority regulates
transmission and natural gas distribution. The Authority also facilitates the resolution of
complaints and disputes. It consults with other regulatory authorities and administers the Act
conferred on him. It is also stipulated that the Minister may, from time to time as occasion
necessitates it, give to the Authority directions of a specific or general character on specific
issues, other than in relation to the discharge of the regulatory functions, arising in relation to
any sector, for the purpose of securing the effective performance by the Authority of its policy,
functions and compliance with the code of conduct. It is also stipulated that the Authority shall
not perform its functions in contravention of any international agreements to which the
Tanzania is a party3.
In South Africa, the Electricity Regulation Act of 2006 established the National Energy
Regulator to enforce and regulate South Africa‘s electricity, piped gas and petroleum
industries. It facilitates investment in the electricity supply industry and promotes the use of
diverse energy sources and energy efficiency. It also facilitate a fair balance between the
interests of customers and end users, licensees, investors in the electricity supply industry and
the public. The regulator has the following powers and duties: (a) to consider applications for
licenses and to issue licenses for the operation of generation, transmission and distribution
facilities, import and export of electricity; (b) to regulate prices and tariffs; (c) to issue rules
designed to implement the national government’s electricity policy framework, the integrated
resource plan and the Act; (d) to establish and manage monitoring and information systems
and a national information system, and coordinate the integration thereof with other relevant
information systems; (e) to enforce performance and compliance, and take appropriate steps
in the case of non-performance; (f) to mediate disputes between generators, transmitters,
distributors, customers or end-users; and (g) to undertake investigations and inquiries into the
activities of licensees.4
2
See Energy Commission (EC, http://new.energycom.gov.gh/) Ghana 2014- Policy and Regulatory OverviewsClean Energy Information Portal
3
Tanzania the Energy and Water Utilities Regulatory Authority ACT, Cap 414, 2001 (EWURA )
4
Government Gazette, Republic of South Africa, No. 4 of 2006: Electricity Regulations Act, 2006. 5 July 2006
The regulatory bodies in Ghana, Tanzania and South Africa are some of the best in Africa.
However, African countries face a number of problems. An effective regulation, especially in
key infrastructure sectors of an economy, requires professional staff that are experts in the
relevant economic sector. The regulatory bodies also need expertise in accounting, engineering
and legal issues and need to be familiar with good regulatory practices elsewhere. Frequently,
it is very difficult for developing countries to enforce the rules and pass declarations for a
number reasons. Officers, for example, do not have adequate skills to investigate cases, and to
gather and present evidence in Court5. Countries with a struggling economy usually find it very
hard to find the financial means necessary for effective regulation.
Investment and Regulatory Space
The right to regulate is the sovereign right of each country. Regulations include both the general
legal administrative framework of a country as well as sector or industry specific rules. It also
entails effective implementation of the rules, including enforcement rights. Regulation is not
only a right, but also a necessity. Without an adequate regulatory framework, a country will
not be attractive for foreign investors, because investors seek clarity, stability and predictability
of investment conditions in a host country. The authority to regulate can, under certain
circumstances, be ceded to an international body, which makes rules for the group of states.
The authority to regulate can be subject to international obligations that countries undertake;
with regard to the treatment of foreign investors this often takes place at bilateral or regional
level. International commitments can, therefore, reduce “policy space”. However, it has been
argued that countries need to maintain sufficient policy space to regulate for the public good6.
It could be argued that investment policies of a host state need to serve two potentially
conflicting purposes. They need to create conditions that are attractive to foreign investors. On
the other hand, they need to ensure that future regulatory measures are possible since future
regulation may be warranted to find an appropriate response to crises such as a financial crisis,
a food crisis, problems related to climatic change, protection of public health.
In order to obtain more control over extractive industries, governments have chosen different
paths. Angola has introduced a new investment regime applicable to national and foreign
investors that invest in developing areas, special economic zones or free trade zones. Provided
certain conditions are fulfilled, it offers investors several incentives in a wide range of
industries, including agriculture, manufacturing, rail, road, port and airport infrastructure,
telecommunications, energy, health, education and tourism7. Historically, investment treaties
were designed in response to the concerns of foreign investors and their home countries over
5
See Emmanuel Opoku Awuku, International Trade and the Environment: The Impact of the WTO on
Developing Countries and Environmental Protection, Ghana’s timber industry and the forest sector as a case
study, Wolf Legal Publishers, 2006 p126
6
UNCTAD, World Investment Report “Towards a New Generation of Investment Policies, United Nations 2012
p 109
7
UNCTAD, World Investment Report “Towards a New Generation of Investment Policies, United Nations 2012
p 79
political and regulatory risks, such as expropriation and nationalisation. 8 Article 13 of the
Energy Charter Treaty provides that “investments of investors of a Contracting Party shall not
be nationalised, expropriated or subjected to a measure or measures having effect equivalent
to nationalisation or expropriation” except where such measure or measures comply with the
rules of customary international law, i.e. public purpose, due process, non-discrimination and
compensation. In a nutshell, investment treaties were aimed at limiting states’ regulatory
actions at their very inceptions.
Below are some of the main guarantees that can be found in virtually all investment agreements
which provide some form of assurance for investors to invest in host states, but these safeguards
are sometimes subject to dispute:
Non-Discriminatory Treatment of Investors: This is a protection against discrimination.
Under the principle of non–discriminatory treatment of investors, a State Party to the agreement
commits itself to treat foreign investors from the other Party in the same way in which it treats
its own investors (national treatment) as well in the same way in which it treats investors from
other countries (Most-Favoured Nation treatment (MFN)). These principles ensure a level
playing field between foreign investors and local investors or investors from different
countries. For example, if a chemical substance were proven to be toxic to health and the state
took a decision that it should be prohibited, the state should not impose this prohibition only
on foreign companies, while allowing domestic ones to continue to produce and sell that
substance. That would amount to discrimination.
Fair and Equitable Treatment (FET), and Full Protection and Security for investors: The
obligation to grant foreign investors fair and equitable treatment is one of the key investment
protection principles in most international investment agreements. It ensures that investors and
investments are protected against treatment by the host State involving arbitrary, unfair, or
abusive practices. This principle has given arbitral tribunal’s significant room for
interpretation. It has been argued that the lack of clarity of the fair and equitable principle has
fuelled a large number of ISDS claims by investors, some of which have raised concern with
regard to the host state’s right to regulate. In some cases, this principle is even understood to
encompass the legitimate expectations of investors.
Protection against expropriation without proper compensation: The legality of a measure
of expropriation is at first instance a question for the internal law of the host state. An act of
expropriation is generally taken in pursuit of a statutory or other legal authority of the host
state. There is a general rule that expropriation is lawful when it is in the public interest.
8
See A number of developed countries endorsed the “Hull formula”, first articulated by the United States
Secretary of State Cordell Hull in response to Mexico’s nationalization of American petroleum companies in
1936. Hull claimed that international law requires “prompt, adequate and effective” compensation for
expropriation of foreign investments. Developing Countries supported the Calvo doctrine during the 1960s and
1970s as reflected in major United Nations General Assembly Resolutions. In 1962, the General Assembly
adopted its Resolution on Permanent Sovereignty over natural resources which affirmed the right to nationalize
foreign owned property and required only “appropriate compensation “. This compensation standard was
considered an attempt to bridge differences between developed and developing countries. In 1974, the UN
General Assembly decisively rejected the Hull formula in favour of the Carlvo doctrine in adopting the Charter
of Economic Rights and Duties of States. While Article 2(c) repeats the appropriate compensation standards, it
goes on to provide that “in any case where the question of compensation gives rise to a controversy, it shall be
settled under the domestic law of the nationalizing State and by its tribunals….nowadays, the Hull formula and
its variations are often used and accepted and considered as part of customary international law.
However, it requires adequate and effective compensation. That means the expropriated
property must be valued to ascertain the actual economic loss sustained by the property owner
and the extent to which the owner is entitled to be compensated for the economic loss suffered9.
Broadly speaking, ‘policy space’ refers to the ability of a country to calibrate national policies
to local conditions and needs. All international economic treaties limit national policy space:
governments may be legally required to take some regulatory measures, and may no longer be
allowed to take other measures. Therefore, negotiation of investment treaties involves a
delicate balancing act between committing to protect foreign investment on the one hand and
preserving policy space on the other.
Insofar as investment protection promotes investments that produce positive social,
environmental and economic outcomes, it is an important ingredient of efforts to promote
sustainable development. But if not carefully framed, investment protection can significantly
restrict policy space in host countries. A recurrent feature of investment treaties is that the
language used is often unspecific, and lends itself to multiple interpretations. When called upon
to adjudicate investment disputes, several arbitral tribunals have interpreted the standards of
investment protection in expanded ways. It has been argued, in the main, that investment
arbitration leads to a shift away from the host states’ position of ultimate control over national
affairs, since investment arbitration often scrutinizes domestic legislation and practices in the
light of treaty rules. This scrutiny covers sensitive domestic measures, including environmental
protection, conservation of resources, public health, banking reforms, tax reforms, revocation
of permits, measures adopted in response to economic crises in regulatory reform, termination
of concessions by domestic courts, and others10.
A central requirement of fair and equitable treatment standards is considered to be respect for
the legitimate expectations that the investor had when making the investment. The requirement
has been held to include, for example, consistency and transparency of government conduct,
and stability and predictability of the regulatory framework. Through a country’s unqualified
promise to treat investors “fairly and equitable”, the country provides a maximum of protection
for investors but also risks posing limits on its policy space, raising its exposure to foreign
investors’ claims and resulting in financial liabilities. Most International Investment Treaties
include a guarantee of Full Protection and Security (FPS), which is generally regarded as
codifying customary international law obligations to grant certain levels of police protection
and physical security. However, some tribunals may interpret the FPS obligations so as to cover
more than just police protection. If FPS is understood to include economic, legal and other
protection and security, it can constrain government regulatory prerogatives including
sustainable development objectives. It is advised that policy makers follow a recent trend to
qualify the FPS standard by explicitly linking it to customary international law or including a
definition of standard clarifying that it is limited to physical security. It is assumed that this
would provide predictability and prevent expansive interpretations that would constrain
regulatory prerogatives11.
9
P.T. Muchlinski, Multinational Enterprise and the Law, Blackwell, Oxford UK, 1995, p506
Dominic N Dagbanja, The limitation on Sovereign Regulatory Autonomy and Internationalization of investment
Protection by Treaty: African Perspectives, Journal of African Law, , SOAS, University of London, 2015, UK
11
UNCTAD, World Investment Report “Towards a New Generation of Investment Policies, United Nations 2012
p 147 -149
10
African Regional Regulations and Investor State Dispute Mechanism
Some regional economic communities (RECs) have signed regional regulations that relate to
investment. Among these are the Investment Agreement for the COMESA Common
Investment Area, the Supplementary Act adopting Community Rules on Investment and the
Modalities for their Implementation with the Economic Community of West African States
(ECOWAS), and the Southern African Development Community (SADC) Protocol on Finance
and Investment. The East African Community (EAC) and SADC have developed model laws
on investment12. In SADC, the Protocol on Finance and Investment (FIP) came into force in
2010. According to the Protocol on Finance and Investment, investment in signatory states is
protected against uncompensated expropriation. Investors are also guaranteed most-favoured
nation (MFN) treatment, but not national treatment. FIP is worded rather cautiously, calling on
state parties to “encourage the free movement of capital”. The SADC “Model BIT” tries to
reflect a balanced approach between member states’ development objectives and investor
interests. Thus, while it contains substantive provisions to protect investors, it also provides for
obligations of investors regarding corruption, environmental and social impacts, transparency,
and human rights and labour standards, among other areas.
In ECOWAS, a Supplementary Act A/SA.3/12/08 on the Common Investment Rules for the
Community was adopted in 2008. As is customary in BITs, the Supplementary Act includes
protection against uncompensated expropriation. ECOWAS investors are guaranteed free
transfer of assets, which includes in essence all payments related to the investment. In investorstate and state-state disputes, the parties can refer their case to a national court or tribunal or to
the ECOWAS Court of Justice. The Supplementary Act is different from most BITs in that it
contains a designated chapter on “obligations and duties of investors and investments”. These
include a provision for a “pre-establishment” environmental and social impact assessment, the
results of which are made available to community where the investment takes place as well as
to other affected interests. The investor obligations also include a number post – establishment
requirements including the protection of human rights and respect for fundamental labour
standards. Some of these investor obligations are mirrored in the subsequent chapter on “host
state obligations”, which calls on member states to refrain from competing against each other
using investment incentives13.
In COMESA, the Investment Agreement for the COMESA Common Investment Area (CCIA)
was adopted in 2006. This document is not legally binding, but is rather a reference guide for
the design of national investment policies and laws. Its goal is to improve the business climate
in the EAC region and to harmonize investment laws and policies of member states. The Model
also includes provisions for the free transfer of assets and protection from uncompensated
expropriation. According to the code, investors can apply for an investment certificate to the
designated national investment agency. In 2010, the Protocol on the Establishment of the EAC
Common Market came into force. It provides for freedom of movement of goods, labour,
services, and capital, with provisions on investment including protection and harmonization of
tax regulations14.
12
Economic Commission for Africa, Investment Policies and Bilateral Investment Treaties in Africa, Implications
for Regional integration, ECA, United Nations Addis Ababa, Ethiopia, 2016
13
ibid
14
ibid
Virtually all BITs to which African countries are signatories have provisions for dispute
settlement, usually along three avenues. Some of the first-generation agreements allowed only
for state-to-state dispute settlement, such as the Switzerland-Madagascar BIT (1964),
Belgium–Morocco BIT (1965), and Germany-Chad BIT (1976). Dispute settlement in most
cases was envisaged as ad hoc; that is, an arbitration panel was only set up once a dispute arose
and after the traditional channels of conciliation and mediation had all been exhausted. Though
some BITs may pose no obligation to follow these channels first, they are often considered a
starting point, and only when they are exhausted do some agreements refer to the international
arbitration mechanisms.
Fewer still mention local remedies (i.e. seeking redress through domestic courts) as an
alternative to international arbitration, such as in the Morocco-Italy BIT of 1990 and the South
Africa-Madagascar BIT of 2006. Indeed, in many instances local remedies were not considered
before international arbitration procedures were sought.
More recent BITs involving Africa incorporate investor-state arbitration, which allows private
investors to submit a claim against the host country. This development has given rise to a
number of investor-state disputes, which are probably one of the most contentious aspects of
BITS, as seen in high-profile cases where the right of a government to regulate in the public
interest assumes less importance than private investors’ rights, especially on issues relating to
expropriation. Investor-state dispute settlement also remains contentious because it is onesided, allowing a private investor to take a state to international tribunals, but not the opposite.
On investment-dispute rules and venues, BITs with an African party envisage ad hoc or
permanent dispute settlement procedures (or both approaches), as well as local and
international instruments. The dispute settlement provisions in BITs have led to more and more
African countries to be involved in cases with private investors.
Despite of rising investment disputes, African countries have continued signing BITs. There
are three basic explanations for that: firstly, many African countries were not fully aware of
the obligations emanating from these agreements (or their interpretation) at the time they
signed, nor the financial implications of violating them; secondly, the change of government,
political instability, and elements of conflict in the African region have made it impossible for
some countries to uphold their obligations to protect investors and investments, hence
triggering disputes; and thirdly, provisions in these investment agreements are sometimes
worded in such a loose and general manner that they increase the potential liability of the state,
opening the door for the filing of investment disputes on almost any account by investors.
Given the recent case law and the financial implications of investment disputes, some countries
such as Morocco and South Africa are renegotiating and even terminating BITs to avoid
litigation. Indeed, this concern is shared among other countries, such as Indonesia, given the
human and financial resources that litigation implies. Some countries have even gone as far as
withdrawing from international arbitration mechanisms such as ICSID (e.g. Bolivia, Ecuador
and Venezuela), on the ground that litigation outcomes often appear arbitrary, unaffordable,
and unjustified, going beyond the intended objectives and spirit of the BITs invoked.
Conclusion
Each nation state has the sovereign right to regulate under its domestic law in the interest of
public good. Within Africa there are some good regulatory practices, both at national and
regional level. The African regional economic communities, for example, have put forward a
number of principles to minimise disputes and create a favourable investment atmosphere. This
includes, for example, that investments shall not be nationalised or expropriated except for
public purposes and subject to the payment of prompt, adequate and effective compensation.
Treatment of foreign investments should be fair and equitable treatment, and the most favoured
nation-treatment should apply. In the case of a dispute, between a foreign investor and the host
state, local remedies should be exhausted first before they submit to international arbitration.
African countries will need to consider their policy options to find the right degree of state
regulation, which must be based on the public interest and take into account international legal
obligations. Host states need to take into consideration that investors reasonably expect that the
circumstances prevailing at the time the investment was made remain unchanged. Foreign
investors, on the other hand, need to be aware that the host state has the legitimate right to
regulate domestic matters in the public interest.
Increased regional regulation, combined with regionalisation of regulatory bodies and
agencies, could assist the countries of Africa in overcoming national limits in sourcing
technical expertise and to enhance national capacity to make credible commitments to stable
regulatory policy space. This will improve the efficiency of infrastructure industries by
allowing them to grow without respecting economically artificial national boundaries, and thus
ultimately increase infrastructure investments. The harmonisation of the regulatory framework
at the regional level will also minimise investment disputes.