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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.