Foreign investors may be in search of investment incentives or exemptions from certain requirements. This may be driven because, although the fundamental requirements for the project exist, such as the gas resource and a ready market, a number of additional factors may make investing in the project difficult, such as high local taxes, contaminated land issues or problematic local legal requirements. Accordingly, investors may seek concessions or protection from the host state in relation to matters such as tax holidays; an indemnity in relation to costs for remedial work in the case of contaminated land; and exemptions from or changes to problematic local legal requirements.
Foreign investors will want a clear and stable legal, fiscal and regulatory regime. The applicable legal and tax treatment will need to be investigated and understood. Ideally, due diligence will reveal a satisfactory regime, although in reality this is unlikely to be the case. Having understood the baseline position, investors must consider the political risks associated with investing in a particular state and ensure the legal and fiscal regime is not subject to radical change. Expropriation has always been a risk and recent problems in Algeria, Bolivia, Ecuador, Russia and Venezuela show that political risk remains a significant problem in certain parts of the world for IOCs and other investors.
Unfortunately, contractual provisions do not always provide as much comfort as foreign investors expect. There are various examples of foreign investors running into difficulties when seeking to enforce contracts that a government or a state entity wishes to avoid, particularly where a previous administration or regime entered into the contract. Even if an IOC is successful in bringing a claim, it may find it impossible, for example, to enforce a valid arbitration award in the host state because of interference with the courts by the state entity with which the contract was made and is in default.
There are a number of extra-contractual mechanisms open to foreign investors to assist in protecting their investment. A bilateral investment treaty (BIT) is entered into between two states to protect investments made by a national of either of the states into the other. It also aims to provide a level of legal protection to the investor. Many BITs contain broadly similar protections.
To qualify for protection under a BIT, there must be an investor with an investment in the host state. A dispute would qualify for protection under a BIT if it is between the investor and the host state. Each BIT contains the definition of an investor and an investment. International arbitration is usually the neutral forum used to resolve disputes. But a number of treaties provide for arbitration under World Bank’s International Center for Settlement of Investment Disputes (ICSID).
The protections commonly found in BITs are: the right to fair and equitable treatment; the right to national treatment, requiring a host state to treat foreign investments no less favourably than the investments of its own nationals and companies; the right to most favoured-nation-treatment; the right to compensation for civil disturbance; protection against expropriation and nationalisation; the right to repatriate profits and property; protection against breach of contractual obligations/umbrella clauses; and dispute resolution/arbitration.
It is advisable to carefully consider protection under a BIT before a project commences so that the investor can take advantage of any BITs signed by the host state. The protection afforded by BITs is extra-contractual, so will apply to an investment contract even if not expressly referred to. The host states signature of the BIT is sufficiently binding for it to apply to the investment contract.
The importance of BITs continues to grow, with the total number rising to 2,676 at the end of 2008. Despite the intense BIT negotiating activity of some countries, over the last four years, there has been no change in the ranking of the top ten signatory countries of BITs (see page 3 of the UNCTAD ’s Recent Developments in International Investment Agreements (2008–June 2009)).
Multilateral investment treaties (MITs) are similar to BITs. The Energy Charter Treaty (ECT) is an example of a MIT that seeks to protect and promote foreign investments in the energy sector in member countries. Disputes under the ECT can either be settled by: arbitration between parties to the ECT on the interpretation or application of the treaty; various dispute-settlement mechanisms for investors to take host governments to international arbitration; a specialised conciliation procedure; a mechanism for settling trade disputes between member countries (provided that at least one of them is not a WTO member); and bilateral and multilateral non-binding consultation mechanisms for disputes arising out of competition or environmental issues.
The ECT came into force in April 1998, but it is difficult to assess the effect of the treaty as only 22 disputes have been brought under it to date - 15 of the 22 reported ECT disputes are under ICSID. ICSID is an institution that administers and provides facilities for the conciliation and arbitration of international commercial disputes between states and nationals of other member states. It is available only in respect of disputes where a state is a party to the convention. The primary purpose of ICSID is to promote foreign investment.