10 May 2016

The changing face of investment protection in the Middle East

Foreign Investors into the Middle East and North Africa region (“MENA”) are increasingly familiar with the protection available under international investment agreements (“IIAs”) in order to mitigate against ongoing regional instability.  Some states (particularly Egypt) regularly face claims by foreign investors in international arbitration. The region’s own investors are increasingly alive to the protection that their investments may also be afforded within the region, as is demonstrated by the increasing reliance placed on hitherto obscure regional multilateral investment treaties.

The MENA region needs foreign direct investment. Oil prices are at historic lows and even the MENA region’s wealthier states, such as Saudi Arabia and the United Arab Emirates, find themselves under pressure to cut spending. At the same time, owing to the sustained crises in the region, particularly the ongoing war and instability in Syria, Yemen and Iraq, the region has experienced six consecutive years of falling foreign investment.[1] Even the GCC,[2] which is relatively stable, has failed to recover the levels of FDI enjoyed prior to the 2008 financial crisis. Against this crunch, MENA states are committed to attracting much needed investment, particularly as regards the development of necessary infrastructure to meet the needs of a young and growing population, including in residential and commercial development, transport, power, water and agriculture.

MENA states, like those in other regions of the world, enter into bilateral and multilateral IIAs in order to encourage long-term foreign direct investment by investors from the other state parties. IIAs commonly provide foreign investors with protection from the kind of risks relevant to long-term investments, including the particular issues that can hold investment back in politically and socially unstable environments. IIAs almost invariably provide protection from unlawful expropriation of the investment by the host state, and may provide guaranteed standards of treatment as between the state and the investment, such as the right to “fair and equitable treatment”, “full protection and security”, the right by the investor to “most favoured nation” treatment and the guarantee that the state will comply with its undertakings (the so-called “umbrella clause”).

Importantly, most modern IIAs provide a direct right for the investor to bring a claim against a state by way of recourse to international arbitration. The form of arbitration may vary. As of December 2015, Iraq became the latest state in the region to ratify the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”), which leaves only Iran and Libya as non-members. ICSID, which is connected to the World Bank, operates a specialist arbitration institution that specialises in investment disputes. While Libya is not an ICSID member, it is nevertheless currently a party to arbitration before ICSID’s Additional Facility, which is available to non-members if both parties consent. Regional IIAs also routinely provide for recourse to other forms of arbitration, particularly ad hoc tribunal under the UNCITRAL Rules.

Particular IIAs of note

MENA states are party to a large number of IIAs, most of which are bilateral investment treaties (“BITs”). It is difficult to identify any distinctive regional characteristics for these BITs because they are almost invariably based on the model BITs of the major capital exporting states (such as the United States, China, and individual member states of the European Union).

There are, however, some distinctive regional treaties providing for similar rights on behalf of MENA investors. One such treaty has been entered into by the members of the Organisation of the Islamic Cooperation (the “OIC”, which was formerly the Organisation of the Islamic Conference), an international organization of 57 states with significant Muslim populations. That treaty, which entered into force in 1981, is called the Agreement on Promotion, Protection and Guarantee of Investments (the “OIC Investment Agreement”). The OIC Investment Agreement applies to a broad definition of investments made by nationals of member states (including companies registered in those states) in other member states. It provides for protection from expropriation and for compensation in the event of damage to physical assets due to international hostilities, civil disturbances or other violent acts. It also contains a “most favoured nation” provision, which can be interpreted as enabling the investor to rely on the substantive provisions of other IIAs entered into by the host state. The OIC investment agreement may be of particular interest to investors into Libya and Iran.

The interesting aspect of the OIC Investment Agreement is that it lay largely forgotten outside academic circles (not least because the OIC itself did not publicise its existence to investors).[3] The OIC envisages the creation of a bespoke dispute resolution body for investment disputes but, despite having entered into force more than thirty years ago, no such body has yet been established. The default position under the OIC is that, until the disputes body is brought into being, the parties shall refer disputes to arbitration. This position as established in the first known case brought under the OIC, Hesham Al Warraq v Indonesia (2014). In that case, the claimant succeeded in persuading a tribunal that investors were afforded the right to commence arbitration proceedings without further consent by the state party. The OIC Investment Agreement does not provide for any arbitral institution and so, absent further agreement between the parties, the proceedings would have to be held on an ad hoc basis.

In 1981 the Arab League brought into force another multilateral investment treaty known as the Unified Agreement for the Investment of Arab Capital in the Arab States (the “Unified Arab Investment Agreement”), which has been ratified by all member states of the Arab League except Algeria and Comoros.[4] The aim was to promote joint Arab economic integration and investment. It provides that investors from member states shall have freedom to transfer capital, protection from unlawful expropriation without compensation, non-discrimination and compensation for breach of state undertakings. Unlike the OIC, the Unified Arab Investment Agreement provided for the creation of a dedicated Arab Investment Court, which sits in Cairo and is composed of five judges. The court has heard at least one case (brought by a Saudi investor against Tunisia)[5] and there are reported to be up to six further cases pending.[6]

With the existing web of BITs and a greater investor understanding of the multilateral IIAs described in outline above, investors in the region are increasingly aware of the advantages to be gained in structuring investments in order to gain from the investment protections available. Investors from outside the region have already forged a path in enforcing their rights against MENA states under traditional BITs. Over the coming decade, it is likely that MENA investors will join them in the use of the region’s multilateral IIAs.

View more articles from the latest edition of Crossing Borders.

[1] UNCTAD 2015 World Report, pp 56 et seq.

[2] Cooperation Council for the Arab States of the Gulf.

[3] Walid Ben Hamida, “A Fabulous Discovery: The Arbitration Offer under the Organisation of Islamic Cooperation Agreement Related to Investment”, Journal of International Arbitration; Kluwer Law International 2013; Vol 30 Issue 6.

[4] An English translation of which is in the public domain at: www.investmentpolicyhub.unctad.org.

[5] Tanmiah v Tunisia (2003).

[6] M.N. Al Rashid & L. Carpentieri, “The Revival of Islamic and Middle East Regional Investment Treaties: a new way forward?”, TDM 2 (2015): www.transnational-dispute-management.com/article.asp?key=2195

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