Policymakers, academics and lawyers at a conference in Hong Kong last month spoke of the “immense opportunities” for investors in Asia in sectors such as transport and energy generation under the One Belt One Road (OBOR) initiative. They warned, however, that investors in the 65 countries along the route of OBOR must be aware of the risks in putting their money into emerging economies that may not be equipped with robust legal frameworks.
At the 2017 Colloquium on International Law: Common future in Asia, organised by the Asian Academy of International Law, panellists shared their views on the risks in financing projects, investment protection in developing countries and important considerations for investor-state dispute settlement.
Risks in financing of projects
To finance projects, options for countries along OBOR have a variety of choices ranging from government grants, public private partnerships, commercial bank loans, listings and investments from organisations such as the Asian Infrastructure Investment Bank. Only 20% of infrastructure spending along OBOR is financed by private funding, so there is plenty of room for interested investors. The power sector alone makes up half of the financing needs, followed by transport. However, because of political, legal, construction and currency risks, investors are wary that they could get burned without getting the returns they expect. Vincent Lee, deputy director, Hong Kong Monetary Authority’s Infrastructure Financing Facilitation Office (IFFO), believes that with more clear-cut national infrastructure plans, anti-corruption policies, investor education and building currency connectivity through the use of the RMB in transactions can help to increase the attractiveness of projects and lower the risk for investors.
More than 60 bilateral investment treaties are in force between countries along the OBOR but the variation between treaties can be dramatic; some have been in existence for decades whereas others have just come into effect. Li Yongjie, deputy director general at the PRC Ministry of Commerce’s department of treaty and law, described how the new generation of investment treaties focus on investment liberalisation and borrow trade rules into treaties with features such as most favoured nation, and fair and equitable treatment clauses. Investors have to think carefully about who can bring what claims on what conditions as investments are often laden with complicated shareholding structures and investor protection can be restricted by time limits, relations with domestic remedy proceedings and constitution of tribunals.
As investors venture into lesser developed countries with their investments, the legal risks are even greater. Robert Pé, adviser to Myanmar’s attorney general, observed the difference between Myanmar’s goal to attract foreign direct investment and the reality in the country. He spoke of the gap in government officials’ knowledge and investment laws in practice. There is even a sense of secrecy in draft legislation where government officials struggle with getting access to laws, in addition to conflicts between laws and a lack of coordination between ministries.
Investor-state dispute settlement
Figuring out the level of protection for an investor can be a challenge as there may be several levels of relevant laws to think about, said May Tai, partner at Herbert Smith Freehills, such as international treaties, domestic foreign direct investment laws and contract structures. But deciding whether a project may qualify as an investment can be a conundrum and this can affect whether the project may be protected by multilateral and bilateral investment treaties that are limited to approved investments. Another factor to consider is that a treaty may have a state-friendly interpretation or investor-friendly interpretation depending on the tribunal. Other contractual factors that can affect investor protection include stabilisation clauses, which put a halt to domestic law; waivers of sovereign immunity; and clauses specifying that expropriation amounts to repudiation.
Albert van den Berg, partner at Hanotaiu & van den Berg, outlined what investors should consider before choosing their form of dispute settlement which include experience in administering investment arbitrations, appointment of arbitrators, support and supervision of arbitral proceedings, confidentiality and transparency, costs, venue, but most importantly, the legal regime. The International Centre for Settlement of Investment Disputes (ICSID) administers 70% of investment arbitrations with 153 contracting states, with hearings conducted in multiple locations, including Hong Kong and Singapore. There is single control and automatic enforcement of award with oversight by an ad hoc annulment committee. In contrast, the UN Commission on International Trade Law (UNCITRAL) rules are enforced by national arbitration law which have exclusive jurisdiction or, if the case is non-domestic, the New York Convention is used. Investors should think about what dispute resolution mechanisms are available before they invest, not when a dispute arises.
Dispute settlement, the legal risks attached to project financing and options for investment protection are all important considerations for investors before they embark on investment opportunities in the developed and emerging economies along OBOR.