Strengthening MENA Investment and Corporate Governance Framework in
Response to the Crisis
Dr. Alexander Böhmer, Head, MENA-OECD Investment
Programme
MENA – CLS, ACRLI Conference22-23 January 2010
Beirut
Overview
1. MENA Investment Flows
2. Convergence of National Investment Laws
3. Strengthened PPP Frameworks
4. Corporate Governance Standards
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3
Both FDI and capital flows to major emerging market economies have been impacted by the economic crisis
Private capital flows (principally bank lending) to emerging markets are expected to lead to a net outflow of foreign capital in 2009
FDI flows to major emerging economics are expected to fall both in 2008 and 2009 while still remaining at historically high levels.
However, strong impact of the crisis on private capital flows.
Source: OECD Investment Division
4
FDI Flows into the MENA region have been less affected than other regions but are expected to fall in 2009
Source: UNCTAD GCC + Yemen: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE, YemenNorth Africa: Algeria, Djibouti, Egypt, Libya, Morocco, TunisLevant: Iraq, Jordan, Lebanon, Palestinian Territory, Syria
Estimated drop of 30% in 2009
North Africa
GCC
Levant
Keeping open and transparent investment regimes in times of economic crisis and beyond
67.2
78.1
93.7
CAGR 2000-2008: 61.6%
MENA Investment Flows
• 2003-2009: Gulf countries invested 59.4 US$ Billion in MENA: 41.9 US$ Billion in Mashreq and 17.5 US$ Billion in Maghreb
• In comparison, Europe has invested 53.5 US$ Billion in MENA: 22.9 US$ Billion in Mashreq and 30.6 US$ Billion in Maghreb
• USA/Canada invested 11.7 US$ Billion in MENA: 5.2 US$ Billion in Mashreq and 6.5 US$ Billion in Maghreb between 2003 and 2009
• The First Arab Economic Summit in Kuwait 2008 called for a more robust framework for economic integration
5Source: ANIMA, December 2009
Key Motivations for Investment Laws
Restriction of FDI
Regulation of FDI
Encouragement of FDI
No specific regulation
of FDI, but sectoral restrictions
Full National Treatment
of FDI
Key Motivations for Investment LawsKey Motivations for Investment Laws
Past =>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=> Present
Key Themes of Investment Laws
EntryInvestor
GuaranteesPositive vs.
negative list
Screening/ Approval
Procedures
Institutional provisions
Key Themes of Investment LawsKey Themes of Investment Laws
Investment Incentives
Coherence with International Obligations
Key Chapters in Investment Laws
I. Regulation of Entry
II. Screening and approval
III. Investor guarantees
IV. Institutional provisions
V. Investment incentives
I. Entry: International Framework
• Regulation of entry based on principle:
Under international law every state is sovereign in controlling entry and establishment of
foreign entities within its territory.
• But: international obligations can restrict this principle
– WTO– BITs– FTAs with investment chapters– OECD Instruments (Codes)
I. Entry: OECD FDI Restrictiveness Index
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S elec ted ME NA C ountries F DI R eg ulatory R es tric tiv enes s by All S ec tors (1=c los ed, 0=open)
0,000,100,200,300,400,500,600,70
Bus s ines s , Telec oms , Cons truc tion, Dis tributribution, Financ e, Touris m, Trans port, Elec tric ity
I. Entry: EIIAs
• Economic Integration Investment Agreements (EIIAs) with investment promotion provisions:– European Union association agreements– TIFA with US
• EIIAs with investment protection and liberalisation provisions– NAFTA– ASEAN Investment Area– Energy Charter Treaty– FTAs– GCC
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Number of signed Bilateral Investment TreatiesJune 2009
Source: UNCTAD (2008).
I. Entry: Network Bilateral Investment Treaties
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I. Entry: Positive List vs. Negative List
• List only the sectors which are closed to FDI – the so called ‘negative list’ approach. Certain MENA countries provide such a ‘list of FDI restrictions’ outlined in their investment laws or publicly accessible information sources.
• A list of remaining restrictions to foreign investment gives investors transparent and easily accessible information. This transparent approach is currently followed by Bahrain, Jordan, Qatar, Tunisia and Saudi Arabia
• Morocco has also prepared a negative list, although it is not included in the current investment framework.
• In the services sector restrictions of MENA countries are
II. Screening & approval procedures
1. Control procedures for general monitoring only (monitoring approach, national treatment)
2. Screening and approval procedures controlling certain criteria:
•Negative list•Ownership restrictions•National Security•Broader national interest (economic benefits etc.)
3. Screening to impose performance requirements/grant incentives
Summary: Possible regulation of access
1. Issue Negative List– Transparency– Predictability
2. Install transparent screening and approval procedure– To assess compliance with negative list– (To screen foreign investment under clearly defined national
interest considerations)– (To grant regulatory incentives and/or performance
requirements in line with international obligations)3. Provide foreign investor with the right to ask for review of decision
of Licensing authority by Ministry – Transparency– Equality of treatment (possible MFN obligations from BITs/WTO
framework)– Administrative guideline limiting discretion
III. National Treatment
• National Treatment provisions in some investment laws of MENA countries and part of the standard provisions in IIAs signed
• With respect to OECD member countries, the National Treatment approach of the OECD Investment Committee obliges adhering countries to notify their exceptions to NT within the framework provided by the OECD Declaration on International Investment and Multinational Enterprises.
III. Expropriation
• The majority of the MENA countries’ investment laws include legal guarantees against expropriation. Some more recent drafts include indirect expropriation.
• Moreover, international investment agreements concluded by MENA countries (BITs, FTAs with investment provisions) provide for guarantees in the case of expropriation.
• These agreements tend to preserve the international minimum standard, according to which expropriation is only lawful when it is carried out for a clear public purpose, without discrimination and upon payment of ‘prompt, adequate and effective compensation’.
• New: Indirect Expropriation
III. Free Transfer
• Generally, MENA countries vary in the degree to which foreign investors may freely repatriate capital. Several MENA countries also allow unhindered repatriation of capital without restriction.
• Thirteen of the MENA countries (Bahrain, Djibouti, Egypt, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Tunisia and United Arab Emirates, Iraq and Libya) report that they allow repatriation of capital without restriction.
• Algeria, Morocco, Syria and Yemen, operate restrictions of varying depth.
IV. Institutional provisions
• Key competences: Investment Promotion Agency/Ministries/other agencies, namely FEZ authorities
• Design of efficient Screening and Approval procedures on national/regional level
• Regulation of possible review instance for decisions of the Authority
• Internal organisational and procedural issues
V. Investment incentives: Overview
• Incentives offered are mostly fiscal: exemptions in actual investment phase and corporate tax holiday later on
• Regulatory incentives (outside FEZ) not common
• Nor are financial incentives
• Graduation of incentives according to geographic zones
V. Investment incentives
• Heavy reliance on fiscal incentives in the region
• Performance criteria for investors for granting incentives could be assessed
• Administrative discretion: rules-based, transparent, administrative guidelines, rights of investors to appeal?
• Intra-regional competition should be tackled
Privatisation/PPP: Choice of Methods
In the MENA Region, the dominance of the energy and telecom sector is even more obvious than on average (87%).
Projects in the transport sector comprised:airports, railroads, roads, seaports. Moreover, the water and sewerage sectors count 4% of the total vestments
Source: World Bank PPI Database, 2009. This page provides a snapshot of infrastructure projects in low- and middle-income countries by
developing region. Projects included are management or lease contracts, concessions, Greenfield projects, and divestitures. On MENA the database contains data from 1990 to 2008
Chapter I-2: Framework for Privatisation and PPP
Public Private Partnerships
Privatisation and Public Private Partnerships
PPP UNIT• Placement of PPP unit• Implementation stage• Coordination capacity
LEGISLATION• Status of Law
• Forms of PPPs covered• Stages of PPP process covered
CONSULTATIONS• Stakeholders consulted
• Frequency of consultations
COST-BENEFIT-ANALYSIS• Elements of analysis
PPP MONITORING• Frequency of Monitoring
Two approaches
TRANS-SECTORALPrivatization/ Concession/
Public Private Partnership legislation
SECTORALSector regulations/
Sector authorities (only)
operative in approval process
planned
•Algeria (2001)•Bahrain (2002)•Djibouti (1997)•Jordan (2000)•Lebanon (2000)•Morocco (1989/98)•Oman (2004)•Yemen (1999)
•Tunisia •Egypt•Iraq
•Libya•Qatar•Kingdom of Saudi Arabia•Syria•United Arab Emirates/ Abu Dhabi
Regulatory Frameworks for Public Private Partnerships in MENA countries
Source: Cohen, Shams, Attia,
2002
OptionAsset
ownershipOperation and maintenance
Capital investment
Commercial risk
Duration (years)
Service contract PublicPublic and private
Public Public 1–2
Management contract Public Private Public Public 3–5
Lease Public Private Public Shared 8–15
Build-operate own (BOO)
Private (bulk services)
Private Private Private 20–30
Concession Public Private Private Private 25–30
Privatisation Private Private Private Private Indefinite
Different forms of PPPs
PPPs law should allow option of full private sector ownership (BOO)
Problem
CONTRACTING AUTHORITY
PROJECT COMPANY
EXPORT CREDITAGENCIES/BANKS
INTERNATIONAL LENDERS
LOCALLENDERS
PPP Concession Contract
Direct Agreement
Funding Terms
Security Documents
Equity
Documentation
SHAREHOLDERS/PROMOTORS
Subcontracts
CONSTRUCTIONCONTRACTOR
OPERATOR MAINTAINER
Insurance Contracts
INSURERS
Project Level: Parties and Legal Documents
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•Effective frameworks for PPP have become and important comparative advantage for countries’ ability to attract international investors. Egypt has:
• New PPP strategy has been launched in 2006 and a horizontal PPP law is underway.
• Central PPP unit has been established in the Ministry of Finance, however coordination and buy in with line ministries is difficult.
• Horizontal PPP law is still missing forms of PPPs such as BOO*.
• 5 Pilot projects launched since 2006, however progressing slowly.
Public Private Partnerships - Achievements and Issues
Privatisation and PPPs: Example of Egypt
Framework for Corporate Governance
Effective legal and
regulatory framework
for enterprises
The rights and equitable
treatment of shareholders
Corporate governance of state-owned enterprises
• Effective corporate
governance Framework
• Coordination of supervisory responsibilitie
s
• Basic shareholder
rights
• Proportionality and control
• Acquisition of corporate control
• Equitable treatment of shareholders
• Legal protection of minority
shareholders
• Disclosure requirements
• Accounting standards
• Quality and independence
of audit
Transparency and disclosure
Responsibilities of the board and
rights of stakeholders
• Functions of the board of directors
• Qualification and objectivity of the
board
• Rights of stakeholders
• Separation of ownership and
regulatory functions of
SOEs
• Level playing field for SOEs
• Authority and capacity of
SOE boards
• Accounting and auditing
standards for SOEs
Corporate Governance
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Corporate Governance: Achievements and Challenges, example Egypt
Achievements• Introduction of Egyptian Code of Corporate Governance in
2005• Code of Corporate Governance for Public Enterprise Sector
2006• Creation of Egyptian Institute of Directors (EIOD) 2003• Creation of single non-bank financial regulator: Egyptian
Financial Services Authority (EFSA) 2009
Challenges• Streamlining and synchronisation: code, law, FSA• Ongoing revision of the Companies Law incorporating
governance requirements balancing with Code reform• Improving the implementation of the Governance Code• improving the capacities and power of financial regulator
(FSA)
Effective Legal and Regulatory Framework
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CG codes and regulations in MENA: banksCountry Name Code Name Other related Initiatives
Bahrain ----- Guidelines for banks based on Basel Committee's recommendations on Enhancing Corporate Governance for Banking Organisations
Jordan Corporate governance code for banks
Bank Directors Handbook of Corporate Governance
Egypt General corporate governance code applies to banks (under revision)
Draft Corporate Governance Guidelines for Egyptian Bank Directors
Lebanon Corporate governance code for listed companies and banks (forthcoming)
Guidelines for banks based on Basel Committee's recommendations on Enhancing Corporate Governance for Banking Organisations
Morocco Annex to the general corporate governance code pertaining to credit institutions (forthcoming)
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Saudi Arabia Corporate governance code for banks (forthcoming)
Powers and Responsibilities of the Board of Directors in Commercial Banks in Saudi Arabia
Qualifications and Requirements for Appointments to Senior Positions in Banks licensed in Saudi Arabia 1
Syria Code of governance for financial intermediaries
Yemen Corporate governance code, annex specific to banks (forthcoming)
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