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Oliver L Campbell : How will leaving
ICSID affect inward investment?

 

 

Bolivia, Ecuador and Venezuela have withdrawn from the Convention on the Settlement of Investment Disputes and Argentina has said it may soon do the same. It comes as no surprise these countries are ones that have most pending disputes for arbitration before the International Centre for Settlement of Industrial Disputes (ICSID). The table below shows Argentina has the highest number followed by Venezuela, Ecuador and Bolivia. The number of cases filed is reduced by those where settlements have been agreed and proceedings discontinued, and where awards have been made, but the figure is still a good indicator of the problems investors have encountered. .

 

Country

Convention effective

Convention denounced

Number of cases filed

 

 

 

 

Bolivia

1995

2007

4

Ecuador

1986

2009

14

Venezuela

1995

2012

36

Argentina

1994

not yet

49

The countries have usually offered compensation for any expropriation but the investors have considered it inadequate and gone to arbitration. The exception is Argentina where President Cristina Fernandez said no compensation would be paid when it expropriated Repsol's stake in YPF.

Countries have the right to withdraw from the ICSID at any time but, without Bilateral Investment Treaties (BIT's) in place, many investors will be deterred from investing there. There is no doubt the existence of a BIT with a country is seen as a safeguard by investors contemplating investment. However, it is by no means a requisite for attracting foreign investment. Brazil, for instance, has no such Treaties.

Bolivia is attracting foreign investment despite denouncing the Convention because the number of disputes with foreign investors is small and the country is seen as investor-friendly. It is attracting substantial investment in the hydrocarbons sector and I believe companies will continue to invest in the country.

Ecuador has a reputation for moving the goal posts. Investors wants certainty but the country frequently changes laws. The interpretation of the legislation is often inconsistent as well which creates an uncertain business climate. The extractive industries in particular have been hit by these changes. The political situation is also difficult and not conducive to good business relationships. I believe new investors will be wary of investing there but established investors, who know how to live with the situation, will continue to invest.

Venezuela has such huge oil reserves that I believe it will continue to attract investment from China, Russia, India, Iran and other eastern countries. The west most probably will not invest there--it perceived compensation offered upon nationalisation, basically net book value, as inadequate and has seen subsequently how the government expropriates businesses at the drop of a hat. In addition, the return, after high royalty and income tax charges, is lower than from other options. The government may reduce the windfall tax to entice more investment..

Argentina has the largest number of disputes of any country with investors and it does not help that in 2002 the country defaulted on bond repayments and so lost the confidence of foreign lenders. To expropriate Repsol's investment and then say no compensation will be paid will scare off potential investors. This situation will only worsen if it proceeds to denounce the Convention and I believe the country will find it difficult to attract investors

Investment in oil and minerals can give excellent returns and it is still a magnet for foreign investors. However, it always carries the risk of expropriation since the United Nations' Resolution 1803 states "The right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the State concerned." This risk is increased if a Bilateral Investment Treaty is not in place since the latter provides for adequate compensation not only for expropriation but also for substantive changes to the economic conditions .

The above is just my personal assessment and each investor needs to make his own. What I do recommend is to use the table of cases before the ICSID as a good measure of the risk involved in investing in the countries mentioned.

Oliver L Campbell

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Oliver L Campbell MBA, DipM, FCCA, ACMA, CGMA, MCIM was born in 1931 in El Callao, Venezuela where his father worked in the gold mining industry. He spent the WWII years in England, then in 1953 returned to Venezuela and worked with Compañía Shell de Venezuela (CSV). He spent 15 years in the oilfields and ended up as Company Financial Controller. Upon nationalisation of the oil industry, he went to Petróleos de Venezuela (PDVSA) as its Head of Finance. In 1982 he returned to England and was the Finance Manager of the British National Oil Corporation prior to its privatisation. He then worked as an oil consultant and retired in 2002 after fifty years in the oil industry. Petroleumworld does not necessarily share these views.

Editor's Note: All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.


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Petroleumworld News 06/20/2013

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