Australian miners have been quick to recognise the opportunities in African mining, oil and gas projects and their vast experience and commercial expertise in the domestic resources sector means they are well placed to succeed. Current numbers indicate there are around 260 Australian companies with more than 600 projects across 42 nations.
Despite the interest, there is still much hesitancy when it comes down to committing to any Foreign Direct Investment (FDI) in Africa. The problem is two-fold: on the one hand, investments into non-renewable resources projects require large sums of capital expenditure over substantial periods of time that are for the most part illiquid. Further, a long-term investment by a foreign investor in a developing country poses many political risks such as the risk of expropriation of project assets and discriminatory treatment.
While there is no doubt that sovereign risk has declined in a number of developing countries, the instances of sovereign risk that do occur are widely reported. And they do continue to influence investment decisions.
Foreign governments in developing countries not held to certain levels of international accountability may lock horns with investor companies and breach contracts they have entered into with foreign investors or interfere with local relationships and business practices. Woodside Petroleum's $100 million pay-out to the Mauritanian Government in 2006 provides a reminder of how Australian FDI can go wrong. Woodside had entered into lucrative production-sharing contracts with the Government, which became dishonoured following the Government's removal from power in a bloodless coup. The new Government refused to recognise the legality of the agreements and argued that disputed amendments to the contracts were damaging to the national economic interest. While international arbitration was contemplated, the parties eventually settled out of court.
If Australian and Mauritania had an international treaty in force at the time of the Woodside dispute that governed the treatment of foreign investments, Woodside's negotiating position may have been substantially strengthened. For decades before treaties became the norm, foreign investors often had to rely upon the protection of home governments to safeguard investments in foreign countries. At times this gave rise to threat of military action or so called 'gunboat diplomacy'. For example, the Infrastructure Consortium for Africa notes that the US has sent troops to Latin America 34 times to resolve commercial disputes. Nowadays, states tend towards entering into Bilateral Investment Treaties (BITs) to establish protocols for how governments handle foreign investors. BITs have spread rapidly since the first treaty was signed in 1959 and are now seen as the primary legal mechanism governing FDI.
Some countries have taken up the BITs charge more enthusiastically than others. For example, China is a prolific signatory, having signed 32 BITs with African nations, with 13 currently in force. On the other hand, Australia has only one BIT with an African nation, Egypt. If Australia had more BITs in force with African nations, it could create a more stable and predictable business climate for Australian companies to operate in as well as a measure of comfort in terms of financing. Political risk insurance is also easier and less costly to obtain where a treaty is in place between a home and host state.
BITS are usually entered into between a developed country and a developing country and while the obligations are mutual, the developed country stands to benefit more from the protections afforded by the treaty while the developing country gains the much needed inflow of capital and economic development. The main BIT protections are:
- Direct action against the state - the most significant implication of entering into a BIT is that breach by the host state of obligations under the treaty allows not only the home state but also the foreign investor to take direct action against the host state
- Dispute resolution - BITs usually provide for disputes to be resolved through international arbitration, typically the International Centre for the Settlement of Investment Disputes. The trend in Australian BITs so far has been for the parties to enter into compulsory negotiations, failing which the investor can opt between relief through a domestic court of the host country or international arbitration
- Promotion and protection of investment - investments shall enjoy the constant protection and security in the host country and no unreasonable or discriminatory measures against the management, maintenance, use, enjoyment and disposal of the investments
- National treatment or most favoured national treatment - foreign investments shall be treated as favourably as local investments or as favourably as the most favoured foreign investor
- Expropriation - foreign investments are protected from expropriation, nationalisation or similar measures (with certain carve outs such as for the public interest)
- Compensation - a foreign investor may be entitled to compensation for expropriation or losses suffered owing to war, national emergencies, armed conflicts, insurrection, riot or similar events
- Transfer of payment and capital - foreign investors may repatriate their investment and returns back to their home country.
Given the myriad of protections afforded under a BIT, certain Australian companies have expressed frustration that the Australian Government has not taken a more proactive role in engaging in this process. In the Gillard Government Trade Policy Statement of April 2011, it is seen that:
- The Australian Government believes multilateral agreements offer the largest benefits and places great importance in progressing large-scale trade negotiations such as the Doha Round and Asia Pacific Economic Cooperation (APEC) forum
- The Australian Government takes a conservative approach to the benefits of trade agreements and will not enter into any trade agreement that falls short of the benchmarks set by the World Trade Organisation or Australian benchmarks of high-quality, truly liberalising trade deals that support global trade liberalisation
- The Australian Government will not tolerate foreign companies attempting to restrict Australian Government policy-making, having stated that it will no longer accept provisions in future BITs which allow companies to take direct legal action against states.
The problem with the Doha Round and APEC is that they are very large political bodies and progress very slowly as a result. The benefit of a BIT is that it is made between only two state parties and can be concluded relatively quickly. While multilateral approaches have their advantages, in some instances the Australian Government should still take a targeted country approach to foreign investment in consultation with key stakeholders, Australian businesses and Austrade to understand issues surrounding investment potential, sophistication of the foreign government and market, and level of associated risk that entry into the BIT entails for domestic affairs, given the mutuality of BIT protections. If this is done, it will be seen that the risk-reward ratio will sway to the latter for many developing nations with relatively stable governments, where there are tremendous resources opportunities emerging that have foreign companies jostling for the best position.
Furthermore, the Australian Government's outright rejection of all provisions in future BITs which allow for a foreign investor to bring direct legal action against a state is too extreme. It is understandable that the Government does not want foreign investors taking action to restrict its law-making powers under a BIT. However, this is unlikely to happen when Australia is entering into BITs with developing countries because it is likely that these will have far more Australian companies investing offshore than companies from the corresponding country investing in Australia. In these situations, Australian businesses need the ability to protect their investments by having the ability to bring actions against developing country governments. Removal of this provision in such a context effectively removes the teeth of the treaty and the key provisions that Australian companies will rely on when operating in developing countries. To address the Australian Government's concerns on this issue, it should be noted that:
- There are usually provisions in the treaties that preserve a government's powers to make laws in the national interest
- The dispute resolution provision conferring powers to take direct actions against states can be tailored to suit each individual circumstance
- Carve outs can be formulated to protect law-making powers relating to social, environmental and economic matters where those laws do not discriminate between domestic and foreign businesses.
Hence, it is strongly recommended that the Australian Government take a case-by-case approach to this issue instead of a blanket ban.
The Australian Government needs to take a proactive approach to opening up the African resources market for Australian businesses. At the moment, it is caught in a dilemma whereby it refuses to enter into BITs with developing nations unless there are proven economic benefits. However, Australian businesses would be assisted in making investments where there is more political certainty and protection provided by a BIT. There is a great opportunity at stake. Australian companies need the Government's support in taking advantage of those opportunities.
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