INVESTMENT PROTECTION AND THE RISE OF SOVEREIGN POWERS

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2011)
CHAPTER 1A
INVESTMENT PROTECTION AND THE RISE OF SOVEREIGN POWERS
Bernardo Tobar
Tobar & Bustamante Cia. Ltda.
Quito, Ecuador

BERNARDO TOBAR is the managing partner of Tobar & Bustamante Cia. Ltda., in Quito, Ecuador. He leads the Sustainability Unit as well as Business Development Strategies, particularly in regards to product innovation and expansion to international markets. In the area of Sustainability he advises regarding Corporate Social Responsibility, Corporate Government, Corporate Structure, Environmental Protection Policies and Risk Management Strategies, mostly for high exposure companies based on the dimension of their infrastructure or based on the nature of their activities. He usually leads contract negotiation teams dealing with the above-mentioned critical issues, focusing on the sustainable growth of the businesses he advises. Typically, these contracts relate to natural resources, infrastructure, investment stability and social investment programs. In regards to social responsibility, Bernardo advises on strategic communication and also assumes the responsibility of bringing together different communication and corporate image advisory sources in order to integrate them with legal procedures and global strategies to add value to his clients. During his more than 20 years of legal practice, Bernardo has devoted time and passion to the defense of intellectual property, having started the first intellectual property defense campaigns in Ecuador, and often participating as a guest speaker at conferences in various American and European countries under the sponsorship of the European Justice Court, the Andean Justice Court, the US Copyright Office and the World Intellectual Property Organization among others. He is the coordinator and co-author of "Intellectual Rights", published in 1995 after the X International Congress on Intellectual Rights organized by the WIPO, with many articles concerning intellectual property. Among his acknowledgements is that presented by the US Department of State for his contribution to the defense of Intellectual Rights, and for his efforts to obtain approval for the 1998 Intellectual Property Law, the main text of which was written in collaboration with other members of the Firm. In 1997 he was selected and honorary member of the International Who's Who of Professionals, and in 2010 has been selected by Global Law Experts as legal counsel for Ecuador on Corporate Law. Among his complimentary activities, Bernardo writes a weekly editorial for one of the major newspapers in Ecuador.

1. INTRODUCTION

Government actions in certain countries that challenge investment protection vehicles, such as the denunciation of the ICSID Convention and BITs and the enactment of laws limiting access to or the enforceability of international arbitration, have altered the usual approaches to investment protection. Meanwhile, state-owned enterprises and state-controlled ventures are taking advantage of opportunities which typical corporate investors may be less inclined to pursue. This paper will discuss alternative approaches in dealing with political risk and legal stability in countries where these and similar issues confront the mining and oil & gas industries.

The discussion about the scope and raison d'être of the sovereign powers of states is limited, as far as possible, in this document to the legal impacts related to the security of investments; it is nonetheless inevitable when setting the context, due to the nature of the subject, to observe political developments insofar as they spur changes in legislation. If we do not understand the backdrop to these changes, we will likewise find it impossible to imagine measures that will allow investors to reach their objectives while the countries receiving the investment also reach theirs. In the long run, there is no safer business than one which is equally attractive to all parties in the equation, and this equal footing in the relations is both a perception and a reality that can be technically evidenced in legal instruments. Law is a sine-qua-non factor in this analysis of equality, indispensable but not enough.

Recent history in the region has seen various examples of contracts for the exploitation of non-renewable resources. When analyzed from an academic

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viewpoint, from the penthouse of the most sophisticated legal laboratories, these contracts appeared safe and equitable. However, in the trenches where political undercurrents and public opinion are spawned and the forces of the stakeholders concur, basically in the commonplace corridors where decisions are born, they were seen as businesses that were not in the public interest and they have had to bear the consequences of this perception.

Whichever way one looks at it, it is obvious that the consequences for a developing state of taking measures that go against the security of investments are as negative for its own economy as they are for the bottom line of the investors who tolerate them, if not more so. But this essay does not set out to give advice to any politician or civil servant. It is addressed at business executives and their consultants and seeks, in the author's humble, frank opinion, to bring to light what could be done differently in a business environment that, like it or not, is no longer the same as it was a few years ago, and will not be the same again.

2. INTERNATIONAL SETTING

China has grown at an average rate of 9% and 10% for nearly three decades. It ranks first in the world in manufacturing and exports, has international reserves of US$ 2.5 trillion and a population four times larger than that of the United States of America (USA), whose economy it will overtake in just over a decade, according to experts. This economic might has enabled it to exert a growing influence worldwide, turning it into the largest trading partner of Brazil, South Africa and other emerging economies, in both Sub-Saharan Africa and Latin America. India and Brazil sided with China in the recent discussions on climate change, while Turkey and Brazil voted against the USA in the heart of the United Nations over sanctions against Iran.

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While China buys bonds from Greece and Portugal, the most powerful members of the European Union are struggling to quell their own crises and stabilize the euro.¹

And, contrary to conventional belief, Chinese leadership is not only expressed quantitatively in the figures of its macroeconomy but also in the indicators of its technological development. Thompson Reuters, leader in strategic information research, predicts that China will be at the forefront of technological innovation by 2011,² surpassing the USA and Japan, based on its patents, the local production of which has risen by 26.1% in the last five years, over 20 points ahead of its immediate rival. Traditionally based on agriculture and commodities, China's inventions in digital technology have increased ten times more in the last decade than those related to its natural products. It is hardly surprising that, in twenty-four hours, the Chinese can dispatch orders for parts and pieces used in the First World in the assembly of made-to-order vehicles.

Information on the quality and quantity of patentable inventions produced by a country is the most reliable and objective gauge for assessing the quality of its current education and forecasts its economic future in the new era, called "the Age of Knowledge".

If, besides the figures on China's economic and demographic growth, its position in the balance of trade with emerging economies and current monetary reserves, we add its imminent ranking in technological leadership, we are unarguably dealing with a culture that has significant influence on the configuration of the global business environment. And it is not the only one. India and other countries outside the western business pattern are doing their bit.

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A study by the National Intelligence Council, a branch of the CIA, states that China and India will transform "the world, geopolitical panorama, with as dramatic an impact as that which occurred in the last two centuries",³ adding that the multinational companies will have "a more Asian and less western leaning", and that globalization will become a phenomenon associated with the rise of Asia.⁴

But this is not just an Asian phenomenon. The Economist published a report on January 6, 2011, with the following figures:

Go south, young man
World's ten fastest-growing economies* Annual average GDP growth, %
2001-2010**	2011-2015***
Angola	11.1	China	9.5
China	10.5	India	8.2
Myanmar	10.3	Ethiopia	8.1
Nlgeria	8.9	Mozambique	7.7
Ethiopia	8.4	Tanzania	7.2
Kazakhstan	8.2	Vietnam	7.2
Chad	7.9	Congo	7.0
Mozambique	7.9	Ghana	7.0
Cambodia	7.7	Zambia	6.9
Rwanda	7.6	Nigeria	6.8
Sources:
The Economist IMF

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To these statistics, The Economist confirms that Sub-Saharan Africa is home to six of the ten fastest-growing economies in the world, despite the problems in this region, "among them political instability, the weak rule of law, chronic corruption, infrastructure bottlenecks, and poor health and education".⁵

Angola, heading the list with an impressive GDP growth of 11.1%, has wrestled in practice between civil war and authoritarianism. Since the 2010 Constitution, the country has officially abandoned representative democracy to adopt a form of government more similar to Caesarian monarchy, which is, in practice, what had actually been in force. Notwithstanding, the indices of foreign direct investment in the country averaged US$1.9 bn. per annum from 2000 to 2006 and, in 2008, China alone had approved loans for 13.5 bn., followed by Brazil with 1.8 bn.⁶

Thus there is a clear transformation on a world scale of how business is done, which does not respond...