Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

1. Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis Dr. Alexander Böhmer, Head, MENA-OECD Investment Programme MENA – CLS, ACRLI Conference 22-23 January 2010 Beirut

2. Overview MENA Investment Flows Convergence of National Investment Laws Strengthened PPP Frameworks Corporate Governance Standards

3. Both FDI and capital flows to major emerging market economies have been impacted by the economic crisis 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. Private capital flows (principally bank lending) to emerging markets are expected to lead to a net outflow of foreign capital in 2009 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 93.7 CAGR 2000-2008: 61.6% Levant 78.1 67.2 North Africa Estimated drop of 30% in 2009 GCC  Keeping open and transparent investment regimes in times of economic crisis and beyond Source: UNCTAD GCC + Yemen: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Yemen North Africa: Algeria, Djibouti, Egypt, Libya, Morocco, Tunis Levant: Iraq, Jordan, Lebanon, Palestinian Territory, Syria

5. 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 Source: ANIMA, December 2009

6. 2. Convergence of National Investment Laws

7. Key Motivations for Investment Laws Key Motivations for Investment Laws Regulation of FDI Encouragement of FDI No specific regulation of FDI, but sectoral restrictions Restriction of FDI Full National Treatment of FDI Past =>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=>=> Present

8. Key Themes of Investment Laws Key Themes of Investment Laws Investor Guarantees Positive vs. negative list Screening/ Approval Procedures Entry Institutional provisions Investment Incentives Coherence with International Obligations

9. Key Chapters in Investment Laws I. Regulation of Entry II. Screening and approval III. Investor guarantees IV. Institutional provisions V. Investment incentives

10. 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)

11. I. Entry: OECD FDI Restrictiveness Index

12. 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

13. I. Entry: Network Bilateral Investment Treaties Number of signed Bilateral Investment TreatiesJune 2009 Source: UNCTAD (2008).

14. 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

15. 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

16. Summary: Possible regulation of access • Issue Negative List • Transparency • Predictability • 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) • 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

17. 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.

18. 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

19. 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.

20. 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

21. 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

22. 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

23. 3. Strengthened PPP frameworks

24. 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

25. Chapter I-2: Framework for Privatisation and PPP Privatisation and Public Private Partnerships 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

26. Regulatory Frameworks for Public Private Partnerships in MENA countries Two approaches TRANS-SECTORAL Privatization/ Concession/ Public Private Partnership legislation SECTORAL Sector regulations/ Sector authorities (only) planned operative in approval process • Libya • Qatar • Kingdom of Saudi Arabia • Syria • United Arab Emirates/ Abu Dhabi • Algeria (2001) • Bahrain (2002) • Djibouti (1997) • Jordan (2000) • Lebanon (2000) • Morocco (1989/98) • Oman (2004) • Yemen (1999) • Tunisia • Egypt • Iraq

27. PPPs law should allow option of full private sector ownership (BOO) Different forms of PPPs Problem Source: Cohen, Shams, Attia, 2002

28. Project Level: Parties and Legal Documents CONTRACTING AUTHORITY EXPORT CREDIT AGENCIES/BANKS Direct Agreement PPP Concession Contract INTERNATIONAL LENDERS PROJECT COMPANY SHAREHOLDERS/ PROMOTORS Funding Terms Equity LOCAL LENDERS Security Documents Documentation Insurance Contracts Subcontracts INSURERS CONSTRUCTION CONTRACTOR OPERATOR MAINTAINER

29. Privatisation and PPPs: Example of Egypt Public Private Partnerships - Achievements and Issues • 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.

30. 4. Corporate Governance Standards

31. Framework for Corporate Governance Corporate Governance Effective legal and regulatory framework for enterprises The rights and equitable treatment of shareholders Transparency and disclosure Responsibilities of the board and rights of stakeholders Corporate governance of state-owned enterprises • Effective corporate governance Framework • Coordination of supervisory responsibilities • 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 • 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

32. Corporate Governance: Achievements and Challenges, example Egypt Effective Legal and Regulatory Framework • 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)

33. CG codes and regulations in MENA: banks

34. Thank you Contact: Alexander Böhmer alexander.boehmer@oecd.org