strengthening mena investment and corporate governance framework in response to the crisis

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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

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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. Overview. MENA Investment Flows Convergence of National Investment Laws - PowerPoint PPT Presentation

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Page 1: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 2: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

Overview

1. MENA Investment Flows

2. Convergence of National Investment Laws

3. Strengthened PPP Frameworks

4. Corporate Governance Standards

2

Page 3: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 4: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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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%

Page 5: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 6: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

2. Convergence of National Investment Laws

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Page 7: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 8: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 9: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

Key Chapters in Investment Laws

I. Regulation of Entry

II. Screening and approval

III. Investor guarantees

IV. Institutional provisions

V. Investment incentives

Page 10: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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)

Page 11: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

I. Entry: OECD FDI Restrictiveness Index

11

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

Page 12: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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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Page 13: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

Number of signed Bilateral Investment TreatiesJune 2009

Source: UNCTAD (2008).

I. Entry: Network Bilateral Investment Treaties

13

Page 14: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 15: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 16: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 17: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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.

Page 18: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 19: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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.

Page 20: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 21: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 22: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 23: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

3. Strengthened PPP frameworks

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Page 24: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 25: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 26: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 27: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 28: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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

Page 29: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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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

Page 30: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

4. Corporate Governance Standards

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Page 31: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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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Page 32: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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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Page 33: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

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)

-----

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)

------

Page 34: Strengthening MENA Investment and Corporate Governance Framework in Response to the Crisis

Thank you

Contact:

Alexander Bö[email protected]