IFC Investor Protection Project for Mongolia December 2013

MODULE 1: INVESTOR

PROTECTION AND CONFIDENCE,

AND INVESTMENT

The Case for IP Reform

Political risk (PR) has emerged as one of the most important constraints for foreign

investment in developing countries, including Mongolia, a finding that has been consistently

sustained by investor surveys reported in MIGA’s World Investment and Political Risk.

As such, PR affects governments’ ability to successfully attract and retain investment and can

result in:

a. Lost investment: More than a quarter of corporate investors surveyed by MIGA in 2012

and 2013 said that in the past year, political risk had caused their companies to withdraw

from existing investments or cancel planned ones.

b. Significant (investment) opportunity costs: Even when investments take place, PR

imposes a risk premium that investors initially absorb but ultimately pass on to the host

country, through increased demand for incentives or reduced benefits / or scope of

investments.

c. Risk of high-cost investor-State disputes: PR exposes host governments to loss of the

investment, damaged reputation, and significant cost of litigation and arbitral awards

(average of $3 million in administrative costs and $10.4 million in damages per case).

d. Weak Governance: PR is associated with weak governance structures characterized by

low levels of transparency, high corruption etc. which, in turn, make the business

environment less competitive.

Expansion of established investments –and keeping existing

investors happy-- is as important as to attract new investors….

Reinvested earnings are becoming increasing sources of FDI…

Perceptions of political risk can deter investment

Ranking of the most important constraints for FDI in Developing Countries (MIGA 2012)

Stability and predictability is key for investors

Why should Governments be concerned?

One out of four corporate investors either withdrew from an existing investment or

canceled planned investments due to political risk concerns over the past twelve

months

0 5 10 15 20 25 30

Transfer and convertibility restrictions

Breach of contract

Non-honoring of gov't guarantees

Expropriation/nationalization

Adverse regulatory changes

War

Terrorism

Civil disturbance

Withdraw existing investment Cancel planned investments

Source: WIPR 2012

Political risks that

investors are most

concerned about relate to

government actions

Mongolia faces the same issues

Political risk has been increasing for the last 4-5 years:

♦ Adverse regulatory changes

♦ Breach of contract

♦ Expropriation

♦ Policy and decisions gap between central and local government

Resulted in:

♦ Drop in FDI

♦ Deterioration of Investment climate and sinking reputation

♦ Lost investment opportunities

♦ International arbitration

Measures and first steps:

♦ New Investment law – stabilization and incentives. Abolishment of SEFIL.

Implementation? Effective incentive policy?

♦ Investor protection through grievance management mechanism – GoM/IFC project (implementation starts in July 2014)

Increasing Investor Protection and Confidence – ultimate

goal of the project

Objective

• Unlock investment constraints through identification, tracking of investor protection issues (such as expropriation, breach of contract, arbitrary government action and lack of transparency, transfer and conversion of currency)

• Implementation of regulatory frameworks to reduce political and regulatory risk

Overall Impact

• Retention of existing investment

• Prevention of investor-State disputes

Implementation is critical…. How Can the IP Project Help?

Expropriation

Lack of transparency,

unpredictable and

arbitrary government

action

Local Government

decisions

Investors face problems

relating to…

INVESTORS

1. Tracking and Monitoring System

For each grievance/ problem record:

a) Investor profile and amount of stock of investment

b) Issue area

c) Government agencies involved

d) Impact of grievance on investment plan

e) Impact of grievance on revenue and other aspects

f) Action taken by investor

g) Existence of a domestic/international court case

relating to grievance; current status of case.

2. Grievance Management Mechanism

Key objectives will be:

a) Establishment of the Lead agency and its attributes

b) Information Sharing

c) Early Alert

d) Best practices on problem solving techniques

e) Implementation of solution

Breach of Contract

Example: Grievance Tracking and Monitoring

Grievance A

Grievance B

Grievance C RESOLUTION

Investment

Retained $

Investment not

retained $

Arbitration Dispute

Investment not

retained + cost

of handling

dispute

Grievance

filed with

tracking and

monitoring

system

GRIEVANCE MANAGEMENT SYSTEM

NO

RESOLUTION

Investment at Risk $

Grievance Management: Preventing grievances from escalating into legal disputes

Conflict becomes a dispute (notice of Intent for Investor-State Arbitration)

Grievance Management

Dispute resolution

Investor-State Arbitration

State or Agreement

Grievance Problem

Award Countries could improve their investment climate by taken care of Investors’ grievances an this stage

THANK YOU!

IFC Mongolia

Investment Climate Program