09 April 2012 Written by  Tesfaye Abate

History of Investment Law

Throughout the history of capitalism, investment has been primarily the function of private business; during the 20th century, however, governments in planned economies and developing countries have become important investors.[1]

 

Before the 1930, investment was thought to be strongly affected by the growing rate of interest, with the rate of investment likely to rise as the rate of interest fell. Since then, empirical investigation has shown business investment to be less responsive to interest rates and more dependent on business men’s expectations about future demand and profit, technical changes in production methods, and the expected relative costs of labour and capital.[2]

 

Foreign investment, as one form of investment, was necessitated to ensure raw materials for productions in the Western states continued. At the time of colonization, resources were transferred from colonies to the metropolitan powers so that they could be converted into manufactured products or used to fuel the industries in these states. In the earlier stages, the petroleum sector was the most prominent sector for foreign investments. At that time, concession agreements were used to tie up resources for foreign investments.[3]

 

As time went, on the concession agreements ceased to be the norm in investment and were replaced by the production sharing agreements. These agreements reflect the shift in the power equations that have taken place within the investment, particularly in oil industry. Indonesia was a pioneer in the field of devising new arrangements for the oil industry. Such a shift was aided by the formulation of international law doctrines such as the doctrine on the permanent sovereignty over natural resources. The doctrine of the permanent sovereignty over natural resources has been translated into national legislation. Thus, constitutions and foreign investment legislation incorporated the doctrine. It was also possible to draft investment contracts that ensure the host state having greater control over the process of the exploitation of the mineral resources. As a result of this development, it was recognized that host states have the power to control their natural resources.[4] Thus, international agreements which have provided significant rights for investors were began in 1959.[5]

 

HISTORY OF INTERNATIONAL LAW ON FOREIGN INVESTMENT

 

International Law on Foreign Investment has passed through some history. The first attempt to create rules to govern the conduct of foreign investment was made by the United Nations conference held in Havana after World War II. At that time, it was felt essential to reconstruct the damage caused by the war. Having in mind this reconstruction purpose, a general attempt has been made to create an International Trade Organization (ITO). The proposed law of ITO under Article 12 provides provisions for the conduct of foreign investment that include the host states’ ability to regulate investment. This provision was opposed by some countries, particularly the United States of America. Such countries argued that the provision is contrary to liberal economic principles and public international law. The opposition contributed to the demise of the ITO.

 

In place of ITO, the General Agreement on Tariffs and Trade (GATT) came into being. However, GATT deals with a reciprocal tariff reduction agreement and it does not directly deal with foreign investment. In addition, the provisions of GATT will only be applicable if states have concluded agreements to govern international trade between them.[6]

When countries became free from colonization during the early 1960’s, they wanted to control their resources. Consequently, there was a conflict between the interest of host countries and the principles of international law that determined the relations between investors and host states.

 

What do you think is the cause of such conflict? The newly independent developing countries desired to control their natural resources in order to realize their dreams of development. On the other hand, the rules of public international law concerning foreign direct investment lacked a development-focused approach. Consequently, there emerged a conflict between the interest of the host states and the rules of international law on the field. Developing countries wanted rules of international law that would promote their desire to develop by sharing fair profits from foreign investment. Thus, developing countries advocated the reconstruction of international economic order in a manner that would expedite their economic growth and development. They succeeded in having the Charter of Economic Rights and Duties of States by using their majority at the United Nations. According to this Charter, the right of all states to regulate, supervise, expropriate and nationalize foreign investment has been reasserted. Nevertheless, the developed states argued that the resolution contradicts the rules of public international law on foreign investment.[7]

 

The evolution of international rule making in the field of foreign investment is marked by the growing prominence of bilateral, regional and plurilateral agreements aiming at encouraging foreign investment. Such arrangements have also an advantage in providing substantive standards with regard to the admission and treatment of foreign investment by host states.[8]

 

HISTORY OF INVESTMENT LAW IN ETHIOPIA

 

Coming to Ethiopia, though it is not possible to pin point the date investment was started, it is not new to Ethiopia.

I. The Emperial Era

The Ethiopian economy after the war with Italy was described as a mixed economy in which the private and public sectors worked hand-in-hand to achieve economic progress. The private sector was having good ground during this period since there was no any law that limited the private business.[9]

In the Emperial era, Proc. No 60/1944 and 107/1949 were enacted to promote foreign investment in Ethiopia. In 1950, the Minster of Finance gave an income tax exemption notice with a view to encouraging investment.[10] After that, in 1956, the Income Tax Decree which provided for income tax emption to encourage investment was promulgated. However, this Decree was replaced by the Income Tax Proclamation of 1963.[11] This Decree was the first proper law to regulate investment transaction in Ethiopia. After three years, i.e. in 1966, the Investment Proclamation No. 242/1966 was enacted.

What is special to those laws was that they did not provide investment areas for the government. Thus, investors could invest in all areas of the economy with no restriction. They also provided investment incentives which included: import export income tax exemptions, income tax holidays. It was also possible for foreign investors to own land required for their investment.[12]

Though the private sector was in good condition, the share of the domestic investors was very small due to lack of entrepreneurship.[13]

II) The Derg Regime

Then, the 1974 Revolution got rid of the concept of private property including private investment. This retarded the development in the sector. During the Derg regime, it was only the state that invests. After all that was considered investment proper.

The Derg regime adopted a socialist economic policy through National Democratic Revolution (NDR), which disfavours private investment. During this period, it was witnessed that nationalization was exercised repeatedly.[14]

Proclamation No 26/1977 heralded the start of nationalization. The proclamation clearly stated that it was necessary to transfer to government ownership all resources that were crucial for economic development.[15]

As a result, the government had controlled all private investments and the private sector was restricted to small industrial activities.[16] However, the government allowed investment through joint venture, i.e. investment in Cooperation with the Ethiopian Government.[17] The intention of the government was to introduce capital know-how, and technology into the country. But the law was taken as a disincentive to the private investors since the share of the government could grow from 51-99% while that of private investors could fall down from 49-1%.[18]

The government felt the necessity to change the economic policy in the late period of the Derg Regime and adopted a mixed economic policy by adopting the Multilateral Investment Guarantee Agency (MIGA) of which Ethiopia became a member.[19] Then, this economic reform was reiterated by the transitional Government of Ethiopia in 1992 after the down fall of Derg Regime.

III) The Period after Derg

The Derg regime was replaced by the Transitional Government. The Transitional Government, which was established in 1991 adopted an economic and investment policy directly opposite to that of the Derg regime. The policy emphasised the role of private investment in the development of the Ethiopian economy. In 1992, Ethiopia embarked up on the liberal economic policy which is deemed to be a favourable condition for investment. To implement this policy, the Transitional Government enacted Investment Proclamation No 15/1992 so as to open the door to private investment.[20] The proclamation also reserved some sectors such as large scale eclectic power and postal service to the government. It also provided for joint investment with the Ethiopian government.

The proclamation provided for incentives to attract and promote private investment. It also guaranteed against nationalization and expropriation. Thus, “no assets of a domestic or foreign investor may be expropriated or nationalized wholly or partially except in accordance with the due process of law”.[21]

The Investment Office was established by the proclamation to regulate and supervise investment activities.[22] The proclamation imposed a higher capital requirement for foreign investors and proclamation No 37/1996 was enacted to rectify this problem.

Thus, the following are essential developments[23] in Proc No 37/1996 and Regulations No 7/1996.

1. The minimum capital required from foreign investors has been reduced from 500,000 USD to 300,000 USD to establish joint venture with our government.[24] The minimum capital of retained profit and dividends reduced to 400,000 USD for expansion. Further, the capital requirement for foreign investors to invest in engineering and consultancy was reduced from 500,000 USD to 100,000 USD.

2. Foreign investors were relieved from the obligation to deposit 1258,000 USD in blocked account.

3. Foreign investors were also allowed to invest in building construction equipment, and in hotels whose standard was below the four star and five grades.

4. Foreign investors were allowed to repatriate capital from sale, liquidation or transfer of residence to their home country, in addition to profits, dividends, interests and payments arising from technological transfer.

5. It also provided for internationally accepted investment dispute settlement procedures where it was not possible to solve the dispute amicably.

6. Investment incentives were also extended to additional sectors such as education, hotels, tourism and health. Further, the period of incentives was extended from 3 to 5 years.

7. Banking and insurance, electricity generating up to 25 MW, air transport with the capacity of up to 20 passengers or 2,700kg. were reserved for Ethiopian nationals.

8. Both domestic and foreign investors were allowed to borrow money from abroad provided that they are registered with the NBE.

9. It was also provided under the proclamation that investors should be provided land within sixty days from the date of application for land.

 

In general, despite its constraints and drawbacks, the law seems to be attractive to the private investment when compared to the past regime’s restrictive policy.[25]

Investment (Amendment) Proclamation No 116/1998 and Regulations No 36/1998

These laws were enacted with a view to encouraging and facilitating investment (both domestic and foreign). Thus, the amendment was made with the aim of opening more investment areas to the private sector. It also aimed at providing additional investment incentives.[26]

These laws resulted in the following essential changes to the proclamation No 37/1996 and Regulations No 7/1996.

  1. The status of foreign nationals of Ethiopian origin: A number of Ethiopians were forced to leave Ethiopia and went abroad for political and other reasons (especially in the past regime).

It is felt important to give them a chance to invest in their country and to contribute in the economic development by investing their capital and know-how that they acquired abroad. Thus, Proclamation No 116/1998 provides that foreign nationals of Ethiopian origin are at liberty to chosse to be treated as domestic investors or foreign investors.

If they opt to be considered as domestic investors they must apply to the then Ethiopian Investment Authority (EIA) and fill a form which is taken as a promise not to be considered as a foreign investor.[27] Thus, they are relieved from a capital restriction on a foreign investors and be able to take part in investment with a capital of 250,000 Ethiopian Birr rather than 500,000 USD, 300,000 USD or 100, 000 USD.

In addition, they will acquire a right to invest in areas exclusively reserved to domestic investors by Regulations No 35/1998. On the other hand, they will lose the rights of foreign investors. Thus, they may not claim to repatriate their profits and capital outside Ethiopia, because such a right is given to foreign investors.[28]

Once an investor is considered a domestic investor, s/he/it may participate in investment areas exclusively reserved for Ethiopian nationals such as banking and insurance.

Employment of Expatriates

According to Proclamation No 37/1996, there were restrictions in employing expatriates imposed on investors both domestic or foreign.  First, they must ascertain that a person of the required qualification cannot be found in Ethiopia Second, they must arrange to replace such foreigners by Ethiopians within a limited period.[29] Nonetheless, Proclamation No 116/1998 avoided these restrictions with regard to foreign investors while maintaining the restrictions for domestic investors.

However, it is worth noting that Proc. No 116/98 gave a discretion to the EIA to allow or refuse the recruitment because prior consent of the Authority is a requirement. The restriction is also limited to top managerial positions though the term top managerial position was not defined by the law.

Ownership of immovable properties by foreigners to create conducive atmosphere for foreign investors and to make them feel at home in Ethiopia, Proclamation No 116/1998 allows foreigners to own immovable property required for their investment.[30] Immovable property in this context means buildings only since land is not the subject of private ownership but is made available for investors by lease.

Areas of Investment

One of the achievements of investment Proclamation No 116/1998 was that it fully opened the hydro-electric power generation for private sectors. However, the distribution of the electricity was still made to continue as the exclusive monopoly of the government. Thus, private investors were allowed to generate electric power and to sell it to a state owned electric distribution agency.[31]

Further, the proclamation allowed private investors to invest in the telecommunication sector jointly with the government,[32] although it which was reserved only for the government as per Proclamation No 37/1996.

Defence industries may be important to produce civilian goods and services in addition to weapons. Thus, it was felt important to allow private investors to participate in order to have the knowhow to efficiently run the defence industries that were inherited from the Derg regime.[33] Thus, Proclamation No 116/1998 allowed private investors to participate jointly with the government.[34]

Proclamation No 116/1998 also expanded the scope of consultancy services to include accounting and auditing services in addition to engineering, architectural or other technical services.[35]

Regulation No 35/1998 also recognized oil companies such as Shell, Mobil, Agip and Total as areas of investment for foreigners with a view to maintaining efficient service in supplying petroleum and its by products.[36]

Another important change made to Proclamation No 37/1996 was that Proclamation No 116/1998 conferred on the Ethiopian Investment Board the power to decide on additional investment incentives other than those provided under the Investment Regulations No.

Thus, the Board was given the power to initiate and propose additional investment incentives so as to promote investment, but the power to approve was given to the Council of Ministers.[37]

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[1] Encyclopedia of Britannica, Volume6 p. 365

[2] Ibid, p. 363

[3] Sornarajah; Ibid, p. 31

[4]Ibid, pp. 32-33

[5] Haward Mann and Etal; IISD Model International Agreement on Investment for Sustainable Development.https//www.iisb.org. April  2005, p. V

[6]Edmund  Kwaw;   GATT and the Debate about Investment Liberalization, p. 113

[7] Ibid, p. 114

[8] Ibid

[9] Lubo Teferi, A Critical Evaluation of Ethiopian Investment Laws with specific Reference to Proclamation No 116/1998 and Regulations No. 36/1998, (un published), Addis Ababa University, Faculty of Law, An LL.B thesis, May 1999, P.12

[10] Timothy P. Padman; “Income Tax Exemption as an Incentive to Invest in Ethiopia”, Journal of Ethiopian Law, Volume VI, No. 1, 1969, P. 215

[11] Ibid, pp. 216-17

[12] A.A Fatours in Lubo, Ibid, P.12

[13] Lubo, Ibid

[14] Ibid, P.13

[15] Proclamation No 26/1977, preamble

[16] See Lubo, Ibid, P.14

[17] Proclamation to provide for the Establishment of Joint Venture, Proclamation No 275/1983, Negarit Gaseta, - 42nd Year, No 6.

[18] Mellion Alemu, in Lubo, Ibid, P.14

[19] See Council of State special Decree No 17/1990, Negarit Gazeta, 49th Year, No 12 and Council of State Decree to Ratify the MIGA Convention, Council of State Decree No 39/1990, Negarit Gazeta, 50th Year, Number -12

[20] Assefa Ali, The Problems of Incentives Regimes of Private Foreign Investment in Ethiopia: the law and the practice, a Master thesis, Addis Ababa University, Faculty of Law,(un published), 2005, p. 29

[21] Proc. No 15/1992, Art

[22] Ibid, Art

[23] See Lubo, Ibid, Pp-17-19

[24] Proc. No 37/1996,  Art

[25] See Lubo, Ibid, P.19

[26]

[27] Lubo, Ibid, P.21

[28] Ibid, P.22

[29] Proc. No 37/1996, Ibid,  Art.37

[30] Proc. No 37/1996 (as amended)

[31] Lubo, Ibid, P.26

[32] Proc. No 37/1996(as amended), Ibid,  Art. 5(2) (b)

[33] Lubo, Ibid, Pp 27-8

[34] Proc No 37/1996 (as amended), Ibid,  Art. 5(2)(a)

[35] Ibid ,Art. 11(4)

[36] See Lubo, Ibid, p.30

[37] Proc. No 37/1996 (as amended), Ibid, Art. 28(1)

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