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Investment-agreements-practice

 INVESTMENT AGREEMENT IS THE CONTRACT WITH THE REPUBLIC OF BELARUS WHICH MAY PROVIDE THE INVESTOR WITH ADDITIONAL GUARANTEES, WARRANTIES, PRIVILEGES, TAX AND CUSTOMS EXEMPTIONS.  IN 2009 PROCEDURE OF NEGOTIATING AND CONCLUSION OF THE INVESTMENT AGREEMENTS WAS SIMPLIFIED, AND INVESTORS STARTED TO USE THEM VERY ACTIVELY - A COUPLE OF HUNDREDS WERE CONCLUDED OVER THE YEAR, MOST AT THE LEVEL OF MUNICIPAL AUTHORITIES.  STILL, THE QUALITY OF THESE CONTRACTS IS QUESTIONABLE AS THE GOVERNMENT STICKS TO THE TEMPLATE IT DESIGNED, WHICH IS NOT THE BEST EXAMPLE OF LEGAL QUALITY.  WE ARE WAITING FOR THE INVESTMENT AGREEMENTS TO BE TESTED IN BUSINESS PRACTICE AND ALSO BY ARBITRAL TRIBUNALS.  WE COULD WRITE ABOUT BENEFITS OF THIS TYPE OF AGREEMENT AND DIFFICULTIES FACED WHEN NEGOTIATING WITH GOVERNMENT, AND ALSO TIPS ON HOW TO OVERCOME THOSE DIFFICULTIES.

 

Please prepare answers to the following questions:

-          Do you have any examples of what additional guaranties, privileges, tax & custom exemptions were achieved by some investment agreement/s? Any famous case/s?

-          Have you consulted any clients from Lithuania (or Baltics) in preparing such agreements?

-          What main simplifications of negotiations and conclusion of such agreements appeared from 2009? What laws embedded them?

-          What do you see as main (potential) problems rising from these agreements and what are the recommendations?

 

 

Investment Agreement – a Panacea Against Investment Risks in Belarus?

During the last 2 years, „investment agreement“ has become a buzzword among international investors which decided to launch business in Belarus.  It seems like no significant acquisition, development project, or greenfield investment has happened without using this instrument.  Why did private business fancy the investment agreement so much, what is it trying to achieve by signing such document, and how well justified are the expectations related to it?

Some statistics. According to the information disclosed by the Ministry of Economy of Belarus on 18 July 2011, since late 2009 683 investment agreements has been concluded, including 622 agreements by Belarusian companies (including joint ventures and foreign enterprises) and 61 by foreign companies.  Those foreign companies mainly came from Cyprus (13), Russia (13), Iran (4), Switzerland (4), Germany (3), Czech Republic (3). 

The concept of investment agreement was first introduced in 2001 along with adoption of the Investment Code, a comprehensive legal act which replaced several quite outdated laws and ministerial acts that regulated investment activity during the first years of Belarus‘ independence.  According to the Code, such agreement could be made by the Republic of Belarus (represented by its government bodies or special organizations) directly with the investor in order to provide governmental support to investment projects of especially high importance to national economy.  The idea of contracting directly with Belarusian State appeared to be so unusual that up until 2009 concluded investment agreements could be counted by fingers of one hand.  Main reasons were that procedure of approval and making the agreement by the state was very complex;  also, interested state authorities were reluctant to undertake responsibility for granting to the investor significant incentives (tax, customs exemptions, and other) differing from what could be obtained under law.  One of the most famous agreements of the time was investment agreement between Minsk City Executive Committee and Ūkio banko investicinė grupė on reconstruction of one of the largest Minsk stadiums, Traktor, and development of adjacent areas, signed in autumn 2007.  It seems like this agreement in particular was ill-fated as the project has not progressed much from laying the first symbolic stone in the foundation of the project on September 1st of the same year.  Making of investment agreements was attempted with regard to many other, not less important, projects without much luck.  Instead, special tax, land use, and other incentives were granted to investors on individual basis by special acts of the President (edicts, decrees).

In 2009, Belarus Government decided to unify the practice of granting such incentives and also make conclusion of investment agreements easier.  On 06 August 2009 Decree # 10 on Creation of Additional Incentives for Investment Activity in the Republic of Belarus was signed by the President Lukashenka, later amended by Decree # 4 of 06 June 2011.  First of all, it has been clarified that investment agreements may be concluded with the Republic at two levels, depending on the scope of incentives provided.  The first level is that of ministries, state concerns, and municipal authorities, the agreement is signed when investment project does not require any extraordinary tax, customs, or other exemptions (which are, as a rule, beyond their competence anyway).  The main value of such agreement would normally be represented by guarantees of raw material base, product off-take arrangements, securing other administrative aid from government bodies and economic support from state-controlled enterprises.   The investment agreement of the second level requires approval of the President and is signed by the Council of Ministers, whereas it may contain unique privileges otherwise not provided by effective laws.  Decree # 10 summarized several important incentives and exemptions for the investors, which used to be granted under the above mentioned “individual” decrees and edicts.  Thus, investors acting on the basis of investment agreements may receive land for leasing without the normally required auction, exemption from customs duties and VAT with regard to goods imported for investment project needs, exemption from duties for recruiting foreign labor, and certain other privileges. In order to facilitate implementation of long-term construction projects, the Decree also allowed investors to begin construction under investment projects at the same time as producing construction designs for specific stages of the project (this may not tell much to a non-specialist but in practice means significant acceleration of construction).

The investors’ community reacted quite enthusiastically to this novelty:  according to official statistics, after the Decree # 10 entered into effect over 680 investment agreements have been concluded, most at the first level.  Our law firm, for example, received a number of mandates to draft and help negotiate investment agreements in diverse areas such as renewable energy, agriculture, real estate and construction, food & drink, and others.  Focus is on different incentives, e. g. tax, customs exemptions, land use privileges in development projects and guarantees of raw material supplies, long term pricing arrangements in projects in the energy sector and food & drink industry.  Of course in all cases investors are interested in guarantees of stable legal environment, guarantees against nationalization and requisitioning, possibility to resolve disputes in international arbitration and enforce arbitral awards against the sovereign, i. e. the Belarusian State.  And we have to admit that in most cases Belarus government officials demonstrated considerable understanding of investors’ interests and concerns and flexibility in negotiating these important elements of investment agreements.

Investment agreement is also often viewed as a universal tool to mitigate political risks seen by many in Belarus, immaturity of the country’s legal system and law application practice, government’s limited experience of cooperation with investors.  This is a good logic, but to have a realistic vision of how efficient the investment agreement can be, it is worth considering the following factors.

Belarus Government’s experience of cooperation with foreign investors is indeed comparatively limited.  It has developed a template investment agreement which first was presented as etalon (foreign investors were requested just to fill out few gaps in the template and submit the agreement to the sovereign party already signed by them) but then was labeled only as a recommended draft.  Still, negotiating government officials tend to stick to this template (21 clauses, approximately 5 pages long) and are very reluctant to change its structure or agree to extensive contents detailing the parties’ rights and obligations, liabilities, procedures of dispute resolution, etc.  One of the excuses is that even if the signing government body accepts a more detailed agreement based on the international standards, it will get stuck in the other involved authorities who under law must approve of the draft (as a rule, Ministry of Economy, Ministry of Justice, Ministry of Taxes and Duties, State Customs Committee) and do not like anything unusual (i. e. suggested based on the international practice) in the draft. 

Belarus government officials also seem to have their own understanding of what a quality investment agreement is.  Besides being lengthy document as close to the “government” template as possible (we know an agreement pertaining to acquisition of one of the largest banks in Belarus being just about 2 pages long), which raises no concerns with the above mentioned government bodies, the “ideal” investment agreement should mostly copy provisions of the Investment Code and Decree # 10, be negotiated quickly and signed at the annual Belarus Investment Forum in November.  Government clerks also often see the very fact of the Republic of Belarus making a contract with a private party as absolute guarantee of investor’s comfort and security, and exclude any possibility of the investment agreement ever allowing for any disputes between the parties, being tested by an international arbitration and, moreover, being enforced against the Belarusian State.

In our opinion, this position is quite near-sighted.  Belarus Government could study a bit more carefully the international investment arbitration practice (especially that related to CIS countries like Russia, Kazakhstan, and Ukraine) to realize that investment agreements with investors of all scales should be treated with greater diligence and more attention should be paid to the language of their provisions, quite many of which in those numerous concluded investment agreement are self-contradictory and ambiguent. Otherwise, the investment agreement as major instrument of securing foreign capital inflows could turn into a factor negatively affecting the country’s image of favorable investment destination.

Not less careful should be foreign investors, many of which seem to be tempted by the opportunity of getting quite quickly a simple “insurance policy” against major threats to their business in Belarus.  There can be no template investment agreement which addresses all business and legal peculiarities of any investment project, regardless of the amount, type of investment, composition of the parties and their rights and obligations respectively, economy sector in which the project is implemented.  Each case is unique even within the same industry.  The following elements should be treated with utmost attention (of course the list is not exhaustive).

1.       Composition of the parties to the agreement and division of responsibilities between them.  Questions which arise often in case of multi-party agreements are whether all co-investors and also a local joint venture company created by them should sign the agreement;  whether guarantees of raw material base should be granted by the domestic co-investor – a state owned enterprise, or by the Republic itself; whether investors having option rights to access the project at a later stage may be parties to the investment agreement from the start, and other.  Besides, what if investor at a later stage decides to participate in the project via a different entity from its group?  Formally, party to the agreement is changed and this must be negotiated and approved by the government afresh.

2.       Type of investment:  it is worthwhile deciding from the start whether the investor intends to invest equity and wants his possible local counterpart or the state to do the same, or wishes to have flexibility also to use borrowed funds.

3.       Period during which the investment incentives will remain effective, and scope thereof.  What if implementation of investment project takes longer than expected, or its structure is adjusted, or its scope is broadened?  The agreement should be flexible enough to accommodate these changes so no new rounds of approvals by the government bodies are necessary.

4.       Membership at state or local industry concern.  These relations are normally regulated by direct agreement with the concern which, however, is very often of low quality and addressing the matter in investment agreement is very expedient.

5.       Provisions ensuring cooperation of involved government enterprises, especially monopolists (power, heat, water suppliers).

6.       Possible withdrawal of parties from the investment project.  What if local co-investor, an enterprise that controls raw materials supplies, provides manpower, manufacturing facilities decides to leave the project?  What if the investor finds that the opportunity has exhausted itself and wishes to use his money some place else?

7.       Arbitration clause.  Government “template” suggests International Arbitration Court of the Belarusian Chamber of Commerce but foreign and international tribunals (ICC, Stockholm, LCIA, Vilnius) are far more practical.

8.       Waiver of sovereign immunity by the Republic, including immunity against interim measures and execution of arbitral awards – good thing for the investors to have in the agreement but of course depending on type and scale of the project the Government may be very reluctant to agree to such waiver, and investors should be reasonable when going for it.

The investment agreement has had a positive effect on activity of foreign investors in Belarus and has a yet greater potential as large scale transformation of the economy is just commencing now.  When used wisely, it may be an excellent supporting legal tool; when treated formally, it is capable of damaging the most carefully prepared and negotiated business project.

 

   

 


 [m1]This could come like a special side note rather than in the main body of the article.

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