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Over the past few weeks, Egypt’s economy has been plunged into disarray, erasing some of the nation’s recent economic success. Now, Egypt and other countries throughout North Africa are looking hard at foreign investment, as they struggle to find a path forward amidst an unprecedented oil crisis and a collapse in tourism.
In Egypt’s case, its pitch to foreign investors is straightforward enough, highlighting its recently-enacted economic reform measures, its reductions in public debt, as well as the rise of the Egyptian pound despite the ongoing coronavirus crisis. It is making this case against the backdrop of a 5% growth rate in the past two years.
But as promising as that pitch may sound to investors, it will not do Egypt any good if the country fails to uphold the rule of law – and its contractual obligations particularly. Anything less would send a troubling message to investors about the willingness of Egypt’s government to honour its commitments. And that would be a dangerous step because investors need assurance that the Egyptian government will pay its bills.
Regrettably, though, Egypt is undermining that trust. Consider the Egyptian government’s handling of its contract with the Damietta International Port Company (DIPCO). In February, the International Court of Arbitration issued an award in favor of DIPCO and against the Damietta Port Authority (DPA)—an affiliate of the Egyptian Ministry of Transport—ordering the DPA to pay DIPCO a total of $427 million, including $120 million in lost profits, as a result of the DPA’s decision to illegally terminate a 40-year concession agreement with DIPCO to build and operate a sea port in Damietta, Egypt.
The expansion of the Damietta Port would have created long-term benefits for Egypt and its developing economy. In addition, as shareholders in the project, the DPA and Egypt stood to reap a huge financial windfall in expanded customs fees from the new port facility. Instead, the International Court of Arbitration panel found that the DPA breached the concession agreement, acted in an arbitrary manner and illegally violated the terms of the contract.
This latest arbitration award against Egypt illustrates an existing pattern of inviting foreign investment only to undermine the projects being backed. Indeed, the DIPCO award is just one of a long string of arbitration disputes and awards against Egypt since the Arab Spring in 2011.
The city of Damietta itself, for example, has been the site of several other international arbitrations involving the natural gas industry. In a recent case, Unión Fenosa Gas, SA (UFG)—one of the three largest gas operators in Spain—had a $2 billion decision rendered against Egypt by an ICSID tribunal.
To be fair, Egypt is not alone in getting into disputes with investors. For example, Kuwait is the subject of separate arbitration involving Egyptian real estate investors. That case stems from the cancellation of a contract for the Sharq Heritage Village project by Kuwait’s Ministry of Finance.
The Sharq Heritage Village was planned as a major urban-development project, including the restoration of historic buildings, as well as the operation of a hotel, restaurants and several commercial buildings in Kuwait City. But the contract wound up being cancelled, raising legal issues similar to those in the Damietta case.
And across the globe, countries with emerging economies are reneging on contracts or defaulting on debt obligations with foreign creditors with troubling frequency. Moody’s reports that between 1998 and 2015, at least 16 sovereign bond issuers defaulted, with Greece, Ecuador, Jamaica, Belize and Argentina defaulting twice during that same time period alone.
In March, Ecuador conceded that it wouldn’t be able to make a $200M payment on three of its sovereign bonds—a development which is likely to become more commonplace as the COVID-19 pandemic ravages economies in the developing world.
But the situation in Egypt stands out because the number of contract violations and disputes in North Africa’s biggest economy has been discernibly higher than in other countries. In turn, it needs to remedy this situation quickly.
The importance of foreign investment to rebuild from this pandemic is going to be great in Egypt, particularly at a time when international banks have indicated that they may increase the interest rate to reflect the higher risk of default without an effective remedy to recover damages.
But the prospect of such investment is put at risk as a result of the country’s troubling lack of transparency with foreign investors, cavalier attitude towards contracts and apparent disregard for the rule of law.
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