TABLE OF CONTENTS

INTRODUCTION.........................................................................................................4

CHAPTER ONE..........................................................................................................6

OVERVIEW OF INVESTMENT LAW..........................................................................6

1.1 Definition and Nature of Investment..........................................................................................................6
1.1.1 Meaning of Investment...............................................................................................................................6
1.1.2 Meaning of Investment under Ethiopia’s Investment Proclamation.........................................................9

1.2 Types of Investment.......................................................................................................................................11

1.3 Conflicting Economic Theories on Foreign Investment.............................................................................14

1.3.1.The Classical Theory...................................................................................................................................14

1.3.2.The Dependency Theory.............................................................................................................................17

1.3.3 The Middle Path Theory............................................................................................................................19

1.4. Risks in Foreign Investment.........................................................................................................................22

CHAPTER TWO....................................................................................................... 27

INTERNATIONAL LAW ON FOREIGN INVESTMENT............................................27

2.1 Sources of International Law on Foreign Investment................................................................................27

2.2 History of International Law on Foreign Investment.................................................................................33

2.2.1 Historical Background..............................................................................................................................33
2. 2.2 Attempts Made to Formulate Multilateral Instrument on Foreign Investment.......................................36

CHAPTER THREE....................................................................................................40

BILATERAL INVESTMENT TREATIES...................................................................40

3.1 Reasons for Rapid Growth in the Number of Bilateral Investment Treaties...........................................41

3.2 Features of Bilateral Investment Treaties....................................................................................................43

3.3 BITs Signed by Ethiopia................................................................................................................................51

CHAPTER FOUR......................................................................................................56

REGULATION OF INVESTMENT............................................................................56
4.1 General Overview on Regulation of Investment.........................................................................................56

4.2 Rationales for Regulation of Investment......................................................................................................59

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4.3 Regulation of Investment in Ethiopia...........................................................................................................63
4.3.1 Regulations During Entry/ Admission of Foreign Investment.................................................................65
4.3. 2 Regulation During Establishment and Operation....................................................................................71
4.3.3 Regulation During Exit or Withdrawal....................................................................................................80

CHAPTER FIVE........................................................................................................83

INCENTIVES, GUARANTEES, FAVOURABLE CONDITIONS AND PROBLEMS

TO INVESTMENT IN ETHIOPIA.............................................................................83
5.1 Incentives........................................................................................................................................................83
5.1.1 Incentives Under Ethiopian Investment Law...........................................................................................86

5. 2 Guarantees.....................................................................................................................................................93

5.3 Favourable Conditions and Problems..........................................................................................................97

5.3.1 Favourable Conditions.............................................................................................................................97
5.3.2 Problems.................................................................................................................................................101

CHAPTER SIX........................................................................................................104

NEW CONCERNS IN FOREIGN INVESTMENT: HUMAN RIGHTS AND

ENVIRONMENTAL ISSUES...................................................................................104
6.1 Introduction..................................................................................................................................................104

6.2 Human Rights and Investment...................................................................................................................105

6.2.1 The Human Rights Implications of Investment Liberalization..............................................................109

6.3 Foreign Investment and the Environment: Climate of Controversy......................................................113

6.3.1 Some Compromising Initiatives for Environmental Problems..............................................................119

CHAPTER SEVEN..................................................................................................122

SETTLEMENT OF INVESTMENT DISPUTES.......................................................122

7.1 Introduction..................................................................................................................................................122

7.2. State-to-State Investment Dispute Settlement..........................................................................................122

7.2.1.Dispute Settlement Mechanisms and Their Procedures.........................................................................124

7.3 Investor-to-State Investment Dispute Settlement.....................................................................................130

7.3.1. Investor-State Dispute Settlement Through ICSID Convention...........................................................135

ANNEXES...............................................................................................................141

ANNEX 1 - CASES................................................................................................141

ANNEX 2: BIT BETWEEN ETHIOPIA AND CHINA..............................................144

ANNEX 3- INVESTMENT LEGISLATION..............................................................151

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Bibliography.......................................................................................................... 174

3
Introduction

Dear distance learners, welcome to the study of the law of investment!

Investment is viewed as an engine for fueling economic growth and development to a country
which hosts the investment. Many countries have been busy to make sure that their economic
policies and legal framework attract both domestic and foreign investment. Especially, this
area of law has attracted the attention of investors and countries in recent years with the
increased level of economic globalisation. In particular, many developing countries have
been keen to attract foreign investment in the belief that it is an engine to their economic
growth. Because of the limited capital available on the part of companies in general and
multinational enterprises in particular, there have been competitions for attracting foreign
investment among countries. To become a better competitor, countries have been trying to
create conducive investment environment. They have been engaged in strengthening national
investment laws towards making them foreign investment friendly. They also concluded as
many bilateral investment treaties as possible and became parties to some regional treaties on
foreign investment. At the same time, they have also been trying to control investment to
ensure that it brings about the desired benefits to the host country.

On the other hand, capital importing countries have been cautious as to the adverse
consequences of investment if it is not properly controlled. Hence, they have been regulating
investment in order to minimize the adverse impacts of investment on social, economic and
environmental interests.

Against this backdrop, the first chapter of this teaching material deals with general issues of
investment. The meaning and type of investment in general and foreign investment in
particular is discussed. Different theories for and against foreign investment are also covered.
This chapter also deals with the risks that foreign investors might encounter in host countries.

The second chapter discusses international law on foreign investment. The different sources
of international law on foreign investment are discussed. The development of international
law on foreign investment in general and efforts made to formulate multilateral instrument on
foreign investment are also covered. This chapter also examines the relationship between
rules of international trade and foreign investment.

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The third chapter contains bilateral investment treaties. The reasons why countries have been
concluding as many bilateral investment treaties as possible is explored. Even though there
are large number of bilateral investment treaties, their feature is similar. Hence, this chapter
deals with features of bilateral investment treaties in detail. Moreover, bilateral investment
treaties signed by Ethiopia are also discussed.

Chapter four examines the regulation of investment by different actors. Regulations at

different levels of investment activities and the need to control investment are explored. This
chapter mainly focuses on regulations in place by Ethiopian investment law and other
domestic laws that have implications on investment. The fifth chapter explores legal regime
of incentives and guarantees in Ethiopia. Other important factors that have impact on offering
conducive investment environment such as market access, infrastructure, resources and other
factors are also discussed under this chapter.

Chapter six contains investment and other related issues. The relationship between
investment and human rights as well as environment is explored. The impact of investment
on human rights as well as environment or the vice-versa is examined.

The last chapter deals with settlement of investment disputes. Investor-to-state and state-to-
state types of investment disputes are discussed at length. Role of investment dispute
settlement organs such as national courts, arbitration (both ad hoc and institutional
arbitration), or international tribunals in settlement of investment disputes are examined.

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 Chapter One
Overview of Investment Law
The term investment features in our every day usage, which appears to provide a sense of
comfort with respect to its understanding. It appears that there is a simple and straight
forward definition of investment. However, the scope of what constitutes investment in
national legislations and international investment agreements may be beyond what is
commonly understood by the term. Different definitions have been provided in national
proclamations, bilateral investment treaties, regional agreements and decisions of investment
arbitration tribunals. Moreover, the extent of protection to investors and the role of states in
regulating investment also attract controversies. In this regard, different theories and laws
have been adopted. Thus, this chapter deals with the nature and meaning of investment, types,
theories and risks of investment.

Course objective
At the end of this chapter, students will be able to;

 Describe the nature and definition of investment;

 Identify the difference between foreign direct investment and portfolio investment;
 Evaluate basic theories on investment;
 Understand risks involved in Investment.

1.1 Definition and Nature of Investment

1.1.1 Meaning of Investment

There is no straight forward definition of investment. In fact, definitions of investment vary

in different legal systems. The definition adopted in bilateral treaties is also usually different
from the definition found in domestic investment proclamations. However, it can generally be
defined as ‘the expenditure of assets (capital) for the purpose of generating profits’. To
consider a given activity as investment there should always be expenditure of assets. Assets
can take two forms-tangible assets and intangible assets. Tangible assets refer to things which

6
have material existence such as machinery, equipments, buildings, etc. Intangible assets refer
to things that do not have material existence such as patent rights, copy rights, good will or
other business assets. The expenditure of either tangible or intangible assets or both can be
investment. However, any kind of expenditure of capital may not necessarily be investment.
The aim of the expenditure of capital should be to generate additional wealth or profits. If the
purpose of the expenditure of capital is for other purposes such as to promote religious or
other societal interests without profit motives, it does not qualify to be investment under the
law of investment.

The question of what constitutes an investment can be critical as it is a threshold

jurisdictional question in investment disputes. Only the interests of investors falling within
the scope of an “investment” defined in the particular applicable law can form the basis of a
claim. Hence, if the interest of the investor that is under dispute is not within the scope of
‘investment’, his claim would not be entertained by laws governing investment and
consequently loses his protection and privileges accorded to investment. His claim , however,
can be entertained by other laws.

Countries should take the necessary precaution in deciding what should constitute
‘investment’. Some of the definition provided in international agreements may be so wide
that even a simple contractual claims arising from the delivery of goods and services is
considered as ‘investment’. This may result in subjecting countries to many and undesirable
disputes with investors under international investment arbitrations. This can have far reaching
implications on costs to be incurred on the part of host countries. Thus, the definition of
investment should be made with greater precision.

Virtually all international investment agreements define investment. Nearly all of them
follow a typical formula in defining investment, which was propagated in Bilateral
Investment Treaties (BITs). This formula typically consists of a wide, open ended phrase,
stating that investment means “every kind of asset” or “any kind of asset”, and is followed by
an illustrative list of categories of assets, interest and rights. For example,

Article 1 of Ethiopia-United Kingdom BIT provides:

For the purposes of this Agreement:

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a. “Investment” means every kind of asset and in particular, though not exclusively, includes:

i. Movable and immovable property and any other property rights such as mortgages, liens
or pledges;

ii. Shares in stock and debentures of a company and any other form of participation in a
company;

iii. Claims to money or to any performance under contract having a financial value;

iv. Intellectual property rights, goodwill, technical processes and Know-how;

v. Business concessions conferred by law or under contract, including concessions to search

for, cultivate, extract or exploit natural resources.

A change in the form in which assets are invested does not affect their character as investments
and the term “investment” includes all investments, whether made before or after the date of
entry into force of this Agreement;

b. “Returns” means the amounts yielded by an investment and in particular, though not exclusively,
includes profit, interest, capital gains, dividends, royalties and fees;

The definitions of investment in other BITs to which Ethiopia is a party contain similar
definitions.

The fact that investment in most BITs is defined to mean “every kind of asset” or “any kind of
asset” with the illustrative categories serving as a non-exhaustive list of examples makes the
expanse of the BIT protection very vast.

The broad, general definition of investment found usually in BITs was developed by capital
exporting states to ensure that a wide variety of their investors‟ assets were protected in the
territories of their capital importing treaty partners. However, from the perspective of the host
state, the expanse of the types of assets covered under BITs can be problematic, particularly
as it makes it difficult for governments to predict which investments would be affected by its
measures.
Do you think that Ethiopia’s investment Proclamation defines investment in the same way as
BITs do? The following section discusses the meaning of investment under Ethiopia’s
Investment Proclamation.

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1.1.2 Meaning of Investment under Ethiopia’s Investment Proclamation

The provision of Art 2(1) of Proclamation No. 280/2002 (as amended) provides:
“Investment” means expenditure of capital by an investor to establish a new
enterprise or to expand or upgrade one that already exists.

The definition itself does not as such convey a clear meaning of investment. You will be able
to have a fuller understanding of its meaning once you read the definition of the terms
incorporated in the definition which are capital, investor, enterprise and expansion or
upgrading. These terms are further defined by the investment Proclamation.

Capital according to Art. 2(3) of Proclamation No 280/2002 (as amended), means “local or
foreign currency, negotiable instruments, machinery or equipment, buildings, initial working
capital, property rights, patent rights, or other business assets.”

From this definition it can be inferred that the law recognizes both tangible assets (such as
machinery, equipments, buildings, etc) and intangible assets ( such as property rights, patent
rights , or other business assets like goodwill, trade mark, etc) are considered investment. The
lists of categories of assets do not also seem exhaustive. It is illustrative in the sense that
other categories of assets not expressly mentioned in the definition may be within the scope
of the definition of capital under Art. 2(3).

The term ‘Investor’ is defined under Art. 2(4) of the Proc. Investor is defined as domestic
or foreign investor having invested in Ethiopia. Art. 2(4) provides a circular definition. It
appears that it is classifying investor into domestic and foreign investor rather than defining
the term investor. The definitions of domestic and foreign investors is provided under the
subsequent provisions nonetheless.

As per Art. 2(5) of the Proc. 280/2002 Domestic investor is defined as “an Ethiopian or a
foreign national permanently residing in Ethiopia, who has made an investment, and includes
the Government, public enterprises as well as a foreign national, Ethiopian by birth and
desiring to be considered as a domestic investor.”

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According to Art. 2 (5) three groups of people may be regarded as domestic investors under
Ethiopian investment law. The first group of persons are Ethiopians. Persons having
Ethiopian nationality are by definition regarded as domestic investors. Secondly, Ethiopians
by birth (having foreign nationality) can be considered as domestic investors if they wish so.
The only requirement for Ethiopians by birth to take them as domestic investors is to declare
their intention that they want to be regarded as domestic investors. Thirdly, the provision
states that even foreign nationals may be regarded as domestic investors provided that they
fulfil the requirements stipulated by the law. According to the same provision, if foreign
nationals permanently reside in Ethiopia having made an investment, they are taken for
domestic investors. Permanent residency is not sufficient for foreign nationals to be taken for
domestic investors. In addition to permanent residency, the purpose of the residence should
be to make investment. If there are foreign nationals who permanently reside in Ethiopia as
employees of some companies or foreigners engaged in promoting their religious values, they
fall short of being taken for domestic investors.

Foreign investor is defined under Art. 2(6) of the Proc. According to this provision a
foreign investor is “a foreigner or an enterprise owned by foreign nationals, having invested
foreign capital in Ethiopia, and includes an Ethiopian permanently residing abroad and
preferring treatment as a foreign investor.”

According to this provision, the following group of persons are considered foreign investors:
Persons having foreign nationality, enterprises owned by foreign nationals and
Ethiopian nationals who permanently reside abroad and desiring treatment as foreign
investors.
Persons having foreign nationality could be either natural persons or legal persons. According
to this provision, anyone having foreign nationality is a foreign investor by definition.
However, you should bear in mind that foreign nationals who permanently reside in Ethiopia
having made an investment are taken for domestic investors as per Art. 2(5) of the Proc.

This provision also states that enterprises (legal persons) may be regarded as foreign
investors even when the legal persons have Ethiopian nationality. This is so if these
enterprises are owned by foreign nationals. In other words, legal persons(enterprises) owned
by foreign natural persons are always foreign investors even where they might have been
incorporated under Ethiopian law and accordingly acquired Ethiopian nationality. Dear
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distance learners, what do you think is the rationale to take enterprises owned by foreign
nationals as domestic investor even when such enterprises have Ethiopian nationality? Do
you think enterprises jointly owned by both foreign nationals and Ethiopian nationals also fall
under the scope of this definition?

Moreover, the provision also stipulates that an Ethiopian who permanently resides abroad
may be considered as foreign investors if he/she opts to be taken as foreign investor. In other
words, Ethiopians residing abroad permanently are presumed to be domestic investors under
the law unless they desire to be taken for foreign investors.

The term Enterprise is defined under Art. 2(2). An enterprise is defined as “an
undertaking established for purpose of gaining profit”. According to this provision, entities
which are established for the purpose of promoting other societal values such religion, culture
or interests are not considered as investors. Their activities can also be taken as investment.
Hence, for entities to be regarded as investors, they should be engaged in expenditure of
capital with a view to make profits or to generate additional wealth. In other words, all for-
not-profit organisations are not investors under Ethiopia’s investment law.

Expansion or upgrading is defined under Art.2(8) of the Proc. According to this provision
“Expansion /upgrading” means increasing in value, by more than 25% the full production of
service capacity of an existing enterprise, be it in variety, volume, or both.”
For the law to consider any expansion or upgrading as investment, there has to be an increase
in value (be it in variety or in volume or both) by more than 25% of the existing enterprise. In
other words, an increase in variety or volume of an existing enterprise by less than 25 % is
not taken as investment in the eye of the law. Dear distance learners, why do you think the
law provides a minimum threshold for increase in volume of an existing enterprises to
consider their activities as investment? To answer this question, please see the relevant
section on Incentives under chapter five.

1.2 Types of Investment

Investment can be categorized into domestic and foreign investment. In brief, a domestic
investment is expenditure of assets whose source of capital is the host state. On the other
hand, foreign investment involves the transfer of tangible or intangible assets from one

11
country into another for the purpose of their use in that country to generate wealth under the
total or partial control of the owner of the assets. In foreign investment, the source of capital
for the investment is abroad. Foreign investment can further be divided into foreign direct
investment (FDI) and portfolio investment.

There can be no doubt that the transfer of physical property such as equipment or the physical
property that is bought or constructed such as plantations or manufacturing plants constitute
foreign direct investment. Such investment is contrasted with portfolio investment. Portfolio
investment is normally represented by a movement of money for the purpose of buying
shares in a company formed or functioning in another country. It could also include other
security instruments through which capital is raised for ventures. The distinguishing element
is that, in portfolio investment, there is a divorce between management and control of the
company and the share of ownership in it.

In the case of portfolio investment, it is generally accepted that the investor takes upon
himself the risks involved in the making of such investments. He cannot sue the domestic
stock exchange or the public entity which runs it, if he were to suffer loss. Likewise, if he
were to suffer loss by buying foreign shares, bonds or other instruments, there would be no
basis on which he could seek a remedy. Portfolio investment was not protected by customary
international law. Such investment was attended by ordinary commercial risks which the
investor ought to have been aware of. But, customary international law protected physical
property of the foreign investor and other assets directly invested through principles of
diplomatic protection and state responsibility. One viewpoint maintains that there should be
no distinction between portfolio investments and foreign direct investments as to the
protection given by international law. This view is based on the assumption that there is no
distinction between the risks taken by either type of investor, both being voluntarily assumed.
But, this view is not accepted generally in international law, where it is clear that foreign
direct investment is subject to the protection of customary law. Several reasons are given for
this differential treatment. The foreign investor takes out of his home state resources which
could otherwise have been used to advance the economy of the home state. The home state is
said to be justified in ensuring that these resources are protected.

Portfolio investments, on the other hand, can be made on stock exchanges virtually anywhere
in the world. Since the host state cannot know to whom linkages are created through the sale
12
of shares on these stock exchanges, there can be no concrete relationship creating a
responsibility. This is otherwise the case of foreign direct investment where the foreigner
enters the host state with the express consent of the host state. Nevertheless, the trend of the
law in the area may be to create responsibility towards those who hold portfolio investments
through treaties. This is a trend associated with the liberalization of the movement of assets.
Opinions are found in some that portfolio investments are now to be included in foreign
direct investments. To a large extent, such opinions are influenced by the fact that treaties
defining investments include shares in the dentition of foreign investment. But, as will be
demonstrated, shares in this context mean the shares of a joint venture company in which the
foreigner present in the host state has invested, and is not meant to include shares held by a
non-resident and purchased entirely outside the host state. There will be continued
uncertainty attached to the question whether portfolio investment is protected in the same
manner as foreign direct investment in international law. The better view is that portfolio
investment is not protected unless expressly included in the definition of foreign investment
in the treaty.

Foreign direct investment (FDI) plays a pivotal role in economic development. It provides
access to a number of economic factors which are indispensable in this context. These
include capital, technology and know-how. The volume of capital transfers through FDI is
considerably larger than all forms of development aid, bilateral and multilateral. During the
1990s and the first years of the twenty first century, the amount of FDI has grown
dramatically.

In addition, FDI facilitates access to world markets, to worldwide distribution channels and
other networks. This is not to say that all phenomena associated with FDI and with
globalization in general have been welcomed in all quarters. But there is broad consensus that
private investment constitutes the most important factor in economic development. This has
led many developing countries to revise their previously reserved attitudes towards FDI and
to adopt an open and welcoming attitude towards foreign investors.

The recognition that FDI is an important element in development has led many if not most
developing countries to strive to create conditions that are attractive to foreign investors. In
fact, nowadays developing countries often compete for FDI.

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1.3 Conflicting Economic Theories on Foreign Investment

Dear distance learners this section will spray the light to the general pattern of the subject. It
tries to provide some general background on most contentious issues in the world at large. As
part of global system, we may take a lesson to ours. These theoretical arguments do have far
reaching practical consequences. So try to give due attention.

Theoretical conflicts have had an impact on shaping legal attitudes to foreign investment.
Leaving aside the Marxist theories, the conflict is between two extreme theories, one of
which maintains that foreign investment is wholly beneficial to the host state while the other
maintains that unless a state turns away from dependence from foreign investment, it cannot
achieve development. There are theories which seek to adopt a middle course between these
extreme views. All theories focus attention on the eonomic development of the host state,
particularly the host developing state. Lawyers who favour complete protection for foreign
investments rely on theories which emphasize the positive effects of foreign investment on
economic development. This view gained impetus during the high point of globalization
when arguments made for the liberal flow of multinational capital had wide acceptance and
many legal instruments in the field reflected these views. There was also a formulation of
legal principles on the basis that they would promote such beneficial flows of capital.
Lawyers holding the opposite point of view argued to the contrary, relying on economic
theories which emphasised the deleterious nature of foreign investment on the host economy.

1.3.1.The Classical Theory

The classical economic theory on foreign investment takes the position that foreign
investment is wholly beneficial to the host economy. There are several factors which are
relied on to support this view:
A) Avoids scarcity of capital in the host state: The fact that foreign capital is brought into a
host state ensures that domestic capital available for use could be diverted to other uses of
public benefit.
B) Transfer of technology: The foreign investor usually brings with him technology which
is not available in the host state and this leads to the diffusion of technology within the host
economy.

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C) Creating new Job opportunity: There is new employment created whereas, without
foreign investment such opportunity for employment would have been lost. The labour that is
so employed will acquire new skills associated with the technology which the foreign
investor brings with him.
D) Transfer of Managerial Skill: Skills in the management of large projects will also be
transferred to local personnel.
E) Expansion of Basic Infrastructures: Infrastructure facilities will be built either by the
foreign investor or for the foreign investor by the state and these facilities will be to the
general benefit of the economy. The upgrading of facilities such as transport, health or
education to benefit the foreign investor will ensure to the benefit of the society as a whole.

Focus on these beneficial aspects of the foreign investment flows enables the making of the
policy oriented argument that foreign investment must be protected by international law.
Such protection will facilitate the flow of foreign investment and lead to the economic
development of less developed countries. It provides a strong, altruistic policy justification
for the protection of foreign investment through the principles of international law.

Events in the recent past have given a great boost to the view that foreign investment brings
uniform benefits to developing countries. The dominance of free market theories in the
United States and Europe ensured that the classical view on foreign investment dominated
thinking on the subject. The process of globalization was regarded as inevitable due to
advances in technology. This view promoted the idea that multinational corporations, which
were the forerunners of globalisation, should have unlimited movement around the world and
that their investments should be protected so that the process of global integration could be
advanced. The new mood was enhanced by the dissolution of the communist states and the
much flaunted triumph of capitalism. The 1990s were the hey-days of economic liberalism,
embodying the classical view on foreign investment. It swept across the world. It was also
spread by international economic institutions like the World Bank and the International
Monetary Fund. The conditional ties attached to loans granted by such institutions were an
effective means of the dispersal of these views. Privatization, liberalization and macro-
stability are the prescriptions given by these institutions to attract foreign investment which
would, it is assumed, contribute to development.

Practical considerations also led to the dominance of the classical view. The financial crisis
15
brought about by defalcations on sovereign borrowings had led to banks being unable to lend
money for development projects. Aid as a development policy was frowned upon by the new
leaders of the United States and Europe as it was inconsistent with the notions of economic
liberalism. With the dissolution of the Soviet Union, new states came into being. They
espoused free market ideologies and began to court foreign investment. The only capital that
was available was that provided by multinational corporations. There was strong competition
among the developing countries and the new states resulting from the collapse of the Soviet
Union for the available foreign investment capital. The espousal of the classical theory
became necessary to demonstrate that the states courting the multinational corporations were
receptive to their needs for protection of their capital flows..
.
Added to this was the attitudes taken by the World Bank and the International Monetary
Fund. They made loans conditional on the acceptance of ideas embedded in economic
liberalism. The term ‘Washington consensus’ came to epitomize the notion that the two
financial institutions acted in concert with the government of the United States in imposing
conditions that were based on notions of economic liberalism. There were theories in
international law which were being formulated favoring the instrumental use of international
law to favor the interests of the United States and the neo-liberal thrust. In this context, the
classical theory on foreign investment which had its base in notions of economic liberalism
gained great currency.

Criticisms against classical theory

The advantages of foreign investment stated by the proponents of the classical theory have
been countered by those who reject the theory.
A) Discourage local entrepreneurs: The existence of a foreign investment thus soaks up
local capital which could have been otherwise used to promote local entrepreneurial
endeavors. Often, the foreign investor, if permitted to do so, would raise the capital for
the project locally implemented than risk his own capital.
B) Repatriation of capital: As much as there is an initial inflow of capital where such
capital is brought from outside the country, there is subsequent repatriation of capital in
that profits are sent home by the foreign investor to benefit shareholders. The capital
outflow through repatriation often exceeds the capital that was initially brought in.
According to some studies, capital outflows through foreign investment in developing
16
 countries were twice as much as capital inflows.
C) Obsolete Technology: The technology that is brought in is usually outdated technology
or it is capital intensive and is unsuitable for labour intensive production in developing
countries. One of the many reasons for a company moving out of its home state to invest
in another country is that the product cycle for the goods it manufactured had been
replaced by other goods incorporating newer technology. The older product is then
moved into a market which is yet to receive such a product. If this reasoning is sound then
what is transferred in the manufacturing sector is not the state of the art technology. The
products which are made with such technology will not bring an export market for the
goods manufactured in the host state. Besides, there is much debate about the
appropriateness of the technology that is transferred from one economy into another.
D) Focus on lower management level: The claim that management skills are transferred
may also be illusory as higher management, particularly in positions requiring
confidence, is seldom within the reach of local personnel.
E) Human rights violations and environmental problems: As regards the building of
infrastructure facilities too, the question is whether benefits seep to all sectors of the
community or only to the elite who can afford to live according to the standards of the
foreigners and pay sufficiently to enjoy the same educational and health facilities enjoyed
by the foreign nationals working for multinational corporations. There has been
considerable literature on the alliance between elites of developing societies and foreign
investors resulting in repressive regimes and suppression of human rights to ensure the
continued maintenance of regimes favorable to foreign investment. Since their primary
target is profit maximization, their products may result in undesirable impact on the
environment.

1.3.2.The Dependency Theory

The dependency theory is diametrically opposed to the classical theory and takes the view
that foreign investment will not bring about meaningful economic development. It is a theory
which is popular among Latin American economists, although there have been studies in
other parts of the world based on the dependency theory.

The theory focuses on the fact that most investment is made by multinational corporations
which are headquartered in the developed countries, and which operate through subsidiaries

17
in the developing countries. The proposition is that the multinational devises a global policy
in the interests of its parent company and its shareholders in the home country. As a result,
the network of multinational corporations comes to serve the interests of the developed states
in which they have their headquarters. The home states become the central economies of the
world and the states of the developing world become subservient or peripheral economies
serving the interests of the central economies of the home states of the multinationals.
Development becomes impossible in the peripheral economies unless they can break out of
the situation in which they are tied to the central economies through foreign investment.

The resources which flow into the state as a result of foreign investment are seen as
benefiting only the elite classes in the developing state, who readily form alliances with
foreign capital. Indigenization measures and efforts to exert control by permitting foreign
investments through joint ventures are seen as failures because these attempts at control are
easily defeated by the foreign investor through his alliance with the elite.

Its significance to the law is that it may influence the restructuring of the economy by driving
out foreign investment and providing policy justifications for such restructuring.

This theory comes to the exact opposite conclusion that the classical theory comes to in that it
holds that foreign investment is uniformly bad. It holds that, rather than promote
development; foreign investment keeps developing countries in a state of permanent
dependence on the central economies of developed states. Unless a developing state can
break out of the situation of dependence, economic development becomes impossible in the
state. The panacea that is advanced is to get rid of foreign investment rather than attract it.
The theory reflects the long-held animosity to foreign investment in Latin American states. It
is perhaps a natural outcome of the dominance of the United States in the economic life of
Latin America.

The theory did influence many nationalizations that had taken place on some countries. Its
significance is that it provided a rationale for restructuring the economy excluding foreign
investment.

Dependency theorists see economic development not in terms of flow of resources to the host
state but as involving the meaningful distribution of wealth to the people of the state. The
18
appeal of the theory in times when globalisation has created increasing disparities in wealth
should be taken seriously. On this view, there cannot be development unless the people as a
whole are freed from poverty and exploitation. Development becomes a right of the people
rather than of the state. The appeal of the theory to international lawyers attracted by the
rights of people over the rights of states is enormous. If a shift does occur towards the
recognition of the rights of people, the role of international law in investment protection will
require radical rethinking.

The protests against globalisation and its impact on international law evidence a rift that is
taking place. The writings of some international lawyers tend towards the view that
international law should arise from the will of the people rather than the practice of states.
The reaching out of peoples effectively began when opposition mounted to the Multilateral
Agreement on Investments (MAI) sponsored by the OECD. This opposition concentrated on
the fact that the MAI provided protection to multinational corporations without addressing
the environmental and human rights harms that these corporations cause. These protests,
effectively interlinked through the new technology of the Internet, then steamrolled into the
movement against globalisation. The dependency theory has relevance in that movement in
that it symbolizes a way in which local interests could be protected against the interests of
multinational corporations.

1.3.3 The Middle Path Theory

The animosity which is directed against the multinational corporations, upon which theories
such as the dependency theory depend, has become somewhat dented in recent times. In an
age where communism has proved unsuccessful and the superiority of a free market economy
to marshal the means of production is gaining acceptance, theories which are hostile to
private initiative as the means of generating growth are unlikely to make headway. With
increasing privatization of state companies under way in developed countries as well as
developing countries and the dawn of capital markets in the East European states, there has
been a shift away from ideological predispositions to foreign investment. The view which
was once held that multinational corporations were a threat to the sovereignty of developing
states may not arouse the same degree of concern any more. The developing states have built
up confidence in dealing with these corporations. Multinational corporations, in turn, have
often left behind the role of being instruments of the foreign policy of their home states. On

19
occasions, they have even begun to form alliances with developing countries to the detriment
of their home states.

This reduction in hostility was furthered by the studies of the United Nations Commission on
Transnational Corporations. These studies helped to identify the beneficial as well as the
harmful effects of foreign investment. The beneficial effects identified were very similar to
those which were identified by the supporters of the classical theory of foreign investment.
There was a very definite identification of the fact that foreign investments made by
multinational corporations benefit the local economy through the flow of capital and
technology, the generation of new employment and the creation of new opportunities for
export income.

While pointing out the benefits brought in by foreign investment these studies also identified
the deleterious effects of foreign investment. For the first time, serious efforts were made to
identify the precise types of activity of multinational corporations which could harm the host
economy. This enabled the host countries to take regulatory measures to counter harmful
practices. They also resulted in efforts to fashion codes of conduct for multinational
corporations, thus generating principles, which though not international law yet, will have an
influence in shaping the course of the development of the law for the future. The underlying
theme of these codes of conduct was that multinational corporations should avoid certain
identified conduct which was seen as harmful to the economic development of poorer states.

The influence of the theory that strikes a middle course has been significant. It has been the
moving force behind much of the legislation on foreign investment in the developing
countries. There is an indication that many developed countries, which are increasingly
enacting legislation to keep out foreign investment perceived as undesirable, also take some
leads from this theory. Many developing states have now enacted legislation to set up
screening bodies which permit entry to or give incentives to investments which are approved
by these bodies. Some have legislation designed to ensure that technology transfers are
effected without too many restrictions on the use of such technology by the transferee.

On the international plane, the theory has been the basis on which codes regulating the
conduct of multinational corporations are sought to be formulated. The theory, which accepts
that multinational corporations can engineer development if properly harnessed, challenges
20
many propositions relating to international law which have been stated. Previously, on the
basis of the classical theory that foreign investment is uniformly beneficial, some
international lawyers have contended for an absolute rule of foreign investment protection.
This contention has been considerably shaken by the increasing acceptance that foreign
investment is not uniformly beneficial. The effect of the acceptance of the new theory is that
foreign investment is entitled to protection only on a selective basis, dependent on the extent
of the benefit it brings the host state and the extent to which it had behaved as a good
corporate citizen in promoting the economic objectives of the host state.

Developing countries generally view the success of the newly industrialized states of Hong
Kong, Singapore, Taiwan and South Korea as the models to follow. Though the classical
economists may believe that these states achieved success by following free market
economies and permitting full scope for non-indigenous capital and technology, this does not
present an accurate picture. There was considerable state regulation and intervention which
accompanied the process of industrialization of these states. If the emulation of these states is
possible, then, a mix of regulation and openness to foreign investment rather than an attitude
of hostility is necessar.

The impact of the "middle path" is seen in the legislation on the entry of foreign investment
into states. The pattern of the legislation in the different states is similar, indicating a strong
imitation effect in the shaping of attitudes to foreign investment. The basis of such
legislation, in terms of international law, is the principle of economic sovereignty of states.
The nature of the administrative control over foreign investment involved in such legislation,
however, increases the potential for conflict. Traditional international law sought to protect
foreign investment through the insulation of such investment from the reach of national law.
It relied on externally imposed minimum standards of treatment for achieving such
insulation. The new development, however, seeks to increase the control of national law
through means of administrative controls and supervision on the basis of a valid theory of
international law relating to economic sovereignty. The clash between these two attitudes,
both of which rely for validity on claims based on principles of international law, has yet to
be resolved.

21
1.4. Risks in Foreign Investment

The risks to foreign investment increased after the ending of the period of colonialism.
In the absence of protection through the exercise of military power, there has been an
increase in the risks to foreign investment in the modern world. Consequently, there has been
a search for legal methods of conferring protection upon foreign investments. The principal
risks to foreign investment come from certain uniform and identifiable forces. The following
factors are some of the major risks for foreign investment.

A) Ideological hostility

Communist ideology is opposed to private capital and private means of production. With the
fall of the Soviet Union, the force of communism has been dented. The remaining communist
states like China and Vietnam are experimenting with mixed systems that permit the influx of
foreign investment even into sectors of the economy that are controlled by state entities
provided the foreign investor makes a joint venture with these entities. Yet, socialism, as
distinct from communism, is also averse to property rights and remains a potent force in the
politics of most nations. Whenever socialistic notions take hold in a state, a threat to foreign
investment and to private capital will arise.

In states which are opening their doors to foreign investment, there are still political forces
which remain antagonistic to foreign investment either because they are socialist or because
they resent the possibility of foreign control of business sectors. Where groups with
ideological beliefs opposed to foreign investment come to power, there will be a definite
threat to foreign investment. The incoming government will seek the reversal of previous
attitudes to foreign investment. It may also want to dismantle the foreign investment which
had been allowed into the state by the previous government. It may regard the terms on which
entry was permitted as too favorable to the foreign investor and require them to be changed.
Regime changes, particularly those ideologically inspired, pose problems for foreign
investment.

22
B. Nationalism

Nationalistic sentiments pose a threat to foreign investments. Particularly at times when the
host economy is in decline, prosperous foreign investors who are seen to control the economy
and repatriate profits will be easy targets of xenophobic nationalism. They are ready targets
for opportunistic politicians who may see advantage in such a situation to bring about a
change of government. It is also easy to deliver the promise of taking over or divesting
ownership of established foreign-owned business ventures. It is a popular measure, which
would appease nationalistic forces.

Religious fundamentalism is of a like character. The Iranian revolution of 1981 was both
nationalist and fundamentalist. It resulted in the taking of US business interests. The Iranian
situation illustrates the futility of political maneuvering to protect foreign investment. In
1952, when the Mossadegh1 government sought to nationalize foreign-owned assets, it was
overthrown by the joint efforts of Britain and the United States. The monarchy, which
favoured foreign capital, was reinstated. But, several years later, Iranian nationalism took an
even more virulent, anti-American stance. Such virulence may not have been present if not
for the earlier interference in the efforts of a milder government. The driving out of US
business after the installation of the Ayatollah Khomeini resulted in the Iran–US Claims
Tribunal set up to determine the claims of US companies which had suffered damage as a
result of the Iranian revolution.

C) Ethnicity as a factor

Alongside nationalistic factors, the role of the ethnic structure of the host state on foreign
investment has become a focus of attention. Market liberalization promoting foreign
investment may accentuate problems arising from ethnic nationalism as foreign investors
make alliances with the economic elite of states, who usually belong to minority groups.
Measures like privatization, taking place in the context of corruption, visibly enhance the
wealth of these minority groups and their allies. Such situations contain the seeds of
instability.

1
Mohammad Mosaddegh was the Prime Minister of Iran from 1951 to 1953 when he was overthrown in a coup
d’état backed by the United States and Britain. He is most famous as the architect of the nationalization of the
Iranian oil industry, which had been under British control since 1913 through the Anglo-Iranian oil Company
( AIOC) (later British Petroleum or BP). The British government controlled the Anglo-Iranian Oil Co.

23
Some states, like Malaysia and now South Africa, have sought to deal with the problem
through constitutional means ensuring that the majority community has the opportunity of
sharing the economic cake in proportion to its size. Such solutions have met with a measure
of success. When treaties are made by such states on investment protection, the internal laws,
which are no doubt discriminatory, are preserved from being subjected to treaty obligations.
In states which have not worked out such an accommodation, the instabilities inherent in the
situation pose a threat to foreign investment as the dominance of the alliance between foreign
investment and the local entrepreneurial minority groups will become a target of political
animosity. Nationalization of foreign investment often becomes an option in such
circumstances.

D. Contracts made by previous regimes

Incoming governments may wish to change the contracts made with foreign investors by
previous governments. This may take place where there are allegations of corruption in the
making of contracts or where the legitimacy of the previous government is doubted on
objective grounds by the incoming government contracts made with military regimes will
pose a problem. There is a view that the foreign investor who made the investment agreement
with a totalitarian government consciously took the risk of its validity being contested by a
later democratic government and hence need not be protected.

F. Regulation of the economy

The modern state, despite its adherence to an open economy, contains a substantial amount of
regulatory mechanisms which control the economy. In the case of developing countries, the
adherence to the middle path, which has been described above, makes such regulatory control
intense. The scope for interference with foreign investment, which does not adhere to the
policy objectives behind the regulations, therefore increases.

Regulations are usually implemented through licensing systems and the sanction is the
withdrawal of the license. Without the license, the rights of operation of the foreign investor
in a sphere of activity become inoperative. The role of regulation and the extent to which it is
permissible becomes an important issue in the law. Many recent cases have considered the

24
question as to when a regulation is permissible and when such regulation becomes
expropriator so that it has to be accompanied by compensation. Regulation in the field of the
environment is the most common cause of disputes.

G. Human rights and environmental concerns

Competing concerns of environmental protection and the protection of human rights could
trump the interests of investment protection in certain circumstances. This introduces a new
element of instability into the international law on foreign investment. Please see chapter six
of this module for further discussion on the relationship between investment and environment
or human rights.

25
Review questions
1. What are the implications of defining investment broadly?
2. Do you think the definition of investment provided under Ethiopia-UK BIT would
pose any problem to Ethiopia? Explain.
3. Disccus the difference between foreign direct investment and portfolio investment.
4. Which of the three economic theories should be valid for Ethiopia?
5. Evaluate Ideological problem as a risk for Foreign Investment in our contemporary
world?

26
 Chapter Two
International Law on Foreign Investment

International law on foreign investment involves many areas that are of paramount
importance to the national interest of countries. It involves issues of social, economic,
political, legal and other related issues. Countries had diverging views on laws governing
foreign investment due to the sensitive nature of the issues involved. As a result, there has not
been a well-developed international law on foreign investment. This area of law has drawn
controversy among different countries. This has been one of the major reasons for lack of
well-developed international law on foreign investment. The different efforts to come up with
multilateral instrument on foreign investment had brought only a very limited success.

Objectives

At the end of this chapter, students will able to:

 Be familiarized with different sources of international law on foreign investment;

 Understand how laws governing foreign investment have developed through course of
time;
 Understand the major reasons for the failure to formulate multilateral instrument on
foreign investment;
 Examine how some rules of the World Trade Organization are directly related to
issues of foreign investment.

2.1 Sources of International Law on Foreign Investment

Dear distance learners, I hope you remember the different sources of public international law
from your international law course. These sources of international law are stipulated under
Art. 38(2) of the Statute of International Court of Justice. These sources are Treaties, custom,
judicial precedents, general principles recognized by nations and writings of scholars. As
foreign investment rules are part of public international law, sources of international law on
foreign investment would then be the same as sources of public international law.

27
 A. Treaties

Treaties are the main sources of public international law including international law on
foreign investment. There are different types of treaties. These are multilateral, regional,
plurilateral and bilateral treaties.

Multilateral treaties are those international instruments signed by large number of countries
across the world. Membership to multilateral treaty is not as such limited by geographical
location or level of development. Regional and plurilateral treaties, on the other hand, are
made on the basis of same geographical area or similar level of economic development. In
regional agreements, agreements are reached among countries in the same geographical area.
Plurilateral treaties mainly refer to those agreements concluded among countries at similar
levels of economic development even though they can also be made among countries in the
same geographical location.

As far as different treaties on foreign investment is concerned, there are no multilateral

treaties/ instruments on foreign investment. There are only either regional or plurilateral and
bilateral investment treaties. The non-existence of multilateral instrument on foreign
investment is not the result of failure to make efforts to formulate such treaty but rather the
result of disagreements over issues of foreign investment among many countries. In fact,
there have been a number of efforts to formulate multilateral instrument on foreign
investment. Such efforts almost proved to be a failure. Such efforts date back to the late
1940s when attempts were made to establish the International Trade Organization. Under the
Havana Charter the US proposed incorporation of investment issues. Dear distance learner, as
you may remember from your international trade law course, such organization did not come
into existence. The first attempt to incorporate foreign investment issues did not prove a
success.

In subsequent years, different attempts have been made with a view to come up with
international instrument in which large number of countries would be parties to such
instrument. Such attempts have been made by organizations like Organization for Economic
Co-operation and Development (OECD), by the World Bank Group, and the World Trade
Organization. In general, they all proved to have little success. Dear distance learners, please
see the section ‘Efforts made to Formulate Multilateral Instrument on Foreign Investment’ for
28
a detailed discussion on efforts that have been made by different organs to come up with a
multilateral instrument governing foreign investment.

Unlike multilateral treaty on foreign investment, there are several regional treaties on foreign
investment. Regional and/or plurilateral international agreements are agreements in which
only a limited number of countries participate and which are often not open to the
participation of all countries. They are of course binding on the participating countries alone
and applicable only to them. Such instruments are becoming increasingly important in
foreign investment matters.

The case of the European Community, now the European Union, is probably the prime
example of regional agreements in foreign investment issues; the extensive liberalization of
capital movements, the effective elimination of discriminatory measures and the adoption of
common rules among its members has had far-reaching effects on foreign investment among
member countries and an important impact on investment in and from third countries.
Investment in developing countries has been affected by the successive agreements
concluded between the European Union/ European Community and African, Caribbean and
Pacific countries, although the pertinent bilateral and multilateral arrangements foreseen in
the Conventions have been slow in their realization.

Other regional integration arrangements involve “shallower” integration, but still affect in
important ways of foreign investment. North American Free Trade Agreement (NAFTA) is a
significant illustration of a regional agreement which is not limited to developed countries
only and may indeed be extended to other countries. It is pertinent to note that, although
NAFTA is formally only a “free trade zone” -- and not a common market or an economic
union like the European Community/ European Union -- the agreement covers foreign
investment. Its provisions on the subject have already significantly influenced other
arrangements. It may in fact be considered as characteristic of a recent trend for free trade
agreements to include foreign investment in their scope.

The strongest provisions are those contained in Chapter 11 NAFTA. The provisions of this
chapter largely track the model bilateral investment treaty of the United States. It creates a
framework for the free movement of investments within the NAFTA region (the United

29
States, Canada and Mexico). The treaty provides for a strong investor–state dispute resolution
mechanism, giving the investor a unilateral right to invoke arbitration against the host state.

Regional and plurilateral instruments have some of the characteristics of multilateral ones:
the agreement of many countries is needed for their negotiation and conclusion, they often
have important institutional structures and they generally provide for their continuing growth
and development. At the same time, the number of countries involved is smaller and they
tend to be relatively homogeneous; the adoption of instruments that serve common interests
in fairly specific fashion is more feasible. With respect to foreign investment, regional and
plurilateral agreements have helped to change pre-existing structures of law and policy and to
create important habits and patterns of expectations on a broader transnational level, even
though not a universal one. As a result in recent years, regional agreements have often been
the sources of significant new trends in matters of investment law and regulation.

Bilateral investment treaties are treaties concluded between two countries. Countries have
been concluding a large number of bilateral investment treaties since the 1990s. There have
been proliferation of bilateral investment treaties as of the 1990s even though the first of its
kind was concluded in 1959. They are one of the most important international instruments on
foreign investment. Dear distance learners, for a more explanation of issues of bilateral
investment treaties, please see the chapter that deals with bilateral investment treaties.

B. Custom
Dear distance learners, do you remember course what elements should be fulfilled for a
customary international law to develop from your international law course ?

As you might remember, consistent state practice and opinion juris (sense of legal obligation
on the part of the states that practice) should be fulfilled for development of customary
international law on a given issue. Concerning issues on foreign investment there are only
few customs on foreign investment. The reason for lack of well developed customary
international law on foreign investment is lack of uniform practice and diverging views on
issues of foreign investment among countries. The history of international law on foreign
investment shows that, there has been different practices by countries and issues of foreign
investment were subject of controversies especially between the Western countries and many
developing countries. Dear distance learner, for a better understanding of why there has not
30
been a well developed customary international law on foreign investment, please read the
topics on ‘history of international law on foreign investment’ and ‘efforts to formulate
multilateral instrument on foreign investment.’ These sections show that there has been
diverging views and practices among countries on issues of foreign investment thereby
contributing to the lack of well developed customary international law on foreign investment.

C. General Principles of Law

The limited scope of the role of general principles of law as a source of international law is
generally accepted by authorities. Yet, many claims as to the existence of principles of
international law on foreign investment have been based on general principles of law. Thus,
much of the support for the payment of full compensation upon expropriation of foreign
property is based on arguments relating to notions of unjust enrichment and acquired rights
being general principles of law. The principle that compensation must be paid is itself said to
be a general principle of law.

General principles of law have been used widely by arbitration tribunals in extracting
principles applicable to investment contracts. Since there is a systematic pattern in their use
by arbitral tribunals and precedents have been built on the basis of past awards recognising
general principles, the existence of some general principles, cannot be denied. Consequently,
general principles have acquired a role in the shaping of rules in the area of foreign
investment protection. However, tribunals have used general principles in a manner which
may not be acceptable to states. They have often selected rules that favour the promotion of
investment protection and which are detrimental to the interests of the host state. This result
can be explained only on the basis that the present arbitral system is inclined towards
investment protection rather than towards the acknowledgment of norms that may favour
developing states.

D. Judicial Decisions

Judicial decisions are a subsidiary source of international law. Though stated to be a

subsidiary source, the decisions of the International Court of Justice and its predecessor
(Permanent Court of International Justice) have had an immense influence in shaping the
principles of international law. There are three significant decisions of these courts on the
31
area of foreign investment. The first, the Chorzow Factory Case a decision of the Permanent
Court of International Justice, remains the basis for any discussion of issues of compensation
for the taking of foreign property. The second, the Barcelona Traction Case concerned
corporate nationality and the diplomatic protection of shareholders of corporations. The third,
the ELSI Case concerned issues as to what amounts to a taking and whether liquidation of a
foreign corporation by a court could provide the basis of a claim that there was a denial of
justice for which responsibility arose in the state. There are other decisions of the
International Court of Justice which have peripheral relevance to the subject. Dear distance
learners, for details of the issues involved in each of the cases, please see the facts of these
cases which are annexed at the end of this teaching text.

Arbitral awards made on disputes arising from foreign investment transactions also contribute
to the subject. Relevant principles and rules may also be found in the norms applied by
international tribunals, particularly arbitral ones, when deciding disputes relating to foreign
investment. Transnational arbitration may thus not only provide the indispensable procedures
for dispute settlement but may also, through the corpus of its awards, gradually fill in the
gaps in the conceptual framework on foreign investment. While limited by the facts (and law)
of each case and formally binding only on the parties to the specific arbitration, such
decisions have contributed significantly to the development of the legal framework for
foreign investment in the last four decades, though not at times without controversy. The
extensive use of arbitration for settling disputes related to foreign investment obviously
confers increasing importance on this class of rules.

Both the awards made by ad hoc tribunals as well as those made by institutional tribunals
(please refer to the last chapter of this teaching material on the differences between ad hoc
tribunals and institutional tribunals), particularly those made by tribunals constituted under
the International Center for Settlement of Investment Disputes (ICSID), provide evidence of
possible norms which could be used for the construction of norms of international law on
foreign investment. Dear distance learners, see the last chapter of this teaching text to
understand how decisions of ICSID and other dispute settlement mechanisms could
contribute to the development of the law on foreign investment.

32
E. Writings of Scholars

The contribution of private persons and groups, scholars and learned societies should not be
ignored -- and not only because the Statute of the International Court of Justice, in its famous
article 38, provides, under subsection (d), that “the teachings of the most highly qualified
publicists of the various nations” are a subsidiary means for the determination of rules of
international law. The writings of scholars and commentators do not, of course, provide
authoritative rules; but they help to construct the conceptual framework and to crystallize
approaches and expectations that may eventually find expression in formal binding texts.

2.2 History of International Law on Foreign Investment

2.2.1 Historical Background

The history of investment activities by foreign nationals in territories of other states can be
traced back to early times. These kinds of investments existed in different parts of the world.
However, there was no well-developed international law that would govern foreign
investment. There are different reasons for lack of developed international law on foreign
investment in this period. First, investment was largely made in the context of colonial
expansion. Foreign nationals from colonial powers were investing in territories that were
colonized by the imperialist powers. If there were any risks against their investment, the
imperialist powers would provide protection either by use of force or any other means
without difficulties as the territories were under the colony of imperialist powers. Hence,
such investment did not need much protection under international law as the imperial powers
gave the protection. In this context the need for an international law on foreign investment
was minimal.

Secondly, even when there was a need to protect investment in the territories that were not
colonized, countries were resorting to use a mix of diplomacy and power to protect the
investment by their nationals in other territories. They would first try to resolve the dispute by
way of diplomacy with a state that endangered the property of foreign investors. If agreement
could not be reached between the host and home state, the home state would send its war
ships or other forces to the border of the host state to ensure that investment of its national
was protected or the investor was paid compensation if property of the investor was subject to

33
nationalization /expropriation. The use of force to protect investment was so-called “Gun-
boat diplomacy.”

If the condition of the investment activity could not be protected by the means mentioned
above, resort was made to international law on the treatment of aliens. Hence, international
law to resolve foreign investment issues was a last resort. This hindered the development of
international law on foreign investment. Dear distance learner, please try to remember (if
you do not know the principle as you read this topic) the principle of treatment of aliens
under international from your classes of international law course. As foreign investors are
aliens(foreign nationals), state responsibility for treatment of aliens under international law
would then be applicable to treatment of foreign investors by adapting the rules to situations
of foreign investment. Resort to such principle had led to controversy on the scope of the
principle.

For reasons mentioned above the need for a rapid growth of international law on foreign
investment was not felt or needed. However, as things started to change, there developed a
need for the growth of laws that would govern foreign investment. Many countries were
liberated from colonial dominations as of the early 20 th century especially in the period
immediately after WWII and 1960s. After liberation, the imperialist powers could not any
more give protection to foreign investment on their own to companies that invested in
formerly colonized countries as the territories were not in their direct control. In addition,
those countries which were under colonial domination became hostile to foreign investment
after their liberation and took over the property of foreigners or nationalized properties of
foreign investors in some cases without compensation. They feared that the domination of
their economy by foreign companies would threaten their sovereignty. Hence, they wanted to
regain control on some important sectors or on the economy in general.

Developed countries were pretty much concerned with such measures taken by many
developing countries. They could not use force against such countries to protect the
properties of the companies partly because use of force started to be condemned in the
international arena especially after bloody wars of WWI and WWII. Hence, many developed
countries were seeking ways that would protect the interest of their nationals abroad. They
then started to argue that there is international law that gives protection to foreign investment
and called for countries to be abided by such law.
34
It was in the relations between the US and its Latin American neighbours that the need for the
development of an international law relating foreign investment played a role during the
period prior to World War II. In the foreign investment relations between the US and Latin
American Countries, one witnesses the difference between developing and developed
countries on the kind of protection that would be given to foreign investors. The difference
was between the idea that a foreign investor should be confined to the remedies available in
the local law and the idea that he must be accorded the treatment according to an external,
international standard.

Many Latin American countries invoked the writings of the 19 th c. Argentine jurist Carlos
Calvo who had taken the position that under international law foreign nationals had no rights
greater than citizens of the host country. They argued that provision of equal treatment to
foreign investors satisfied the requirement of international law. On the other hand, the US
asserted that foreign investors should be given that treatment that is set under international
law. The US was of the opinion that there existed an external standard for treatment of
foreign investors- foreign investors could not be subject to standards set by domestic law of
host country.

The clash of ideas between the US and Latin American countries was mainly prevalent in the
relations between the US and Mexico when Mexico nationalized the properties that belonged
to US nationals. Even before the Mexican Constitution of 1917 had been promulgated,
agrarian expropriations were carried out in Mexico, including properties owned by American
citizens. A binational claims commission was established by agreement of the two countries
in 1927, but by 1938 not a single claim had been effected or paid. In July 1938, Cordell Hull,
the US Secretary of State, began a series of diplomatic exchanges with the government of
Mexico. Cordell Hull argued that right of prompt and just compensation for expropriated
property should be respected. He further argued there is an obligation on states to pay
compensation by standards set by international law. He argued that it is not acceptable under
international law for a foreign government to take the property of American nationals in
disregard of the rule of compensation under international law.

In response to letters from the US, Mexico responded that she is under obligation to pay
compensation in adequate manner but the doctrine which she maintained was that the time
35
and manner of such payment would be determined by her own laws. It asserted that there is
no external standard for treatment of foreign investors under international law.

The position of Mexico was in line with the idea of the Argentine jurist Carlos Calvo. Similar
idea was adopted by many developing countries. The principle that foreign investment would
be protected only in accordance with domestic law was called the Calvo doctrine. It was
named after the Argentine jurist Carlos Calvo.

The idea advocated by Cordell Hull- by then the secretary of state of the US, had acceptance
by many developed countries. Hence, the idea that there is an external standard set by
international law to determine the manner and amount of compensation for foreign
investment was called the Hull Formula. This principle was named after Cordell Hull.

Nationalizations took place not only in Mexico but rather in many parts of the world there
were wave of nationalizations for a long period of time. This in turn heated the debate on the
kind of treatment that should be accorded to foreign investors in case their properties are
subject to nationalizations. Such nationalizations and the debates that followed had an impact
on the growth of international law on foreign investment.

2. 2.2 Attempts Made to Formulate Multilateral Instrument on Foreign

Investment

As indicated above, there have been a lot of efforts made to formulate a multilateral
instrument on foreign investment but only with a limited success. The attempts have proven a
failure mainly because of the diverging views among different countries on issues of foreign
investment. This is so because of the fact that foreign investment issues are sensitive in the
sense that they involve a wide-ranging issues such as economics, politics and other issues of
special significance that make concluding agreements among countries difficult. Please read
the following article extracted from United Nations Conference on Trade and Development
series on International Investment Agreements: Key Issues (Volume 1) which shows the
different efforts made to formulate multilateral instrument governing foreign investment.
Developments since 1945: the early years

This was the general international legal picture at the end of the Second World War. At that
time, in the context of the creation of a broad organizational framework for the post-war

36
economy, an attempt was made to formulate international principles concerning Foreign
Direct Investment (FDI) in the Havana Charter of 1948. The Charter was intended to
establish an International Trade Organization and dealt mainly with international trade (the
original General Agreement on Tariffs and Trade (GATT) was based on its trade
provisions)). It also included, however, important provisions that addressed, directly or
indirectly, other issues, such as investment and competition. The initial United States
proposals for the provisions on foreign investment were intended to provide protection to
investors, but, during the last phase of the negotiations, important qualifications were
introduced through the efforts of developing, particularly Latin American, countries. It met
with strong opposition by investor interests in developed countries, and this was in fact partly
responsible for the Charter ’s failure to enter into force.

A watershed in the efforts to find common ground between developed and developing
countries on foreign investment was Resolution 1803 (XVII) of the United Nations General
Assembly, adopted in 1962, concerning the principle of permanent sovereignty over natural
wealth and resources. While recognizing the rights of peoples and nations over their natural
resources, including their right to exercise control over investments in such resources and to
nationalize them, the resolution provided expressly for the payment of appropriate
compensation for any taking of property and stressed that agreements between foreign
investors and Governments should be observed in good faith.

The decade of the 1970s

In the early 1970s, , the developing countries’ demands for a radical restructuring of the
world trading and financial system, under the banner of the creation of a New International
Economic Order, found formal expression in a series of programmatic texts embodied in
General Assembly resolutions, adopted by large majorities, but not without dissent. The most
relevant for present purposes are the 1974 Declaration on the Establishment of a New
International Economic Order and its accompanying Programme of Action (Resolutions
3201(S-VI) and 3202(S-VI)) and the Charter of Economic Rights and Duties of States
(Resolution 3281(XXIX)), also adopted in 1974. The latter, in particular, sought to restate the
basic legal principles governing international economic relations, focusing attention on
developing country demands for economic independence and stressing the legitimacy of their
concerns. The Charter’s provisions on the treatment of FDI emphasized the role of host

37
country Governments and insisted on the exercise of host country jurisdiction and national
controls over foreign investment and specifically over TNCs.

The past Three decades

When describing trends, an impression of uniformity, simplicity or clarity can be misleading.

The general climate surrounding FDI started to change in the 1980s and is still fluid. It is
now more favourable to FDI; but it still consists of many instruments and norms at several
levels, differing from one another in many respects. Neither the past nor the present legal and
policy situation concerning FDI is simple, universal and univocal.
A series of national and international developments has led to a radical reversal of the
policy trends prevailing

The past three decades have been a time of investment liberalization, promotion and
protection. Recent policy changes at the national level, however, have not yet been
extensively reflected in general multilateral instruments.

38
Review Questions
1. Discuss the role of judicial decision in the development of international law on
foreign investment.
2. What are the major reasons that have halted the formulation of multilateral instrument
on foreign investment?
3. Discuss Calvo doctrine and Hull formula.
4. Read the Barcelona Traction case and analyze the issues raised in this case.

39
 Chapter Three
Bilateral Investment Treaties
Bilateral investment treaties are treaties concluded between two countries. The importance of
bilateral investment treaties (BITs) has grown through course of time. They are currently one
of the most important instruments that govern foreign investment issues. Many countries of
the world have concluded such treaties for reciprocal promotion and protection of investment.
It can be concluded that issues of foreign investment between countries is mainly governed
by BITs (of course regional agreements also play a very important role in this regard). Hence,
because of their significance to issues of foreign investment, BITs deserve special discussion
on a separate chapter.

BITs were initially addressed exclusively to relations between home and host, developed and
developing countries. Yet, they have shown over the years a remarkable capability for
diversification in participation, moving to other patterns, such as agreements between
developing countries, or with countries with economies in transition or even with the few
remaining socialist countries. BITs appear capable of adapting to special circumstances. BITs
have been successfully utilized, for instance, in the past two decades throughout the process
of transition of Central and East European countries towards a market-type economy. The
recent increase in the number of BITs between developing countries suggests that they may
also be useful in dealing with some of the problems in such relationships.

There is very little known on the use that countries and investors have made of BITs. But
are being invoked in an increasing number of international arbitrations, and presumably in
diplomatic correspondence and investor demands. Their most significant function appears to
be that of providing signals of an attitude favouring foreign investment. Their rapid increase
in number has made them standard features of the investment climate for any country
interested in attracting foreign investment.

Objectives

At the end of this chapter, students will be able to:

40
  Understand the factors that led to a rapid growth in number of bilateral investment
treaties;
 Be familiarized with the common features of bilateral investment treaties;
 Examine the significance of concluding bilateral investment treaties to home and host
states;
 Examine the real impact of bilateral investment treaties to boost confidence of
investors;
 Be introduced with some of bilateral investment treaties signed by Ethiopia.

3.1 Reasons for Rapid Growth in the Number of Bilateral

Investment Treaties

BITs have been rapidly expanding in number. The first BIT was concluded in 1959 between
Germany and Pakistan. Germany continued to negotiate more such BITs and soon other
European nations followed suit. The growth of the number of BITs was not rapid during the
1960s, 1970s and 1980s as compared with the period in the 1990s and onwards. There were
less than 700 BITs between the period 1959 until 1980s. There has been a rapid growth in
the number of BITs as of the 1990s. Currently there are more than 2700 BITs concluded.
Dear distance learner, from discussions in earlier chapters, why do you think that there has
been a rapid increase in the number of bilateral investment treaties as of the 1990s? If you
cannot think of any reasons, please have a look at the previous topics specially history of
international law on foreign investment and efforts for the formulation of multilateral
instrument on foreign investment.

One of the major reasons for rapid growth in the number of BITs is the failure to formulate
multilateral instrument on foreign investment. The attempts made by countries to formulate
multilateral instrument have been discussed under chapter two. As has already been pointed
out, there were several unsuccessful attempts at multilateral treaties on foreign investment
protection.

The efforts at making multilateral instruments on investment will continue, but the possibility
of making strong rules in such an instrument remain a distant possibility. Bilateral treaties, on
the other hand, are different in that they are made on an ad hoc basis and their ability to give
rise to general principles is remote. In addition, such treaties could be negotiated in such a

41
manner as to suit the mutual interests of the parties, whereas a multilateral treaty cannot be.
Bilateral solutions become necessary simply because of an absence of a consensus to create
multilaterally acceptable norms.

The lack of a well developed customary international on foreign investment was also a factor
for rapid increase in the number of BITs. There were no clear rules developed by custom over
issues of foreign investment. In this confused state of conflicting norms, bilateral investment
treaties provided the parties with the opportunity to set out the definite norms that would
apply to the investments their nationals make in each other’s territory.

Change of ideology by former communist countries also contributed to the growth of BITs.
The states of the old Soviet bloc, now turning towards a market economy and foreign
investment, have begun making bilateral investment treaties with capital-exporting countries.
The practice began even when communism was still in place as the Eastern bloc countries
were desperately short of capital and looked to foreign investment to provide it. The
remaining communist states have also made several investment treaties. China, which
announced its ‘open door’ policy in 1984, signed over 100 such treaties within a short period.
Vietnam has also joined the trend. In the case of the remaining communist states and the
former communist states, the reasons for this treaty activity may be to dispel perceptions that
they are high-risk countries because of past ideological commitments that opposed the influx
of foreign investments and the notion of private ownership of property The treaties have a
signaling function in that they are addressed to the investment community to indicate a major
change of policy undertaken by a country in relation to foreign investment.

Other factors also contributed to the rapid growth of BITs in number. The lack of loans for
many developing countries following their failure to repay their loans caused capital available
to dry up. Many banks were not willing to give loans upon loan defaults on the part of some
developing countries.

Moreover, the principal reasons for developing countries concluding such treaties is the belief
that they will lead to greater investor confidence by dispelling any impression of risk
associated with the country in the past. In other words, many developing countries conclude
BITs in the hope that such conclusion would bring about flow of foreign investment by
boosting confidence of investors to invest in their territory. The assumption behind such

42
treaties is that the framework for protection they create leads to increased flows of foreign
investment. This assumption is coming to be questioned nonetheless. The mere fact of
concluding BITs does not seem to bring about flow of foreign investment. Conclusion of
such treaties is one factor that contributes to flow of investment. Nevertheless, it does not
mean that a country that concludes large number of BITs will necessary attract huge capital.
There are some other important factors that determine flow of foreign investment. It now
seems to take the view that other factors such as political stability and economic
circumstances play a greater role in promoting investments.

3.2 Features of Bilateral Investment Treaties

As discussed earlier, there are large numbers of BITs concluded by many countries across the
world. Considering the large number of BITs in force, they are remarkably similar. The
similarity of these BITs is mainly on the structure of the treaties even though many BITs also
share similar features in contents. This is not to suggest that all BITs have common feature as
far as the contents are concerned. There are few and in some cases basic differences between
different BITs. However, the structure of different BITs has a basic similarity.

BITs begin with introductory statements as to the aims of the treaty, which are usually the
reciprocal encouragement and protection of investment flows between the two states. This is
followed by definition of investment and investors which provide for the types of property
which are protected and the nature of the link of nationality to one of the parties that entitles
the foreign investor to the protection of the treaty. The standard of treatment to be accorded
to the foreign investor is also incorporated. The right of repatriation of profits is asserted.
There are provisions on expropriation. The standard of compensation in the event of a
takeover of the foreign investor’s property is identified. There are statements on the nature of
the compensation, if any, to be provided to the foreign investor for loss occurring during wars
and civil riots. The procedure for the settlement of disputes arising from the investment by
arbitration is stated. These are standard contents in all bilateral agreements. But, there are
variations on the contents of the rules that are to be applied as between the parties.
A. Preamble/ Introduction

Every BITs provide introduction or preamble. In their preamble BITs provide the purpose as
to why the countries signing the treaty are entering into such obligations. It is provided that

43
the investment treaty is directed at a reciprocal encouragement and protection of investment.
Preamble of BITs also stipulate that countries conclude such treaties with a belief that foreign
investment brings about economic and other benefits to both the host and home state. This is
just an expression that it is not only one of the countries that benefits from conclusion of BIT.
BITs stipulate that promotion and protection of investment benefits both countries that are
concluding BIT either directly or indirectly.

B. Definitions
Please see the relevant section under chapter one for issues related to definition of the term
‘investment’.

C. Standards of Treatment

There are a variety of standards of treatment provided for in bilateral investment treaties.
They may be contained in one article or more on treatment standards but would identify
several different standards of treatment. These include national treatment, most-favoured-
nation treatment (MFN), and fair and equitable standard of treatment.

1. National Treatment
National treatment can be defined as a principle whereby a host country extends to foreign
investors treatment that is at least as favourable as the treatment that it accords to national
investors in like circumstances. In this way the national treatment standard seeks to ensure a
degree of competitive equality between national and foreign investors. This raises difficult
questions concerning the factual situations in which national treatment applies and the precise
standard of comparison by which the treatment of national and foreign investors is to be
compared.

The national treatment standard is one of the main general standards that is used in
international practice to secure a certain level of treatment for foreign investment in host
countries. Other general standards include principally, fair and equitable treatment and MFN
treatment. National treatment is a contingent standard based on the treatment given to other
investors.

44
Terms used to express national treatment principles usually are “same treatment” or “as
favourable as that treatment accorded to domestic investors” or “no less favourable treatment
accorded to domestic investor.” These formulations suggest that the treatment offered to
foreign investors is no better than that received by national investors. In effect it excludes the
possibility of the foreign investor claiming preferential treatment as a matter of treaty
obligation on the part of the host country..

For national treatment principle in investment treaties to apply, the investors or investments
in a host country should be found in like circumstances. We cannot apply national treatment
principle in a situation where the investors or the investment activities are not comparable or
are not in like circumstances. There is no clear and straightforward meaning of “in like
circumstances”. However, whether investors or investments are in like circumstances or not
can be determined having regard to the type of investment or the amount of capital involved
in a given investment.

It would not, for instance, violate national treatment principle if a host state provides
incentives to domestic investors in the agriculture sector while it does not extend such
incentive to foreign investors who invest in the banking sector. This is because the
investment activities are two completely different types. They are not in like circumstances
and are not subject to comparison.

Exceptions to national treatment might be provided under the agreements. The exceptions
could either be general or specific. General exceptions are typically based on public health,
public order and morals, and national security. National Treatment instrument permits
distinctions of treatment for foreign affiliates consistent with the need to maintain public
order, the protection of essential security interests and the fulfilment of commitments to
maintain international peace and security.

The standard of national treatment is an important principle for foreign investors, but it may
raise difficulties for many host countries, since such treatment may make it difficult to foster
the growth of domestic enterprises. This is especially the case for developing countries, since
their national enterprises may be particularly vulnerable, especially vis-à-vis large
transnational corporations. Indeed, host Governments sometimes have special policies and
programmes that grant advantages and privileges to domestic enterprises in order to stimulate
45
their growth and competitiveness. If a national treatment clause in BIT obliges a host country
to grant the same privileges and benefits to foreign investors, the host government would in
effect be strengthening the ability of foreign investors to compete with local business.

2. Most-favoured-nation treatment

The most-favoured-nation treatment (MFN) standard is a core element of international

investment agreements. The MFN standard means that a host country must extend to
investors from one foreign country treatment no less favourable than it accords to investors
from any other foreign country in like cases. In other words, the MFN standard seeks to
prevent discrimination against investors from foreign countries on grounds of their
nationality. At the same time, the MFN standard sets certain limits upon host countries with
regard to their present and future investment policies by prohibiting them from favouring
investors of one particular foreign nation over those of another foreign country. The MFN
standard gives investors a guarantee against certain forms of discrimination by host countries,
and it is crucial for the establishment of equality of competitive opportunities between
investors from different foreign countries. For example, assume that there are investors from
country X and Y investing in the same sector in Ethiopia. If Ethiopia, accords favourable
treatment (either incentives or other privileges) to an investor from X, this same treatment has
to be extended to an investor who come from country Y provided that the investor undertakes
the same investment activity.

The MFN standard does not mean that foreign investors have to be treated equally
irrespective of their concrete activity in a given host country. Different treatment is justified
vis-à-vis investors from different foreign countries if they are in different objective situations.
Thus, the MFN standard does not necessarily impede host countries from according different
treatment in different sectors of economic activity, or to differentiate between enterprises of
different size. It would therefore not violate the MFN standard per se for a host country to
grant subsidies only to investments in, say, high-technology industries, while excluding
foreign investment in other areas. Likewise, the MFN clause would not give a big foreign
investor the right to claim government assistance under a programme that was designed only
for small and medium-sized enterprises.

46
The MFN standard is not without exceptions. While the degree and extent of these exceptions
vary considerably in individual treaties, they can be traced back to some general
considerations. Most BITs allow contracting parties to derogate from the non-discrimination
standard, if this is necessary for the maintenance of public order, public health or public
morality. Nevertheless, it is hard to identify concrete cases where, for example, the
maintenance of public order would actually require discriminating among foreign investors,
although the case of a foreign investor being involved in systematic abuses of human rights
might elicit such a response, especially if required by the resolution of an international
organization. However, most BITs do not contain an exception for national security reasons.
Nevertheless, it would seem that contracting parties could take at least any measure that the
United Nations Security Council would authorize them to take.

3. Fair and Equitable Treatment

The concept of fair and equitable treatment now occupies a position of prominence in
investment relations between States. Together with other standards that have grown
increasingly important in recent years, the fair and equitable treatment standard provides a
useful yardstick for assessing relations between foreign direct investors and Governments of
capital-importing countries. Broadly speaking, most legal systems strive to achieve fairness
and equity as a matter of course; however, when parties to a treaty agree, as a matter of law,
that fair and equitable treatment must be granted to foreign investors, it may be presumed that
the parties accept a common standard of treatment. One of the challenges in this area of the
law is to identify the main elements of this common standard.

Dear distance learners, three different standards of treatments are discussed above. In almost
all BITs we do find these standards. Have a look at the following standards of treatment
stated below from a BIT between Ethiopia and Swiss Confederation under Art. 4 of this
treaty and identify which sub-articles deal with national treatment, most-favoured-nation
treatment and fair and equitable treatment.

Art. 4 of BIT between Ethiopia and Swiss Confederation Provides:

ARTICLE 4
PROTECTION AND TREATMENT
47
1) Investments and returns of investors of each Contracting Party shall at all times be
accorded fair and equitable treatment and shall enjoy full protection and security in the
territory of the other Contracting Party. Neither Contracting Party shall in any way
impair by unreasonable or discriminatory measures the management, maintenance, use
enjoyment, expansion, or disposal of such investments.
2) Each Contracting Party shall in its territory accord investments or returns of investors of
the other Contracting Party treatment no less favorable than that which it accords to
investments or returns of its own investors or to investments or returns of investors of any
third State, whichever is more favorable to the investor concerned.

1) Each Contracting Party shall in its territory accord investors of the other Contracting
Party, as regards the management, maintenance, use, enjoyment or disposal of their
investments, treatment not less favorable than that which it accords to its own investors
or investors of any third State, whichever is more favorable to the investor concerned.
2) If a Contracting Party accords special advantages to investors of any third State
by virtue of an agreement establishing a free trade area, a customs union or a common
market or by virtue of an agreement on the avoidance of double taxation, it shall not be
obliged to accord such advantages to investors of the other Contracting Party.
3) For the avoidance of doubt it is confirmed that the national treatment principle
provided for in paragraphs 2 and 3 of this Article applies to investments once legally
admitted, whether through specific authorization or not.

D. Repatriation of Capital

Repatriation of capital refers to flow of capital from one country into another country. In the
context of foreign investment, it mainly refers to remittance of capital from the host state to
home state or any other third country. BITs have provisions that deal with repatriation of
capital.

As you know, the ultimate purpose of investors is to gain as much profit as possible. Hence, a
foreign investor who profits from investment will repatriate some capital from his profits. It
may also be the case that, a foreign investor might decide to partially sale his enterprise or to
withdraw his investment from the host state all together. In such circumstances, the amount
48
of money or capital that a foreign investor want to repatriate may not be effectively
transferred to his home country if the investor is not given the right to do so either in BIT or
in national legislations. Hence, to avoid or minimize any problems related to remittance of
funds, BITs do have provisions on repatriation of capital giving investors the right to
repatriate their capital under different circumstances.

As an example how BITs provide right of repatriation of capital to investors, please see a
provision on transfer of capital in the BIT between Ethiopia and China below. However,
please note that all BITs do not employ the same terminology and structure to deal with
issues of repatriation of capital.

Art. 6 of the BIT between Ethiopia and China provides:

Transfers of Investments and Returns

1. Each Contracting Party shall, subject to its laws and regulations, guarantee investors
of the other Contracting Party the transfer of their investments and returns held in the
territory of the one Contracting Party, including :

a) profits, dividends, interests and other legitimate income;

b) amounts from total or partial liquidation of investments;

c) payment pursuant to a loan agreement in connection with investments;
d) royalties in Paragraph 1 (d) of Article 1;
e) payment of technical assistance or technical service fee, management fee;
f) earnings of nationals of the other Contracting Party who work in
connection with an investment in the territory of the one Contracting
Party.

2. The transfer mentioned above shall be made at the prevailing exchange rate of the
Contracting Party accepting the investment on the date of transfer.

As you can see from the provision above, investors of contracting states are allowed to
repatriate almost all assets that belong to them. What is more, payments related for
rendering services and payments due for nationals who work in connection with an
investment can also be remitted. Hence, even capital which does not seem to form part of
investment like earnings from working in enterprises can be repatriated. The provision
also provides that the transfer of capital shall be made in convertible currency at

49
 prevailing exchange rate. This is one instance which shows that the right of repatriation is
broad and absolute.

E. Taking of Property and Compensation

The taking of foreign property by a host country has constituted, at least in the past, one of
the most important risks to foreign investment. As a foreign investor operates within the
territory of a host country, the investor and its property are subject to the legislative and
administrative control of the host country. The risk assessments that a foreign investor makes
at the time of entry may not be accurate since internal policies relating to foreign investment
are subject to change, as are the political and economic conditions in a host country. Changes
could be brought about by several factors, such as a new government, shifts in ideology,
economic nationalism or monetary crises. Where these changes adversely affect foreign
investment or require in the view of a host country a rearrangement of its economic structure,
they may lead to the taking of the property of a foreign investor.

The conditions that expropriation should be made only to serve public purpose and that it
should be non-discriminatory are stated in all bilateral investment treaties, and there can be
little doubt that these conditions form part of customary international law. It is such
customary law that is reiterated in these treaties. In this respect, the treaties do not create new
customary law but reinforce existing customary law as found in the practice of developed
states.

F. Dispute Settlement Mechanisms

Provisions concerning the settlement of investment disputes are a central feature of BITs. The
dispute settlement mechanisms in BITs can either be provisions dealing with state-to- state
dispute or investor-to-state dispute. Every foreign investment transaction entails a trilateral
relationship involving a host State, a foreign investor and the latter’s home State. Inherent in
the concept of State sovereignty lies the notion that a State has the power – which can be
qualified in BITs – to admit foreigners within its territory and to regulate their activities, as
well as to protect its nationals abroad from acts contrary to international law. Thus, within the
context of the regulation and protection of the investment activities of transnational
corporations, disputes might arise between States or between States and investors.
50
For further discussion on investment disputes between foreign investors and host states, and
between states please refer to the last chapter of this module.

3.3 BITs Signed by Ethiopia

The following discussions on BITs signed by Ethiopia has been extracted from an article
prepared by Habteselassi, Tewodros Tamiru entitled: Some Brief Notes on Ethiopian
Investment: BITs, FDI, and Development (2009).

As BITs are recent phenomena in the global economy so is the case in Ethiopia. The first
country to sign Bilateral Agreements on the Promotion and Reciprocal Protection of
investments with Ethiopia is Italy. The Agreement was signed in 1994 and has entered in to
force in 1997. Since then Ethiopia has signed BITs with more than twenty countries.

In Ethiopia, BITs are initiated, in most cases, as part of package agreements (trade,
commerce, health, education, culture, etc) in bilateral relationships. Usually, the negotiation
process commences with the exchange of draft BITs on either side. In some cases these
exchange of draft documents will continue on both sides even without being commented.
Both sides insisting on its draft document to be a basis up on which comments, proposals and
counterproposals are to be exchanged. Even when one of the drafts has been accepted as a
document for negotiation, the latter process will take many years before the document is
formally signed. Sometimes there will be no reaction on either side or on one of the
contracting parties.

Another issue on BITs signed by Ethiopia relate to whether signing of such treaties bring
about more flow of foreign investment into the country. No one can be certain whether BITs
ensure the security of foreign direct investment (FDI). The current Ethiopian Investment
Laws have incorporated similar provisions which give guarantees and protections to foreign
investments which otherwise are provided for in modern BITs. This could be one of the
reasons why many foreign investors have been investing in Ethiopia without their countries
having signed BITs with Ethiopia.

51
In effect, there is no direct correlation between BITs and FDI in Ethiopia as can be observed
until recently. Rather they are seen as part of the diplomatic activity in strengthening bilateral
relationship with countries. This in turn would serve as basis for tripartite and regional
cooperation in the form of ‘Joint Commissions’ or ‘Cooperation fora.

Here are the list of countries that signed BITs with Ethiopia.

Bilateral Investment Treaties(BITs) Signed by Ethiopia

Signatory Countries Date of Entry Place of

No. Date of in to Force Adoption Duration Sta
Signature
0
1 Arab Republic of Egypt July 27, 2006 Cairo

2 Federal Republic of Jan. 19, 2004 June 25, 2004 Addis Ababa
Germany

3 French Republic June 25, 2003 August7, 2004 Paris

4 Great Socialist People's Jan. 27, 2004 June 25, 2004 Addis Ababa
Libyan Arab Jamahiriya

5 Islamic Republic of Iran Oct. 21, 2003 Dec. 15, 2004

6 Italian Republic Dec. 23, 1994 May 8, 1997 Addis Ababa

Kingdom of Belgium &

7 Luxembourg Oct. 26, 2006 May 1, 2000

8 Kingdom of Denmark Apr. 24, 2001 Aug. 21, 2005 Addis Ababa

9 Kingdom of Spain Madrid Not yet

ratified

Kingdom of the Addis Ababa

10 Netherlands May 16, 2003 June 1, 2005

52
11 Kingdom of Sweden Dec.10, 2004? August 1, 2005 Addis Ababa

12 Malaysia Oct. 22, 1998 June 4, 1999 Kula

Lumpur

13 People's Democratic June 4, 2002 Nov. 1, 2005

Republic of Algeria

14 People's Republic of May 11, 1998 May 1, 2000 Addis Ababa

China

15 Republic of Austria Nov. 12, 2004 July20, 2005 Vienna

16 Republic of Djibouti Nov. 18, 2006

17 Republic of Equatorial June 11, 2009 Malabo Not yet

Guinea ratified

18 Republic of Finland Feb. 23, 2006 May 3, 2007

Not yet
19 Republic of India June 5, 2005 Addis Ababa ratified

20 Republic of South Africa April 17,2008

21 Republic of the Sudan March 7, 2000 May 15, 2001 Khartoum

March 10, 2005 Addis Ababa

22 Republic of Turkey Nov. 16, 2000

23 Republic of Yemen Apr. 15, 1999 April 15, 2000 Sana'a

,20
24 Russian Federation Dec.10, 2000 Moscow

25 State of Kuwait Sept. 14, 1996 October 12, Kuwait

1998

26 State of Israel Nov. 26, 2003 March 22, 2004 Jerusalem

53
 Crans
27 Swiss Confederation June 26, 1998 Dec. 7, 1998 Montana

Not yet
28 Tunisian Republic Dec. 14, 2000 Tunis ratified

29 USA Oct. 24, 2000 March 4, 2004 Addis Ababa

UK of Great Britain and
30 Northern Ireland Nov. 19, 2009 Addis Ababa

 The Agreement with Djibouti pertains to “Preferential Investment Facilitation and

Property Acquisition Agreement.” Concerning Agreement on Reciprocal Promotion
& Protection of Investment, there is only an MOU signed on Dec. 12, 1993 in Addis
Ababa.

 The Agreement with USA concerns “Investment Incentive Agreement.” No

Reciprocal Investment Promotion and Protection Agreement so far.

54
Review Questions

1. Discuss the major reasons for rapid increase in the number of BITs.
2. What is the significance of defining investment and investors in investment treaties?
3. Explain principles of most-favoured-nation and national treatment standards in the
context of foreign investment.
4. Why do host countries provide absolute rights of repatriation of capital to foreign
investors?
5. Discuss types of expropriations and remedies available in the event of expropriation.
6. Ethiopia has signed a number of BITs in the hope of creating conducive investment
environment thereby ensuring flow of foreign investment into the country? Do you
think concluding as many BITs as possible results in flow of foreign investment?

55
 Chapter Four
Regulation of Investment

Regulation of investment refers to different controls made by either host or home state. As
investment activities are undertaken in the territory of host state, much of the regulation is
made by host state. However, home states to some extent may also regulate the activities of
companies headquartered in their territory but investing in other countries. Our discussion
will mainly focus on the regulation (control) made by host states. In particular this chapter
mainly focuses on regulation of investment under Ethiopian law.

Objectives

At the end of this chapter, students will be able to:

 Be familiarized with the regulations placed at different levels of investment activity;
 Understand the rationales behind regulating investment;
 Examine why Ethiopia’s investment laws have been subject to many revisions and
amendments;
 Be introduced with the different investment regulations in Ethiopia;
 Examine whether the current regulations in Ethiopia have the potential to bring about
concrete benefits to the country.

4.1 General Overview on Regulation of Investment

Regulation of foreign investment can generally be made in three different stages. It could be
made during entry, during establishment and operation, and at the time of withdrawal.

During the first stage i.e. at the time of entry, a country may open some investment areas for
foreign investors while also at the same time closing some other investment areas for foreign
areas. In other words, foreign investors may not be allowed to invest in some of the
investment areas. These areas may be exclusively reserved for domestic investors or for the
government.

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There are different justifications why a country does not open some areas of investment to
foreign investment. For instance, Ethiopia does not allow foreign investors to invest in areas
of banking, insurance, and micro-credit and saving services. On the other hand, a host state
might allow entry of foreign investors in some of the areas but it imposes some
restrictions/conditions on such investors for starting operation. For example, a foreign
investor might enter into obligation that he shall export some percentage of his products to
the outside world. Unwillingness or failure to do so will prevent that investor from continuing
his investment activity as he was allowed to enter into the country under certain conditions.

The right of a state to control the entry of foreign investment is unlimited, as it is a right that
flows from sovereignty. The entry of any foreign investment can be excluded by a state. But,
a sovereign entity can surrender its rights even over a purely internal matter by treaty. Some
regional and bilateral treaties now provide for the right of entry and establishment of
investments to the nationals of contracting states where such pre-establishment rights are
created by treaty, the denial of a right of entry to any investor from one of the contracting
states would amount to a violation of the treaty, unless it can be shown that his investment is
not covered by the treaty.

Conditions could be attached to the entry of a foreign investor into a host state. It originates
from a rule relating to the power of exclusion of aliens which sovereign states possessed by
virtue of their sovereignty. The power of exclusion implies the power to admit conditionally
and withdraw the license to do business where the condition is not satisfied. The rule is
universally recognized.

There are also regulations imposed on foreign investors once an investor is admitted. It is in
this second stage that much of the regulation is made. Once an alien enters a state, both he
and his property are subject to the laws of the host state. This result flows from the fact that
the foreign investor has voluntarily subjected himself to the regime of the host state by
making entry into it. The unqualified right to exclude the alien prior to entry becomes
somewhat modified after entry as the alien then comes to enjoy a status which is protected by
international law. These regulations are related to establishment and operation. Such
regulations relate to requirement of getting different permits like investment and business
license, minimum capital requirements, requirements related to joint venture, requirements

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related to export, local equity requirement, local content requirement, employment
requirements and any other requirements imposed during establishment and operation.

Finally, states also make regulations by the time a foreign investor withdraws his investment
from the territory of a host state. Investors cannot withdraw their investment overnight once
they decide to discontinue their investment activity. Host states impose different procedures
that should be followed by investors when they withdraw their capital out of the country. In
almost all countries, there are rules that govern the process of winding up and dissolution of
business organizations. Hence, when investors decide to withdraw their investment, they
should follow the relevant law on withdrawal or winding up of businesses. What do you think
are the justifications behind for states to regulate investment during withdrawal?

In a nutshell, On the basis of the rule that conditions could be imposed upon alien entry, the
whole process of the foreign investment could be controlled by the host state’s laws. The law
of the host state could specify the legal vehicle through which the foreign investment should
be made, the nature of the capital resources that should be brought from outside the state, the
planning and environmental controls that the manufacturing plant should be subject to, the
circumstances of the termination of the foreign investment and other like matters. While
regulating the entry of foreign investment, a state could also seek to attract foreign
investment into its territory by holding out incentives attractive to such investors.
Increasingly, such legislation takes the form of a code or a single piece of legislation which
states all the pertinent rules relating to the making of a foreign investment in a state. Besides
facilitating the promotional purposes behind such codes, the existence of a single code
enables the foreign investor to acquaint himself with the laws on foreign investment of a state
more easily.

Even though, foreign investment is subject to the laws and regulations of a host state, it does
not mean that it is only the laws of host state that control or regulate investment. It is
inevitable that regulation of investment is also affected by other international elements. In
other words, despite efforts at regulating any foreign investment which comes into its
territory, a state is never fully able to localise the foreign investment. The nature of the
process of foreign investment is such that it will always have international elements. There
are three important areas of international law which confer protection on the alien and his
property. The first relates to the rules of state responsibility for injuries to aliens. There are
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strong claims that certain minimum safeguards are provided to an alien and that these
minimum standards of treatment cannot be violated by the host state. Though, in the past,
these minimum standards of treatment were abusively used to provide pretexts for
intervention by powerful states and attracted a measure of resentment, in modern times these
standards assumed a new form through association with developments in human rights. Many
of the claims as to the law in this area related to the extent to which a state owes a duty to
protect foreign businessmen and their property from mobs and riots during civil unrest.

The second area through which international law operates is through rules relating to
international trade. Some of the regulations controlling foreign investors, such as the use of
local components, may be violative of principles of free trade. There is an effort to include
rules on investment within the competence of the World Trade Organization. The instrument
on Trade Related Investment Measures (TRIMS), for example, seeks to prohibit performance
requirements associated with foreign investment. (These issues have already been discussed
under chapter two of this material in detail). On the other hand, some measures, particularly
those on the control of the use of environmentally harmful methods of production, may be
justified by movements that have taken place in the sphere of international environmental
law.

A third area in which international law restricts the sovereign rights of the host state to
impose whatever measure it pleases, relates to the bilateral and regional investment treaties
which have increased in number in recent times. It is well accepted in international law that
sovereignty over a purely domestic matter could be restricted if there is an international treaty
dealing with that matter. Bilateral and regional investment treaties, which are relatively recent
efforts at investment protection, seek to impose certain agreed standards of treatment on the
foreign investors of the two state parties. The significance of these treaties to the international
law on foreign investment is great. At least as between the parties to the treaties, they
constitute the law on foreign investment.

4.2 Rationales for Regulation of Investment

There are different rationales as to why countries regulate investment. As measures to

regulate investment are different, the rationales for each measure also differ. In general, host
countries have sought to control the entry and establishment of foreign investors as a means

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of preserving national economic policy goals, national security, public health and safety,
public morals and serving other important issues of public policy. Several other strategic and
socio-economic considerations have also played a role as to why host states regulate
admission, establishment and operation of investment. These include: defence capabilities,
employment effects, technology transfer, and environmental and cultural effects.

Dear distance learners, let us now try to see the justifications of each measures that might be
taken by host states. The rationale for regulation of investment during entry/admission mainly
relate to issues of the impact of foreign investment on the local economy. It has the task of
ensuring that local entrepreneurs are not affected by the entry of a powerful foreign
companies into some industrial sectors. The question of discrimination against a foreign
national arises, if such measures are taken before or after entry. But such discrimination must
be considered lawful unless there is a treaty commitment to provide national treatment in like
circumstances. There are sound economic reasons for excluding foreigners from certain
industries. In developing countries, such exclusion is rationalised on the basis that it would be
better that basic industries be handled by local entrepreneurs as otherwise a state could be left
stranded by a foreign multinational which relocates at any point in time in the future. Another
reason is that the entry of a foreign business giant may stifle the emergence of an
entrepreneurial class within the state. Care is therefore taken to ensure that, while high-
technology industries which local entrepreneurs cannot handle without help from outside are
open to entry to foreign multinationals, low-technology, labour-intensive areas are reserved
for nationals. Developed states may also adopt a policy of keeping foreign investors out of
certain industries. Industries associated with the production of military equipment are rarely
open to foreign interests. This is justified on national security considerations.

Let us now try to see some of the regulations and their rationales during establishment and
operation. One of the regulations during establishment and operation imposed on foreign
investors is minimum capital requirement. Foreign investors are required to bring some
amount of capital from the outside world to a host state rather than coming to a host state
with the aim of raising capital domestically.

States may require that a foreign investor seeking entry should bring in all the capital or a
certain percentage of it from overseas. A state’s interest in ensuring that capital is brought
from outside by the foreign investor is to prevent him raising capital on the local markets. If
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he were permitted to do so, local savings that could be utilised for some project of benefit to
the state would be absorbed in serving the interests of the foreign investor. The attraction of
local investors to invest in shares in a project with a large foreign corporation will divert
investment funds that could have gone to finance local entrepreneurs or local projects. There
are economic reasons justifying such discriminatory treatment. The obvious one is that an
assumed benefit of foreign investment – that it leads to capital flows from outside into the
host state – will be nullified if the investor raises his capital on the local markets.

Where a foreign investor agrees to capitalisation requirements and later fails to comply, a
right to terminate or otherwise interfere with the foreign investment arises in the host state.
This right arises as a matter of the internal law of the host state. The exercise of this right
cannot amount to an international wrong provided due process standards have been met.

Another regulation relates to export requirements. The strategy of development adopted by

developing states has moved away from manufacturing within the state to substitute imports
to a strategy of earning income through the export of goods. The model for such development
is provided by the newly industrialising states – Singapore, South Korea, Taiwan and Hong
Kong – whose export incomes have led to the spectacular growth of their economies. The
shift of emphasis from import substitution to export-led growth has made developing
countries turn to investment by multinational corporations in the hope that they would
manufacture and export products from their countries and thus earn foreign exchange. With
this aim, there have been efforts made to induce exports by multinational corporations by the
conferment of privileges or through tax and other incentives. The requirement of entry in
collaboration with a local partner is often dispensed with if the larger percentage of the
production is for export.

Strong economic considerations also exist for the regulation that foreign participation in
industry could only be made through joint ventures. This enables a more effective transfer of
management and technology to the local joint venture partner and, consequently, the
maximisation of one of the assumed benefits of foreign investment. It will also ensure that the
state’s policies are better reflected when decisions as to policy are made. This consideration
applies with greater force in industries which are state monopolies whose industrial policy
has been clearly laid down.

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It is clear that the requirements relating to local equity in new foreign investment ventures
bring obvious economic advantages to the host state. Quite apart from the fact that a smaller
proportion of the profits will be repatriated abroad, it ensures that the state has a direct or
indirect control over the venture. It also ensures that a local entrepreneurial class, which will
profit by its association with foreign investors through the acquisition of managerial and
business skills, will emerge. The criticism of these measures is that they give rise to an elite
group of local businessmen who form associations with foreign capital and enable
governments that are favourable to their business interests to remain in power. Sometimes, it
is alleged that this association between foreign capital and the local elite leads to repression
and human rights abuses. Indigenisation measures in any state will become less vigorous
once the process of indigenization has been completed and the visible dominance of foreign
investment has diminished. The political pressure for such measures will no longer be
pressing concerns.

The requirement that entry be made in collaboration with local business has meant that the
preferred form of entry was through a joint venture. This is a logical consequence of the
measures relating to the indigenisation of the economy. The joint venture has become the
most important vehicle for foreign investment in recent times across the world, for various
reasons. From the point of view of investment in developing countries, entry regulations have
been the most important reason for their formation. Both the joint venture in the
manufacturing and mineral sectors as well as the production-sharing agreement in the mineral
sector were agreements which were structured with the aim of maximising local control of
investment.

There are several other requirements which are imposed by different host states on foreign
investment. They may be explained as efforts at maximising the benefits of the foreign
investment to the local economy. There may be requirements relating to the level of
employment of local staff, thus ensuring that the perceived benefits of the transfer of skills to
the local labour and management are made a reality. There may be a requirement for local
research relating to products and the adaptation of the products to local conditions. There
may be a requirement that the processing of minerals should take place locally so that more
activity associated with the mineral industry takes place within the state and more value is
thereby added to the product within the state before export. The imposition of such

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requirements could also be justified as based on the sovereign rights of the state to regulate
economic activity that takes place within its territory.

4.3 Regulation of Investment in Ethiopia

In an attempt to attract foreign investment Ethiopia has put in place conducive legal
framework for investment. On the other hand, It has also put in place, different controlling
mechanisms to ensure that the investment brings about tangible benefits to the country. To
this effect, Ethiopia has been changing its investment legislation from time to time.

Let us now turn to see the different efforts made on the part of Ethiopia to regulate
investment. In May 1992, the Transitional Government of Ethiopia (TGE) issued Investment
Proclamation No. 15/1992 with a view to encourage, expand and coordinate investment in the
country. Under this Proc., areas eligible for investment incentives were restricted to broad
sectional categories such as agricultural development and agro-processing; manufacturing;
large scale capital-intensive road and building construction; the development, protection and
preservation of natural resources; rural transportation; as well as support machinery and
services. The incentives provided were 100% duty exemption for imported capital goods and
equipment including spare-parts worth up to 15% of the value of the capital goods imported
and exemption from the payment of income tax for periods ranging from 3-8 years depending
on the type and location of investment.

Proclamation No. 15/1992 was in force for duration of four years (July 1992-June 1996).
Later, it was found necessary to issue a new proclamation to overcome the shortcomings
identified in the course of the four years. As a result, Investment Proclamation No. 37/1996
was issued in June 1996. The main changes introduced include:

 Education, health, tourism, engineering and technical consultancy as well as

construction contracting below grade 1, were included in the incentive scheme;
 Many small-scale agricultural and manufacturing activities each with an investment
capital of less than Birr 250,000 previously excluded from incentives were exempted
from the payment of import customs duty on capital goods;
 Some areas of investment that were reserved for government were allowed for the
participation of private investors (e.g. large-scale hydropower generation above 25
MW for all private investors);

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  The minimum capital required of a foreign investor investing jointly with domestic
investor(s) was reduced from US$500,000 to US$300,000, and the minimum
investment capital required of a foreign investor investing in engineering or other
technical consultancy services was lowered to US$100,000;
 The requirement for foreign investors to deposit in a blocked account US$ 125,000
was removed.

Further, Proclamation No. 37/1996 was amended in June 1998 by Proclamation No.
116/1998 in order mainly to redefine domestic investors so as to include foreign nationals
who were Ethiopian by birth, to allow private investors to invest jointly with the Government
in defense industries and telecommunication services as well as with the approval of the
council of Ministers, to enable the Federal Investment Board grant additional incentives other
than what is provided under the Investment Incentive Regulations. In connection with this
Proclamation, Regulation No. 7/1996 was also amended by the Regulation No. 36/1998 in
June 1998 in order to grant additional incentives to selected activities in the education and
health sectors and to investments in telecommunication services, defense industries and
industrial states.

Furthermore, the amendments and revisions of investment laws mentioned above were
repealed and replaced by Proc. No. 280/2002. This very Proclamation itself was amended by
Proc. No. 375/2003. Ethiopia has also came up with Regulations on investment. Council of
Ministers Regulation No. 84/2003 on investment incentives and investment areas reserved for
domestic investors was enacted in 2003. An amendment to this law was enacted in 2008
(Regulation No. 146/2008). Hence, the laws that are currently applicable in the country are:

 Investment Proclamation No. 280/2002;

 Investment (Amendment) Proclamation No. 375/2003;
 Investment Incentives and Investment Areas Reserved for Domestic Investors Council
of Ministers Regulations No. 84/2003;
 Investment Incentives and Investment Areas Reserved for Domestic Investors Council
of Ministers (Amendment) Regulations No. 146/2008.

The investment laws of Ethiopia have been subject to many revisions and amendments
mainly because the previous laws were thought to create more restrictive environment to flow
of foreign investment. Hence, different restrictions had to be lifted in order to create a

64
conducive environment for investment in general. Therefore, the laws currently
applicable( mentioned above) regulate the investment environment in Ethiopia. In the
sections that follow, different regulations of investment under Ethiopian investment
legislations are discussed.

4.3.1 Regulations During Entry/ Admission of Foreign Investment

As mentioned above, one of the regulations by host states is during entry/admission.

Accordingly, Ethiopia has tried to control flow of foreign investment by imposing different
regulations during entry. Ethiopia’s regulation of investment during entry is mainly effected
by way of not opening some investment areas to foreign investors. Some investment areas are
closed to foreign investors i.e. foreign investors are not allowed to invest in some areas that
are exclusively reserved for domestic investors, Ethiopian nationals, to the Government and
in joint venture with the government.

a. Areas of Investment Reserved for Ethiopian Nationals

The Ethiopian investment law reserves some areas in which only Ethiopian nationals are
eligible to invest. As per Art. 6 of Proc. No. 280/2002 the Council of Ministers has been
mandated to specify areas that can be exclusively reserved for Ethiopian nationals and
domestic investors. Accordingly, the Council of Ministers has specified those areas that are
exclusively reserved for Ethiopian nationals under Council of Ministers Regulations No.
84/2003.

The areas exclusively reserved for Ethiopian nationals are listed under a schedule which is
attached to the regulation. As per Art. 2 of the schedule, the following areas of investment are
exclusively reserved for Ethiopian nationals:

1) banking, insurance and micro-credit and saving services;

2) forwarding and shipping agency services;
3) broadcasting services; and
4) air transport services using aircraft with a seating capacity of up to 20 passengers.

Only persons who have Ethiopian nationality are allowed to invest in the investment areas
mentioned above. Investors who have foreign citizenship including foreign nationals who
might be regarded as domestic investors as per Art. 2(5) of Proc. No.280/2002 are excluded

65
from investing in these areas. An issue that might arise in this regard is whether an enterprise
(legal person) having Ethiopian nationality (but owned by foreign nationals) can invest in
areas that are exclusively reserved for Ethiopian nationals. The law does not clearly make any
distinction between physical persons and legal persons. It simply stipulates that the areas are
reserved for Ethiopian nationals without making any distinction between physical persons
and legal persons having Ethiopian nationality.

One could argue that the provision can be interpreted to allow legal persons having
Ethiopian nationality (but owned by foreign nationals) to invest in the areas that are
exclusively reserved for Ethiopian nationals as there is no clear exclusion of legal persons
owned by foreign nationals. However, interpreting the provision in this manner would defy
the very purpose of reserving some areas for Ethiopian nationals. The very purpose why the
law reserves some category of investment areas exclusively for Ethiopian nationals is to
exclude foreign nationals’ participation in those areas. If legal persons having Ethiopian
nationality but owned by foreign national can invest in those areas, foreign nationals are
indirectly becoming eligible to invest in investment areas that are exclusively reserved for
Ethiopian nationals. Hence, an enterprise should be wholly owned by Ethiopian nationals
(natural persons) to be able to invest in areas exclusively reserved for Ethiopian nationals. If
we have an enterprise that has Ethiopian nationality but owned by foreign nationals, it should
not be allowed to invest in areas that are exclusively reserved for Ethiopian nationals.

Dear distance learner, what are the rationales behind excluding investors that have foreign
citizenship from investing in such areas? Exclusion of foreign nationals from such areas may
be justified on the need to control basic or strategic sectors in the hands of Ethiopian
nationals (Banking, insurance and micro-credit and saving service, air transportation with a
seating capacity of up to 20 passengers, forwarding and shipping services). Cultural effects
and political sensitivity of the current situation might have forced the Ethiopian government
to exclusively reserve broadcasting services for Ethiopian nationals.

b. Areas Exclusively Reserved for Domestic Investors

The Ethiopian investment law also specifies areas that can only be invested by domestic
investors. It is important to note that there is a difference between Ethiopian nationals and
domestic investors as defined under the investment legislation. As per Art. 2(5) of the Proc.
66
domestic investors are not only Ethiopian nationals. Foreign nationals may also be regarded
as domestic investors provided that they permanently reside in Ethiopia having made an
investment. Ethiopians by birth are also be regarded as domestic investors without any
conditions if they so desire (for instance without the need to permanently reside in Ethiopia
having made an investment as is the case for other foreign nationals to be regarded as
domestic investors).

Council of Ministers Regulation No. 84/2003 in Art. 1 of the schedule exclusively reserves
the following areas for domestic investors: retail trade and brokerage; wholesale trade
(excluding supply of petroleum and its by-products as well as wholesale by foreign investors
of their locally-produced products); import trade (excluding LPG, bitumen and upon approval
from the Council of Ministers, material inputs for export products); export trade of raw
coffee, chat, oilseeds, pulses, hides and skins bought from the market and live sheep, goats
and cattle not raised or fattened by the investor; construction companies excluding those
designated as grade 1; tanning of hides and skins up to crust level; hotels (excluding star-
designated hotels), motels, pensions, tea rooms, coffee shops, bars, night clubs and
restaurants excluding international and specialized restaurants; trade auxiliary and ticket
selling services; car-hire, taxi-cabs transport services; commercial road transport and inland
water transport services; bakery products and pastries for the domestic market; grinding
mills; barber shops, beauty salons, and provision of smith, workshop and tailoring services
except by garment factories; building maintenance and repair and maintenance of vehicles;
saw milling and timber making; custom clearance services; museums, theaters and cinema
hall operations; and printing industries.

Dear distance learners, what do you think are the rationales for reserving these investment
areas to domestic investors? If you see the list of investment areas, they do not seem
investments that require huge capital. It seems that such businesses can easily be run by local
investors as they are within their reach in terms of the amount of capital needed to undertake
such businesses. Hence, the law tries to make sure that foreign investors undertake
investment activities in areas that relatively require large amount of capital. By so doing, the
law also tries to achieve the purpose of bringing about flow of capital into the country. As
discussed earlier, one of the perceived advantages of foreign investment is inflow of capital
from the outside world into the country. Therefore, the law by reserving the areas that require
small amount of capital to domestic investors tries to ensure that foreign investors take part in
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investment activities that need huge capital thereby making sure that there is huge inflow of
capital to the country.

What is more, allowing foreign investors in such area might have the effect of wiping out
local entrepreneurs who are engaged in such activities. This might emanate from the fact that
local investors in Ethiopia do have limited resources to run their businesses. If foreign
investors are permitted to invest in the same areas, it is likely that local investors might not be
able to compete with foreign investors. Hence, domestic investors will be out of the business
eventually. The purpose behind reserving these areas would then be to protect local
entrepreneurs from competition against foreign investors. On the whole, this large exclusion
of foreign investors from the Ethiopian economy is designed to encourage indigenous
entrepreneurship and the domestic private sector.

c. Areas Exclusively Reserved for the Government and Areas Reserved for Joint
Investment with the Government

The law also provides category of investment areas that are exclusively reserved for the
government. In this case, the prohibition of investing in these areas applies not only to
foreign investors but also domestic investors. It is only the government that can undertake
any investment activity in such areas.

Art. 5(1) of Proc. No. 280/2002 provides the list of areas exclusively reserved for the
government. As per Art. 5(1) of the Proc. the following investment areas are exclusively
reserved for the Government:

(a) Transmission and supply of electrical energy through the Integrated National Grid
System: and

(b) Postal services with the exception of courier services.

In addition to those areas mentioned above, the Investment Amendment Proc. No.373/2003
has added a new item to Article 5 of Proc. No 280/2002. As per Art. 3 of the Amendment
Proc. Investment in air transportation services using aircraft with a seating capacity of more
than 20 passengers is also exclusively reserved to the government. Accordingly, the

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following areas are exclusively reserved to the government: a)transmission and supply of
electrical energy through the Integrated National Grid System; b) postal services with the
exception of courier services; and c)air transport services using aircraft with a seating
capacity of more than 20 passengers.

As can be observed from the wording of Art. 5(1) (a), not any kinds of activities related to
electrical energy are reserved to the government. The government has an exclusive power to
transmit and supply electrical energy through national grid system leaving other activities
related to electrical energy (for instance generation of electric energy and supply of electric
energy through off-grid transmission) open for both domestic and foreign investors. Even
though domestic and foreign investors are allowed to generate electric energy, they are not
permitted to transmit and supply electric energy to consumers through the national grid
system. The Investment Proclamation obligate the investors to sell the generated energy to
the government utility, the Ethiopian Electric Power Corporation, along the national grids. It
becomes, therefore, apparent that the hydropower producers, would have to enter into
agreements with the Corporation for the sale of generated hydropower, usually referred as a
Power Purchase Agreement (PPA). However, outside the national grids, investors are allowed
to transmit and distribute the electric power they generate.

It is also important to see whether investors are allowed to invest in alternative energy
sources. In the electric power sector, the program of the ruling party enshrines the use of
alternative energy sources to alleviate the existing shortage of energy, to expand the coverage
of the electric power services, to improve the electric power service, and to strengthen the
participation of private investors. For electricity generation from hydropower sources, there is
no capacity limit for both domestic and foreign investors. But, power generation from non-
hydropower sources above 25MW capacity is reserved for the government while below 25
MW is allowed only for domestic investors.

Art. 5(1) (b) provides that postal services is reserved to the government. Same provision
makes some exception where private investors are allowed to invest in delivering postal
services. Courier services can be operated by private investors. Examples of courier services
in Ethiopia would be postal services delivered by DHL and FedEx.

Air transport services using aircraft with a seating capacity of more than twenty passengers is
also specified as an area exclusively reserved for the government. As discussed earlier, air

69
transport service using aircraft with a seating capacity of up to twenty passengers is
exclusively reserved for Ethiopian nationals. Hence, air transportation service is either
reserved for Ethiopian nationals or for the government. This would prohibit foreign nationals
from investing in this area. In other words, this area is not open for foreign nationals
including foreign nationals taken for domestic investors as per Art. 2(5) of the proclamation.

Dear distance learner, what do you think are the justifications for exclusively reserving these
areas to the government?

The law also specifies areas of investment that can only be undertaken in joint investment
with the government. In this case, private investors are allowed to undertake investment but
can do so only in joint venture with the government.

Art. 5(2) of the Proc. provides:

Investors shall be allowed to invest in the following areas only in joint venture with the,
Government;
(a) Manufacturing of weapons and ammunition; and
(b) Telecommunication services.

Allowing investors to undertake investment activities only in joint venture with the
government in manufacturing of weapons and ammunitions can be justified by national
security interest. The government might want to closely control activities that take place in
areas of manufacturing of weapons and ammunitions as failure to do so might have the effect
of endangering the national security of the country.

Moreover, the law provides that investment in the areas of telecommunication services can
be undertaken in joint venture with the government. However, in practice the government has
been reluctant to jointly invest with private investors in the areas of telecommunication
services. Investment in the telecommunication services has almost been monopolized by the
government. Only limited areas of telecommunication services are open for domestic
investors.

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Dear distance learners, can you think of any justification as to why investment activity in this
area can only be undertaken only in joint venture with the government? What rationale is
there for the government to be reluctant to liberalize the area for private investment?

The government reasons that it is monopolizing telecommunication sector to achieve

development objectives. Ethiopia’s government programmes highlights the importance of
modern telecommunications infrastructure for economic growth and more specifically, the
development of Ethiopia’s rural economy. Having basic telephone access in villages allows
farmers to get information on prices for their crops. It also improves local administration
(e.g., Woreda-Net project) and hence good governance, the development of trade and small
businesses, and the provision of social services such as education (e.g., School-Net project),
health, and agricultural extension. The government aims to expand coverage of
telecommunications in Ethiopia by increasing fixed line coverage and mobile coverage.

According to the government, the above stated objectives can be achieved if

telecommunication services are substantially controlled by the government. The participation
of private investors may halt achieving the objective as private investors investment activity
will be limited to areas that they can profit much (would most likely be in cities).
Accordingly, this would defy the purpose of achieving universal access i.e. objective of
reaching all the localities in the country might be jeopardized .

Therefore, the government believes that monopoly is the most dependable way of extending
basic connectivity to every region. The government intends to keep the monopoly and finance
telecommunications infrastructure projects from revenues generated by Ethiopian
Telecommunication Corporation.

Dear distance learner, do you agree with the justifications given by the government for
keeping substantial telecommunication services in the hands of Ethiopian
Telecommunication Corporation- a state owned enterprise?

4.3. 2 Regulation During Establishment and Operation

The Ethiopian investment law tries to discipline foreign investment by way of placing
different regulation during establishment and operation. We will see only some of the
regulations during establishment and operation as we will not be able to discuss all

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regulations. The following regulations are some of investment controlling mechanisms
incorporated under Ethiopia’s law.
a. Capitalisation Requirement

One of the regulations is capitalization requirement. Art. 11 requires foreign investors to

allocate minimum capital. A foreign investor intending to invest on his own is required to
allocate a minimum capital of US$100,000 for a single investment project as per Art. 11(1) of
Proc. No.280/2002. This minimum capital requirement was $500,000 in previous investment
legislation that was repealed by subsequent investment law. However, a foreign investor that
undertakes investment activity in joint venture with a domestic investor will only be required
to allocate minimum capital of $ 60,000 as per Art 11(2). The minimum capital required for
joint venture with domestic investors was $ 300,000 in previous legislation that has been
repealed.

The $100, 000 minimum capital requirement is not for all investment activities. There are
some few areas of investment that foreign investors are required to allocate less amount of
capital. In areas of engineering, architectural, accounting and audit services, project studies
and management consultancy services or publishing, the minimum capital required for a
foreign investor who intends to undertake investment activity on his own is $ 50, 000 for a
single investment project as per Art. 11(3)(a). If a foreign investor in these areas invests in
joint venture with domestic investors, the minimum capital a foreign investor is required to
allocate will be reduced to $ 25,000 as per Art. 11(3)(b). Why do you think the law provides
relatively lower minimum capital requirement for investment in areas of engineering,
architectural, accounting and auditing services? The reason may be, for one thing, the areas
mentioned are more of intellectual works that do not as such require the movement of huge
capital. Hence, it would not be fair to require foreign investors to allocate huge capital in
investment areas that can be undertaken with relatively low capital. For another, the areas
cannot be easily undertaken by local people as there is lack of experts in these areas in the
country. Therefore, it is a means of encouragement for foreign investors to invest in these
areas. This is aimed at filling the gap of shortage of expertise in the country through foreign
investment.

By requiring foreign investors to allocate minimum capital, the law is trying to make sure that
there is an inflow of capital to the country. As discussed earlier, foreign investors should not
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be allowed to raise all of their capital domestically. To ensure that foreign investment results
in inflow of capital, it is necessary that foreign investors be required to allocate some amount
of capital for their investment undertakings.

Why do you think the law reduces the minimum capital requirement when foreign investors
invest in joint venture with domestic investors? The simple reason is to encourage foreign
investors to invest in joint venture with domestic investors. The law encourages joint
investment with domestic investors as this can bring about some tangible benefits to the
country. As discussed earlier, one means of realizing transfer of technology and sharing of
management skills is through joint venture. Hence, one of the reasons why the law
encourages joint investment is to enable domestic investors to share management skills of
foreign investors and to get and be acquainted with the technology of foreign investors. What
is more, the amount of capital that outflow from enterprises jointly owned by both foreign
and domestic investors will be reduced. Not all dividends will be repatriated to the home
country of the foreign investors. Since the enterprises are partially owned by domestic
investors, some amount of money will be given to domestic investors in the form of
dividends thereby preventing some outflow of capital.

Art 11(4) provides an exception to the requirements of allocating minimum capital by foreign
investors. As per this provision, a foreign investor shall not be required to allocate a
minimum capital provided that the foreign investor re-invests his profits or dividend or
exports at least 75% of his outputs. The main aim of this arrangement is targeted at reducing
the amount of money that might be repatriated outside of the country in the form of dividend
and also encourages foreign investors to export their products.

Furthermore, in order to effectively control whether foreign investors have the minimum
capital required by law, Art. 11(5) obligates foreign investors having brought investment
capital into the country to register the capital at the National Bank of Ethiopia and obtain a
certificate of registration.

b. Requirements for permit

Both domestic and foreign investors are required to obtain different permits such as
investment permits, business licenses, work permits for expatriate employees, etc before they

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start operation. This section discusses which investors are required to get investment permits
and the procedures they should follow in order to get investment permits.

Art 12(1) lists the type of investors who are required to obtain investment permits. Foreign
investors, foreign nationals taken for domestic investors as per Art. 2(5) of the Proc.
excluding Ethiopian by birth, domestic investors investing in areas eligible for incentives and
domestic and foreign investors making investments in partnerships are all required to obtain
investment permit. As can be seen from the provision, all foreign investors are required to
obtain investment permits. They cannot start investment operation without first securing
investment permits. Moreover, foreign national (with the exception of Ethiopians by birth)
who might be regarded as domestic investors pursuant to Art. 2(5) of the Proc. are also
required to get investment permits. In a nutshell, all foreign national with the exception of
Ethiopians by birth are required to obtain investment permits.

What is more, domestic investors may also be required to obtain investment permits if they
invest in investment areas eligible for incentives and invest in joint venture with foreign
investors as per Art. 12(1) (c) and (d). In general, the types of investors that are not
required to obtain investment permit are Ethiopian national and Ethiopians by birth
provided, however, that they do not invest in areas eligible for incentives and in joint
venture with foreign investors. If Ethiopians and Ethiopians by birth invest in areas eligible
for incentives and in joint venture with foreign investors, they will also be required to obtain
investment permits.

Investors should submit application for investment permit. They should submit their
applications along with documents necessary for issuance of investment permit. Please note
that Art. 13 of Proc. 280/2002 has been repealed and replaced by new articles by the
Amendment Proclamation. Hence, please refer to the Amendment proclamation to see how
and what things are necessary for domestic and foreign investors to submit application.

Art. 14 of the proclamation (as amended) provides that Upon receipt of an application made
in accordance with the law, the appropriate investment organ shall, after examining the
intended investment' activity in light of the Proclamation, Regulations and directives issued
there under within five working days:

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(a) issue the investment permit upon receipt of the appropriate fee, where the application is
found acceptable; or

(b) notify to the investor its decision and the reason thereof in writing, where the application
is found unacceptable.

Proc. No. 280/2002 provided 10 days time period for issuance of investment permit. As you
can see from the Amendment Proc. 373/2003, this has been amended to five working days.
Hence, the appropriate investment organ has an obligation to either issue an investment
permit or reject the application by stating the reasons thereof within five working days. The
law by providing five working days as the maximum period that an investment organ can
take to reach into its decision is trying to minimize any delay that investors might face for
waiting to get any response after they submit applications.

The investment law has also provided supervision mechanism to control how investors who
obtained investment permits undertake their investment activity. Some investors who obtain
permits might not start operation as required by law, or may even not care to make any effort
to start operation, or they might have obtained the permit with the intention to use the permit
for other purposes ( for instance as a means to enter into and stay in the country to promote
some hidden agenda). To try to avoid such problems, the law as per Art. 15(1) (Art. 17 as
amended by the Amendment Proc.) of Proc. No. 280/2002 provides that an investment permit
shall be renewed annually until the investor commences the marketing of his output or
services provided, however, the investor shall submit progress reports on the implementation
of the project to the appropriate investment organ, at the end of every six months.

c. Environmental Requirements

The Environmental Impact Assessment Proclamation No. 299/2002 and the environmental
regulations, as well as directives, govern the investment and environment nexus. The
Ethiopian Environmental Protection Authority (EEPA) is the organ responsible for ensuring
compliance with the provisions of the proclamation. For investment projects with potentially
negative environmental impacts, the EEPA requires investors to submit environmental impact
assessments(EIA). The EEPA directives identify investment projects that require
environmental impact assessment. Dear distance learners, the issues of investment and

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environment nexus is discussed in detail under chapter six. Please refer to the sixth chapter
for further details.

d. Local Content and Export requirements

Local content requirement refers to a measure by host state that obliges investors to purchase
locally produced goods. Export requirement, on the other hand, refers to a measure of the
government that requires investors to export their products rather than supplying them to the
local market. There are no local and export requirements under Ethiopian investment laws
even though the law has incorporated different provisions that encourage investors to use
locally produced products and to export their products.

The law does not oblige investors to purchase locally produced goods and to export their
products. However, investors might lose some privileges or incentives accorded to them if
they fail to purchase local products or export their products. Hence, the law indirectly tries to
influence investors to use domestic resources in their manufacturing processes as much as
possible and to export their products.

Let us now try to see some of the specific provisions that are related to local content and
export requirements under Ethiopian investment law. Art. 11(4) of the Proc. is one of the
provisions that encourages investors to export substantial portion of their products. As
discussed earlier, this provision relieves foreign investors from the obligation of allocating a
minimum capital. A foreign investor who agrees to export at least 75% of his products is not
required to allocate a minimum capital. The law in this case does not oblige investors to agree
to export their product but encourages or gives some advantage to a foreign investor who is
ready to enter into an obligation of exporting at least 75% of his products. The privilege for
such investor is that he will not be required to allocate a minimum capital requirement for his
investment project.

Council of Ministers Regulation No. 84/2003 has also incorporated provisions that are
targeted to influence foreign investors to export their products. As per Art. 4(1) of this
regulation, where an investor engaged in manufacturing, agro-industrial activities or
production of agricultural products exports at least 50 % of his products or services, he shall
be eligible for income tax exemption for 5 years. On the other hand, as per Art. 4(3) of the
regulation, an investor engaged in the same investment activities but exports less than 50% of

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his products, services or supplies only to the domestic market is eligible for income tax
exemption of 2 years. The period of exemption from income tax for investors who export
more than 50% of their products or services is much longer than the period of income tax
exemption for investors who export less than 50% of their products ( 5 and 2 years
respectively). Therefore, the law by according longer period of benefits to investors who
export more is encouraging them while it indirectly discourages investors who export less.

Moreover, the law goes to the extent of providing that an investor who supplies his products
only to the local market might be prohibited from enjoying benefits of income tax exemption.
As per Art. 4(5) of the regulation, the investment board is given the power to prohibit
exemption from income tax with respect to an investor who supplies his products only to the
local market. The law has clearly the objective of discouraging investors who supply their
products only to the domestic market. As discussed above, the law does not prohibit investors
from supplying their products only to the domestic market. However, there is a risk of losing
income tax exemption privilege in respect of an investors who supplies his products only to
the domestic market.

The purpose of encouraging investors to export their products is targeted at earning foreign
currency and keeping balance of trade. As you know, developing countries like Ethiopia have
low reserve of foreign currency. One of the means in which they try to solve problem of
foreign currency is by making sure that there are lots of exports which can bring about flow
of foreign currency in exchange. What is more, countries also want to ensure that there are
some minimum levels of exports to keep balance of trade. Hence, to minimize or avoid trade
deficits, countries take different measures that are targeted towards encouraging exports of
which one is providing incentives to investors who export their products.

The investment law of Ethiopia also tries to influence investors to purchase domestic
products as far as possible. Similar to those laws on export, the law on purchase of local
inputs does not oblige investors to use locally produced goods as an input for their production
but rather encourages them to do so. Pursuant to Art.8(3) of Reg. No. 84/2003 the investment
board may bar the duty free importation of capital goods and construction materials where it
finds that they are locally produced with competitive price, quality and quantity. One of the
incentives provided under Ethiopian investment law is that investors can import capital goods
and construction materials without paying customs duty (they can imports such products duty
free). However, investors might lose this advantage(incentive) if they import products while
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such products are locally produced with competitive price, quality and quantity. In other
words, investors should purchase those locally produced goods if they are available with
competitive price, quality and quantity in order to get the incentive. Otherwise, investors have
to pay customs duty when they import products while locally produced goods are available
with competitive price, quality and quantity.

The law discourages those investors who import capital goods and construction materials
while they are able to purchase them from the local market. Investors are not prohibited from
importing products even when there are locally produced goods that are available with
competitive price, quality and quantity. Rather, such investors will not enjoy privilege of
exemption from customs duty in case they import products that are available in the local
market with a competitive price, quality and quantity. The whole purpose is designed to
encourage local entrepreneurship in the country. Moreover, the purpose is also to protect
products of local entrepreneurs from competition against foreign products.

e. Employment Requirement

Investors are allowed to employ foreign nationals. There is no complete ban on employment
of foreign experts. However, they are required to replace such experts by Ethiopians within a
limited period of time. As per Art. 36(1) of Proc. No. 84/2003 (Art. 38 as amended) any
investor is permitted to employ qualified expatriate experts necessary for the operation of his
investment activity. Nevertheless, investors have the obligation to replace the foreign experts
by Ethiopians within short period of time. Art. 36(2) provides that an investor who employs
expatriates shall be responsible for replacing, within a limited period, such expatriate
personnel by Ethiopians by arranging the necessary training thereof. The law does not specify
the time period required for replacement of foreign experts by Ethiopians. It simply provides
that the replacement has to take place within a limited period. Hence, the period of time
needed for replacement of foreign experts by Ethiopians can differ in different
circumstances. The period needed might be determined on case by case basis with due regard
to factors such as the availability of Ethiopian experts that can undertake the task they might
be entrusted by investors, the time needed to provide training to prospective Ethiopian
employees, etc.

Nevertheless, not all expatriate experts have to be replaced. Foreign national on top
management level might not be replaced provided that an investor secures permission from

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the investment authority and the investor is the sole or major owner of the enterprise. Art.
36(3) provides that a foreign investor upon obtaining the prior consent of the Authority shall,
without any restriction, have the right to recruit expatriate employees on top management
positions of an enterprise of which he is the sole or major owner. Hence, provided that the
conditions stipulated under the law are fulfilled, there is probability that foreign investors
might not replace foreign experts who assume top management positions. This is an
exception to the employment requirement of replacing foreign experts by Ethiopian nationals
within limited period of time. Why do you think is the law providing this exception?

f. Requirements Related to Exchanging and Remitting of Funds

The National Bank of Ethiopia regulates the entry and remittance of foreign currencies in
Ethiopia through specific directives applicable to both Ethiopians and foreigners. Almost all
outgoing and some incoming foreign currencies (such as foreign loans) are regulated. Art.
19(2) of the Proc. (Art. 21 as amended) allows foreign investors to open foreign currency
accounts, with the authorization of National Bank of Ethiopia, in commercial banks. Subject
to the exchange regulations of the National Bank of Ethiopia, a person with a foreign
currency account can remit foreign currency abroad.

Moreover, as per Art. 20 of the Proc. (Art. 22 as amended), a foreign investor has the right to
make the following remittances out of Ethiopia in convertible foreign currency at the
prevailing rate of exchange:

 Profits ,and dividends accruing from investment;

 Principal and interest payments on external loans;
 Payments related to a technology transfer agreement registered in accordance with
this Proclamation;
 proceeds from the, sale or liquidation of an Enterprise;
 Proceeds from the transfer of shares or of partial ownership of an enterprise to a
domestic investor.

Generally, the law relating to remittance of funds seems to be attractive. The foreign
exchange regime is not also a big problem even though there is dissatisfaction in so far as the
application/implementation is concerned.

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g. Other Regulations

There are also a number of other regulations imposed on investors other than those
mentioned above. Such regulations are stipulated not only under investment legislations but
also in other laws of the country. There are requirements related to submitting an application
to obtain business license or to get work permits for expatriate experts, there are also
requirements related to labour standards( to be determined by labour law of the country),
obligations related to paying different types of taxes as applicable, requirements related to
competition in order to curb monopolies and restrictive trade practices(to be governed by
trade-practice legislation, Proc. No. 329/2003), and many other regulations set by domestic
law of the country which can be applicable to regulate business activities of investors either
directly or indirectly. Therefore, not only investment legislations but also other domestic laws
of Ethiopia are important in regulating investments in the country.

4.3.3 Regulation During Exit or Withdrawal

Ethiopia does not have a specific exit law for foreign investment. This does not mean,
however, that there is no law for regulation of investment at the time of exit. The Commercial
Code of Ethiopia’s provisions for dissolution and winding up of legally established business
organizations govern regulation of foreign investment during exit or withdrawal. As
stipulated under Art. 10 of the Proc. investments may be effected in one of the business forms
recognized by the Commercial Code of Ethiopia. In other words, investment activities of
foreign investors are to be undertaken by any of the business forms recognized by the law.
Hence, the provisions of the Commercial Code of Ethiopia on dissolution and winding up of
business organizations are applicable to businesses of foreign investors during exit.

The Commercial Code provides grounds and procedures for dissolution and winding up of
business organizations. One legitimate reason for the dissolution of a share company, for
example, may be the resolution of an extraordinary general assembly of shareholders. Having
resolved to liquidate, the general meeting must appoint liquidators, where provision are not
made for such appointment in the memorandum or articles of association. The liquidators
must follow the rules and procedures of the Commercial Code in liquidating the share
company. Private limited companies may be voluntarily liquidated according to the provision
of their memorandum or articles of association and according to the Commercial Code.

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Dissolution of a business organization may also be ordered by a court for good cause. Foreign
investors may also exit by selling or transferring their assets, shares or enterprises. As
discussed above, foreign investors have the right to remit proceeds from the sale or
liquidation of an enterprise and from the transfer of shares or partial ownership of an
enterprise to a domestic investor in convertible foreign currency.

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Review Questions

1. What are the rationales for regulating investment?

2. What are the justifications behind prohibiting foreign investors’ entry in some areas of
investment?
3. Discuss the reasons why the Ethiopian law reserves some areas of investment to be
undertaken only in joint venture with the Government.
4. Discuss the requirements related to employment under Ethiopian investment law.
5. Are there requirements related to local content and export under Ethiopian investment
law?
6. Discuss regulation of foreign investment during exit or withdrawal under Ethiopian
law.

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 Chapter Five
Incentives, Guarantees, Favourable Conditions and
Problems to Investment in Ethiopia

There are a number of factors that determine the flow of foreign investment. Some of the
existing conditions in a country could attract foreign investment while others could detract its
growth. Host countries have been busy in creating conducive environment for the flow of
foreign investment including provisions of incentives, guaranteeing property of investors
against risks, providing adequate infrastructure, etc. In addition to those measures that might
be taken by host countries, political stability, availability of market and labour, the prevalence
of corruption, etc are generally other more important factors that have impact on flow of
foreign investment. Some of the factors that either attract or stifle foreign investment
generally are discussed under this chapter. In particular, incentives, guarantees, other
favourable conditions and problems to investment in Ethiopia are discussed in some detail.

Objectives

At the end of this chapter, students will be able to:

 Be acquainted with types of incentives;

 Examine whether the incentives available in Ethiopia have the potential to attract
foreign investment;
 Understand the significance of guarantees available in Ethiopia in boosting
confidence of investors;
 Identify favourable conditions which may create conducive investment environment
in Ethiopia;
 Understand factors that could stifle flow of foreign investment into Ethiopia.

5.1 Incentives

One of the features of globalization is the worldwide competition for foreign investment.
Over the past two decades, most countries have liberalized their investment regimes and
opened most sectors of their economies to foreign investors. Policy changes created a more

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welcoming environment for foreign investment. Incentives are frequently used as a policy
instrument to attract foreign investment and to benefit more from it.

Incentive refers to the grant of a specific advantage to investors arising in connection with the
establishment, acquisition, expansion, management, operation, or conduct of an investment
in the territory of a state with a view to attract foreign investment or meet other objectives. As
can be seen from the definition, states may confer benefits on investors at the time of
establishing new enterprise or purchasing an existing enterprise, during expansion phase of
the enterprise or at any time during operation of the investment activity. It would be difficult
to think of that a state would provide incentives to foreign investors at their exit or
withdrawal as it would hardly serve any purpose by doing so. Therefore, states would confer
specific benefits to investors mainly during establishment and operation of their enterprises.

Surveys indicate that the number of countries granting investment incentives and the range of
possible incentive measures is on the rise. This reflects the growing number of countries that
proactively pursue investment promotion efforts. The result is a highly competitive world
market for foreign investment. Governments use three main categories of investment
incentives to attract foreign investment and to benefit more from it:

 financial incentives, such as outright grants and loans at concessionary rates; this type
of incentive government might provide money to investors either in the form of
aid/grant or could provide loans at no or much lower interest than normal
 fiscal incentives such as tax holidays and reduced tax rates; In this type incentives
government does not make direct contribution of money to investors but relieves
investors form payment of taxes at all or permits them to pay taxes at much reduced
rates usually for a limited period of time.
 other incentives:
o including subsidized infrastructure or services, market preferences (closing
the market to further entry or granting of monopoly rights to protect from
import competition, or
o providing preferential government contracts without having to compete with
others) and regulatory incentives(including exemptions from labour or
environmental standards).

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 o Governments may also provide incentives by arranging subsidized
infrastructure (electricity, water, and telecommunication) at less than
commercial price. Subsidized services includes assistance in identifying
sources of finance, information on market, availability of raw materials and
supply of infrastructure, advice on production processes and marketing
techniques, technical facilities for developing know-how or improving quality
control.
Regulatory incentives could either be lowering of environmental and labour standards to
attract foreign investors or to provide stabilization clause which guarantees that existing
laws or regulations will not be amended or repealed in the future to the detriment of
investors.

Among the broad range of possible incentives, financial and fiscal incentives are the ones
most frequently employed. Developing countries often prefer fiscal instruments, such as tax
holidays, and reduced tax rates whereas developed countries mainly use financial incentives,
including cash grants. This may be seen as reflecting differences in wealth, as developed
countries can afford to use up-front subsidies for inward investment whereas developing
countries can, at best, afford to ease the tax burden after investors start production.

On the other hand, based on the purpose that a state is trying to achieve, incentives may be
divided into locational incentives and behavioural incentives. Incentives can be used for
attracting new foreign investment to a particular host country (locational incentives) or for
making foreign entities in a country undertake functions regarded as desirable such as
training, local sourcing, research and development or exporting (behavioural incentives).
There could also be varied locational incentives. A variation of locational incentives are site
incentives seeking to influence the choice of a site within an economy, for instance, inducing
investors to locate in a backward area or away from a congested area. Similarly, incentives
can be used to attract foreign investment into certain industries. For instance the Ethiopian
government might provide additional incentives to investors who invest in regions like
Somalia, Afar, and Gambella in order to minimize congestion of investment activity in Addis
Ababa and some other regions.

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5.1.1 Incentives Under Ethiopian Investment Law

The Ethiopian investment law provides different types of incentives under the Council of
Ministers Regulations No. 84/2003. There is no definition of incentives provided under the
law. The law simply provides incentives including exemption from income tax (Arts 4-7) and
exemption from the payment of customs duty(Arts. 8-11). As discussed above, these are
fiscal type of incentives. As you might imagine, it would be hard for countries like Ethiopia
to provide financial incentives as they have limited capital and cannot afford to provide
financial incentives. Financial incentives are benefits readily available to investors mainly by
developed countries. Moreover, there are incentives related to provision of land in Ethiopia.
Regional states in Ethiopia have different laws regarding provision of land either for free or
at reduced rate for investors. We will see each of the type of incentives below.

5.1.1.1 Exemption from Income Tax

Provisions concerning exemption from income tax are provided from Arts. 4 to 8 of
Regulation No. 84/2003. Art. 4 of the regulation specifies those investment areas that are
eligible for income tax exemption. Therefore, not all investment areas are eligible for income
tax exemption. As per Art. 4(1) of the regulation, for an investor to be eligible for income tax
exemption, he should either be engaged in manufacturing or agro-industrial activities or the
production of agricultural products. Investors who are engaged in other types of investment
activities are not eligible for income tax exemption. Dear distance learner, why does the law
exclude investors from enjoying income tax exemption if they are engaged in investment
activities other than those specified under Art. 4(1)?

The law sets different time period of income tax exemption depending on the type of activity
an investor is engaged in. As per Art. 4(1)(a) (b) an investor who exports at least 50% of his
products or services, or supplies at least 75% of his product to an exporter as a production
input shall be eligible for income tax exemption for 5 years. The law provides incentives not
only to investors who export but also investors who do not export but supply their products
(at least 75%) to exporters. The whole purpose of the law aims at encouraging investors to
export their products. The law also encourages investors to supply inputs for exporters who
would use such products as a production input. This encouragement is still aimed at making
sure that investors get the necessary inputs for the manufacturing of products to be exported.

86
This minimizes risk of exporting less amount of products due to lack of inputs that are needed
to be used as a production input.

The period of income tax exemption for investors who either export at least 50% of their
products, or who supply at least 75% of their products to exporters as production input might
be extended under special circumstances. As per Art. 4(2) of the Regulation, the period of
income tax exemption might be extended for additional two years i.e. for a period not longer
than 7 years upon the decision of the investment board. The period of the income tax
exemption can also be extended for longer than 7 years but in this case it requires the
decision of the Council of Ministers.

The law conditions the extension of exemption period only under special circumstances but
does not specify what would be considered as special circumstances. Therefore,
determination of what might be regarded as special circumstances will be made by the
investment authority on case by case basis.

The law provides shorter period of income tax exemption for investors who export less than
50% of their products or who supply their products only to the local market. As per Art. 4(3)
an investor who exports less than 50% of his products or supplies his products only to the
domestic market shall be eligible for income tax exemption of 2 years. As per Art. 4(4) of the
Regulation, the investment board may extend the period for additional three years under
special circumstances i.e. the board may grant income tax exemption for a period not longer
than 5 years.

The laws discussed above, show that the state is more interested in encouraging investors
who export more. The law indirectly discourages investors especially those who supply their
products only to the local market. An investor who supplies his products only to the local
market might not get any incentives if the investment board decides to that effect. Pursuant to
Art. 4(5) of the Regulation, directives issued by the investment board may prohibit exemption
from income tax with respect to an investor who supplies his products only to the local
market.

Moreover, the investment law has incorporated a provision that is targeted towards inducing
investors to invest in areas that are relatively under developed. As discussed earlier,
incentives that are targeted to make sure that investors are induced in investing in under

87
developed regions or away from investment congested area is locational or more specifically
site incentive. This kind of incentive is provided under Art. 4(7) of the Regulation. As per
Art. 4(7) of this Regulation, an investor who undertakes investment activity in relatively
under developed regions in terms of economic advancement such as Gambella, Benishangul
and Gumuz, Afar, South Omo and Somalia shall be eligible for income tax exemption for
additional one year. For instance, an investor who is engaged in agro-industrial activities in
Somalia region will be eligible for income tax exemption of 6 years as opposed to 5 years
that he would have been granted if it were in other regions that are relatively more developed.
The goal is to induce investors to locate their investment activities in regions that are
relatively under developed. This may minimize congestion of investment activities in some
regions and balance the distribution of investments among different regions. Nevertheless,
whether an additional one year incentive is sufficient enough to induce investors to locate
their investment in these regions is questionable.

The Ethiopian law provides incentives not only for newly established enterprises but also for
existing enterprises provided that they upgrade or expand their investment. Hence, existing
enterprises will be eligible for income tax exemption if they expand or upgrade their
undertakings and export more than 50 % of their products or services. Pursuant to Art. 5 of
the Regulation an investor engaged in areas eligible for income tax exemption who exports at
least 50% of his products or services and increases his production by 25% shall be entitled for
income tax exemption for 2 years.

As provided under Art. 2(8) of Proc. No. 280/2002 expansion or upgrading is increasing in
value, by more than 25%, the full production or service capacity of an existing enterprise, be
it in variety, volume, or" both, through additional investment. An enterprise that expands or
upgrades will only be eligible upon fulfilling other condition stipulated under Art. 5 of the
Regulation. For an enterprise that is upgrading or expanding to be eligible for income tax
exemption for 2 years, the enterprise has to export more than 50% of its products or services.
Hence, the mere act of expanding or upgrading an enterprise will not entitle an investor to be
granted incentives.

The period of exemption from income tax begins from the date of commencement of
production or provision of services as per Art. 6. In principle investors will no more enjoy
incentives after the end of the exemption period counted from the date of production or
provision of services. Nevertheless, investors may still continue to enjoy incentives for a
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limited period of time after the end of the exemption period provided that they have not been
able to use incentives in one of the years or more during the exemption period due to losses
incurred by their enterprises. To enable investors to get incentives after the end of exemption
period, the law has devised a mechanism of carrying forward the losses of investors. As per
Art. 7 of the Regulation, an investor who has incurred loss within the period of income tax
exemption shall be allowed to carry forward his loss for half of the income tax exemption
period after the expiry of such period.

Let us try to elaborate the concept of carrying forward of losses by the following hypothetical
case. Assume Ato Yigeremu, a multimillionaire has been granted income tax exemption
period for 6 years as he is engaged in agro-industrial activities in Afar Region. The
exemption period began in 1995 E.C. The exemption period should have come to an end in
2000 E.C. However, let us assume that Ato Yigeremu had incurred losses of one million Birr
in 1997 E.C. This means Ato Yigeremu has not bee able to use the advantage granted to him
in the year 1997 E.C. due to the loss he incurred. (Please be reminded of the fact that a
business person will not pay income tax at any period if he incurs losses. Income tax on
businesses is imposed only on profits they earn). According to Art. 7 of the Regulation, Ato
Yigeremu will be granted incentive after the end of the exemption period(in this case after
2000 E.C.) to enable him compensate the loss he incurred in 1997 E.C. The maximum period
allowed to carry forward losses (to compensate the loss) is half of the income tax exemption
period. In the case at hand, he was granted six years income tax exemption period. Hence, he
can carry forward his losses for three years (half of the income tax exemption period)
beginning from the year 2001 E.C.

If investors cannot recover their losses in half of the income tax exemption period (in this
case if Ato Yigeremu cannot recover his loss until 2003 E.C.), they will not be granted
additional incentive period. There is no further extension of income tax exemption if an
investor cannot recover his loss(es) in the additional incentive period. Moreover, if an
investors recovers his loss in the first year of additional incentive period ( in the context of
Ato Yigeremu, if he recovers his loss in 2001 E.C.), he will not be granted an exemption
from income tax in the subsequent years( Ato Yigeremu will not be granted income tax
exemption in 2002 and 2003 E.C.). This is because the law permits investors to carry forward
only their losses. By the time investors recover their losses, the income tax exemption shall
come to an end even when half of the income tax exemption period has not expired.

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5.1.1.2 Exemption from Payment of Customs Duty

The Ethiopian law allows investors to import capital goods and construction materials duty
free. Capital goods are distinguished from consumer goods in that they are used for further
production or used as input of production while consumer goods are not used for further
production but rather used by consumers.

As per Art. 8(1) an investor shall be allowed to import duty-free capital goods and
construction materials necessary for the establishment of a new enterprise or for the
expansion or upgrading of an existing enterprise. Like income tax exemption, the law on
exemption from customs duty accords incentives for both newly established enterprises and
for enterprises that are expanding or upgrading. What is more, any investor granted with
customs duty exemption can import duty free capital goods that are necessary for his
enterprise any time during the operation of the enterprise pursuant to Art. 8(2) of the
Regulation. However, not all investment areas will be eligible for importing capital goods
and construction materials duty free. Art. 10 of the Regulation specifies those investment
areas that are not eligible for exemption from the payment of customs duty. Some of the areas
that are not eligible for this type of incentive are: hotels (excluding star-designated hotels),
motels, tea rooms. coffee shops, bars. night clubs and restaurants which do not have
international standards; wholesale, retail and import trade; real estate development; theatre
and cinema hall operations, etc. Please read Art. 10 to see all the lists of investment areas that
are not eligible for customs duty exemption. What is the justification to exclude these
investment areas from enjoying customs duty exemption?

Furthermore, the privilege of importing duty free capital goods and construction materials
might not be extended with respect to an investor who imports capital goods and construction
materials to Ethiopia while such goods are locally produced and available in the local market
with competitive price, quality and quantity. As per Art. 8(3) of the Regulation, directives
issued by the investment board may bar the duty-free importation of capital goods and
construction materials where it finds that they are locally produced with competitive price,
quality and quantity. As discussed earlier, the law discourages those investors who import
capital goods and construction materials while they are able to purchase them from the local
market. Investors are not prohibited from importing products even when there are locally
produced goods that are available with competitive price, quality and quantity. Rather, such

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investors will not enjoy privilege of exemption from customs duty while they import products
that are available in the local market with a competitive price, quality and quantity. The
whole purpose is designed to encourage local entrepreneurship in the country. Moreover, the
purpose is also to protect products of local entrepreneurs from competition against foreign
products.

Vehicles can also be imported duty free. Nevertheless, the importation of importing duty free
vehicles depends upon fulfilling those conditions set by the investment board. As per Art. 9
of the Regulation, directives by the investment board shall determine conditions for
importing vehicles duty free depending on the type and nature of the project. As can be
observed from this provision, investors are not allowed to import all vehicles duty free. The
importation of vehicles duty free depends on the identification by the investment board of
those investment projects eligible to benefit from this type of incentive. However, any
investor can import duty free ambulances (for employees that are needed for emergency
cases) and buses for tour operation services as per Art. 9(a) and (b).

An investor can transfer the capital goods he imported to a third party – a third party who is
eligible for exemption from customs duty without conditions. However, capital goods
imported duty free can be transferred to a third party who is not eligible for customs duty
exemption only upon prior payment of the customs duty. Pursuant to Art. 11, capital goods
imported free of customs duty shall not be transferred to third parties not entitled to similar
duty free privileges unless prior payment of the customs duty is effected thereon. Let us
elaborate this issue by hypothetical case. Assume that Investor A who imported capital goods
necessary for expansion of his business is eligible for customs duty exemption. There are two
other investors B and C. Investor B is eligible to benefit from customs duty exemption while
investor C is not eligible to benefit from Customs duty exemption. Both investors B and C
want to buy capital goods imported duty free from investor A. Investor A can transfer the
capital goods imported duty free to investor C only upon prior payment of the customs duty
because investor C would have paid the same if he was to import them on his own (as he is
not eligible to benefit from customs duty exemption). However, investor A can transfer the
capital goods to investor B without being required to pay the customs duty. This is because
investor B is eligible to a similar duty free privilege and there is no need to effect prior
payment of the customs duty. He could have imported these goods without payment of
customs duty as he enjoys importation of duty free capital goods.
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5.1.1.3 Incentives Related to Provision of Land

To encourage investment in some areas, regional states in Ethiopia have arranged different
mechanisms whereby investors can get land for free or at a reduced rate. Regional states are
empowered by the FDRE Constitution to administer land. That is why regional states have
identified some areas of investment and provided different incentives related to land. As per
Art. 35 of Proc. 280/2002 (Art. 37 as amended by the Amendment Proc.), Regional
Governments have the obligation to deliver land within 60 days to an investor in accordance
with Federal and State laws. The law does not provide further details in so far as the
provision of land to investors is concerned. Determination of provision of land for free or at
reduced rate depends upon the decision of each regional state. Accordingly different Regional
States have identified investment areas that are eligible to get land for free or at reduced
price. Some of the regions and the investment areas eligible for provision of free land or
provision at reduced rate are listed below.

In the City of Addis Ababa, significant reduction in lease prices are made for investments in
some social infrastructures in the City. For investments in the areas of technical and
vocational schools, and college level education land is provided for free. For some other
investment areas, the City Administration provides land at reduced price. For instance,
investors investing in general hospitals are expected to pay only 15 % of the lease price, in
grades 1-8 school (expected to pay only 20 % of the lease price), etc.

In Oromia Regional Sate land is provided for free for a short period of time. Land is provided
for free for three years in areas of producing flowers, herbs and spices and producing
improved seeds. Land is also provided for free for four years in investments in
coffee, tea, sugarcane, or any other perennial crops on an area of more than 100 hectares.

In Amhara Regional State, list of investment activities in which land is provided freely as an
investment incentive includes: Industry ( Producing more than 50% for export, Agro-
Processing Industries, Fertilizer, and Pesticides Manufacturing, Pharmaceuticals and related
equipments, Agricultural equipments, Metal production), Health (Higher health center,
Primary general hospital, Medium general hospital, Higher general hospital ), Education
( Kindergarten, Elementary school, Secondary school, Technical and vocational school ).

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In Tigray, some of the investment areas in which land is provided freely include: livestock
production, processing and preserving of meat, and meat products, dairy farming and
processing, production, processing and preserving of fruits and vegetables, manufacture of
leather products, technical and vocational training, engineering colleges and higher hospitals.

5. 2 Guarantees

Apart from incentives which might induce investors to undertake investment activities in a
host state, the guarantees available in a country play an important role in attracting foreign
investment. Investors want to see that there are sufficient protections to their investment
activities that could ensure their properties are not damaged or in case of damage that they
receive appropriate compensation, and assurance that they can easily remit their capital
whenever they need.

To meet the demands of investors, the Ethiopian law has provisions that guarantee investors
against different risks. The FDRE Constitution and the Investment Proclamation give due
protection to private property of investors. As per Art. 40(8) of the Constitution, private
properties will not be subject to expropriation unless there is a legitimate public interest.
What is more, the constitution provides that the expropriation has to be made against
payment of compensation commensurate to the value of the property. The payment has to be
effected in advance. The provision uses the term ‘every Ethiopian or every Ethiopian citizen’
in addressing the protections accorded to private properties. Does it mean that properties of
foreign investors are not accorded protection by the FDRE Constitution? Have a look at Art.
40 of the constitution provided below and try to answer the question..

Article 40.
Right to Property
1. Every Ethiopian citizen has the right to the ownership of private property. Unless
prescribed otherwise by law on account of public interest, this right shall include the right to
acquire,to use and, in a manner compatible with the rights of other citizens, to dispose of
such property by sale or bequest or to transfer it otherwise.

2. "Private property", for the purpsoe of this Article, shall mean any tangible or
intangible product which has value and is produced by the labour, creativity, enterprise or
capital of an individual citizen, associations which enjoy juridical personality under the law,
or in appropriate circumstances, by communities specifically empowered by law to own
property in common.

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.
.
.
7. Every Ethiopian shall have the full right to the immovable property he builds and to the
permanent improvements he brings about on the land by his labour or capital. This right
shall include the right to alienate, to bequeath, and, where the right of use expires, to remove
his property, transfer his title, or claim compensation for it. Particulars shall be determined
by law.

8. Without prejudice to the right to private property, the government may expropriate private
property for public purposes subject to payment in advance of compensation commensurate
to the value of the property.

As can be seen from the above provision, the FDRE Constitution uses the terms ‘every
Ethiopian citizen (Art. 40(1)) or ‘every Ethiopian’(Art. 40(7)) in specifying persons whose
properties are protected. Does the use of these terms exclude protection of foreign
investors’ properties under the FDRE Constitution? One may argue that this provision
protects only Ethiopian investors excluding foreign investors as it expressly uses the terms
every Ethiopian or every Ethiopian citizen.

On the other hand, it may also be argued that the references in the provision do not exclude
protection of properties of foreign investors as legal persons (companies or entities)
established by foreigners may be considered as Ethiopians. Ethiopian nationality is conferred
not only on natural persons but also legal persons. Hence, this provision may refer to both
natural and legal persons who have Ethiopian nationality. In this case, even though foreign
natural persons may not have acquired Ethiopian nationality, the enterprise or the company
they establish may be regarded as an entity that has Ethiopian nationality. As you know, an
entity can have nationality of its own independently of its owners. Therefore, companies
owned by foreigners may still be accorded protection by the FDRE Constitution if the
companies acquired Ethiopian nationality. The properties that belong to these companies
would then be protected as the companies are ‘Ethiopians’ under the law.

Do you think the above assertion is acceptable? Could Ethiopian citizenship have different
meaning than Ethiopian national and invalidate the above possible interpretations?

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Even assuming that foreign investors’ properties are not accorded protection under the FDRE
Constitution, there is no as such risk to legal protection of foreign investors in Ethiopia. This
is because other domestic laws give protection to foreign investors. The investment
legislation accords sufficient protection to both foreign and domestic investors. The
investment Proclamation does not use any term that distinguish foreign investors from
Ethiopian investors as far as protection of private properties is concerned. Both foreign and
Ethiopian investors are accorded protection to their investment in the country. As per Art. 21
of Proc. No. 280/2002 (Art. 23 as amended) no investment may be expropriated unless the
following conditions are met:
 Expropriation can be made only when it is required by the public interest;
 Expropriation should be undertaken in compliance with the requirements of the law;
 Payment of adequate compensation should be effected (adequate compensation has
been defined as amount that corresponds to the market value); and
 The compensation should be paid in advance.

All the above conditions should be fulfilled for a legitimate expropriation to take place. They
are cumulative requirements. The requirement related to payment of compensation is
interesting in the sense that many BITs and regional agreements on investment require
payment of compensation immediately after expropriation or just simply state that it has to be
effected without delay. The Ethiopian law seems to have moved one step ahead as far as this
issue is concerned because it requires the compensation to be effected before the
expropriation takes place. In general such law is more favourable to investors even though it
might bring about difficulties in implementation as the government may find it hard to
comply with the requirements of paying compensation in advance.

‘Public interest’ is not defined. What might be considered public interest should be
determined having different circumstances into account. There is no formula to decide what
interests fall within the scope of public interest. It is determined on case by case basis.

Requirements ‘in accordance with the law’ relate to procedures that have to be observed or
right of due process of law of an investor. If there are procedures that should be followed
during expropriation, such procedures should be observed. Investor’s right of due process of

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law has to be also respected before expropriation if required by the law i.e. he has to be heard
and given the opportunity to challenge the decision of the government.

The law tries to define adequate compensation. It is provided that adequate compensation
refers to the amount which corresponds to the market value. However, the question would be
should it be the ‘market value’ of the property before the decision of expropriation is made
known to the public or after the decision is made known to the public? Some bilateral and
regional agreements on investment stipulate that the market value of the property should be
the value of the property before the decision of the expropriation is made known to the
public. The reason is that it is inevitable that the market value of properties will go down
once announcement is made that the property is to be expropriated. Hence, to enable
investors to compensate the real value of their properties, the market value should refer to
that value of the property before the decision of expropriation is made known to the public.

The Ethiopian investment law guarantees investors on remittance of compensation paid to

them. As per Art. 21(3) of the Proc. (Art. 23 as amended by the Amend. Proc.) an investor
may remit compensation paid to him out of Ethiopia in convertible foreign currency.

Moreover, as per Art. 20 of the Proc. (Art 22 as amended) investors can remit out of Ethiopia
the following payments in convertible foreign currency at the prevailing rate of exchange on
the date of remittance: profits and dividends accruing from investment; Principal and interest
payments on external loans; Payments related to a technology transfer agreement registered
in accordance with the Proclamation; Proceeds from the sale or liquidation of an enterprise;
Proceeds from the transfer of or of partial ownership of an enterprise to a domestic investor.

The Ethiopian investment law, as can be observed from the above provisions, seems to give
enough guarantees. The attempt is to inform investors that there are little or no risks in
relation to their investment and boost their confidence to invest in Ethiopia.

Guarantees are also provided under the BITs that Ethiopia has signed so far. Please refer to
provisions on guarantees under the BITs annexed to this material. The provisions on
guarantees in BITs are more or less the same with the guarantees stipulated under the
Investment Proclamation of Ethiopia.

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The fact that Ethiopia is a member to the Multilateral Investment Guarantee Agency (MIGA)
can serve as means of guarantee for investors in the country. MIGA is a World Bank Affiliate
which issues guarantees against non-commercial risks in member countries. Eligible
investors can purchase insurance against non-commercial risks of inconvertibility of local
currency, expropriation, war and civil disturbances, including politically motivated acts of
sabotage or terrorism.

To be an eligible investor, a person must be a national of a member country to MIGA.

Eligible projects include new investments as well as expansions, restructuring, and
privatization of existing investments.

5.3 Favourable Conditions and Problems

The flow of investment is determined by many different factors other than incentives. There
are more important factors like political stability, market access, infrastructure, availability of
resources, etc. that have impact on flow of foreign investment. Moreover, legal framework of
a country plays an important role in regulating foreign investment. Students, however, should
be aware of the fact that not only investment laws but also other domestic laws of a host state
are crucial to determine the environment of investment in a host state. Employment law,
environment law, law of traders and business organizations, contract law, property law, and
others do have impact on investment environment. It is the interplay of all these laws and
other factors mentioned above (political stability, infrastructure, market access, availability of
resources, etc) which create either a conducive or hostile environment to investment.

5.3.1 Favourable Conditions

There are a number of favourable conditions for investing in Ethiopia. Some of them are
discussed below.

a. Political stability

One of the favourable conditions is a relative political stability and security. Although
Ethiopia is a diverse country- people with different religions, more than 80 ethnic groups, and
nine regional states- it offers a stable and secured political environment. Hence, Ethiopia with

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its little crime and disorder is relatively stable and secure for investors. This is not to suggest
that there has not been any violence in the country. There have been incidents of sporadic
ethnic and religious violence in Oromia, Southern and Somali regions in recent years but has
not seriously affected foreign or domestic investors. However, an insurgent attack on Chinese
workers at an oil exploration site in Somali region in April 2007 has prompted China to
suspend exploration operations there.

Moreover, the war and the continued tension between Ethiopia and Eritrea could be
mentioned as a potential risk for investment. There was political unrest, violent protests and
numerous arrests following the disputed May 2005 elections. The unrest had largely subsided
by 2007. Such incidents have not as such affected properties of investors either directly or
indirectly. Therefore, it can be arguably concluded that in Ethiopia there is political stability
and security which creates conducive environment in the country.

b. Market

Ethiopia has close to 80 million population which makes the country potentially one of the
largest markets in Africa. Beyond the domestic market access, investors may also get
preferential market accesses by virtue of Ethiopia’s membership to regional integrations and
its qualification to benefit from preferential trade arrangements.

Ethiopia is a member to one of the regional integration- Common Market for Eastern and
Southern Africa (COMESA) which would potentially provide investors an opportunity to
access the markets of the member countries at preferential tariffs (at reduced tariff rates).
However, as Ethiopia has some reservations in the arrangement, currently it is not fully
beneficial from the integration but will be one of the most important market accesses in the
future when the country is fully integrated to COMESA.

Ethiopia also enjoys trade preferences arranged by European Union (EU) and the US.
Ethiopia benefits preferential access market to European markets under the EU’s Everything-
But-Arms (EBA) initiative. Dear distance learner, I hope you remember the EBA initiative
from your international trade law course. The Everything But Arms (EBA) is a trade
preference programme provided to Least Developed Countries (LDCs) by the EU. EBA is a
preferential programme of quota-free and duty-free access to the EU market on nearly all
items except arms for least developed countries. This would enable investors that produce

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products in countries like Ethiopia to access the European markets without facing tariff and
quota restriction thereby creating more market opportunities for their products.

Ethiopia also qualifies for preferential access to the US market under the African Growth
Opportunity Act (AGOA). AGOA provides duty free and quota free market access for some
products to the US for countries that are eligible to the trade preference. The legislation
authorized the President of the United States to determine which sub-Saharan African
countries would be eligible for AGOA on an annual basis.

The US President designates countries as eligible to receive the benefits of AGOA if they are
determined to have established, or are making continual progress toward establishing the
following: market-based economies; the rule of law and political pluralism; elimination of
barriers to U.S. trade and investment; protection of intellectual property; efforts to combat
corruption; policies to reduce poverty, increasing availability of health care and educational
opportunities; protection of human rights and worker rights; and elimination of certain child
labor practices. These criteria have been embraced overwhelmingly by the vast majority of
African nations, which are striving to achieve the objectives although none is expected to
have fully implemented the entire list. Ethiopia has been eligible to receive the benefits of
AGOA as of August, 2001.

Furthermore, a wide range of goods from Ethiopia are entitled to preferential access under the
Generalized System of Preference (GSP) in Austria, Canada, Finland, Japan, Norway,
Sweden and most countries in the EU. No quota restrictions are imposed on Ethiopian
exports falling under many items currently eligible for GSP treatment.

c. Availability of resources

Ethiopia is a country endowed with abundant and diversified natural resources and diverse
climate. Ethiopia is a country with great geographical diversity. It has different climate zones
which is an asset for a variety of agricultural activities. Moreover, domestic raw materials are
available for many investment areas in the country. These and other related make the country
favourable for undertaking investment in various areas.

Furthermore, the availability of cheap labour resources creates additional favourable

conditions for investment in Ethiopia. Ethiopia's labor force is estimated at 35 million, of

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which 85 percent are employed in subsistence agriculture, mostly as farmers. Labor remains
readily available and inexpensive in Ethiopia even though skilled manpower is scarce in
many fields.

d. One-stop-shop Service

Ethiopia’s licensing requirements are generally considered fair even though there are some
burdensome bureaucratic procedures that investors have to pass through. Coupled with the
delays and inefficient services rendered by governmental offices, investors might be
frustrated by the procedures they have to go through. To tackle these problems, the Ethiopian
investment law has introduced the so-called ‘One-stop-shop service’. This refers to delivery
of services by one organ without the need to go to different offices to submit applications for
obtaining licenses or to get services. One organ will be delegated to issue different licenses or
deliver services that would have been rendered by different offices of the government under
normal circumstances.

The whole purpose of one-stop-shop service is to eliminate cumbersome bureaucratic

procedures that investors might face. As per Art. 24 of Proc. No. 280/2002 (Art. 26 as
amended by the Amendment Proc.), the investment organ of the Federal Government or
Regional Investment organs, apart from rendering services that they are entrusted with by the
investment legislation, they have obligations to render the following services representing the
competent Federal or Regional executive organs: notarization of memorandum of association
and Articles of association; effecting commercial registration; issuance of work permits to
expatriate employees; grading of construction contractors; and issuance of business licenses.

As can be observed from the lists above, the services mentioned are normally rendered by
different executive organs of the Federal or Regional governments other than investment
organs. However, to eliminate bureaucratic hurdles the law entrusts the Federal investment
Commission or Regional Investment Organs to render the services on their own by
representing the competent organs of the Federal or Regional executive organs.

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5.3.2 Problems

As discussed above Ethiopia has a lot of favourable condition that can induce investors to
locate their investment undertakings in the country. On the other hand, there are a number of
problems that can deter investment flow into the country. As we cannot address all the
problems in this material, only some of them are discussed below.

One of the problems is related with the existence of corruption. As far as corruption is
concerned, there are two contrasting independent reports. According to the UN’s investment
guide to Ethiopia, corruption is almost non-existent. According to the UN’s guide routine
bureaucratic corruption is virtually non-existent in Ethiopia. It further states that bureaucratic
delays and difficulties exist but they are not devices by which officials strive to line their
pockets. The report concludes that the absence of routine bureaucratic corruption is a
powerful incentive for foreign firms to consider Ethiopia very seriously as a location for
investment. On the contrary, Transparency International has reported that there are serious
corruption problems in Ethiopia which can adversely affect the investment climate in
Ethiopia. According to the reports, Ethiopia's Transparency International corruption rating
has declined. Ethiopia ranked 114th out of 146 countries rated in 2004 (a higher number
indicates a higher level of corruption), 137th out of 159 countries rated in 2005, 130th out
of 160 countries rated in 2006 and 138th out of 180 countries rated in 2007 suggesting a
worsening corruption trend.

Whether Ethiopia has a rampant corruption or not could be arguable. The existence of some
level of corruption is clear nonetheless. This has got its own adverse impact on flow and
expansion of investments in the country.

The existence of bureaucratic hurdles set another problem to investment in Ethiopia.

Investors are forced to face delays and unnecessary bureaucratic procedures that are prevalent
in many government offices. Even though the law has provided the so-called one-stop-shop
service to eliminate unnecessary bureaucratic, there have been problems in relation with the
implementation of this service.

The lack of adequate infrastructure is also another problem to investment in Ethiopia. There
are serious problems related to supply of energy. Though the country has large potential to

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generate energy, there has been little progress. Power cut or failure are common. The supply
of energy is not reliable. What is more, there are problems related with access, quality and
cost of energy. There are also serious deficiencies in the telecommunication services.
Telecommunication services are one of the lowest in Africa by any standards. The services
are not accessible to most people in the country. The quality of the service is very low and
has been characterized by very slow progress. As far as road transportation is concerned,
large parts of the country still have no real access to road transport and hence no access to
social services or to markets. However, the last decade has seen significant increase in access
to roads.

Furthermore, the inefficiencies of the judicial system in Ethiopia are reasons for investors not
to have confidence in national courts. Even though the legal framework generally is
conducive for investment excepting some rules, Ethiopia's judicial system remains
underdeveloped, poorly staffed and inexperienced, although efforts are underway to
strengthen its capacity. This has a negative impact on making sure that investors can rely on
national courts in cases of any risks to their investment during any stages of their investment
activity. Lack of confidence on national courts will eventually have serious repurcussions on
flow of foreign investment into the country.

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Review Questions

1. Discuss types of incentives.

2. Explain locational incentives in general and site incentives in particular in the context
of Ethiopia’s investment law.
3. What guarantees are available under Ethiopian law against risks of investment
4. What are the conditions that should be fulfilled under Ethiopian investment law for
expropriating the property of investors.
5. Discuss the market opportunities available for investors who are engaged in
manufacturing products in Ethiopia.
6. Discuss two main problems that could stifle growth of foreign investment in Ethiopia.

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 Chapter Six
New Concerns in Foreign Investment: Human Rights and
Environmental Issues

Regulation of foreign investment by the host state under the guise of protection of human
rights and environment may be seen as a risk by investors. However, there are various
allegations of over exploitation of resources and work force by multinational corporations
especially in the developing countries. Liberalization might be supplemented by regulations
so as to keep the interests of the host state and the foreign investors.

At the end of these chapter students be able to;

 appreciate the impact of foreign investment on the obligation of states to fulfill
Human rights
 identify some of environmental impacts of foreign investment

 Current movements used by various organizations in protecting damage on

environment and human rights violations by Multinational corporations.

6.1 Introduction

Foreign Investment may create employment opportunities, transfer technology and know-
how, stimulate local research and innovation, and improve opportunities for income
distribution while at the same time promote trade and prospects of growth and further global
integration. There have been a number of bilateral treaties which aims for liberalization of
investment regulations. There have been also various efforts to create multilateral
agreements. However those acts done so far are not free from criticism,

The globalization protesters against multilateral investment agreements were generated by the
fact that these agreements showed little concern for the environmental and human rights
interests involved in foreign investment. The charge was that investment agreements focused
entirely on the protection of the interests of the foreign investor and did not concern the
interests of the international community or the host state in the protection of the values that
were of concern to them. These values generally involve:
 the areas of environmental protection,

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  human rights and economic development.
The non-governmental organizations working in these fields have ensured that the criticisms
remained vibrant. Initially the criticisms were made against the Multilateral Agreement on
Investment promoted by the OECD. Later these criticisms have become directed at all types
of investment treaty. Those who argue along these lines want to ensure that:
 the regulatory function of the state in areas such as environmental protection are
retained
 that the state should have a defense to any claims made by foreign investors on the
basis of the protection of its interests;
 and that the state should also have the means of recourse to the same dispute
resolution mechanisms provided in the treaty in the event of the violation of its
interests.
The reaction is justified, for investment treaties have almost solely provided for the interests
of multinational corporations without taking into account the possible harm that may be
caused by such corporations. This imbalance would render developing states powerless in
and lead them to complex problems. In these chapter we will see some controversies in
foreign investment in relation with human rights and environment.

6.2 Human Rights and Investment

Investment offers significant potential for generating growth, combating poverty and
promoting development. This in effect potentially contributes to the promotion and protection
of human rights. However such generalization on the effects of investment on the enjoyment
of human rights needs to be evaluated carefully. The fact that investment can promote trade,
growth and development suggests at first glance a potential correlation between investment
and the enjoyment of human rights, particularly economic, social and cultural rights and the
right to development. Perhaps, the most direct benefit that flow from investment is its effects
on employment. UNCTAD has noted that investment has generated significant employment
in export-oriented labor-intensive activities, primarily in lower-end manufacturing but also in
services, and there is evidence to suggest that increases in investment have had positive
effects on the participation of women in paid employment over the past 20 years.
Employment can lead to new skills and the training of human resources and there is evidence
that this can make income distribution less unequal. This in turn can have positive impacts on
the enjoyment of human rights by empowering people and creating more equal societies. For

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women in particular, Employment even low-paid employment - could provide a vehicle to
increased autonomy both within and outside the family. This in turn could lead to increased
pressure for greater social recognition of women’s equal rights. However, increased
employment opportunities for women do not necessarily correlate with equal rights for
women and male workers.

On. the other hand, we need to recognize the impact of human rights promotion on
investment. We can say that human rights and investment could be self-reinforcing, at least to
some extent. Importantly, while investment offers the opportunity to improve training and
skills, the promotion of the right to education through the national education system remains
the primary means of ensuring a skilled workforce. So skilled work force is a vital area of
host government policy to attract investment. Further, reducing child labour, eliminating
discrimination in the workplace and promoting collective bargaining are not only important
in their own right, they motivate the labor force and can help attract investment. Similarly,
the promotion and protection of the right to participation and freedom of information can
promote more accountable, democratic and transparent societies that are also attractive to
investors and investment.

However, the effects of investment on the enjoyment of human rights are not uniform and the
potential for investment to affect human rights through stimulating growth and development
will differ depending on the type of investment, the host country, the sector targeted by
investment, the motivations of the investor as well as the policies of both host and home
country.

The effects of investment on the enjoyment of human rights can change over time, leading to
progressive improvements in times of prosperity but regressions when investment flow
decrease, particularly where the State has pursued a policy of investment liberalization
without also setting up appropriate social safety nets.

The effect of investment as a positive force to promote the enjoyment of human rights
depends significantly on the actions of the Government. Traditionally, host country
Governments have taken various active measures to direct investment towards national
development needs. Such safety measures often include:
 Protecting infant industries by restricting the entry of foreign investors;
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  protecting the domestic economy against the entry of certain forms of investment
 requiring investors to use certain local materials, to transfer technology and skills,
 to undertake joint ventures with local enterprises.
Provided that these measures have been part of an overall coherent and comprehensive
investment strategy, such measures can have beneficial impacts on national development.
While such measures might help direct investment towards improved trade, growth and
development, additional government action might be needed.

In particular, governments need to ensure that the gains from investment are also fairly
channeled to the benefit of those whose human rights are most vulnerable, such as the poor or
people living in outlying regions that might not immediately attract investment.

Also in certain situations, Governments have to introduce or reinforce complementary

measures to investment, such as competition policies, environmental protection standards,
taxation measures and regulations directed towards the fulfillment of human rights, in order
to direct investment and to avoid abuses of market power.

Indeed, government action can be an important determinant in the relationship between

human rights and investment. In the past, there has been concern that Governments have
lowered environmental and human rights standards - including labour standards, freedom of
expression and freedom of association - to attract investment.

The relationship between human rights and investment is therefore subject to many variables
and much depends on the type of investment, the motivations of the investor, the actions of
Governments, and the country and sector in question. Nonetheless, the potential of well-
managed investment to promote the enjoyment of human rights exists and today most
developing countries seek investment as a means of promoting development. In order to
encourage higher levels of investment, many States have undertaken investment liberalization
through:
 Unilaterally action.
 World Bank/International Monetary Fund (IMF) structural adjustment programs
 through the adoption of trade and investment treaties.

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While the liberalization of investment through the removal of obstacles to the entry of
investment and investors, strengthening standards of treatment for investors and the
establishment of a more stable and transparent investment environment domestically and
abroad is only one factor that determines investment flows, UNCTAD has identified
investment liberalization as one of the long-term driving forces behind investment behavior
of firms.

The interest and motivation of investors and host governments may be at variance. While the
objective of ensuring efficient` international` production through lowering barriers to
investors might be what drives investors. Thus, the objectives of investors might focus on
freeing up movement of investment and reducing restrictions on how they invest in order to
increase economic efficiency and provide an optimum return on investment. On the other
hand, Governments generally seek higher levels of investment in order to pursue` national
`development objectives. Thus the objectives of Governments might focus on attracting
certain forms of investment over others and in directing investment towards specific sectors
or activities that promote long-term national development goals. Meeting these two goals
might sometimes require compromise human rights perspective, it is important to balance
these objectives with a view not only to attracting investment and promoting national
development, but also to achieving economic, social, cultural and political development in
which all human rights and fundamental freedoms can be fully realized, as stated in article 1
of the Declaration on the Right to Development (DRD).

In practice there are a lot of human right violations through foreign direct investment. Mostly,
Transnational Corporations took a lion’s share for such criticisms.

International law and organizations play a key role in setting the standard for human rights
recognition and compliance. Despite their initiatives, however, implemented policies to
safeguard human rights are not addressing the concern as expected nor are policies effective
as they could be.

Human rights are seldom, if at all, referred to in bilateral investment treaties. However,
violations connected with the suppression of dissent against particular projects initiated by
multinational corporations have come to light in recent years. Recent litigation before
domestic courts against parent companies of multinational corporations allege violations of
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human rights committed by agents of those multinational corporations in association with the
political elites of developing countries illustrates the extent of the problem. Investment
treaties may deter a state from interfering to correct a human rights situation that may have
arisen. Often, however, the state, or the elites, which control it, is also participants along with
the multinational corporation in the violation of the human rights abuse.

Succeeding governments may, however, want to remedy the situation but may be deterred
from doing so by the fact that such interference may be regarded as an infringement of
investors’ rights under the treaty.
Dear distance students let us see one instance, which may clarify the issue further. Coca Cola
Company has been involved in the alleged scandal in Columbia.

`In 2001 the number of Union workers at Coca Cola plants in Columbia had dropped to 450
from 1300 in 1993. In response, the International Labor Rights Fund (ILFR) brought a
lawsuit against Coca Cola Parent Company in USA for violating the right of freedom of
association. Additionally, a worldwide boycott started against Coca Cola. The suit alleged
that the Subsidiary bottlers of Coca Cola in Columbia contracted with or otherwise directed
paramilitary security forces that utilized extreme violence and murdered, tortured, unlawfully
detained or otherwise silenced trade union leaders. Latter on investigations revealed that the
bottlers have committed serious human right violations. What was even worse is that the
Columbian Army has also involved and cooperates with the bottling Company.`

The British Petroleum company (BP), which is one of the top ten corporate spenders
influencing US-Latin American policy, has also been alleged to create links with groups who
have record of human rights violation in Columbia. There are also a number of other
instances.

6.2.1 The Human Rights Implications of Investment Liberalization

In liberalizing investment, States have had to deal with the reality that host country objectives
in relation to investment might differ from those of investors: while Governments seek to
spur national development, investors seek to enhance their own competitiveness and market
share in an international context. Much of the debate in the context of investment
liberalization has focused on achieving the right balance between States’ “right to regulate”

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(like protection of infant industry) and investors’ rights (rights of entry, protection against
expropriation and so on).
Agreements concerning investment exist at the various levels. Since the cold war, States have
increasingly viewed BITs as vehicles for liberalizing investment by reducing constraints on
investment opportunities as a means of attracting investment. Internationally, there is
currently no comprehensive international investment agreement Discussions have been
ongoing since the 1990s, however. For example, the member States of the OECD
commenced discussions on a Multilateral Investment Agreement (MAI) during the second
half of the 1990s and had prepared a draft agreement by 1998. The process subsequently
collapsed in part due to concerted pressure from human rights, environmental and consumer
groups. At the time, experts criticized the MAI both for the lack of transparency throughout
the negotiating process and for its failure to take into account several dimensions of States’
affirmative obligations to respect, protect and fulfill human rights within its substance.

The promotion and protection of human rights adds a new dimension to this debate – that of
the promotion and protection of the human rights of individuals and groups. The Universal
Declaration on Human Rights, the International Covenant on Economic, Social and Cultural
Rights (ICESCR) and the International Covenant on Civil and Political Rights (ICCPR),
amongst other treaties, recognize a series of civil, cultural, economic, political and social
human rights carrying corresponding obligations on States - most of which can be affected,
one way or another, by investment. Consequently, to the extent that investment affects these
rights, the obligations on States in relation to individuals and groups should also be
considered within the context of rights and obligations between States and towards investors.

While as States continue discussions regionally and bilaterally, to achieve progressively

higher levels of investment liberalization through the negotiation and implementation of
investment agreements, it is important to remember that States also have concurrent
responsibilities under international law to promote and protect human rights.

Dear distance learners, you have seen that investment liberalization may have its own
negative impact on states obligation to protect and promote fundamental virtues of human
rights, unless some compromising solutions are created.

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Students, try to analyze as to what needs to be done in order to alleviate the aforementioned
problems? How can states balance their need for economic development through attracting
foreign investors up on liberalizing of economic policies on the one hand and safeguarding
their commitment to human rights obligations?

The UN High Commissioner for Human Rights of the Economic, Social and Cultural rights
has proposed the following solutions.

A) Including the promotion and protection of human rights among the objectives of
investment agreements: The Committee on Economic, Social and Cultural Rights has stated
that, in compliance with their responsibilities to cooperate internationally to achieve the
progressive realization of economic, social and cultural rights. States should ensure that they
give due attention to those rights in international agreements, including trade agreements.
Recognizing this link could be an important step in avoiding downward pressure on human
rights protection in the process of investment liberalization. Further, a reference to the
promotion and protection of human rights would encourage interpretations of provisions of
investment agreements that take into account States obligations under human rights law.

B) Ensuring States’ right and duty to regulate: States should ensure that in investment
agreements they maintain the flexibility to use certain policy options to promote and protect
human rights. Similarly, States should maintain the flexibility to promote cultural diversity
and to implement special measures to protect vulnerable, marginalized, disadvantaged or
poor people. Moreover, it is important to highlight the need for States to introduce new
regulations to promote and protect human rights in response to changing conditions and
knowledge of health, water, education, environmental and other issues that affect the
enjoyment of human rights. In this context, broad interpretations of some provisions of
investment agreements such as “expropriation provisions” could affect States’ capacity or
willingness to regulate for health, safety or environmental reasons; to this end,
interpretations, or even explicit declarations, by parties to agreements, that protect State
action to fulfill human rights are encouraged.
C) Promoting investors’ obligations alongside investors’ right: Voluntary codes of
conduct promoting corporate social responsibility are important; yet, as investors’ rights are
strengthened through investment agreements, so too should their obligations, including
towards individuals and communities. To this end, initiatives to clarify and specify the legal
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responsibility of actors towards individuals and groups in the context of investment are
important. Further, States could consider the issue of legal responsibility of investors within
discussions concerning continuing investment liberalization and consider acknowledging
these responsibilities in investment agreements.

D) Promoting international cooperation as part of investment liberalization:

International cooperation and assistance is a fundamental aspect of international human rights
obligations and a necessary measure to secure a just and equitable international and social
order. In this regard, wealthy countries should meet their commitment to provide 0.7 per cent
of GNP as official development assistance and to ensure that such assistance is directed
towards development and poverty alleviation in poor countries. In the context of negotiations
over new investment agreements, it is strongly encouraged that such targets be included
among the obligations in investment agreements.
E) Promoting human rights in the context of privatization: The effective provision of
essential services in the health, education, water, sanitation, energy, transport and
communications sectors has a significant role in promoting and protecting human rights. The
promotion of the rule of law - popular participation, transparency, legality, equality and
accountability - is a significant aspect of ensuring access to essential services for all.

F) Increasing dialogue on human rights and trade: There is a need not only to bring a
human rights perspective to investment, but also to ensure that human rights experts and
mechanisms understand sufficiently the linkages between investment and the enjoyment of
human rights and that take investment issues adequately into account. In particular, there is a
need to improve dialogue between human rights, trade, finance and environmental
practitioners and, specifically, social sector and trade/finance ministries at the national level.

G) Undertaking human rights assessments of investment liberalization: Undertaking

human rights assessments of trade and investment rules and policies will be an important
measure to gauge the extent to which trade liberalization can promote and protect human
rights. In particular, discussion in the context of the WTO Working Group on Trade and
Investment and the ongoing negotiations in the GATS Council should be informed, inter alia,
by sound empirical evidence drawn from public, independent and transparent human rights
assessments based on information gathered through a participatory and consultative process
with concerned individuals and groups. In particular, such assessments should have a gender
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perspective and consider the real and potential effects of investment liberalization on
disadvantaged and vulnerable groups.

6.3 Foreign Investment and the Environment: Climate of

Controversy

The association between foreign investment and the environment is multi-layered/complex/.

It includes both the apparent clash of objectives as well as more subtle attempts at alignment
of interests. The allegations include:
 foreign investment privileges in exchange for raised environmental standards
 as pointed out in recent arbitral awards, there have been allegations that
environmental regulation has operated as a form of indirect expropriation of foreign-
owned investments.
 There have been assertions that foreign investment creates pollution havens and that
its protection laws allow Multinational Corporations to influence the domestic
environmental, worker protection, and health and safety regulation of the states in
which they invest.
 Attention has also been turned to those who provide the finance for environmentally-
harmful projects resulting in pressure to reform lending practices in both the public
and private sectors.
 There is, of course, the converse position:
o advocating the need for safeguards against domestic protectionism disguised
as environmental regulation and
o supporting the viewpoint that Multinational Corporations encourage the
introduction of higher environmental standards through technology transfer.
Arguments directly linking foreign direct investment to environmental degradation have
multiple dimensions.
Fist, felt impact at local level, is that although foreign investment may generate economic
wealth at the national level in host countries; it does not generally benefit the local
communities or indigenous peoples in the vicinity of the project site. These arguments draw
attention to localized environmental degradation, and argue that foreign investment does not
necessarily promote sustainable development.
Environmental non-governmental organizations (‘NGOs’) take the leading role as watch-dog
of corporate and governmental practices, by creating awareness amongst the general public,

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instantaneously publicizing any polluting activities of foreign-owned entities, or lax
enforcement of environmental regulations.

The second layer of this concern linking foreign investment to environmental damage takes a
regional and global perspective. It argues that the rapidly increasing levels of foreign direct
investment activity contribute to a global-scale increase in resource depletion and pollution
generation.

Dear distance students, let us see some of the key sources of hostility in the foreign
investment and environment relationship. The following are some aspects of controversies on
environmental impact of foreign investment.

(a) Micro-Level Corporate Damage

The interaction between foreign investment and the environment is particularly volatile at the
micro-level where the focus is on individual examples of environmental degradation resulting
from the activities of foreign-owned companies. This correlates with the high visibility of
negative impacts that corporate practices and operations can have on local environments and
communities. For instance, where forced resettlements, pollution of waterways and land,
increased illness or mortality rates in humans, and disease or death in livestock have
occurred. This form of contact has often resulted in entrenched, polarized positions between
foreign-owned corporations, governments’ and environmental and human rights activists.

The disputes have involved allegations of environmental devastation, contaminated land and
rivers, ravaged rainforest, damage to human health, death and birth defects, the fracturing of
communities, human rights abuses and collaboration with repressive state regimes.

Notable conflicts include the controversy surrounding the operations of the Shell Oil
Company in Nigeria, ChevronTexaco Corporation in Ecuador, Broken Hill Proprietary Co
(‘BHP’) in Ok Tedi, Papua New Guinea, and Union Carbide in Bhopal, India.

Dear distance learners let us look in to some worst disasters in some parts of the world that
may help to understand the extent of the problem.

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Illustration1; Papua New Guinea

The disputes have involved allegations of environmental devastation, contaminated land and
rivers, ravaged rainforest, damage to human health, death and birth defects, the fracturing of
communities, human rights abuses and collaboration with repressive state regimes.

The flooding of forests downstream from the Ok Tedi copper and gold mine in Papua New
Guinea is one such example. The mining operation, released million tons of mine tailings and
waste rock residue into the Ok Tedi and Fly Rivers every year from 1984 onwards. This toxic
sediment raised the riverbeds, causing the flooding of a 1300 kilometer area and smothering
of rainforest in a process labeled by the United Nations Environment Program (‘UNEP’) as
‘dieback’. The heavily polluted waters poisoned vegetation, fish and animals and resulted in
the loss of traditional lifestyles for the local communities.

Illustration 2: Equador

A further example of massive environmental degradation can be seen in the Texaco vs

Ecuador conflict. In 1964, a US company, Texaco Inc, acquired rights for oil exploration and
extraction in the Oriente region of Ecuador over an area of one million acres. It transferred
those rights to its subsidiary, Texaco de Petròleos and carried out its drilling and extraction
operations through the Ecuadorian company. Texaco dug open, unlined pits, into which
untreated crude oil was dumped, leaching toxic waste into water systems and through the soil
of village lands. Billions of gallons of toxic waste waters and sludge were released untreated
directly into the rivers. Drinking and bathing water was contaminated; food sources became
contaminated. Texaco’s operations inflicted terrible damage on the environment and
appalling injuries and illness on the local inhabitants — villages decimated by cancer and
children afflicted with birth defects.

Serious Multinational Corporate misconduct is also exemplified by Union Carbide. A lethal

gas leak from a pesticide factory in 1984, in Bhopal, India, sent clouds of poisonous fumes
across a city of one million people, killing approximately 8,000 people in the first week
following the disaster. An estimated further 20,000 people have since died from illness and
injury resulting from exposure to methyl isocyanine gas.
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Illustration 3:India

Union Carbide Corporation, an American multinational corporation, operated in India

through its subsidiary, Union Carbide of India, Ltd. This Indian company owned the pesticide
factory responsible for the disaster. The immediate injuries suffered by Bhopal residents were
horrific. Survivors give accounts of the burning in their eyes and mouths, suffocation,
vomiting, convulsions, loss of control of bladder and bowel, spontaneous miscarriages,
blindness, as well as witnessing others frothing at the mouth, writhing in agony and dying on
the streets. The long-term effects for those who survived the exposure to the gas include
blindness, damage to lungs, kidneys, liver and reproductive systems, cancer, and birth defects
in children born subsequently.

The contamination of Bhopal was not limited to the release of toxic gas in 1984.The conduct
of Union Carbide following the disaster exacerbated the pollution. Although the factory was
closed down, the site was not cleaned up and no decontamination program was implemented.
Chemicals still remain dumped at the site, poisoning the soil, groundwater acquifers,
drinking-water wells, and the people of Bhopal.

Some of the victims may institute actions. Local protest and international NGO publicity and
condemnation, objection to the activities of these foreign-owned entities has also led to
litigation seeking redress in the United States, United Kingdom and Australia from the parent
company for damage caused by its subsidiary.

Dear distance learners why do suits are instituted into the courts of developed nations (like
USA) while the place of injury is in the developing nations?

Practical reasons for doing so included the lack of assets and funds held by the subsidiary
company, the potential for higher damages awards in the parent company states and structural
obstacles to plaintiff claims in their own countries such as the lack of legal aid facilities.
However, the defendant corporations have often raises the defense as to the validity of the
jurisdiction of courts of developed nations and some other defenses.

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The forum non convenience2 (not proper jurisdiction) arguments to dismiss proceedings,
arguing that the country in which the alleged damage occurred would be the more appropriate
forum. They will raise a defense claiming the existence of more appropriate forum (court) in
the place where all the wrongful acts occurred, where the subsidiary company is found.

These multinational corporations have also argued that the claims are against the wrong
defendant. As they are entirely separate legal entities from their subsidiaries and technically
do not themselves have any operations in the country of the alleged damage, the proceedings
should be against the subsidiary only. In seeking to avoid financial responsibility for the
Bhopal disaster, Union Carbide even disputed the existence of such an entity as the
‘Multinational Corporation’ (not incorporated in the form of MNC).

There are some indications that courts are beginning to counteract the misuse of corporate
structure and the rules of forum non convenience. This is in order to discourage those
companies which want to escape from the proceedings unduly.

For instance, the United States Court of Appeals held in Texaco Company case that the
appropriate forum for the case was Ecuador, but that any judgment against the company
would be enforceable in the United States. The Court of Appeals also confirmed the proviso
added by the District Court that if the US company, Texaco, Inc, was not prepared to submit
to the jurisdiction of the Ecuadorian courts, the US courts would not apply the rules of forum
non convenience in its favor..

These examples of corporate environmental degradation illustrate the traditional relationship

between foreign investment practices and the environment, being one characterized by
control and use or disregard and destruction. This has been a significant source of hostility
between foreign investors and environmental protection advocates. And it will continue to be
so unless foreign investment practices change to reflect better the new culture of international
environmentalism.

(B) Pollution Havens, Capital Flight and Regulatory Chill

2
Forum non convenience is a common defense raised by the defendant objecting the jurisdiction of a court. It is
mostly practiced in countries follow the common law legal traditions. It is not uncommon to see the defense in
conflict of law cases.

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In the midst of fierce competition to attract foreign investment, there are concerns that states
may lower their domestic environmental and health standards, engaging in what is called a
regulatory ‘race-to-the-bottom’, so as to reduce the costs of doing business and to become
more attractive to potential foreign investors. This possibility raises the spectrum of
‘pollution havens’ and ‘regulatory chill’. The pollution haven theory is based on the premise
that in order to remain competitive in the market for foreign investment, states will set
unacceptably low environmental standards, or set adequate standards but not enforce them,
and then attempt to outdo each other in the continued unraveling of environmental
restrictions — hence the description ‘race-to-the-bottom’. The hypothesis is that
multinational corporations that cannot continue environmentally damaging practices in
developed states, as a result of increasingly restrictive environmental protection standards,
will be able to export their damaging practices to developing states with low environmental
protection measures, hence the term ‘pollution haven’. What empirical evidence there is
suggests that these fears have not been borne out in practice. However, some findings do
suggest that there is evidence of a more subtle and troubling effect of the pollution haven
theory, being that of international environmental ‘regulatory chill’.

The regulatory chill argument puts forward the idea that the fear of a loss of competitiveness
in international markets and of capital flight from states with high environmental standards
has led policy-makers to refrain from raising environmental standards and tightening
regulations. The theory does not require there to be any actual movement of investment
dollars to states offering pollution havens; only the existence of the fear that there might be
capital flight. It is difficult to ascertain whether or not the theory has translated into reality as
the hypothesis is premised on the absence of activity. However, commentators are beginning
to conclude that there is evidence for the existence of environmental regulatory chill due to
the fear of a loss of foreign investment.

(C) Multilateral Agreement on Investment

Protesters of Multilateral Investment Agreements (MIA) often expressed the view that these
provisions in the MAI would elevate the rights of investors far above those of governments,
local communities, citizens, workers and the environment. The MAI negotiations were

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conducted on an outmoded premise, adopting an isolationist approach to the consideration of
issues, law and policy. Globalization, a global environmental consciousness, and the
development of a powerful global civil society generated circumstances in which the OECD
negotiators were forced to re-think their approach.

However, there are preliminary efforts to provide solutions for all odds of foreign investment
against environment. There are new trends in corporate behavior have recently been
emerging. As the spotlight has been turned on the wider effects of corporate practices,
companies have had to respond to demands of consumers, non-governmental organizations,
shareholders, and other stakeholders to improve their social and environmental performance.
These efforts made to foster more collaborative relationships may ultimately hold the key to a
more harmonious foreign investment/environment relationship in the future. Some of the
efforts include creation of code of conducts and creation ethical investment funds.

6.3.1 Some Compromising Initiatives for Environmental Problems

I) Creation of Voluntary Codes of Conduct: An initiative developed in the United States

following the Exxon-Valdez oil spill in Alaska in 1989, the Coalition for Environmentally
Responsible Economies (‘CERES’) has sought to bring about changes in corporate culture
and practice through a two-fold approach:

-The development of a series of guiding principles to which companies commit and then
implement throughout their operations on a continuing basis; and
-The promotion of environmentally, socially and financially responsible investment policies.

CERES is a framework organization to which financial and investment organizations,

pension fund managers, environmental organizations and other public interest groups join as
members. Many companies with transnational operations have adopted the CERES
Principles, including General Motors, the Body Shop International, American Airlines,
Aveda, Coca-Cola, Nike and Time Warner. The Principles begin with an overarching pledge
on the role and responsibilities of corporations regarding their environmental conduct, before
setting out a series of specific commitments on such matters as the protection of the
biosphere, the sustainable use of natural resources, and the sale of products and services that
minimize adverse environmental impacts.

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The ICC Business Charter for Sustainable Development calls for a global shift incorporate
practices so as to achieve sustainable development. The aim of the Charter is to encourage the
widest possible range of corporations, across all sectors, to commit to responsible
environmental corporate governance systems and practices, to improve corporate
environmental performance overall, to change management structures and practices so as to
assist with achieving that improvement, to assess progress towards these environmental
goals, and to report publicly, as well as internally, on any such progress.

The Equator Principles is also is a voluntary code developed by the World Bank’s
International Finance Corporation (‘IFC’) and private investment banking houses to promote
an environmentally and socially responsible approach to project finance. By 2000, investing
in projects that caused or contributed to environmental degradation was attracting public
scrutiny and negative publicity. The financing of environmentally detrimental projects had in
itself become a target for NGO campaigns. Financial institutions were beginning to feel the
impact of a culture of international environmentalism and needed to respond to this shift in
public expectations of corporate behavior.
Finally, The Principles for Responsible Investment (PRI) is a voluntary code aimed at
institutional investors developed by the UN Global Compact and UNEP Finance Initiative.
The Global Compact was established in 2000 with the aim of uniting corporations with UN
Agencies and NGOs in the implementation of environmentally and socially responsible
principles. It seeks to ensure that good corporate citizenship becomes a part of mainstream
business practice, and, in so doing, it hopes to assure a sustainable global economy. The
Principles for Responsible Investment is a sub-set of that Global Compact initiative.

II) Ethical Investment Funds: The emergence of ‘ethical’ investment funds is another
indicator of the current socio-political climate, which looks to the promotion of responsible
environmental corporate governance through the financier. Although there is no universal
definition of what constitutes an ethical investment fund, the process tends to involve the
screening of companies according to environmental and social criteria to determine whether
or not to purchase its shares. The environmental criteria on which to base investment
decisions vary between funds, but can entail versions of the following:

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-Investing in companies that actively engage in environmentally positive activities, such as
research and development into renewable energy sources;
-Investing in companies that pursue policies that are beneficial for the environment, such as
those that adopt energy efficiency programs;
-Excluding companies that engage in environmentally harmful activities, such as
unsustainable forestry; and
-Excluding whole sectors, such as the fossil fuel, pesticide, or mining industries.

While the criteria may vary, the overall aim is uniform. Ethical investment funds seek to
induce change in the social and environmental practices of corporations through the lure of
attracting investment as a reward for good environmental management and the fear of
repelling investors as a result of irresponsible social and environmental practices. Although
ethical investment funds still possess only a small slice of the investment market, it is
regarded as a dynamic and growing sector.

Review questions
1. How can states be able to accommodate their dual obligation: Respect, protect and
fulfill human rights Vs their commitment to Investment agreements.
2. Try to assess the effectiveness of voluntary codes of Conducts of MNC in regulating
and minimizing the risks of human right violations and environmental damage.

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 Chapter Seven
Settlement of Investment Disputes

At the end of this chapter students will be able to;

 Assess the nature of inter-state and investor-state disputes
 Discuss the available dispute settlement mechanisms
 Identify the main procedural rules applicable in the process of dispute settlement

7.1 Introduction

Dear distance learners, dispute is a common aspect of every social and economic
transactions. In this chapter we will look in to investment disputes and those available
mechanisms. This is an area of investment practice that has prompted a broad range of legal
issues, and substantial number of approaches to tackle them. While in theory this issue is of
importance for both the host State and the foreign investor, in practice it has more
significance for the foreign investor. The growth in international trade and investment as a
means of creating new economic opportunities in the global economy, for both developed and
developing countries, has led to the rise of specialized international investment agreements
(IIAs) that seek to regulate a range of issues related to foreign investment. In this context,
special consideration has been given to the concerns of both foreign investors and host
countries with respect to dispute-settlement procedures. The vast majority of bilateral
investment treaties (BITs) – as well as some regional agreements and other instruments –
contain provisions for the settlement of disputes between private parties and the host State,
and of disputes between States arising from investment.

Investment disputes might be Inter-state or between a foreign investor and the host state. We
will analyze both types in detail. But the majority of disputes are between a foreign investor
and the host state.

7.2. State-to-State Investment Dispute Settlement

Every foreign direct investment (FDI) transaction entails a trilateral relationship involving a
host State, a foreign investor and the latter’s home State. Inherent in the concept of State
sovereignty lies the notion that a State has the power – which can be qualified in an IIA – to

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admit foreigners within its territory and to regulate their activities, as well as to protect its
nationals abroad from acts contrary to international law. Thus, within the context of the
regulation and protection of the investment activities of transnational corporations, disputes
might arise between States or between States and investors.

Investment-related disputes between States could arise from various governmental measures
that affect cross-border economic activities, some of which are addressed in IIAs. IIAs put
into place frameworks consisting of general and specific undertakings and obligations by the
States party to such agreements that determine the scope, extent and manner of their
involvement with the cross-border investment activities of their nationals. The genesis of
State-to-State (or“inter-State”) disputes in IIAs can be traced either to issues that arise
directly between the signatories of IIAs, or to issues that first arise between investors and
their host States, but then become inter-State disputes.

Inter-State disputes might also arise in cases that do not appertain to particular investments,
such as the application of an IIA within the territory of its signatories. These types of cases
would, on balance, remain exceptional. However, given that international rule-making in
areas that addresses investment issues is on the rise in various settings, inter-State disputes
could arise in relation to this diffusion concerning the hierarchy of different IIAs between the
same countries that address the same investment issues.

Furthermore, where IIAs seek to reduce government involvement, management and

regulation in national economic sectors or open them to foreign investment, provisions may
be included that allow a widened scope of one country’s policies and legislation affecting
investments to be subject to scrutiny by other States party to those IIAs. Such provisions
could be coupled with further obligations undertaken by the signatories to take or refrain
from taking specified measures affecting the establishment and operations of investments. In
such cases, inter-State disputes could develop on the basis of these undertakings alone,
without specific reference or connection to a particular investment dispute. In these
circumstances, a concrete factual situation involving an investor would no longer be
necessary for a dispute to arise. The dispute is thus one between two regulators, each having
promised to take or refrain from taking certain measures that are presumed to affect
investments adversely, which concerns not what was done to a specific investor, but simply
whether or not there has been compliance with the letter and spirit of their mutual obligations.
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An example of such a dispute could arise over a “no lowering of standards” clause where one
State alleges that the standards contained in the regulatory laws covered by the clause have
been lowered by another State contracting party to the IIA in question.

Inter-State disputes and their settlement, arising within the context of IIAs, involve processes
that are, to a large extent, addressed by dispute settlement arrangements (DSAs) therein.

State-to-State dispute settlement provisions in IIAs are textually diverse. The practical
implications of arrangements on the settlement of inter-State investment disputes flow from
the choices and agreements made during the negotiation of international investment
agreements (IIAs).

7.2.1.Dispute Settlement Mechanisms and Their Procedures

The mechanisms and procedures for the settlement of disputes determine, to a large degree,
the manner and extent of control that the parties have over the outcome of the dispute
settlement process. In their DSAs pertaining to inter-State issues, IIAs predominantly provide
for the initiation of dispute settlement processes through bilateral means. Some IIAs require
that these bilateral attempts for the settlement of disputes must be engaged in as a pre-
condition of having resort to third-party decision-making processes. The types of bilateral
and third-party mechanisms typically provided for in inter-State DSAs include:

• Negotiations and consultations;

• Ad hoc inter-State arbitration, which is most prominently featured in IIAs;
• Permanent arbitral or judicial arrangements for dispute settlement;
• Political or administrative institutions whose decisions are binding.

1. Negotiations and consultations

DSAs typically first provide for mechanisms that utilize bilateral decision-making processes
for dispute settlement, such as negotiations and/or consultations. A prevalent formulation
refers to “diplomatic channels”. Other formulations refer to “negotiations”, “consultations”,
or both. All three formulations essentially involve a negotiation process. This is not

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surprising, since settlement of disputes through diplomatic negotiations and/or consultations
have historically been the most common means of dispute settlement between States.
Negotiations could resolve all but the most intractable disputes and, in the more complicated
cases, they can assist to narrow the issues to more manageable proportions or prepare them
for resolution by the formal binding third party processes.

Negotiations and consultations are normally conducted on an ad hoc basis, even within an
institutional setting. Their inherent flexibility does not easily make these mechanisms
susceptible to any rigid procedural frameworks. The provisions of IIAs are essential in this
regard as they could determine the manner and scope of the negotiation or consultation
process. While there is diversity in the drafting of DSAs in this respect, the significance lies
in the fact that they all establish an obligation that the parties involved in a dispute must first
engage in negotiations, before resorting to third-party means. Thus, where matters have
arisen in relation to an IIA, compulsory consultations or negotiations could provide for the
objective of dispute avoidance. As regards a dispute that has already arisen, consultations or
negotiations could clarify the disputed issues for the parties involved, and provide for a
mutually acceptable solution.

Dear distance students let us see some of the IIAs which impose the obligation to Negotiate
on contracting parties.
Obligation to negotiate
“Disputes between the Contracting Parties concerning the interpretation or application of
this Agreement should, if possible, be settled through through diplomatic channel.”
The UK model BIT, Article 9 (1).

“The Contracting Parties shall endeavor to resolve any dispute between them connected with
this Agreement by prompt and friendly consultation and negotiations.”
Article 11 (1) of Australia/Lao People’s Democratic Republic 1994 BIT.

“Disputes or differences between the Contracting Parties concerning interpretation or

application of this agreement shall be settled through negotiations.”
The Asian-African Legal Consultative Committee (ALCC) Model (A )BITs, Article 11 (1).

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Negotiation processes do not easily lend themselves to “procedural handicaps’. Thus, the
procedures for negotiations under DSAs are left almost entirely to the parties. IIAs may
provide some time frame of beginning and ending of negotiation process. Where no
timeframes exist, DSAs provide that each party could end negotiations by requesting that the
third-party settlement processes begin. Finally, it should be noted that some recent bilateral
agreements between the United States and other countries concerning the development of
trade and investment relations contain only a consultation clause, but do not provide for full
dispute settlement procedures.

The Dispute Settlement Understanding of the WTO requires consultations as a preliminary

step in the dispute settlement process applicable to trade disputes arising between Members
under the WTO Agreements (Article 4) (WTO, 1994).

2. Ad hoc arbitration

Party autonomy is the basic rule in the establishment of an arbitral tribunal (which may be a
single individual or a group of individuals as may be appropriate). It is essentially an
adjudicative process by a tribunal; except that the procedures for the establishment of the
arbitral tribunal are effected either by the agreement of the disputing parties when a dispute
arises (compromise), or by the operation of provisions negotiated previously and incorporated
into DSAs (standard rules and procedures).
These procedures normally address the following tasks:
- Selection of arbitrators, the place, venue and the official language for the proceedings;
-Determination of the terms of reference for the arbitral panel; and
- Institution of time limits for the conduct of the arbitration proceedings and the promulgation
of working rules for the panel and the parties, such as rules on the submission of case-briefs,
arguments and evidence.

Where parties could not reach a mutually acceptable solution to their disputes through
negotiations, most IIAs, and in particular almost all BITs, provide for recourse to ad hoc
arbitration.

The following is an excerpt from the bilateral investment treaties

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“If a dispute between the Contracting Parties cannot thus [diplomatic channel] be settled
within six (6) months from notification of the dispute, it shall, upon the request of either
Contracting Party, be submitted to an arbitral tribunal.”
Article 9 (2) Estonia/Israel 1994 BIT

“Any dispute between the Contracting Parties as to the interpretation or application of the
present Agreement not satisfactorily adjusted by diplomacy shall be referred for decision to
an arbitration board...”
Article 13 (2) Japan/China 1988 BIT

IIAs almost universally provide that each party selects, within a prescribed time period, one
arbitrator. In most instances, parties select an arbitrator who is their own national. This
practice has been questioned, and arguments can be made as to whether or not more relevant
factors, such as conflicts of interest on the basis of, for example, close personal or financial
links with the parties involved in the underlying dispute, should not affect the selection
process. However, it could also be argued that the selection of parties who are nationals of the
disputing parties could ensure that the panel includes members who have intimate knowledge
of special circumstances prevalent in those countries. After the selection of the first two
arbitrators, it is for them to nominate a third, with the proviso that the nominee be the
national of a third country. The almost uniform insistence that the third arbitrator from a third
country would seem to be the countervailing element in the selection process, with which the
parties could ensure the panel’s overall impartiality. Furthermore, the fact that both parties
involved in the dispute must then confirm the nomination also provides for a safeguard that if
either party is uncomfortable with the proposed composition, they would have a chance to
request a change.

The parties would consider the operational rules and procedures of the panel. Most IIAs
leave the determination of the working rules and procedures to the panel. For example, article
8(5) of the Chinese model BIT provides, in its relevant part, which “The arbitral tribunal shall
determine its own procedure.

An alternative to the provision of rules and procedures concerning the establishment and the
operations of the ad hoc arbitral panel is for the parties to agree to refer, in part or in whole,
to provisions of a comprehensive pre-established set of rules, such as the Arbitration Rules of
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the United Nations Commission on International Trade Law (UNCITRAL rules). For
example, article 27 (3) (f) of the Energy Charter Treaty provides:

“(f) In the absence of an agreement to the contrary between the Contracting Parties, the
Arbitration Rules of UNCITRAL shall govern, except to the extent modified by the
Contracting Parties to the dispute or by the arbitrators. The tribunal shall take its decisions
by a majority vote of its members.”

3. Permanent arbitral and judicial institutions

In contrast to ad hoc arbitral tribunals, governments may choose to utilize the rules,
procedures and facilities of specialized institutions for the arbitration of their disputes. The
only arbitral institution that provides for the settlement of State-to-State disputes under its
auspices is the Permanent Court of Arbitration (PCA) at the Hague, which was born out of
the 1899 and 1907 Hague Conventions for the Pacific Settlement of International Disputes.
Other institutional systems, for example, ICSID and the International Chamber of Commerce
(ICC), are geared to the settlement of investor-State disputes. Indeed, ICSID procedures
expressly exclude State-to-State disputes from their jurisdiction, in that the ICSID
Convention is limited to the settlement of disputes between a contracting State and a national
of another contracting State.

In contrast, some IIAs, most of which are at the regional level, have established institutional
arrangements for the settlement of inter-State disputes. An example is Chapter 20 of NAFTA,
which provides for elaborate institutional arrangements for the settlement of inter-State
disputes. As noted previously, the issues that are covered under these arrangements are the
same as those that arise for ad hoc arbitration, but which are pre-arranged within the rules and
procedures of the institutional arrangements.

Recourse to permanent, self-standing inter-governmental judicial bodies such as the ICJ is

always a possibility. In principle, where State that are parties to a dispute have accepted the
jurisdiction of the ICJ, and their acceptance provides, on a reciprocal basis, subject-matter
jurisdiction to the ICJ, then the matter could be adjudicated by the World Court. In some
instances, Dispute Settlement Agreements specifically provide for the submission of the
dispute to the ICJ. But cases referred to ICJ are very rare.
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The resort to a permanent institution with pre-determined procedural rules for choosing the
members of the arbitration panel and its proceedings might secure savings in terms of the
time and resources committed to searching for potential candidates to be selected as an
arbitrator, drafting an ad hoc arbitration agreement (or comparing and negotiating on
proposed drafts from each involved party), looking for a convenient venue, and establishing a
suitable set of procedural rules.

4. Permanent political institution for dispute settlement

The third-party settlement mechanism provided for in a DSA could be a political body or an
organ of an international organization. Recourse to such institutions has caused concern that
their decisions may be political and incapable of achieving binding effects on the parties. In
particular cases, it is argued that political considerations might creep into what should
essentially be limited to legal and commercial issues. Nevertheless, there are permanent
institutions with internal dispute settlement means that could instil finality to disputes. An
example would be the Senior Economic Officials Meeting of the Association of South-East
Asian Nations (ASEAN) Investment Agreement.

Generally, IIAs almost uniformly provide in their DSAs for dispute settlement first through
consultation and negotiation procedures, and then through some type of third-party
mechanism, such as arbitration (be it ad hoc or institutional), or permanent tribunal (be it
judicial or political). The rules and procedures to be followed concerning, for example, the
selection of the third-party decision-makers, their terms of reference, and their working rules
and procedures – where provided for with sufficient detail and clarity – help reduce the scope
of disagreements when these mechanisms are employed. This prevailing model, in principle,
could provide States with the means of avoiding disputes, and contribute to the management
of their relations when disputes arise, by providing a predetermined, clear and
uncontroversial course of action. At the same time, it could provide the confidence that,
where agreement can not be reached in a particular dispute, an impartial (and relatively
quick) settlement would nonetheless be obtained through definitive rulings concerning the
interpretation or application of the provisions of IIAs, which should signify a secure and
predictable investment environment.

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7.3 Investor-to-State Investment Dispute Settlement

Investor –state disputes are very common in addition to the inter state one. More or less the
following methods are all possible means of investor-state dispute settlement mechanisms.
 Diplomatic protection under international law.
 Resolving disputes by Domestic courts
 or using alternative dispute resolution methods;
a) Bilateral means of dispute settlement through negotiation and consultation
b) Mediation
c) Arbitration: either using ad hoc arbitration or Institutionalized Arbitration tribunals (like
ICSID)

Traditionally, dispute settlement under international law has involved disputes between
States. However, the rise of private commercial activity undertaken by individuals and
corporations engaged in international trade and/or investment has raised the question whether
such actors should be entitled to certain direct rights to resolve disputes with the countries in
which they do business. Under customary international law, a foreign investor is required to
seek the resolution of such a dispute in the tribunals and/or courts of the country concerned.
Should these remedies fail or be ineffective to resolve a dispute – be it hat they lack the
relevant substantive content, effective enforcement procedures and/or remedies or are the
result of denial of justice. An investor's main recourse is to seek diplomatic protection from
the home country of the individual or corporation concerned. This is explicable on the basis
that, by denying proper redress before its national courts, the host State may be committing a
breach of international law, where such denial can be shown to amount to a violation of
international legal rules.

Furthermore, generally only States can bring claims under international law, given that they
are the principal subjects of that system. Private non-State actors lack the requisite
international legal personality and so must rely on this indirect means for the vindication of
their legal rights.

However, the remedy of diplomatic protection has notable deficiencies from an investor's
perspective. First, the right of diplomatic protection is held by the home country of the

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investor and, as a matter of policy, it may decide not to exercise this right in defense of an
investor's claim. The home State may choose not to pursue the investor's claim for reasons
that have more to do with the broader international relations between the home and host
countries than with the validity of the investor's claim. Second, even if the home country
successfully pursues an investor's claim, it is not legally obliged to transfer the proceeds of
the claim to its national investor. Third, in the case of a complex transnational corporation
(TNC) with affiliates in numerous countries (each possessing, in all probability, a different
legal nationality) and a highly international shareholder profile, it may be difficult, if not
impossible, to state accurately what the firm's nationality should be for the purposes of
establishing the right of diplomatic protection on the part of a protecting State.

Furthermore, there are practical limitations on the process of diplomatic protection. This
system requires even relatively small claims to be pursued through inter-State mechanisms,
meaning that investor-State disputes on particular points may be conflated into State-to-State
disagreements. As a matter of business strategy, neither the investor nor the host country may
wish this to occur, as it could have implications for future economic arrangements among
investors, and for relations between the home and host countries concerned – implications
that may be quite out of proportion to the claim in issue. Given these difficulties, foreign
investors often decline diplomatic protection where they have the option of securing remedies
more directly by means of investor-State dispute-settlement mechanisms. In addition, capital-
importing countries may wish to avoid the inconvenience of diplomatic protection by
investors’ home States by agreeing to direct settlement procedures with investors.

In the absence of other arrangements, a dispute between a host State and a foreign investor
will normally be settled by the domestic courts of the host State. From the investor’s
perspective, this type of dispute settlement carries important disadvantages. Rightly or
wrongly, the courts of the host State are often not seen as sufficiently impartial in this type of
situation. In addition, domestic courts are bound to apply domestic law even if that law
should fail to protect the investor’s rights under international law. In addition, the regular
courts will often lack the technical expertise required to resolve complex international
investment disputes.

In keeping with traditional perspectives, some developing capital-importing countries –

particularly some Latin American States – have historically maintained that disputes between
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an investor and a host State should be settled exclusively before the tribunals and/or courts of
the latter (referred to as the Calvo Doctrine) This viewpoint was manifested not only in the
domestic legislation of individual countries; it also prevailed in certain regional agreements
that prohibited member States from according foreign investors more favorable treatment
than national investors, demonstrating a clear preference for dispute settlement in domestic
courts. The United Nations Charter of Economic Rights and Duties of States of 1974 also
adopted such an approach. However, while this approach remains an important precedent, it
will be shown that the practice of developing countries and economies in transition has
moved away from it in recent years. Most recent BITs concluded by such States provide for
some type of international dispute-settlement mechanism to be used in relation to investment
disputes. Nonetheless, this remains a controversial issue for negotiations leading to IIAs, as a
balance needs to be struck between host country and international dispute settlement. Local
settlement is convenient and there is a continuing need to recognize the validity of properly
conceived and drafted national investment laws – and other applicable laws and regulations –
as a legitimate and valuable source of rights and obligations in the investment process.

Domestic courts of other States are usually not a realistic alternative. In most cases, they will
lack territorial jurisdiction over investment operations taking place in another country. Even
if a host State were to agree to a choice of forum clause pointing to the courts of the
investor’s home State or of a third State, sovereign immunity or other judicial doctrines will
usually make such proceedings impossible.

In contrast with the above-mentioned approach, foreign investors have traditionally

maintained that, as regards developing countries, investor-State disputes should be resolved
by means of internationalized dispute-settlement mechanisms governed by international
standards and procedures, with international arbitration at its apex. 3This position is supported
largely by arguments concerning the apparent fairness inherent in relying upon independent
international arbitrators, rather than upon national courts that may be subject to the influence
3
The first step in the resolution of any investment dispute is the use of direct, bilateral, informal and amicable
means of settlement. Only where such informal means fail to resolve a dispute should the parties contemplate
informal third-party measures such as good offices, mediation or conciliation. The use of arbitration should only
be contemplated where bilateral and third-party informal measures have failed to achieve a negotiated result.
Indeed, this gradation of dispute-settlement methods is commonly enshrined in the dispute-settlement provisions
of IIAs.

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of the executive in host countries. Host countries may perceive such an emphasis on
internationalized systems of dispute settlement as a sign of little confidence, on the part of
investors, in their national laws and procedures, which may or may not be justifiable in a
given case. However, the willingness to accept internationalized dispute settlement on the
part of the host country may well be motivated by a desire to show commitment to the
creation of a good investment climate. This may be of considerable importance where that
country has historically followed a restrictive policy on foreign investment and wishes to
change that policy for the future. In so doing, the host country can be entitled to expect that
the internationalized system is itself impartial and even-handed with both parties to the
dispute.

International arbitration provides an attractive alternative to the settlement of investment

disputes by national courts or through diplomatic protection. Arbitration is usually less costly
and more efficient than litigation through regular courts. It offers the parties the opportunity
to select arbitrators who enjoy their confidence and who have the necessary expertise in the
field. Moreover, the private nature of arbitration, assuring the confidentiality of proceedings,
is often valued by parties to major economic development projects.

If arbitration is not supported by a particular arbitration institution, it is referred to as ad hoc

arbitration. Ad hoc arbitration requires an arbitration agreement (called a compromise) that
regulates a number of issues. Ad hoc arbitration depends upon the initiative of the parties for
their success. The parties must make their own arrangements regarding the procedure, the
selection of arbitrators and administrative support. The principal advantage of ad hoc dispute
settlement is that the procedure can be shaped to suit the parties. However, there are
numerous problems associated with ad hoc arbitration. First, the process is governed by the
arbitration agreement between the parties. Its content depends on the relative bargaining
power of the parties. The stronger party may therefore obtain an arrangement advantageous to
its interests. Second, it may be impossible to agree on the exact nature of the dispute, or on
the applicable law. Third, there may be difficulties in selecting acceptable arbitrators who can
be relied on to act impartially and not as “advocates” for the side that had selected them.
Fourth, there may be inordinate delay on the part of one side or both, or through the non-
appearance of a party. Finally, there may be a problem in enforcing any award before
municipal courts should they decide that the award is tainted with irregularity, or because the
State party to the proceedings enjoys immunity from execution under the laws of the forum
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State. These difficulties – which may be particularly acute in the case of developing country
parties to investor-State disputes – have led to the use of institutional systems of arbitration.

An institutional system of arbitration may be a more reliable means of resolving a dispute

than an ad hoc approach, especially as it is likely to have been devised on a multilateral level
and so may show greater sensitivity to the interests of developing countries. Once the parties
have consented to its use, they have to abide by the system’s procedures. These are designed
to ensure that, while the parties retain a large measure of control over the arbitration, they are
constrained against any attempt to undermine the proceedings. Furthermore, an award made
under the auspices of an institutional system is more likely to be consistent with principles of
procedural fairness applicable to that system and so is more likely to be enforceable before
municipal courts. Indeed, recognition may be no more than a formality. Two systems in
particular appear suitable for use in investment disputes between a host State and a foreign
investor: the conciliation and arbitration procedures available under the auspices of the
International Centre for Settlement of Investment Disputes (ICSID) and the International
Chamber of Commerce (ICC) Court of Arbitration.

The ICSID system is the only institutional system of international conciliation/arbitration

specifically designed to deal with investment disputes. Apart from ICSID, ICC (International
Chamber of Commerce) arbitration clauses have been used in IIAs, resulting in ICC
arbitration in the event of a dispute. However, one of the criticisms lodged against the ICC
Court of Arbitration as a forum for the resolution of foreign investment disputes is that, being
primarily a centre for the resolution of commercial disputes between private traders, it has
relatively little experience in the complexities of long-term investment agreements involving
a State as a party. This may account for the observation that ICC arbitration clauses are used
relatively infrequently in international economic development agreements. Nonetheless, the
evidence of the actual use of the ICC Court of Arbitration in disputes involving Governments
or State-owned enterprises is by no means negligible. Accordingly, this criticism of the ICC
should not be overstated.

The only system of institutional dispute settlement specifically designed to deal with
investor-State disputes is that provided for under the auspices of the World Bank, the ICSID.
Some detail scrutiny about ICSID may have a paramount importance.

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7.3.1. Investor-State Dispute Settlement Through ICSID Convention

The gaps in the existing structures for the settlement of investment disputes led to a new
initiative in the 1960s. The plan was to create a mechanism specifically designed for the
settlement of disputes between host States and foreign investors. The initiative came from the
World Bank, an institution that is concerned with economic development.

The Convention’s drafting took place from 1961 to 1965. The main bodies involved were the
World Bank’s legal department, the World Bank’s Executive Directors and a series of
regional meetings in which experts from 86 States participated.

The text of the Convention together with a short explanatory report was adopted by the
Executive Directors of the World Bank on 18 March 1965. Its official designation is
Convention on the Settlement of Investment Disputes between States and Nationals of Other
States. It created the International Centre for Settlement of Investment Disputes (ICSID).

The ICSID Convention entered into force on 14 October 1966 after its ratification by 20
States. Of the early participating States most were developing countries notably in Africa.
Over the years, participation in the Convention has grown steadily. By mid-2002 135
countries were parties to the Convention. Another 17 had signed but not yet ratified the
Convention. All major industrialized countries with the exception of Canada have become
parties. Most African countries are parties. The majority of Arab countries are represented.
Most Asian countries, including China, are parties. A number of former Soviet Republics,
including the Russian Federation, have signed but not yet ratified the Convention.

(Dear distance learners, although Ethiopia is one of the signatory members of the
Convention, it does not ratify still.)

The ICSID Convention’s primary aim is the promotion of economic development. The
Convention is designed to facilitate private international investment through the creation of a
favorable investment climate.

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Compared to ad hoc arbitration, the ICSID Convention offers considerable advantages: it
offers a system for dispute settlement that contains not only standard clauses and rules of
procedure but also institutional support for the conduct of proceedings. It assures the non-
frustration of proceedings and provides for an award’s recognition and enforcement.

ICSID arbitration offers advantages to the investor as well as to the host State. Proceedings
may be instituted by either side but in the majority of cases the investor is in the position of
claimant.

The advantage for the investor is obvious: it gains direct access to an effective international
forum should a dispute arise. The possibility of going to arbitration is an important element of
the legal security required for an investment decision. The advantage for the host State is
twofold: by offering arbitration it improves its investment climate and is likely to attract more
international investments. In addition, by consenting to ICSID arbitration, the host State
protects itself against other forms of foreign or international litigation. Also, the host State
effectively shields itself against diplomatic protection by the State of the investor’s
nationality.

The ICSID Convention provides for two methods of dispute settlement, conciliation and
arbitration. Conciliation is a more flexible and informal method that is designed to assist the
parties in reaching an agreed settlement. Conciliation ends in a report that suggests a solution
but is not binding on the parties. Therefore, this method ultimately depends on the continuing
willingness of both parties to cooperate.

Arbitration is a more formal and adversarial process. Nevertheless, a considerable number of

arbitration cases end in an agreed settlement. If no agreed settlement is reached, the outcome
is an award that is binding on both parties and may be enforced. In practice, arbitration is
preferred over conciliation. The vast majority of cases brought to ICSID relate to arbitration.
In fact, conciliation under the ICSID Convention is very rare. This is due, in part, to the fact
that in case of a submission to both methods of settlement, the choice is with the party
initiating proceedings. As a rule, it will seem wiser to direct the necessary effort and expense
to proceedings that lead to a binding decision.

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The ICSID Convention does not contain any substantive rules. It merely offers a procedure
for the settlement of investment disputes. Any effort to codify the substantive law of
international investment in the framework of the Convention would have led to
insurmountable difficulties. But the ICSID convention does contain a rule on applicable law .

In other words, it directs tribunals how to find the rules to be applied to particular disputes.
Tribunals are to follow any agreed choice of law by the parties. In the absence of an agreed
choice of law, the Tribunal is to apply the law of the host State and international law. Choices
of law issues have played a prominent role in the practice of tribunals. The application of the
correct system or systems of law is an essential requirement for a legitimate award. Failure to
apply the proper law is regarded as an excess of powers and may lead to an award’s
annulment.

In applying international law, tribunals have applied treaties, especially BITs as well as
customary international law. General principles of law and judicial practice, especially of
previous ICSID tribunals, have also played a prominent role.The relationship of international
law and domestic law has played an important role in ICSID practice. ICSID tribunals have
held that where both systems of law are applicable, recourse to the host State’s law is
indispensable but international law has a supplementary and corrective function.

A tribunal may decide on the basis of equity rather than law, only if it has been so authorized
by the parties.

Proceedings under the Convention are always mixed. One party (the host State) must be a
Contracting State to the Convention. The other party (investor) must be a national of another
Contracting State. Either party may initiate the proceedings. States may also authorize
constituent subdivisions or agencies to become parties in ICSID proceedings on their behalf.
The investor can be an individual (natural person) or a company or similar entity (juridical
person). Both types of persons must meet the nationality requirements under the Convention.

Both the host State and the investor’s State of nationality must be Contracting Parties, that is,
they must have ratified the ICSID Convention. The decisive date for participation in the
Convention is the time of the institution of proceedings. If either State is not a party to the
Convention, ICSID is not available but it may be possible to proceed under the Additional
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Facility. In 1978 the Additional Facility was created under the roof of ICSID. It is designed
primarily to offer methods for the settlement of investment disputes where only one of the
relevant States, either the host State or the State of the investor’s nationality, is a party to the
Convention.

The Additional Facility is subject to its own rules and regulations. The ICSID Convention
does not apply to it.An additional requirement is that the investor must not be a national of
the host State. But if a foreign investor operates through a company that is registered in the
host State, it is possible for the investor and the host State to agree that the company will be
treated as a foreign investor because of foreign control.

Participation in the ICSID Convention does not, by itself, constitute a submission to the
Centre’s jurisdiction. For jurisdiction to exist, the Convention requires separate consent in
writing by both parties(article 25(1)of the ICSID convention).

Consent to the Centre’s jurisdiction may be given in one of several ways. Consent may be
contained in a direct agreement between the investor and the host State such as a concession
contract. Alternatively, the basis for consent can be a standing offer by the host State which
may be accepted by the investor in appropriate form. Such a standing offer may be contained
in the host State’s legislation. A standing offer may also be contained in a treaty to which the
host State and the investor’s State of nationality are parties. Most BITs and some regional
treaties dealing with investments contain such offers. The more recent cases that have come
before ICSID show a trend from consent through direct agreement between the parties to
consent through a general offer by the host State which is later accepted by the investor often
simply through instituting proceedings. Consent by the parties to arbitration under the
Convention is binding. Once given by both parties, it may not be withdrawn unilaterally. A
party may not determine unilaterally whether it has given its consent to ICSID’s jurisdiction:
The decision on whether jurisdiction exists is with the tribunal.

Consent can be given subject to conditions and limitations. For instance, host states may
submit to ICSID’s jurisdiction only in respect of certain types of disputes such as questions
concerning compensation for expropriation. Consent may also be conditioned on certain
procedural steps such as a prior attempt to reach a settlement by other means.

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Proceedings under the ICSID Convention are self-contained. This means that they are
independent of the intervention of any outside bodies. In particular, domestic courts have no
power to stay, to compel or to otherwise influence ICSID proceedings. Domestic courts
would have the power to order provisional measures only in the unlikely case that the parties
agree thereto. An ICSID tribunal has to obtain evidence without the legal assistance of
domestic courts. An annulment or other form of review of an ICSID award by a domestic
court is not permitted.

The system of arbitration is highly effective. This effectiveness is the result of several factors.
Submission to ICSID’s jurisdiction is voluntary but once it has been given it may not be
withdrawn unilaterally. The principle of non-frustration means that a case will proceed even
if one party fails to cooperate. This circumstance alone will be a strong incentive to
cooperate. Awards are binding and final and not subject to review except under the narrow
conditions provided by the Convention itself .Non-compliance with an award by a State
would be a breach of the Convention and would lead to a revival of the right to diplomatic
protection by the investor’s State of nationality.

The Convention provides an effective system of enforcement. Awards are recognized as final
in all States parties to the Convention. The pecuniary obligations arising from awards are to
be enforced like final judgments of the local courts in all States parties to the Convention.
Domestic courts have no power to review ICSID awards in the course of their enforcement.
However, in the case of an award against a State the normal rules on immunity from
execution will apply.

In the first 30 years of existence, ICSID handled an average of only one case per year. Since
1995,up to 30 cases have been filed in a year, with the number of ne filing increasing very
rapidly.

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Review questions
1. What is the difference between inter-state investment disputes and investor-state disputes?
2. Discuss the role and effectiveness investment dispute settlement via diplomatic process?
3. Analayze the role and effectiveness of ICSID as a dispute settlement forum?
4. Mention the procedures followed by ICSID in resolving investor-state disputes?
5. Discuss the applicable rules used by ICSID in order to solve investment disputes?

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Annexes
Annex 1 - Cases
Case 1- Chorzow Factory Case(Germany Vs Poland)

The Chorzow Factory Case has its roots in the Treaty of Versailles signed in 1919. The
Treaty contained a requirement that certain territories be transferred from German to Polish
control and that the status of certain other lands be determined by plebiscite. The Geneva
Convention adopted to implement the Treaty of Versailles, and the plebiscites that followed
ceded the region of Chorzow to Poland. Under the Geneva Convention, countries that took
over German territory had the right to seize land owned by the Government of Germany and
credit the value of that land to Germany's reparation obligations. Any disputes that arose
under the Convention were to be referred to the PCIJ.

Shortly after Poland took over Chorzow, a Polish court decreed that land belonging to the
German company, Oberschlesische Stickstoffwerrke A.G., be turned over to Poland.
Litigation ensued on the question of whether the land was “property’ of Germany or if it was
privately owned by the company. The dispute eventually reached the PCIJ which concluded
that the land was privately owned, and that Poland had seized private property. The Court
stated that “there can be no doubt that the expropriation .…is a derogation from the rules
generally applied in regard to the treatment of foreigners and the principle of respect for
vested rights”. Thus, the Court enunciated the then existing international law that
expropriations were not permitted and if they occurred, full compensation must be paid. The
PCIJ clearly stated in this case that a State in breach owes to the affected State a duty of
reparation, which must “as far as possible, wipe out the consequences of the illegal act and
re-establish the situation which would, in all probability, have existed if that act had not been
committed”. The general principle of international law is that a State which breaches its
international obligation has a duty to right the wrong committed.

Case 2- Barcelona Traction Case (Belgium Vs Spain)

Barcelona Traction, Light and Power Company limited was a company incorporated in
Toronto, Canada to develop a system to produce and distribute electric power in Catalonia
(Spain). According to the government of Belgium, the shares of the company came to be

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predominantly held by Belgian nationals- both natural and legal persons. Barcelona Traction
issued a series of bonds payable in British pounds and Spanish pesetas, secured by mortgages
on assets of various subsidiaries in Spain. In 1948 three Spanish holders of bonds of
Barcelona Traction petitioned a Spanish Court for a declaration of bankruptcy for Barcelona
Traction. A judgment of bankruptcy was entered several days later, and the Court ordered
seizure of the assets of Barcelona Traction. The Spanish Court appointed a receiver, and the
Traction Company lost the capacity to administer any of its properties. The principal
managers of the Company were dismissed, new directors were appointed, new shares were
issued of the Spanish subsidiaries of Barcelona Traction, and these shares were sold by the
public auction to a newly founded Spanish company.

The measures taken against the Company were not accepted by Belgium. Belgium had an
interest in protecting the interest of the Company as the Company was largely owned by
Belgian shareholder even though it was incorporated in Canada. Following several years of
diplomatic representations on behalf of Barcelona Traction, Belgium initiated proceedings
against Spain in the World Court (International Court of Justice), alleging essentially
‘creeping expropriation’ and claiming some $90 million in reparations.
Spain objected to the Court’s jurisdiction, on the basis that the Barcelona Traction Company
was not a Belgian company, and that Belgian ha not right to exercise diplomatic protection,
including standing in the World Court, on behalf of mere shareholders.

In substance, the dispute concerned the issue whether certain measures by Spanish authorities
in the context of insolvency proceedings constituted expropriatory action. The Court,
however, did not reach these merits because it found that Belgium did not have standing to
exercise diplomatic protection. In this respect the Court noted that:

[t]he traditional rule attributes the right to diplomatic protection of a corporate entity to the State
under the laws of which it is incorporated and in whose territory it has its registered office. These two
criteria have been confirmed by long practice and by numerous international instruments.

The Court also accepted that some states in addition required a company’s actual seat (siège
social) or management or centre of control within their territories or national ownership in
order to exercise diplomatic protection. However, it rejected ownership or control as sole
connecting factors entitling a state to exercise diplomatic protection.

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Case 3- Elettronica Sicula case (ELSI Case)

The Elettronica Sicula Case is the most recent example of an investment dispute brought
before the ICJ as the ultimate form of exercising diplomatic protection on behalf of an
investor.

The United States espoused the claim of two United States corporations which together
owned 100 per cent of the shares of the Italian corporation Elettronica Sicula (ELSI). It
argued that a number of judicial and administrative measures taken in connexion with
insolvency proceedings before Italian courts had effectively deprived the United States
companies of their property in violation of a bilateral 1948 United States-Italian Treaty of
Friendship, Commerce and Navigation (FCN Treaty).

In this case the United States successfully invoked the jurisdiction of the ICJ on the basis of
the FCN Treaty. In addition the ICJ rejected Italy’s jurisdictional challenge that local
remedies had not been exhausted by holding that

... the local remedies rule does not, indeed cannot, require that a a claim be presented to the
municipal courts in a form, and with arguments, suited to an international tribunal, applying different
law to different parties: for an international claim to be admissible, it is sufficient if the essence of the
claim has been brought before the competent tribunals and pursued as permitted by local law and
procedures, and without success.

On the merits, however, the United States failed to convince the majority on the Court that
the Italian measures constituted an expropriation or other measure in violation of the FCN
Treaty.

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Annex 2: BIT between Ethiopia and China

AGREEMENT

BETWEEN

THE GOVERNMENT OF THE FEDERAL

DEMOCRATIC REPUBLIC OF ETHIOPIA

AND

THE GOVERNMENT OF THE PEOPLE’S

REPUBLIC OF CHINA CONCERNING THE

ENCOURAGEMENT

AND RECIPROCAL PROTECTION OF INVESTMENTS

The Government of the Federal Democratic Republic of Ethiopia and the Government of the
People’s Republic of China (hereinafter referred to as the "Contracting Parties"),

Intending to create favorable conditions for investments by investors of one Contracting

Party in the territory of the other Contracting Party;

Recognizing that the reciprocal encouragement, promotion and protection of such

investments will be conducive to stimulating business initiative of the investors and will
increase prosperity in both States;

Desiring to intensify the economic cooperation of both States on the basis of equality and
mutual benefits,

Have agreed as follows:

Article 1
Definitions

For the purpose of this Agreement:

1. The term “investment” means every kind of asset invested by investors of one
Contracting Party in accordance with the laws and regulations of the other
Contracting Party in the territory of the latter, and in particular, though not
exclusively, includes:

a) movable, immovable property and other property rights such as mortgages

and pledges;

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 b) shares, stock and any other kind of participation in company;

c) claims to money or to any other performance having an economic value;

d) copyrights, industrial property, know-how and technological process;

e) concessions conferred by law, including concessions to search for or

exploit natural resources.

2. The term “investors” means with regard to either Contracting Party:

a) natural persons who have nationality of that Contracting Party in

accordance with its laws;

b) economic entities established in accordance with the laws of that

Contracting Party and domiciled in its territory.

3. The term “returns” means the amounts yielded by investments, such as profits,
dividends, interests, royalties or other similar income.

Article 2
Promotion of Investments

1. Each Contracting Party shall encourage investors of the other Contracting Party to
make investments in its territory and admit such investments in accordance with its
laws and regulations.

2. Each Contracting Party shall grant assistance in and provide facilities for obtaining
visa and working permit to nationals of the other Contracting Party to or in the
territory of the former in connection with activities associated with such investments.

Article 3
Treatment of Investments

1. Investments and activities associated with investments of investors of either

Contracting Party shall be accorded fair and equitable treatment and shall enjoy
protection in the territory of the other Contracting Party.

2. The treatment and protection referred to in Paragraph 1 of this Article shall not be less
favorable than that accorded to investments and activities associated with such
investments of investors of any third State.

3. The treatment and protection as mentioned in Paragraphs 1 and 2 of this Article shall
not include any preferential treatment accorded by the other Contracting Party to
investments of investors of a third State based on customs union, free trade zone,
economic union, agreement relating to avoidance of double taxation or for facilitating
frontier trade.

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 Article 4
Expropriation

1. Neither Contracting Party shall expropriate, nationalize or take similar measures

(hereinafter referred to as “expropriation”) against investments of investors of the
other Contracting Party in its territory, unless the following conditions are met:

a) for the public interests;

b) under domestic legal procedure;

c) without discrimination;

d) against compensation.

1. The compensation mentioned in paragraph 1 (d) of this Article shall be equivalent to

the value of the expropriated investments at the time when expropriation is
proclaimed, be convertible and freely transferable. The compensation shall be paid
without unreasonable delay.

Article 5
Compensation for Losses

Investors of one Contracting Party who suffer losses in respect of their investments in the
territory of the other Contracting Party owing to war, a state of national emergency,
insurrection, riot or other similar events, shall be accorded by the latter Contracting Party, if it
takes relevant measures, treatment no less favorable than that accorded to investors of a third
State.

Article 6
Transfers of Investments and Returns

3. Each Contracting Party shall, subject to its laws and regulations, guarantee investors
of the other Contracting Party the transfer of their investments and returns held in the
territory of the one Contracting Party, including :

a) profits, dividends, interests and other legitimate income;

b) amounts from total or partial liquidation of investments;

c) payment pursuant to a loan agreement in connection with investments;

d) royalties in Paragraph 1 (d) of Article 1;

e) payment of technical assistance or technical service fee, management fee;

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 f) earnings of nationals of the other Contracting Party who work in
connection with an investment in the territory of the one Contracting Party.

4. The transfer mentioned above shall be made at the prevailing exchange rate of the
Contracting Party accepting the investment on the date of transfer.

Article 7
Subrogation

If a Contracting Party or its Agency makes payment to an investor under a guarantee it has
granted to an investment of such investor in the territory of the other Contracting Party, such
other Contracting Party shall recognize the transfer of any right or claim of such investor to
the former Contracting Party or its Agency and recognize the subrogation of the former
Contracting Party or its Agency to such right or claim. The subrogated right or claim shall not
be greater than the original right or claim of the said investor.

Article 8
Disputes between the Contracting Parties

1. Any dispute between the Contracting Parties concerning the interpretation or

application of this Agreement shall, as far as possible, be settled by consultation
through diplomatic channel.

2. If a dispute cannot thus be settled within six months, it shall, up on the request of
either Contracting Party, be submitted to an ad hoc arbitral tribunal.

3. Such tribunal comprises of three arbitrators. Within two months from the date on
which either Contracting Party receives the written notice requesting for arbitration
from the other Contracting Party, each Contracting Party shall appoint one arbitrator.
Those two arbitrators shall, within further two months, together select a third
arbitrator who is a national of a third State which has diplomatic relations with both
Contracting Parties. The third arbitrator shall be appointed by the two Contracting
Party as Chairman of the arbitral tribunal.

4. If the arbitral tribunal has not been constituted within four months from the date of the
receipt of the written notice for arbitration, either Contracting Party may, in the
absence of any other agreement, invite the President of the International Court of
Justice to appoint the arbitrator (s) who has or have not yet been appointed. If the
President is a national of either Contracting Party or is otherwise prevented from
discharging the said function, the next most senior member of the International court
of justice who is not a national of either Contracting Party shall be invited to make
the necessary appointment (s).

5. The arbitral tribunal shall determine its own procedure. The tribunal shall reach its
award in accordance with the provisions of this Agreement and the principles of
international law recognized by both Contracting Parties.

6. The tribunal shall reach its award by a majority of votes. Such award shall be final
and binding on both Contracting Parties. The ad hoc arbitral tribunal shall, upon the
request of either Contracting Party, explain the reasons of its award.

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7. Each Contracting party shall bear the cost of its appointed arbitrator and its
representation in arbitral proceedings. The cost of the Chairman and the remaining
costs shall be borne in equal parts by the Contracting Parties.

Article 9
Disputes between an Investor and One Contracting Party

1. Any dispute between an investor of one Contracting Party and the other Contracting
Party in connection with an investment in the territory of the other Contracting Party
shall, as far as possible, be settled amicably through negotiations between the Parties
to the dispute.

2. If the dispute can not be settled through negotiations within six months, either party to
the dispute shall be entitled to submit the dispute to the competent court of the
Contracting Party accepting the investment.

3. If a dispute involving the amount of compensation for expropriation can not be settled
within six months after resort to negotiating as specified in paragraph 1 of this Article,
it may be submitted at the request of either party to an ad hoc arbitral tribunal or
arbitration under the auspices of the International Center for Settlement of Investment
Disputes (ICSID) established by the Convention on the Settlement of Investments
Disputes between States and Nationals of Other States opened for signature in
Washington on March 18, 1965 once both Contracting Parties become member States
thereof. The provisions of this Paragraph shall not apply if the investor concerned has
resorted to the procedure specified in the Paragraph 2 of this Article.

4. Such an ad hoc arbitral tribunal shall be constituted for each individual case in the
following way: each Party to the dispute shall appoint an arbitrator, and these two
shall select a national of a third State which has diplomatic relations with the two
Contracting Parties as chairman. The first two arbitrators shall be appointed within
two months of the written notice for arbitration by either Party to the dispute to the
other, or the Chairman be selected within four months. If within the period specified
above, the tribunal has not been constituted, either Party to the dispute may invite the
Secretary General of the International Center for Settlement of Investment Disputes to
make the necessary appointments.

5. The ad hoc tribunal shall determine its own procedure. However, the tribunal may, in
the course of determination of procedure, take as guidance the Arbitration Rules of
the International Center for Settlement of Investment Disputes.

6. The tribunal shall reach its decision by a majority of votes. Such decision shall be
final and binding upon both Parties to the dispute. Both Contracting Parties shall
commit themselves to the enforcement of the decision in accordance with their
respective domestic law.

7. The tribunal shall adjudicate in accordance with the law of the Contracting Party to
the dispute accepting the investment including its rules on the conflict of laws, the

148
 provisions of this Agreement as well as the generally recognized principles of
international law accepted by both Contracting Parties.

8. Each party to the dispute shall bear the cost of its appointed member of the tribunal
and of its representation in the proceedings. The cost of the appointed Chairman and
the remaining costs shall be borne in equal parts by the Parties to the disputes.

Article 10
Application of other Rules

If the treatment to be accorded by one Contracting Party in accordance with its laws and
regulations to investments or activities associated with such investments of investors of the
other Contracting Party is more favorable than the treatment provided for in this Agreement,
the more favorable treatment shall be applicable.

Article 11
Application of the Agreement

This Agreement shall apply to investments in the territory of either Contracting Party made in
accordance with its laws and regulations by investors of the other Contracting Party, whether
prior to or after the entry into force of this Agreement. It shall however not be applicable to
claims arising out of events which occurred prior to its entry into force.

Article 12
Consultations

1. The representatives of the Contracting Parties shall hold meetings from time to time
for the purpose of:

a) reviewing the implementation of this Agreement;

b) exchanging legal information and investment opportunities;
c) resolving dispute arising out of investments;
d) forwarding proposals on promotion of investment;
e) studying other issues in connection with investment.

2. Where either Contracting Party requests consultation on any matters of Paragraph 1 of

this Article, the other Contracting Party shall give prompt response and the
consultation be held alternatively in Addis Ababa and Beijing.

Article 13
Entry into force, Continuation and Termination

1. This Agreement shall enter into force on the first day of the following month after the
date on which both Contracting Parties have notified each other in writing that their
respective internal legal procedures have been fulfilled and shall remain in force for
period of ten years.

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2. This Agreement shall continue in force if either Contracting Party fails to give a
written notice to the other Contracting Party to terminate this Agreement one year
before the expiration specified in Paragraph 1 of this Article.

3. After the expiration of initial ten years period, either Contracting Party may at any
time thereafter terminate this Agreement by giving at least one year’s written notice to
the other Contracting Party.

4. With respect to investments made prior to the date of termination of this Agreement,
the provisions of Articles 1 to 12 shall continue to be effective for a further period of
ten years from such date of termination.

IN WITNESS WHEREOF, the duly authorized representatives of their respective

Governments have signed this Agreement.

DONE in duplicate at…………….. on ……………………, 1998 in the Chinese, Amharic

and English language, all texts being equally authentic. In case of divergence of
interpretation, the English text shall prevail.

FOR THE GOVERNMENT OF THE FEDERAL DEMOCRATIC REPUBLI OF

ETHIOPIA

FOR THE GOVERNMENT OF THE PEOPLE'S REPUBLIC OF CHINA

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Annex 3- Investment Legislation

Annex 3.1: PROCLAMATION No. 280/2002(as amended)

RE-ENACTMENT OF THE
INVESTMENT PROCLAMATION
WHEREAS, the encouragement and promotion of investment has become necessary so as to
accelerate the economic development of the country and to improve the living standard of its
people;
WHEREAS, in addition to that of domestic investors, it is deemed essential to widen the
scope of participation of foreign investors and to facilitate conditions thereof with a view to
enhancing the country’s investment activities;
WHEREAS, the system of administration of investment needs to be transparent and
efficient;
WHEREAS, to these ends, it has become necessary to revise the existing law on investment;
NOW, THEREFORE, IN ACCORDANCE WITH Article 55(1) of the Constitution of the
Federal Democratic Republic of Ethiopia, it is hereby proclaimed as follows:
PART ONE
General
1. Short Title
This Proclamation may be cited as the “Investment Proclamation No. 280/2002.”
2. Definitions
In this proclamation, unless the context requires otherwise:
2.1. “Investment” means expenditure of capital by an investor to establish a new
enterprise or to expand or upgrade one that already exists;
2.2. “Enterprise” means an undertaking established for purposes of gaining profit;
2.3. “Capital” means local or foreign currency, negotiable instruments, machinery
or equipment, buildings, initial working capital, property rights, patent rights, or
other business assets;
2.4. “Investor” means a domestic or foreign investor having invested in Ethiopia;
2.5. “Domestic Investor” means an Ethiopian or a foreign national permanently
residing in Ethiopia having made an investment, and includes the government,
public enterprises a well as a foreign national, Ethiopian by birth and desiring to
be considered as a domestic investor;

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 2.6. “Foreign Investor” means a foreign or an enterprise owned by foreign
nationals, having invested foreign capital in Ethiopia, and includes an Ethiopian
permanently residing abroad and preferring treatment as a foreign investor;
2.7. “Foreign Capital” means capital obtained from foreign sources, and includes
the re-invested profits and dividends of a foreign investor;
2.8. “Expansion/up grading” means increasing in value, by more than 25%, the full
production or service capacity of an existing enterprise, be it in variety, volume, or
both;
2.9. “Appropriate Investment Organ” means the Ethiopian Investment Agency,
(hereinafter referred to as the “Agency”), established under this Proclamation or
the executive organ of a Region empowered to issue investment permits;
2.10. “Public Enterprise” means an undertaking, wholly owned by the Federal or
regional government established to carry out manufacturing, distribution, service
rendering or other economic and related activities for gain;
2.11. “Government” means the Federal Government or a Regional Government;
2.12. “Region” means any of those specified under Article 47(1) of the Constitution
of the Federal Democratic Republic of Ethiopia and for the purpose of this
Proclamation includes the Addis Ababa City Administration and the Dire Dawa
Administrative Council;
2.13. The phrase “export-oriented no-equity based foreign enterprise collaboration”
means a 100% export-oriented contractual arrangement between a domestic
investor and foreign enterprise in which the foreign enterprise provides, among
others, all or some of the following:
Guaranteed external market access;
Export product and production know-how;
Export marketing know-how;
Export business management know-how;
Raw materials and intermediate inputs needed for export production.
2.14. “Transfer of technology” means the transfer of systematic knowledge for the
manufacture of a product, for the application of improvement of a process or for
the rendering of a service, including management and marketing technologies, but
shall not extend to transactions involving the mere sale or lease of goods.”
3. Scope of Application

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The provisions of this Proclamation shall not be applicable to investments in the prospecting,
exploration and development of minerals and petroleum resources.
PART TWO
Investment Objectives, Areas and Incentives
4. Investment Objectives of the Federal Democratic Republic of Ethiopia
The objectives of the investment policy of the Federal Democratic Republic of Ethiopia are
designed to improve the living standards of the peoples of Ethiopia through the realization of
sustainable economic and social development, the particulars of which are the following:
1) to accelerate the country’s economic development;
2) to exploit and develop the immense natural resources of the country;
3) to develop the domestic market through the growth of production, productivity,
and services;
4) to increase foreign exchange earnings by encouraging expansion in volume and
variety of the country’s export products and services and the improvement of their
quality as well as to save foreign exchange through production of import
substituting products;
5) to encourage balanced development and integrated economic activity among the
regions and to strengthen the intersectoral linkages of the economy;
6) to enhance the role of the private sector in the acceleration of the development of
the country’s economy;
7) to render foreign investment play its proper role in the country’s economic
development;
8) to create wide employment opportunities for Ethiopians and to foster the transfer
of technical know-how, of managerial skills, and of technology required for the
progress of the country.
2) Areas of Investment Reserved for the Government or Joint Investment with the
Government
1) The following investment areas are exclusively reserved for the Government:
(a) Transmission and supply of electrical energy through the Integrated National Grid
system: and
(b) Postal services with the exception of courier services.
2) Investors shall be allowed to invest in the following areas only in joint venture with
the Government (ŸS”Óeƒ Ò` up”σ w‰);

153
 (a) Manufacturing of weapons and ammunition; and
(b) Telecommunication services.
(c ) air transport services using aircraft with a seating capacity of more than 20
passengers.
3) Areas of Investment Reserved for Domestic Investors
Areas of investment shall be specified by regulations to be issued by the Council of
Ministers.
4) Regarding Investments to be undertaken in Joint Venture with the Government
The Supervising Authority of Public Enterprises shall receive investment proposals
submitted by any private investor intending to invest in joint venture with the
government; it shall submit same to the Ministry of Trade and Industry for decision
and, upon approval, designate a public enterprise to invest as partner in the joint
investment.
5) Areas of Investment Open for Foreign Investors
All areas of investment, other than those exclusively reserved, under this Proclamation,
for the Government or joint venture with the Government (ŸS”ÓYƒ Ò` up”σ) or for
Ethiopian national or other domestic investors which shall be specified by regulations to
be issued by the Council of Ministers, shall be open for foreign investors.
6) Investment Incentives
1) Areas of investment specified by regulations to be issued by the Council of
Ministers pursuant to the investment objectives stated under Article 4 of this
Proclamation shall be eligible for investment incentives.
2) The regulations to be issued pursuant to Sub Article (1) of this Article shall
determine the type and extent of entitlement to incentives.
PART THREE
Forms of Investment and Capital
Requirements for Foreign Investors
7) Forms of Investment
1) Investment may be effected in one of the following forms:
(a) Sole proprietorship
(b) Business organizations incorporated in Ethiopia or abroad;
(c) Public Enterprise established in accordance with the relevant law;
(d) Cooperative Societies formed in accordance with the relevant law.

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 2) Any business organization specified under Sub Article (1)(b) of this Article shall
be registered in accordance with the Commercial Code or any other relevant law.
8) Capital Requirements for foreign Investor
1) Any foreign investor to be allowed to invest pursuant to this Proclamation, shall be
required to allocate a minimum capital of 100,000 US dollars for a single investment
project.
2) Notwithstanding the provisions of Sub Article (1) of this Article, the minimum
capital required of a foreign investor investing jointly with domestic investors shall be
60,000 US dollars.
3) The minimum capital required of a foreign investor investing in areas of
engineering, architectural, accounting and audit services, project studies or business
and management consultancy services or publishing shall be:
(a) 50,000 US dollars if the investment is made wholly on his own;
(b) 25,000 US dollars if the investment is made jointly with domestic investors.
4) A foreign investor:
(a) re-investing his profits or dividends; or
(b) exporting at least 75% of his out puts
shall not be required to allocate a minimum capital.
5) Any foreign investor having brought investment capital into the country shall have
registered same at the National Bank of Ethiopia and obtain a certificate of
registration.
PART FOUR
Investment Permit
9) Requirement of Permit
1) The following investors shall be required to obtain investment permits:
(a) foreign investors;
(b) foreign nationals, excluding Ethiopians by birth, taken for domestic investors
pursuant to Article 2(5) of this Proclamation;
(c) domestic investors investing in areas eligible for incentives;
(d) domestic and foreign investors making investments in partnerships(up”σ ›=”yeƒ
¾T>ÁÅ`Ñ< ¾GÑ` ¨<eØ“ ¾¨<ß vKHw„‹).
1) Notwithstanding the provision of sub-Article (1) of this Article, a foreign investor
intending to buy an existing enterprise in order to operate it as it stands or to buy

155
 shares of an existing enterprise shall obtain prior approval from the Ministry of Trade
and Industry
2) Upon receipt of an application made in accordance with sub-Article (2) of this
Article, the Ministry of Trade and Industry shall after examining the matter in light of
the relevant laws within two working days:
(a) register the share transfer or replace the business license upon receipt of the
appropriate fee, where the application is found acceptable; or
(b) notify to the investor its decision and the reason thereof in writing, where the
application is found unacceptable
3) The provisions of this Article shall not affect the right of an investor of Ethiopian
national or foreign national, an Ethiopian by birth taken for domestic investor,
intending to invest, in conformity with the relevant laws of the country, in areas not
eligible for incentives or waiving his right of entitlement in those areas eligible for
incentives.
10) Application for Investment Permit by a Domestic Investor
1) An application for investment permit by a domestic investor shall be
made in a form designed for such purpose and submitted together with the
following documents:
(a) Where the application is signed by an agent, a photocopy of his power of
attorney;
(b) Where the investment is to be made by an individual person, a photocopy
of his identify card, or a photocopy of the certificate evidencing his domestic
investor status and his recent two passport size photographs;
(c) Where the investment is to be made by a business organization, photocopies of
its memorandum of association and Articles of association; or where the business
organization, photocopies of its memorandum of association and Articles of
association; or where the business organization is to be newly established, in
addition, it shall submit photocopies of the shareholders’ identity cards or
photocopies of certificates evidencing there domestic investor status;
(d) Where the investment is to be made by a public enterprise, a photocopy of the
regulation under which it is established or a photocopy of its memorandum of
association and Articles of association; and
(e) Where the investment is to be made by cooperative society, a photocopy of its
Articles of association.
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11) Application for investment permit by a foreign Investor
Application for Investment Permit by a foreign investor shall be made in a form
designed for such purpose and submitted to the Agency together with the
following documents in two copies:
(a) where the application is signed by an agent, a photocopy of his power of
attorney;
(b) where the investment is to be made by an individual person, a photocopy of the
pages of a valid passport showing his identity and his recent two passport size
photographs;
(c) where the investment is to be made by a business organization incorporated in
Ethiopia, photocopies of its memorandum of association and Articles of association;
or where it is to be newly established, in addition, it shall submit photocopies of the
pages of a valid passport of each shareholder showing his identity;
(d) where the investment is to be made by a branch of a foreign business organization in
Ethiopia, photocopies of its memorandum of association and Articles of association or
a similar document of the parent company; and
(e) where it is a joint investment by domestic and foreign investors, in addition to the
documents provided under (c) above, photocopies of identity cards or photocopies of
certificated evidencing the domestic investor status of the domestic investors, as the
case may be.
12) Application for Investment Permit for Expansion or Upgrading
1) An application for investment permit to expand or upgrade an existing enterprise
shall be made in a form designed for such purpose and submitted together with the
following documents:
a) where the application is signed by an agent, a photocopy of his power of attorney;
b) where the investment is made by a business organization, photocopies of its
memorandum of association and Articles of association; and
c) Photocopy of a valid business license of the existing enterprise.
2) The application form and documents stipulated under Sub-Article (1) of this Article
shall be made:
in two copies, where they are to be submitted to the Agency; or
in one copy, where they are to be submitted to Regional Investment Organs.

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13) Issuance of Investment Permit
1) Upon receipt of an application made in accordance with Articles 13, 14 or 15 this
Proclamation, the appropriate investment organ shall, after examining the intended
investment activity in light of the Proclamation, Regulations and directives issued
thereunder within five working days:
(a) issue the investment permit upon receipt of the appropriate fee, where the
application is found acceptable; or
(b) notify to the investor its decision and the reason thereof in writing, where the
application is found unacceptable.
2) The appropriate investment organ shall, after issuing the investment permit, notify the
concerned government institutions that the latter could conduct the necessary follow
up.
3) An investment permit shall contain the following:
(a) the name, nationality and address of the investor;
(b) the investment activity; and
(c) the region in which the investment is to be made.
4) a holder of an investment permit shall not be required to obtain a business license until
completion of project implementation and the commencement of production or of
rendering of service.
5) an investment permit may not be transferred to another person without the prior
authorization of the appropriate investment organ.
6) where an investment permit is transferred to another peroson or where any change
occurs in its content, it shall be submitted to the appropriate investment organ and
amended accordingly.
14) Renewal of Investment Permit
1) An investment permit shall be renewed annually until the investor commences the
marketing of his output or services; provided, however, the investor shall submit
progress reports on the implementation of the project, to the appropriate investment
organ, at the end of every six months.
2) An application for renewal of an investment permit shall be submitted at least a
month before the end of a period of one year for which the permit remains valid.
3) The appropriate investment organ shall renew the investment permit, where
satisfied, as to the existence of sufficient cause for the delay in the commencement or
completion of implementation of the project.
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15) Suspension or Revocation of Investment Permit
1)Where an investor violates the provisions of this Proclamation or regulations or
directives issued to implement this Proclamation, the appropriate investment organ
may suspend the investment permit until the investor takes due corrective measures.
2) the appropriate investment organ may revoke an investment permit where it is
ascertained that:
(a) the investor obtained the permit fraudulently or by submitting false information or
statements;
(b) the investor has transferred the permit to another person without the authorization
of the appropriate investment organ,
(c) incentives granted are misused or illegally transferred to another person;
(d) the investor has failed, without good cause, to 17 of this Proclamation.
(e) If the investor is found engaged in a commercial activity without obtaining a
business license”.
3) The appropriate investment organ shall, prior to suspending or revoking a permit,
notify the investor in writing as to the causes for taking such action and allow him a
period of one month to present his views thereon.
4) The appropriate investment organ shall suspend or revoke the permit where the
investor fails to respond within the time limit prescribed in sub-Article (3) of this
Article or presents unacceptable justification.
5) Upon suspension of an investment permit, the investor shall immediately lose
entitlement to all benefits.
6) Upon revocation of an investment permit, the investor shall return within 6 months
all the benefits he was granted.
7) An investment permit may not be suspended or revoked by any organ other than
the appropriate investment organ having issued same.
16) Right to appeal
An investor who has a grievance against a decision of an appropriate investment organ
may, within 30 days from receipt of the decision, appeal to the Federal Investment Board
or to the concerned organ of a Regional Government, as may be appropriate.

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 PART FIVE
Transfer of Technology, Loans, Utilization of foreign currency, and Remittance of
Funds
17) Technology Transfer Agreements
1) Where an investor concludes a technology transfer agreement related to his
investment, he shall submit the same to the Agency for approval and registration.
2) Upon receipt of an application for registration as per Sub-Article (1) of this Article,
the Agency shall issue the registration certificate within two working days.
3) A technology transfer agreement which is not registered in accordance with this
article shall have no legal effect.
18) Loans and utilization of Foreign Currency
1, An investor who acquires an external loan shall have such loan registered with in
the National Bank of Ethiopia in accordance with the directives of the Bank.
2. For transactions related to their investment, foreign investors shall be allowed to
open and operate foreign currency accounts in authorized local banks in accordance
with directives of the National Bank of Ethiopia.
19) Remittance of Funds
1) Any foreign investor shall have the right, in respect of an approved investment, to
make the following remittances out of Ethiopia in convertible foreign currency at the
prevailing rate of exchange on the date of remittance:
a)Profits and dividends accruing from investment;
b) Principal and interest payments on external loans:
c) Payments related to a technology transfer agreement registered in accordance with
this proclamation:
d) Proceeds from the sale or liquidation of an enterprise;
e) Proceeds from the transfer of shares or of partial ownership of an enterprise to a
domestic investor.
2) Expatriates employed in an enterprise may remit, in convertible foreign currency,
salaries and other payment accruing from their employment in accordance with the
foreign exchange regulations or directives of the country.
PART SIX
Investment Guarantees and Protections
20) Investment Guarantees and Protections
1) No investment may be expropriated or nationalized except when required by the
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 public interest and then, only in compliance with requirements of the law.
2) Adequate compensation, corresponding to the prevailing market value, shall be
paid in advance in case of expropriation or nationalization of an investment for public
interest.
3) Any foreign investor may remit compensation paid to him, pursuant to this Article,
out of Ethiopia in convertible foreign currency.
PART SEVEN
Investment Administration
21) Investment Administration Organs
The administration of investment shall be carried out through the following organs:
1) The Ministry of Trade and Industry;
2) The Investment Board;
3) The Agency
4) Regional investment organs to be defined by the laws of the respective region.
22) Jurisdiction
1) The administration of investment in respect of the following shall be under the
jurisdiction of the Agency
(a) investment made by foreign investor;
(b) investment made by foreign national permanently residing in Ethiopia taken for a
domestic investor;
(c) investment made, in areas eligible for incentives by domestic investor who is
required to obtain business license from concerned federal organs;
(d) joint investment by domestic and foreign investor.
2) Notwithstanding the provision of Sub-Article (1) of this Article, the issuance,
renewal and cancellation of investment permits for air transport services and for
generation or transmission or supply of electrical energy shall be carried out by the
Ethiopian Civil Aviation Authority and the Ethiopian Electricity Authority
respectively, representing the Agency.
3) Investments other than those referred to in sub Article (1) of this Article shall fall
under the jurisdiction of regional investment organs.
4) The granting of incentives by way of exemptions from import taxes and customs duties
shall fall under the exclusive jurisdiction of the Ministry of Revenues.

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23) One-Stop Shop Service
1. The Agency or Regional Investment Organs shall provide the following services as
required under the relevant laws to investors they have given investment permits.
representing the competent Federal or regional executive bodies as appropriate:
(a) Notarization of memorandum of association and Articles of association;
(b) effecting commercial registration;
(c) issuance of work permits to expatriate employees;
(d) grading of construction contractors; and
(e) issuance of business licenses.
The Authority shall register and render a one-stop service to export-oriented non-equity
based foreign enterprise collaborations.
The Agency and regional investment organs shall carry out their functions under Sub
Article (1) of this Article in compliance with the relevant laws thereof.
Upon receipt of an application for a business license in accordance with Sub-Article (1)
(e) of this Article, the appropriate investment organ shall, after examining the matter in
light of the relevant laws within five working days:
a) issue the business license upon receipt of the application fee, where the application is
found acceptable; or
b) notify to the investor its decision and the reason thereof in writing, where the
application is found unacceptable.
5) Notwithstanding the provision of Article 22 Sub-Article (2) (a) of commercial
Registration and Business Licensing Proclamation No. 67/1997, the appropriate
investment organ shall issue the business license upon signing, by the investor, of an
undertaking to respect the relevant laws and directives of the land.
6) Notwithstanding the provision of Sub-Article (1) of this Article, the Agency shall
issue business licenses representing only the Ministry of Trade and Industry.
7) Notwithstanding the provision of sub-Article (1) of this Article amendments
notarization, renewal, replacement or cancellation to be made in relation to documents
stated therein shall be effected by the relevant Federal or Regional executive bodies.
8) The appropriate investment organ shall, after rendering the services listed under Sub-
Article (1) of this Article, notify the concerned government institutions so that the latter
could conduct the necessary follow up.
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24) Transmission of Information on Investment
Each regional investment organ shall transmit to the Agency information compiled
with respect to the resource potential and investment opportunities of the Region as
well as periodic repots on investment activities therein.
PART EIGHT
The Investment Board
25) Members of the Board
1) The number of members of the Investment Board shall be determined by
Government.
2) The Minister of Trade and Industry shall be the Chairperson of the Investment
Board.
3) The members of the Board shall be drawn from Government and private sector.
4) The Director General of the Authority shall be a member of the Board.
5) The Board shall have its own secretariat. The powers and duties of the Secretariat
shall be determined by the internal rule of procedures of the Board.
26) Powers and Duties of the Board
The board shall:
1) supervise and follow up, as the superior authority the implementation of this
Proclamation and the activities of the Agency;
2) decide on policy issues arising in connection with the implementation of this
Proclamation;
3) issue directives necessary for the implementation of this Proclamation and
regulations issued hereunder;
4) submit, as necessary, amendments on investment incentives, to the Council of
Ministers for approval;
5) decide on appeals submitted to it by investors against decisions of the Agency;
6) determine service fees to be charged by the Agency;
7) approve the annual work program and budget of the Agency;
8) publicly notify investors of directives it issues from time to time;
9) whenever it deems necessary, decide on new or additional incentives, other than
what is provided for under the Investment Incentives Regulations and submit same to
the Council of Ministers for approval.
27) Meetings of the Board
1) The Board shall meet regularly once in a month. However, it may hold extra-
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 ordinary meetings at any time when necessary.
2) There shall be a quorum where more than half of the members are present at
meetings of the Board.
3) Decisions of the Board shall b passed by a majority vote, however, the chairperson
shall have a casting vote in case of a tie.
4) Without prejudice to the provisions of this Article, the Board shall draw up its own
rules of procedure.
PART NINE
The Investment Agency
28) Re-establishment
1) The Investment Agency is hereby re-established as an autonomous public
institution having legal personality;
2) The Agency shall be accountable to the Investment Board.
29) Powers and Duties of the Agency
The Agency shall:
1) serve as a nucleus for matters of investment and promote, coordinate and enhance
activities thereon;
2) initiate and submit to the Board policy and implementation measures needed to
create a conducive investment climate for both domestic and foreign investors and
follow up the implementation of same upon approval;
3) collect, compile, analyze and disseminate information on the resource potential of
the country and on the investment opportunities it offers, promote concrete
investment projects, provide, upon request, match making service of possible joint
investment partners;
4)Organize, with a view to helping promote investment, such activities as
exhibitions, training and seminar locally or abroad as may be appropriate, give
advisory support to investors;
5) realize liaison and coordination between investors, public offices, regional
Governments and other relevant organs, with a view to enhancing investment;
6) Prepare and distribute pamphlets, brochures, films and other materials that help
enhance investment;
7) issue investment permits in accordance with Article 25 of this Proclamation;

The Ethiopian Investment Agency shall be accountable to the Ministry of trade and Industry (Art. 33/5 of Proc.
No. 471/2005 Definition of Powers & Duties of the Executive Organs of the FDRE Proclamation)

164
 8) Monitor the implementation of investment projects for which it has issued
permits and ensure that the terms of the investment permits are complied with;
9) approve and register technology transfer agreements related to investments;
10) negotiate bilateral investment promotion and protection treaties for conclusion
between Ethiopia and other countries and sign same upon approval by the Council
of Ministers;
11) give advice and technical support to regional investment organs with a view to
building up their capacity; and
12) perform such other functions as may help to promote and enhance investment.
30) Organization of the Agency
The Agency shall have:
(a) Director General to be appointed by the Government; and
(b) the necessary staff.
31) Powers and Duties of the Director General
1) The Director General shall be the Chief Executive officer of the Agency and, as
such shall, subject to the general directives o the Board, direct and administer the
activities of the Agency.
2) With out limiting the generality of Sub Article (1) of Sub article (1) of this Article,
the Director General shall:
(a) exercise the duties of the Agency specified in Article 33 of this Proclamation;
(b) employ and administer the personnel of the Agency in accordance with the
Federal Civil Service Law;
(c) prepare and submit to the Board the work program and budget of the Agency and
implement same upon approval;
(d) effect expenditure in accordance with the budget approved for the Agency;
(e) represent the Agency in all its dealings with third parties; and
(f) prepare and submit to the Board reports on the performance and financial opinions
of the Agency.
3) The Director General may, to the extent necessary for the efficient performance of
the functions of the Authority, delegate part of his powers and duties to other officials
as well as employees of the Agency.
32) Source of Fund
The sources of the fund of the Agency shall be:

165
 (a) budgetary allocations made by the Federal Government;
(b) income, assistance and grants obtained from any other sources.
33) Books of Accounts
1) The Agency shall keep complete and accurate books of accounts
2) The accounts and financial documents of the Agency shall be audited annually by
the Auditor General or by auditors designated by him.
PART TEN
Miscellaneous Provisions
34) Allocation of Land
1) Where a regional Government receives an application for the allocation of land for
an approved investment, it shall, on the basis of the Federal and its own laws, deliver
within 60 days, the required land to the investor.
2) The region shall allocate land for investment activities and transmit information on
such allocations to the appropriate investment organ.
3) Each Region shall, in the allocation of land, give priority to approved investments.
4) The appropriate investment organ shall, in cooperation with the concerned regional
executive organs, facilitate and follow up the allocation of land for approved
investments.
35) Employment of Expatriates
1) Any investor may employ duly qualified expatriate experts required for the
operation of his business.
2) An investor who employs expatriates pursuant to Sub Article (1) of this Article,
shall be responsible for replacing, within a limited period, such expatriate personnel
by Ethiopians by arranging the necessary training thereof.
3) Notwithstanding the provisions of Sub-Articles (1) and (2) of this Article, a foreign
investor upon obtaining the prior consent of the Agency shall, without any restriction,
have the right to recruit expatriate employees on top management positions of an
enterprise of which he is the sole or major owner or shareholder
36) Foreign Nationals Taken for Domestic Investors
1) Rights and privileges as well as restrictions solely relating to foreign investors shall
not be applicable to a foreign national who invests in Ethiopia being taken for a
domestic investor.

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 2) A foreign national, excluding an Ethiopian by birth, taken for a domestic investor
shall declare same by filling in a form designed for such purpose by the Agency,
and submit it together with his application for investment permit.
37) Ownership of Immovable Property
1) Notwithstanding the provisions of Articles 390-393 of the Civil Code, a foreign
national taken for a domestic investor or a foreign investor shall have the right to
own a dwelling house and other immovable property requisite for his investment.
2) The provisions of Sub-Article (1) of this Article shall include those who have
invested prior to the issuance of this Proclamation.
38) Power delegated to the Ethiopian civil Aviation Authority and the Ethiopian
Electricity Authority.
The Ethiopian civil Aviation Authority and the Ethiopian Electricity Authority shall:
(a) carry out functions delegated to them under Article 25 Sub-Article (2) in
compliance with this Proclamation and Regulations and directives issued there
under.
(b) forward to the Agency photocopies of the investment permits they issued and the
relevant documents.
39) Duty to Provide Information
Any executive organ of the Federal or a Regional Government shall have the duty to
provide information relating to investment whenever so requested by appropriate
investment organ.
40) Repealed Laws
1) The Investment Proclamation No. 37/1996 (as amended) is hereby repealed.
2) No law, regulation, directive or practice inconsistent with this Proclamation shall
have effect with respect to matters provided for in this Proclamation.
41) Transitory Provisions
1) Notwithstanding the provisions of Article 43, incentives provided for in the
Investment Proclamation NO. 37/1996 (as amended) and in regulations and
directives issued thereunder shall remain applicable in respect of investment
approved prior to the issuance of this Proclamation.
2) Where an investor, eligible for incentives under Investment Proclamation No.
37/1996 (as amended), opts instead to be a beneficiary of incentives provided for in
this Proclamation and in regulations to be issued hereunder, he may notify the
appropriate investment organ and be entitled thereby.
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45. Effective Date
This Proclamation shall come into force as of the 2nd day of July, 2002.
Done at Addis Ababa, this 2nd day of July, 2002
GIRMA WOLDE GIORGIS
PRESIDENT OF THE FEDERAL
DEMOCRATIC REPUBLIC OF ETHIOPIA
Annex 3.2
COUNCIL OF MINISTERS REGULATIONS NO. 84/2003(as amended by
Regulations No. 146/2008) COUNCIL OF MINISTERS REGULATIONS
ON INVESTMENT INCENTIVES AND INVESTMENT AREAS
RESERVED FOR DOMESTIC INVESTORS
These Regulations are issued by the Council of Ministers pursuant to Article 5 of the
Definition of powers and Duties of the Executive Organs of the Federal Democratic Republic
of Ethiopia Proclamation No. 4/1995 (as amended) and Articles 6 and 9 of the Re-enactment
of Investment Proclamation No. 280/2002.
PART ONE-General
1. Short Title
These Regulations may be cited as the “Investment Incentives and Investment Areas
Reserved for Domestic Investors Council of Ministers Regulations NO. 84/2003.
2. Definitions
Unless the context requires otherwise, in these Regulations:
2.1. “Commission” means the Ethiopia Investment Commission ;
2.2. “Board” means the Federal Investment Board;
2.3. Capital gods” means machinery, equipment and accessories, needed to produce goods
or render services;
2.4. “Customs Duty” includes taxes levied on imported goods;
2.5. “Income Tax” means tax levied on profits from business and categorized as the
revenue of the Federal Government, Regional Governments or as their joint revenue;
2.6. “Proclamation” means Investment Proclamation No. 280/2002;
The definitions provided for under Article 2 of the Proclamation shall apply these
Regulations.
3. Investment areas reserved for Domestic Investors

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Areas of investment listed in the schedule attached to these Regulations are exclusively
reserved for domestic investors.
PART TWO- Exemption from Income Tax
4. Investment Activities Eligible for Income Tax Exemption
1) Were an investor engaged in manufacturing, agro-industrial activities or investment
areas of information and communication technology development or the production
of agricultural products to be determined by directives to be issued by the Board:
(a) exports 50% (fifty per cent) of his products or services; or
(b) supplies 75% (seventy five per cent) of his product or services to an exporter as a
production or service input;
shall be eligible for income tax exemption for 5 years.
2) Notwithstanding the provisions of Sub Articles (1) of this Article the Board may,
under special circumstances, grant income tax exemption for a period not longer than 7
years. However, the granting of income tax exemption for a period longer than 7 years
requires the decision of the Council of Ministers.
3) An investor engaged in activities mentioned under Sub-Article (1) of this Article who
exports less than 50% (fifty per cent) of his products or services, or supplies his
products only to the domestic market shall be eligible for income tax exemption for 2
years.
4) Not withstanding the provision of sub article (3) of this Article, Board may, under
special circumstances, grant income tax exemption for a period not longer than 5 years.
5) Notwithstanding the provision of Sub Article (3) of this Article, directives issued by
the Board may prohibit exemption from income tax with respect to an investor who
supplies his products or services only to the domestic market.
6) Notwithstanding the provision of Sub Articles (1) and (3) of this Article, an investor
who exports and hides and skins after processing up to crust level may not be entitled to
incentives provided therewith.
7) Notwithstanding the foregoing provisions of this Article, where the investment is in
relatively under developed Regions such as Gambella, Benshangul and Gumuz. South
Omo, in Afar Zones to be determined by the Board, Somali and other Regions determined
by the Board, the investor shall be eligible for income tax exemption for an additional
year period.

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 8) The income tax exemption provided under the provisions of Article 4 of these
Regulations shall be effective when the investor provides the information for the relevant
revenue collecting institution and its validity is ascertained for each income tax period.
5) Income Tax Exemption for Expansion or Upgrading of an Existing Enterprise
An investor engaged in activities mentioned under Sub Article (1) of Article 4 of this
Regulation who exports at least 50% (fifty percent) of his products or services and
increases, in value, his production or services by over 25% (twenty five per cent) shall be
eligible for income tax exemption for 2 years.
6) Commencement of Period of Exemption from Income Tax
The period of exemption from income tax shall begin from the date of commencement of
production or the date of provision of services, as the case may be.
7) Carry Forward of Losses
An investor who has incurred loss within the period of income tax exemption shall be
allowed to carry forward his loss for half of the income tax exemption period, after the
expiry of such period.
PART THREE
Exemption from the Payment of Customs Duty
8) General
1) An investor shall be allowed to import duty-free capital goods and construction
materials necessary for the establishment of a new enterprise or for the expansion or
upgrading of an existing enterprise.
2) In addition, an investor granted with a customs duty exemption privilege shall be
allowed to import duty-free capital goods necessary for his enterprise.
3) Notwithstanding the provisions of Sub Articles (1) and (2) of this Article the Board
may, by its directives, bar the duty-free importation of capital goods and construction
materials where it finds that they are locally produced with competitive price, quality and
quantity.
4) An investor eligible for duty-free importation of capital goods pursuant to these
Regulations shall be given the same privilege for spare parts whose value is not greater
than 15% (fifteen percent) of the total value of the capital goods to be imported.
9) Conditions for Importing Vehicles Duty-Free
1) Any investor may import duty free:
(a) ambulances used for emergency case of employees;
(b) buses used for tour operation services.
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 2) Without prejudice to the provision of sub-article (1) of this Article, the Board may
issue directives on conditions of importing duty free:
(a) up to three 4-wheel drive vehicles for tour operation services;
(b) vehicles for any other investments depending on the type of the project.
10) Areas of Investment Not Eligible for Customs Duty Exemption
1) Notwithstanding the provision of Article 8 of these Regulations, the following areas of
investment are not eligible for exemption from the payment of customs duty:
(a) hotels (excluding star-designated hotels), Motels, tea rooms, Coffee shops, Bars,
night clubs and restaurants which do not have international standards;
(b) wholesale, retail and import trade;
(c) maintenance services;
(d) commercial road transport and car-hire services;
(e) postal and courier services;
(f) real estate development;
(g) business and management consultancy services;
(h) advertisement services;
(i) cinematography and similar activities;
(j) radio and television broadcasting services;
(k) theatre and cinema hall operations;
(l) customs clearances services;
(m) laundry services;
(n) travel agency trade auxiliary and ticket-selling services;
(o) lottery and games of a similar nature;
2) Notwithstanding the provision of Sub-Article (1) of this Article, the Board may where it
finds appropriate issue directives providing for additional areas of investment, which may
not be eligible for exemption from the payment of customs duty.
11) Transfer of Capital Goods Imported Free of Customs Duty
Capital goods imported free of customs duty shall not be transferred to third parties not
entitled to similar duty free privileges, unless prior payment of the customs duty is
effected thereon.
PART FOUR Miscellaneous Provisions
12) Penalty
Any investor who acts contrary to Article 11 of these Regulations shall be punishable in
accordance with Article 73 of the Re-establishment and Modernization of Customs
Authority Proclamation No. 60/1997.

171
13) Repealed and Non-effective Regulations and Directives
1) Investment Incentives Council of Ministers Regulations No 7/1996 (as amended) and
Investment Areas Reserved for Domestic Investors Council of Ministers Regulations No.
35/1998 are hereby repealed.
2) Any Regulations or directives inconsistent with these Regulations shall not have effect
with respect to matters provided for in these Regulations.
14. Transitory Provision
1) Notwithstanding the provision of Article 13 of these Regulations, incentives granted pursuant
to the Investment Incentives Council of Ministers Regulations No. 7/1996 (as amended) and the
directives issued there under, shall continue to take effect.
2) Where an investor granted with incentives under Regulations No. 1996 (as amended) opts
instead to be a beneficiary of incentives provided for in these Regulations, he may notify the
appropriate investment organ and be entitled thereby.
15) Effective Date
These Regulations shall come into force on the date of their publication in the Federal Negarit Gazeta.
Done at Addis Ababa, this 7th day of February, 2003

MELES ZENAWI
PRIME MINSTER OF THE FEDERAL
DEMOCRATIC REPUBLIC OF ETHIOPIA

Annex 3.3- SCHEDULE

Areas of Investment Reserved for Domestic Investors
1. The following areas are exclusively reserved for domestic investors:
1) retail trade and brokerage:
2) Wholesale trade (excluding supply of petroleum and its by-products as well as wholesale by
foreign investors of their products locally produced);
3) import trade (excluding LPG, bitumen and upon approval from the Council of Ministers,
material inputs for export products);
4) export trade of raw coffee, chat, oilseeds, pulses, hides and skins bought from the market and
live sheep, goats and cattle not raised or fattened by the investor;
5) construction companies excluding those designated as grade 1;
6) tanning of hides and skins up to crust level;
7) hotels (excluding star-designated hotels), motels, pensions, tea rooms, coffee shops, bars, night
clubs and specialized restaurants,
8) travel agency, trade auxiliary and ticket selling services;
9) car-hire and taxi-cabs transport services;

172
 10) commercial road transport and inland water transport services;
11) bakery products and pastries for the domestic market;
12)grinding mills;
13) barber shops, beauty saloons, and provision of smith, workshops and tailoring services except
by garment factories;
14) building maintenance and repair and maintenance of vehicles;
15) saw milling and timber making;
16) customs clearance services;
17) museums, heaters and cinema hall operations;
18) Printing industries.
2. Without prejudice to the provisions of sub-Article (1) of this schedule, the following areas of
investment are exclusively reserved for Ethiopian nationals:
1) banking, insurance and micro credit and saving services;
2) forwarding and shipping agency services;
3) broadcasting services; and
4) air transport services using aircraft with a seating capacity of up to 20 passengers.

173
Bibliography

Books and Articles

 Andreas F. Lowenfeld, International Economic Law, 2nd ed., Oxford University

Press(2008).
 Ethiopian Investment Agency, Factor Costs, (2008).
 Ethiopian Investment Agency, Investment Guide to Ethiopia (2009).
 M. Sornarajah, The International Law on Foreign Investment, 2nd ed. Cambridge
University Press, 2004.
 Mosima Makola, The Attraction of the Foreign Direct Investment(FDI) by African
Countries (2003).
 United Nations, An Investment Guide to Ethiopia: Opportunities and Conditions
(2004).
 United Nations Conference on Trade and Development, International Investment
Agreements: Key Issues Volume 1 (2004).
 United Nations Conference on Trade and Development, Incentives: UNCTAD
series on issues in International Investment Agreements (2004).
 United Nations Conference on Trade and Development, Trends in International
Investment Agreements: An Overview (1999).
Laws

 The Constitution of the Federal Democratic Republic of Ethiopia, Federal Negarit

Gazeta, 1st Year No.1(1995).
 Proclamation NO. 280/2002, RE-Enactment of the Investment Proclamation, Federal
Negarit Gazeta, 8th Year No.27.
 Proclamation No. 373/2003 ,A Proclamation to Amend the Investment Re-Enactment
Proclamation No. 282/2002, Federal Negarit Gazeta, 10th Year No.8.
 Council of Ministers Regulation No. 84/2003-Council of Ministers Regulations on
Investment Incentives and Investment Areas Reserved for Domestic Investors,
Federal Negarit Gazeta, 9th Year No.34.
 Council of Ministers Regulation No. 146/2008-Council of Ministers Regulation to
Amend the Investment Incentives and Investment Areas Reserved for Domestic
Investors Regulation, Federal Negarit Gazeta, 14th Year No. 19.

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  Agreement on Trade Related Investment Measures(TRIMS), General Agreement on
Trade in Services(GATS), Trade Related Intellectual Property Rights
Agreement(TRIPS) of the WTO Agreements.
 Convention on the Settlement of Investment Disputes between States and Nationals of
Other States (ICSID Convention).
Internet Sources
 United Nations Center on Trade and Development(UNCTAD) website:
www.unctad.org
 International Center for the Settlement of Investment Disputes(ICSID) website:
www.icsid.org.

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