PRESERVE, PROTECT & DEFEND Global Nationalization Risk: Practical Considerations for Investors Preserve, Protect and Defend Global Nationalization Risk: Practical Considerations for Investors PRESERVE, PROTECT & DEFEND Global Nationalization Risk: Practical Considerations for Investors Contents 1 Foreword 3 2 The Political Situation 4 3 The value of Investment Treaty protections 8 4 How to structure your investment 11 Legal structuring and restructuring 12 Tax structuring 14 5 Case Studies 16 Argentina 18 Indonesia 22 South Africa 26 United Kingdom 30 United States of America 34 6 Key Contacts 38 Return to Contents Page PRESERVE, PROTECT & DEFEND Global Nationalization Risk: Practical Considerations for Investors 3 Foreword Ed Poulton Maria del Carmen Tovar Partner, London Partner, Lima The extent of governmental involvement in their We have looked at the treaty framework that national economies goes to the very heart of political underpins investment decisions, assessing the and economic debates that have raged since time protections afforded by investment treaties and tax immemorial, and as such can seem to be an issue on treaties - how they are valuable to international which opinions are clearly and irrevocably set. However, investors and how investments can be structured the last few years of political upheaval has shown that to take advantage of them. those sands can, and do, shift. The last few days and weeks have arguably accelerated this momentum, While debates around nationalization are widespread, albeit in response to a punctual threat: governments we have applied this analysis to five case study have torn up what were perceived as immutable rules jurisdictions of particular relevance, each demonstrating of economic engagement in response to the Covid-19 a particular aspect of the debate: Argentina, pandemic. The question is whether the genie will be Indonesia, South Africa, the UK and the US. able to be returned into the bottle. Baker McKenzie’s uniquely global platform enables In August 2019, Baker McKenzie’s Dispute Resolution us to assess these risks and the associated practical team in London produced UK Nationalization: Practical considerations with an equal focus on local remedies Considerations, an introductory guide to practical and global protections. In this report, we draw upon steps that investors can take to protect their position the collective knowledge of more than 1100 international in the event of a nationalization, such as was proposed disputes lawyers around the world, embedded in by the UK’s opposition Labour Party for wide their local markets, experts in their industries. swathes of the UK economy. In a related report (available here), our team has In response to client demand, we have broadened our partnered with the Investment Treaty Forum at the analysis to look at the issue through a global lens. British Institute of International Comparative Law (BIICL) to present the first comprehensive empirical Working with geopolitical commentator, business study of corporate restructuring and investment advisor and co-founder of Global Torchlight, David treaty protections, examining all publicly available Chmiel, we dispel four commonly-held misconceptions decisions of investor-state tribunals dealing with about the nature of nationalization policy, (each of issues of corporate structuring and restructuring. which has been disproved by governments’ responses Our findings from that study support and inform to the current crisis), namely: the recommendations we make here. • Misconception One: Nationalization risk is limited We trust you will find this report useful and to countries with weak political and legal systems; interesting. Please use the box below to register • Misconception Two: Nationalization policies focus for any further updates on this topic. For more on natural resources companies; specific questions, please contact any of the authors • Misconception Three: Nationalization is driven listed at the back of this report, or your usual only by economic concerns; and Baker McKenzie contact. • Misconception Four: Nationalization is carried Ed Poulton & Maria del Carmen Tovar out only by expropriation. To be kept informed of further events and publications on this issue, please click here PRESERVE, PROTECT & DEFEND Global Nationalization Risk: Practical Considerations for Investors Return to Contents Page The Political Situation Return to Contents Page PRESERVE, PROTECT & DEFEND Global Nationalization Risk: Practical Considerations for Investors 5 The Political Situation The COVID-19 pandemic is now shattering long-held assumptions about the global economic and political order. Quite rightly, the principal focus of policy makers is to protect public health. However, the potential for immense economic damage David Chmiel is already causing governments to embrace mitigative measures that are far more Geopolitical Advisor and co-founder of Global Torchlight radical than many would have thought politically conceivable a few months ago. These policies will likely include nationalization of governments often favoured privatization. During assets currently in private hands. Some of these acts that time, Australia, Canada, France, Germany and the will be welcomed as governments effectively step UK all put government- run companies into private into the shoes of private owners of distressed assets hands. The privatization of state-owned enterprises in in an effort to stem economic contagion – much as Central and Eastern Europe and the former Soviet Union was the case during the global financial crisis a was a cornerstone of post- Cold War economic reforms decade ago. In other cases, demands may grow for and throughout the developing world, governments more compulsory action to expropriate assets seen opted for public-private partnerships over state-led as critical to public health security or to the basic economic expansion initiatives. functioning of society in order to ensure that resources are directed toward areas of greatest need. But nationalization never completely disappeared as a policy option and the political pendulum may be Even when the immediate medical crisis abates – swinging once again in favour of taking assets into and may that be as soon as possible – many of state control. This report sets out a number of cases the world’s largest economies may have altered in which governments in some of the world’s most fundamentally. It is likely that debates will then important economies have recently nationalized assets emerge about the need for more foundational policy or where arguments in favour of nationalization have change, including whether critical assets should sit in re-entered the mainstream of political discourse. public or private ownership. By that point, whole sectors of the economy may already have been As private investors grapple with these changes, it is nationalized and the nature of these debates would important to recognise that there is no single pattern be very different from those seen recently in some to this debate. Risk takes different forms in different of the countries examined in this report. places. However, it is important to dispel commonly- Nationalization would already be a fact of life. held misconceptions about the nature of nationalization policy if businesses are to hone their It is, therefore, vitally important for companies to gain a risk management and mitigation processes to deal greater understanding of the political dynamics that with this re-emerging challenge. have driven nationalization in the past in order to better appreciate how those policies may work in the present and future. The issues set out in this report are more relevant today than at any time in the recent past. Misconception One: Nationalization risk is limited to countries with weak political and legal systems Given historic patterns, there is sometimes a presumption Nationalization is not a new risk that risk of nationalization exists only in countries for multinational companies. where free market economic systems are not firmly established or where political and legal institutions are There is a long, global history of governments insufficiently robust to prevent arbitrary expropriation. expropriating assets or otherwise bringing them under One of the most striking features of the current debate domestic or state-owned control. In fact, such acts over state versus private ownership is that it is prominent have sometimes been catalysts for more substantive in some of the countries that were at the forefront of geopolitical disruption. In the 1980s and 1990s, however, the privatisation movement in recent decades. 6 PRESERVE, PROTECT & DEFEND Global Nationalization Risk: Practical Considerations for Investors Return to Contents Page The Political Situation Recently, some governments have simply let relevant operating licenses expire without giving foreign investors the opportunity to renew them or they have altered criteria to favour domestic or state bidders... To give a few examples, the Polish government has The global financial crisis of 2008-9 saw banks, embarked on a policy of “repolonisation” which insurance companies and other troubled businesses encourages domestic companies to acquire greater come into state ownership in order to restore public stakes in financial institutions, media companies and confidence in national financial systems. More other strategic sectors. The renationalization of recently, some political leaders have sought greater railroads and utilities