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Investor-govt. disputes: Is it worth settling for?

Egyptian officials said they hope to resolve at least 75 percent of outstanding disputes between investors and the government ahead of a major economic summit scheduled for March.

To that end, in July Prime Minister Ibrahim Mehleb issued a decree establishing a dispute settlement committee empowered to negotiate out-of-court settlements with investors. Mehleb chairs the committee, which also includes the ministers of justice, transitional justice, international cooperation and investment, as well as judicial figures and legal experts.

Egypt’s backlog of corporate-government disputes is a black mark for the country in the eyes of potential investors, who worry about their own projects getting caught up in lengthy legal battles. In this context, it makes sense that the government would make an effort to resolve outstanding cases before launching a major push for foreign investment at the March summit. But what are these disputes, and are voluntary settlements the best way to protect public interest?

The disputes

The government has so far declined to list all of the cases the dispute settlement committee is working on, which is not entirely surprising — it’s easier to carry out negotiations without the pressure of media and public attention. On the other hand, pressure from the public can at times empower government negotiators, since they can honestly tell their corporate counterparts that they cannot accept terms that the general public does not approve.

“There is a general lack of transparency on this issue, whether domestically or internationally, because both parties — state and investor — would prefer it that way. All governments would want their countries to seem as favorable for investors, and all investors want states to think they are serious investors and will not take advantage of loopholes in any legal system. For that reason, we assume as much secrecy as possible is maintained in any venue,” says Hatem Zayed, a researcher at the Egyptian Center for Economic and Social Rights.

Officials have indicated that the Cabinet’s dispute settlement committee is looking into at least 155 cases. Of these, it has proposed solutions for 20.

The types of disputes Egypt gets into with international investors can be divided into four broad categories: property, privatization, taxes and energy, explains Osama, an international banker based in Egypt who requested that his real name not be used, as he is not authorized to speak on behalf of his employers.

Property disputes

The Mubarak years saw a boom in real estate development, mostly on previously undeveloped state-owned land. Since the revolution, virtually all of the major players in Egypt’s real estate sector have faced legal challenges over either land prices or land use.  

There is little doubt that some developers took advantage of political connections to get sweetheart deals on plots of government-owned land, but it’s not always easy to judge what a fair price would have been. 
“We can argue that land was sold above or below market rate if we can establish the market rate,” Osama notes, but the process for assigning prices has often been “quite random.” 

Government contracts are generally the first projects in a newly developed area — but Egypt lacks a centralized database of land sales or clear national pricing guidelines, so it’s not easy to determine whether a particular sale was fair.

As a result, court cases over land sales have dragged interminably, weighing down Egypt’s construction sector and costing both the government and investors time and money. With land prices still in dispute, it’s also difficult for companies in trouble to sell off their assets and leave the market. Such companies are highly motivated to seek voluntary settlements with the government.

One of the first high-profile cases settled by the Cabinet committee involves a land deal with Al-Futtaim. On November 25, the Dubai-based conglomerate said it would invest US$700 million in Egypt over three years and pay the government a US$30.5 million settlement over the price it paid for land in New Cairo.

At least nine of the first 20 cases before the Cabinet committee are said to involve land deals. Company names that have come up in media reports are the Qatari Diar company, the Egypt Kuwait Holding Organization and Dubai’s Damac Properties.

Privatization disputes

Privatization deals are another source of conflict. During the Mubarak years, state-owned companies were sold off to private investors, and many of those deals are now facing challenges over sale prices, labor rights and other issues.

Among the most high-profile cases are department store Omar Effendi and Tanta Flax, both of which were sold to Saudi investors in the 2000s. Both have been in protracted court cases to determine whether they would be re-nationalized after they were determined to have been sold off at below market value.

According to media reports, the government is liaising with Sheikh Gamil al-Ganbit, former owner of Omar Effendi Company, and Saudi investor Abdullah al-Kahk of the former Tanta Flax and Oils Company, although it’s not clear whether those cases are in front of the Cabinet’s dispute settlement committee.

Agricultural company Nubaseed is also said to be close to a deal with the Cabinet committee.

Tax disputes

“We haven’t seen a lot of tax cases being solved through voluntary routes,” notes Osama. 

High-profile cases, such as the Orascom Construction Industries tax dispute, have been resolved through the court system. However, officials have indicated that at least three cases before the dispute settlement committee involve demands for tax breaks. They have also hinted at additional tax negotiations with companies in maritime and oil services, engineering design and technical services, two cement firms and a steel company.

Energy deals 

In addition to causing extensive blackouts nationwide, Egypt’s energy shortage has sparked a number of problems between companies and the government. Facing dwindling supplies and a crippling subsidy bill, state-owned gas company EGAS has tried to raise the price at which it supplies industry with natural gas, even for companies who have prices set in long-term contracts. 

“If the government tries to increase gas prices across the board, companies with gas contracts can sue,” says Osama.

Companies who want to keep production going are highly motivated to settle rather than going to court over prices. Orascom Construction subsidiary Egyptian Fertilizer Company won a suit brought against them by EGAS over natural gas prices, but agreed to settle on a final deal through voluntary negotiations in 2013.

Energy shortages have also lead the government to take more natural gas then they are allowed under contractual agreements with international companies. In most cases, Osama says, companies facing these problems are inclined to seek a voluntary settlement — they are heavily invested in the country and have the resources to weather delays in payment.

Why go for a voluntary settlement?

When the government and investors run into problems, they have three options: take a dispute to local courts, go to international investment courts or negotiate a voluntary settlement.

The Egyptian court system is generally seen as a bad option for businesses. 

“Egypt’s court system is lengthy, costly and unpredictable,” says Osama. 

Some companies also fear that courts will be inclined to favor the government rather than a foreign investor, either through institutional bias or individual malfeasance. 

“Corruption is never too far-fetched,” says ECESR’s Zayed.

Thanks to the scores of bilateral agreements to which Egypt is a party, foreign investors have the right to take cases to international courts, such as the World Bank’s International Center for Settlement of Investment Disputes. Rights activists argue that these courts focus on protecting investors, even corrupt ones, and disregard local regulations and judicial rulings. 

Such cases rack up huge legal fees and are embarrassing for Egypt, but most investors seek to avoid them too, explains Osama. They are the business equivalent of a nasty, public divorce case — once such a case has been initiated, there is little hope for a positive working relationship in the future. 

Companies with long-term investments, or who have assets that would be hard to sell off quickly, are likely to pursue less confrontational ways of resolving disputes.

Cases that make it to international arbitration tend to be exceptional. For example, shareholders in East Mediterranean Gas, which sued Egypt over the termination of gas sales to Egypt, was persona non grata in Egypt since the 2011 revolution. Gas sales had come to a halt, and their primary asset, the Arish pipeline, has been bombed more than 20 times since the revolution. The company has little to lose.

Spain’s Union Fenosa Gas, the majority shareholder of the Damietta natural gas export plant, has also taken Egypt to the ICSID after diversions to the local gas grid left the export plant sitting idle. Not only does Union Fenosa now have what is essentially a dead asset, it also appears to be using the court case as a bargaining chip. Reports have suggested that the company is willing to drop the case if Egypt smoothes the path for gas to be imported to Damietta from Israel.

Outside of these exceptional cases, most companies see advantages in voluntary settlements. They are faster and cheaper than court cases and allow companies to preserve a good relationship with the Egyptian state, explains Osama. They also offer a more controlled, predictable process than court rulings where the outcome of a case is unknown until a verdict is announced. 

“Both parties agree on terms in closed rooms before announcing. Both the government and the investor can make arrangements and plans,” he says of voluntary settlements.

What serves the public interest?

Disputes between investors and the government inevitably involve matters of public interest — the sale of publicly owned land and companies, corporate taxation, energy pricing and subsidies.

Labor groups and other civil society organizations do not have a voice in negotiations between investors and the Cabinet’s dispute settlement committee. However, thanks to changes to Egypt’s Investment Law that block third-party challenges to contracts, civil society also does not have a voice when such cases go to Egyptian courts. International arbitration courts, too, deal strictly with investors and state actors.

In short, all three available options are equally bad when it comes to allowing ordinary citizens to weigh in on corruption cases and other disputes with investors.

The essential question, then, is whether Egypt can achieve fairer settlements through negotiations than it would through court. With little public information about the ongoing negotiations, it’s too early to evaluate the overall success of negotiations.

Osama sees reason for optimism.

“These committees can be good defenders of public interests,” he says. 

Unlike courts, which may lack the expertise to handle complex settlements, the committees can bring in outside consultants on a case-by-case basis. They are also empowered to offer quick and clean solutions to investors, who could potentially offer more generous settlements than a court would require, simply to be able to move on.

Of course, the opposite could be true as well: With pressure to clear a massive backlog of cases before March, negotiators might be inclined to settle early, rather than delaying agreements by pushing hard for additional concessions.

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Isabel Esterman