‘Rule of Law’ and Energy Rich Nations
The oil and gas rich nations of Myanmar, South Sudan, Turkmenistan, Libya, Angola and Iraq have been rated amongst the countries offering the least legal protection for foreign companies and investors, according to a new study rating 197 countries on their respect for the rule of law.
Risk analysis and mapping firm, Maplecroft, has developed the Rule of Law Index to enable multinational corporations to evaluate risks to global investments. The index evaluates countries on their judicial independence and efficiency, and measures the extent to which regulations and policies are implemented in a transparent manner.
Maplecroft rates 19 countries as ‘extreme risk’ including the energy rich countries of Myanmar (1), South Sudan (4), Turkmenistan (5), Libya (10), Angola (13) and Iraq (18). However, the conflict torn and oppressive regimes of North Korea (2), Somalia (3), Cuba (6), Cambodia (7), Afghanistan (8) and Syria (9) also feature in the top 10 countries.
“Organisations investing in lucrative energy markets, such as Myanmar, Turkmenistan or Libya need to be extremely cautious,” said Associate Director at Maplecroft, Mandy Kirby. “The rule of law serves as a check on abuses of private and state power and is important in the oversight of business regulation, including contract enforcement and competition laws.”
A fair, legitimate and effective application of the law is critical for companies looking to exploit opportunities in oil and gas rich markets. However, according to Maplecroft, the fundamental separation of government powers from the judiciary is absent in many resource rich countries where conflict, instability and authoritarianism are the prevalent political forces. Contracts in these countries are not always respected, which can lead to increased legal costs for companies and compromise returns on investment. Expropriation also remains a risk, especially in the extractive sector, where populism in resource-rich countries, coupled with government desire to capitalise on high global commodity prices, is fuelling policies of nationalisation.
With recent political reforms and the likelihood of sanctions being lifted, Myanmar offers huge potential for oil and gas firms. However, the country has topped Maplecroft’s Rule of Law Index for the last five years and the Burmese government continues to dictate policy direction and judicial decisions. Tangible improvements in the rule of law, including increased judicial independence and greater transparency in the regulatory system, will be required before the long-term potential of the economy can be realised.
The rule of law is also particularly fragile in newly formed states, such as South Sudan, or those that have experienced regime change, like Libya, as the overhaul of existing legal and regulatory frameworks create uncertainty for investors because they may be subject to change.
Following the civil war of 2011, Libya retains its position among the top ten highest risk countries in the Rule of Law Index. A lack of judicial independence remains the greatest concern, but there remains optimism that the fall of Gaddafi will bring about a change in policy and, subsequently, better governance and an improved operating environment. It will, however, take time to establish the institutions and capacities necessary to uphold the rule of law.
Maplecroft’s findings also pinpoint emerging and developing economies whose rule of law is strong and therefore should give confidence to companies looking to invest. Of particular interest are South Africa (157), Namibia (158), Chile (164) and Botswana (167), which are classified as ‘low risk’ in the Rule of Law Index.
Chile remains the gold standard for good governance in Latin America. Chile does suffer from some judicial inefficiency, with the procedures and cost required to enforce contracts still some way off the standards of the world’s advanced economies. However, a concerted effort has been made to ensure judicial independence and an effective regulatory system, which promote a favourable investment climate.
Botswana similarly sets the standard for Africa. Since independence from Britain in 1966, Botswana has actively sought to attract investment, largely by promoting a favourable business environment to complement its natural resource wealth. As a result, GDP per capita (based on purchasing power parity, PPP) has risen from int$1,774 in 1980 to an estimated int$16,280 in 2011.
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